The Debt Crisis Is Already Here | Lyn Alden

**Danny Knowles** (0:02)
What happens when people start losing jobs to AI?

**Lyn Alden** (0:04)
It all depends on how quickly it happens. You never want a short kind of multi-decade human productivity. But on five-year, ten-year timeframes, they're not magic. There's no way around it, that's rough.

**Danny Knowles** (0:16)
Is there a chance this is the last step cycle? Could this be the one that actually breaks the fiat system?

**Lyn Alden** (0:22)
I think it could. The fiat system as we know it, only goes back to the 70s. Commerce is happening globally. It's those intermediaries that have all the power. Until the dawn of Bitcoin, there was no fast settlement. And now we have alternatives.

**Danny Knowles** (0:36)
Can this fiat system survive that?

**Lyn Alden** (0:38)
We are already in the period where debt matters. The debasement is already happening. That's kind of the straw that breaks the camel's back. If people can't get to work, if they can't get the lights on, that's when you get revolution. This is like DEF CON 5
This is a catastrophe.

**Danny Knowles** (0:57)
LYN ALDEN, DEF CON 5 Lyn Alden in Bedford. How are you doing?

**Lyn Alden** (1:00)
I'm good. Thanks for having me.

**Danny Knowles** (1:02)
Did you enjoy Cheat Code yesterday?

**Lyn Alden** (1:03)
I did. Yeah. Always a great conference.

**Danny Knowles** (1:05)
You did an amazing talk, and then we did a fireside all about the long-term debt cycle. I think we should kind of go over the talk you did, and then get into it. So I think you started this by talking about when the long-term debt cycle matters. Do you want to pick it up from there?

**Lyn Alden** (1:20)
Sure, yeah, I basically started out by saying that one of the most common questions I get, people ask, when will the debt matter, is what they ask. As though people have it, I think, in their head that there's some day of reckoning where suddenly a treasury auction fails or some crazy thing happens.

**Danny Knowles** (1:38)
I think I had this in my head.

**Lyn Alden** (1:39)
It's commonly what you think, because that's how many debts matter. If you have private debt, it often matters all at once. It doesn't matter until it does. Sovereign debt tends to work differently. It tends to be more of a process. So one of the arguments that I was making at the start of that talk was kind of saying that it has been mattering. Realistically, I would say it's somewhat mattered since the global financial crisis. But really, I would say, since about 2018, 2019, I think it's been really mattering, which is to say that we're shifting more and more toward that kind of fiscally dominant environment. So it kind of reduces credit cycles because the US deficits are so large, partially because of interest expense. And then in addition, I think the populism that we're seeing in the US and Europe especially, a lot of it does tie into basically these very top heavy entitlement systems with slowing demographics. And that's basically a debt problem.
And even things like war that we sometimes see with a number of steps can be potentially tied back to debt problems. That basically financial imbalances build up and countries start making more extreme decisions in those contexts. So my view is that the debt has been mattering from a macro standpoint, and even just from an investor's standpoint, I might not use the phrase nothing stops his train, in large part because we're running these 6-7% of GDP deficits, and a lot of it is so locked in because we already have so much debt, including so much interest expense on that debt. And so a lot of it is just on autopilot at this point.

**Danny Knowles** (3:25)
So you say there's not a moment that it matters, there's not going to be a failed treasury auction, which is the key moment, it's a process. But what happened when in 2008 or in 2018-19, when did it start mattering? What happened that meant this started to become a problem?

**Lyn Alden** (3:39)
Good question. I back up and say there are moments where it matters more than others. I would say it's punctuated by many crises. In the UK, for example, the guilt crisis in 2022, like the Liz Trust moment. That was a moment where it mattered, but it wasn't like the apocalypse, right? It wasn't like the day it mattered all at once, but it was like a moment where the debt, the deficit were basically called out in a sense. And the US has kind of gone through similar moments. The reason I kind of pointed 2018 or so, is we started to see overall deficit spending was larger than total bank lending in the country. And even when you add total bank lending and total net new bond issuance, so you're kind of taking a pretty big snapshot of private lending.