Raoul Pal’s ‘THE METAVERSE IS THE NEW SOLAR SYSTEM’
My notes and reflections on the interview that was recorded for the “What is Money?” podcast with Raoul Pal and Robert Breedlove.
The following are my notes and reflections on the interview that was recorded for the “What is Money?” show and podcast with Raoul Pal and Robert Breedlove. Below is the link:
Where do I start? Raoul Pal Founder & CEO of Real Vision has done it again.
This interview ties together the golden thread for why our economic world and political world are where they are today, and then looks at how this ties into the “Exponential Age”.
If you are not familiar with Raoul’s “Exponential Age” I would highly recommend you to dig into his thesis first before diving into the nitty gritty of today’s topic of discussion.
In short, Raoul argues that crypto is a “black hole” that is sucking in all of the world’s talent and value at a speed that no one can comprehend and that its capacity to generate phenomenal returns for investors is not temporary but rather part of a durable long-term trend that is at the vanguard of what he calls “The Exponential Age”.
Last month, Raoul published a sequel to his “The Exponential Age” thesis to discuss how his views have evolved since he began his Adventures in Crypto. Raoul touches on everything from Bitcoin, Ethereum, Solana, and Luna to just what the hell is going on with NFTs and the Metaverse. Price action aside, Raoul really flashes out the macro view at a conceptual level that I haven’t seen elsewhere before so be sure to check it out.
In addition, Raoul’s hard-hitting documentary on the coming retirement crisis also neatly fits into his narrative that we are about to discuss. In this Real Vision special, Raoul Pal presents the single most important financial topic of a generation — the Baby Boomer retirement crisis. He asks the hard questions: Can you afford to retire? How will the coming crisis impact your life? What risks are you unknowingly taking with your retirement?
Moreover, Raoul asks whether the insufficient retirement savings of the largest generation in history will cripple the economy? Raoul also explores how savvy retirees might avoid — and even profit from — the threatening crisis. In addition, he also offers a glimpse of a brighter future, in which smart millennials take control of their own financial destiny and side-step the crisis.
So to really understand what is going on in our world watch Raoul’s Introduction to the Exponential Age, What a time to be alive, and The Coming Retirement Crisis. I think these videos perfectly complement each other and will give you a good foundation for Raoul’s The Metaverse Is the New Solar System. I know many people favour the easy hack but these videos (albeit long) offer real insight into what the heck is going on in our world.
So now let’s banter about Raoul’s latest video The Metaverse Is the New Solar System, which in short is Raoul’s whole macro framework and crypto narrative i.e. how the world comes together, why we are where we are today, and where we’re all going.
Real Vision Finance (*show notes) summarizes rather eloquently:
First, Raoul looks back at history: from the fall and decline of the British empire, to the Industrial Age, to World War I and World War II, up to the modern era. He then shifts to the new world and the Fourth Turning, “when society passes through a great and perilous gate in history”, and explains that the American Dream as we know it is dead, and a new world is emerging made up of robots, AI, and where there is no cost in producing energy.
Yet in this new world, Raoul imagines a world of hope and optimism, where new identities and communities are formed: the Metaverse.
“The Metaverse is discovering the Americas again or even a new Solar System. If you think of the world constrained by its GDP, because of humans, productivity, and resources, the metaverse is none of that. There is a possibility that the metaverse allows us, people, incomes in a world free of the constraints, free of the debt shackle. This new world of crypto allows us to create our own world in the way that we want it,” says Raoul.*
The End
Nicely put— please come again.
Yeah nah not yet.
*The summary above is just a copy and paste job from Real Vision. I want to dig a little deeper to fully appreciate Raoul’s brain dump. These are my notes and links that I have looked at in order to understand Raoul’s deep dive. Sharing is caring so there you go — you are welcome. I hope these notes will help you in your learning journey.
Prequel to Raoul’s narrative is the law of unintended consequences and how big they can be. It is really a narrative that is 100 years in the making. Most of the time we like to blame politicians but most of the time we’re all to blame and not for any fault of our own but just by something that happened. So what happened?
“The Sun Never Sets on the British Empire”
Raoul’s story begins with the British Empire, which was duelling with Germany for world supremacy. World War I, also known as the Great War, began in 1914 after the assassination of Archduke Franz Ferdinand of Austria. His murder catapulted into a war across Europe that lasted until 1918.
During the conflict, Germany, Austria-Hungary, Bulgaria and the Ottoman Empire (the Central Powers) fought against Great Britain, France, Russia, Italy, Romania, Japan and the United States (the Allied Powers). Thanks to new military technologies and the horrors of trench warfare, World War I saw unprecedented levels of carnage and destruction. By the time the war was over and the Allied Powers claimed victory, more than 20 million people — soldiers and civilians alike — were dead.
The Weimar Hyperinflation
Allied victors took a punitive approach to Germany at the end of World War I. Intense negotiation resulted in the Treaty of Versailles’ “war guilt clause,” which identified Germany as the sole responsible party for the war and forced it to pay reparations.
Germany had suspended the gold standard and financed the war by borrowing. Reparations further strained the economic system, and the Weimar Republic printed money as the mark’s value tumbled. Hyperinflation soon rocked Germany. By November 1923, 42 billion marks were worth the equivalent of one American cent.
During a period of hyperinflation in 1920s Germany, 100,000 marks was the equivalent one U.S. dollar. This quote best illustrates the perils of unintended consequences of the Weimar hyperinflation:
“My father was a lawyer,” says Walter Levy, an internationally known German-born oil consultant in New York, “and he had taken out an insurance policy in 1903, and every month he had made the payments faithfully. It was a 20-year policy, and when it came due, he cashed it in and bought a single loaf of bread.”
Ray Dalio has an excellent book “Big Debt Crisis” that really gets into the nitty gritty of the Weimar hyperinflation crysis. By the way, the Weimar Republic was Germany’s government from 1919 to 1933, the period after World War I until the rise of Nazi Germany. It was named after the town of Weimar where Germany’s new government was formed by a national assembly after Kaiser Wilhelm II abdicated.
Read Ray Dalio’s book for a detailed case study on the Weimar hyperinflation. It is also an outstanding history of financial crises, including the devastating financial crisis of 2008, with a very valuable framework for understanding why the engine of the financial system occasionally breaks down.
You are not a bookworm? I got you covered. Watch “How the Economic Machine Works”. Created by Ray Dalio, this easy to follow 30 minute, animated video answers the question, “How does the economy really work?”
Based on Dalio’s practical template for understanding the economy, which he developed over the course of his career, the video breaks down economic concepts like credit, deficits and interest rates, allowing viewers to learn the basic driving forces behind the economy, how economic policies work and why economic cycles occur.
In retrospect, it is fair to say that the direct cause and effect of WW I was hyperinflation, which in turn lead to the rise of Nazi Germany. And that’s all she wrote — next please.
World War II and The Baby Boomers
Following World War II, the United States experienced the biggest population growth in recorded history, adding on average 4.24 million new babies to the population every year between 1946 and 1964. This generation of “Baby Boomers” constituted as much as 40% of the American population. In America roughly 78 million people were born in the period between 1946 and 1964.
Driven by fiscal stimulus and growing consumer demand the United States reached new heights of prosperity in the years after World War II.
The period is also known as the postwar economic boom or the “Golden Age of Capitalism”. It was a huge technology led economic growth boom with fiscal stimulus in massive size.
For example, “in the wake of war and depression, the GI Bill sent a generation to college and created the largest middle class in history….Government didn’t supplant private enterprise; it catalyzed private enterprise.”
“The Marshall Plan” was an American initiative passed in 1948 for foreign aid to Western Europe. The United States transferred over $13 billion in economic recovery programs to Western European economies after the end of World War II.
Pax Americana and Rules-Based Global Order
Pax Americana refers to a period of relative peace and stability that extended throughout the area of American influence, beginning with the end of World War II.
“The world also retooled its entire global infrastructure and became globalized so as opposed to being emire based it became a rules-based global order system.”
This period saw the creation of global institutions including:
1944 Bretton Woods: The Bretton Woods Agreement remains a significant event in world financial history. The two Bretton Woods Institutions it created in the International Monetary Fund and the World Bank played an important part in helping to rebuild Europe in the aftermath of World War II.
1946 United Nations: The United Nations is an international organization founded in 1945 after the Second World War by 51 countries committed to maintaining international peace and security, developing friendly relations among nations and promoting social progress, better living standards and human rights.
1947 GATT: The General Agreement on Tariffs and Trade (GATT), signed on October 30, 1947, by 23 countries, was a legal agreement minimizing barriers to international trade by eliminating or reducing quotas, tariffs, and subsidies while preserving significant regulations.
1949 NATO: North Atlantic Treaty Organization (NATO), military alliance established by the North Atlantic Treaty (also called the Washington Treaty) of April 4, 1949, which sought to create a counterweight to Soviet armies stationed in central and eastern Europe after World War II.
1957 EEC (EU): It was created by the Treaty of Rome of 1957. Upon the formation of the European Union in 1993, the EEC was incorporated into the EU and renamed the European Community (EC).
These institutions form the super infrastructure of the world that we have all grown up in, which in short form the centralized power of globalization that was led by the USA.
The Largest Demand Shock Ever Seen
In 1967 the first of the Baby Boomers started entering the workforce. Then by 1975 the average Baby Boomer was now in the workforce. “So you had the highest increase in people into the workforce ever.”
And two things happened.
Firstly, prices exploded. “It was the largest demand shock the world has ever seen and will ever see. We will never repeat anything like that again because obviously supply cannot catch up with demand.” As a direct consequence of this the oil price went through the roof, and so did the commodities. Everything went through the roof.
It was the largest demand shock the world has ever seen. Raoul Pal
Secondly, as a direct consequence Nixon abandoned the gold standard.
Under the Bretton Woods agreement, currencies such as the pound, the French franc and the German mark were linked to the dollar at a fixed exchange rate. To ensure the stability of the system, the dollar was fixed to gold at a rate of $35 an ounce. Any country that built up a stock of dollars by running a trade surplus with the US could exchange them for gold.
The Nixon shock was a series of economic measures undertaken by United States President Richard Nixon in 1971, in response to increasing inflation, the most significant of which were wage and price freezes, surcharges on imports, and the unilateral cancellation of the direct international convertibility of the United States dollar to gold.
While Nixon publicly stated his intention to resume direct convertibility of the dollar after reforms to the Bretton Woods system had been implemented, all attempts at reform proved unsuccessful. By 1973, the Bretton Woods system was replaced de facto by the current regime based on freely floating fiat currencies.
The rise of cryptocurrencies can be traced to Nixon abandoning gold in 1971.
Raoul Pal considers the period known as “The Great Inflation” a function of demographics i.e. the large amount of Baby Boomers.
“The real story of this period was that wages in real terms stopped going up. Obviously, if you add a record number of people wages don’t go up, and in fact they never went up again.”
In real terms since 1975 wages haven’t gone up. Raoul Pal
“This is where the real crux of the issue starts. So you pull the Baby Boomers into the workforce and they start competing for wages and nobody needs to pay higher wages.”
Economic Disparity Driving Political Polarization
Economic disparity is driving political polarization as Baby Boomers found themselves in a situation where the fiat was slowly debased, asset prices rose, and wages didn’t go up.
Widening wealth disparity is a reflection of modern politics / populism — “extreme left or right are angry because they were left behind. Baby Boomers were promised the American dream but never got any of it.”
This divergence, according to Raoul, is also largely driven by demographics.
Reagan, Thatcher, and Unintended Consequences
Beginning in the early 1980s, the Reagan administration and Thatcher government implemented a series of neoliberal economic reforms to counter the chronic stagflation the United States and United Kingdom had each experienced throughout the 1970s.
This era was dominated by contemporary forms of neoliberalism-based market fundamentalism, globalisation as world economic integration, and the ideology of ‘free trade’, and by an attack on ‘big’ government and social welfare.
In particular, the Housing Act 1980 was an Act of Parliament passed by the Parliament of the United Kingdom that gave five million council house tenants in England and Wales the right to buy their house from their local authority. The Act came into force on 3 October 1980 and is seen as a defining policy of Thatcherism.
“Reagan and Thatcher spearheaded a massive deregulation of the credit markets and the rise of Wallstreet happens.”
Financialization of the 1980s
“The world starts financializing at an unprecedented rate. Both Reagan and Thatcher started driving things like 401K’s — so now people could invest in the markets. This also meant that stock prices went up and people can afford less of them with their hourly wages. Property also starts to go up because people could now get access to debt.”
Everyone is on the hamster wheel now — running and running and running and nobody can catch up. And their wages aren’t going up. Raoul Pal
As a direct consequence of this people start thinking — “If I borrow money I can make up the difference. My wages aren’t going up but the assets go up so I’ll borrow a bit more!”
“To maintain the standard of living people needed to borrow money and that created the financialization bonanza in the 80s which led to the 1987 financial crash.”
Here is a good video on the stock market crash of 1987.
Introduction of the WTO
“Wallstreet becomes the epicenter of the US and the global economy and manufacturing became irrelevant.”
In 1990 the Berlin Wall fell and the fall of Communism starts. China starts opening up realizing it has to change.
The World Trade Organization (WTO) officially commenced on 1 January 1995 under the Marrakesh Agreement, signed by 123 nations on 15 April 1994, replacing the General Agreement on Tariffs and Trade (GATT), which commenced in 1948.
“Now once you make that agreement the worker in America who is already in excess supply is now competing against the global worker who is cheaper. You have now double f*cked everybody. And they are triple f*cked because in the 80s comes the rise of the silicon chip and the computer and Moors law explodes and Moore’s law explodes and technology starts replacing jobs at every level.”
“Indebted Baby Boomers are now facing a global workforce of cheaper, more effective, more productive labour. The rise of technology and a massive debt burden.”
Raoul Pal uses Sir James Goldsmith’s interview to illustrate the negative consequences of free trade.
“This is not free markets. This is labour arbitrage and you are creating perverse incentives.” Sir James Goldsmith
Sir James Goldsmith’s book is an interesting read.
Central Bank Policy Tools and “Managing” the Business Cycle
Meanwhile, Alan Greenspan uses Central Bank policy tools to manage the business cycle.
Fascinating discussion from the man himself. Take a look — it will be worth your time:
The 1997 Asian Financial Crisis
The 1997–98 Asian financial crisis began in Thailand and then quickly spread to neighbouring economies. It began as a currency crisis when Bangkok unpegged the Thai baht from the U.S. dollar, setting off a series of currency devaluations and massive flights of capital.
Here is a great discussion on this topic:
To avert a crisis “Greenspan cuts rates twice and the world stabilizes and the banking system is saved. Many European banks almost went under — it was a big deal.”
“And then the Central Banks basically said we got your back. So now everyone goes like you did it to us in 1987 and now you have done it for us now so let’s all go in. And the largest stock market bubble in recorded history begins and nobody wants to invest in emerging markets. All the money gets sucked in by the USA and that boom happens. That boom was unprecedented.”
So now everyone goes like you did it to us in 1987 and now you have done it for us now so let’s all go in. Raoul Pal
“We then hit the bust of that and many of us at the centre of the financial system were thinking is this going to be the end? Is this the one that blows up the debt bubble?”
“And lo and behold interest rates get cut, cut, cut, and it stabilizes and the system is saved.”
“But then the Baby Boomers lose faith in the stock market for a decade. So they think how the hell are we going to retire? And so it starts again and it’s the property market this time and the only way to buy it is with with leverage.”
But in the meantime something ugly is going on and it’s the Labor Force Participation (LFPR)
Collapse in Labor Force Participation (LFPR) and Monetary Velocity
LFPR started falling after 2000 due to globalization and advancement of technology. This is compounded by some Baby Boomers retiring early.
Why does LFPR matter?
“LFPR exactly maps the velocity of money. So the velocity of money collapses because of demographics. The older the population gets the less money circulates in the economy.”
The narrative is that older people spend less money on goods and services.
CPI and GDP growth are all a function of demographics. Raoul Pal
“So the next part of the story is that we’ve got households that are now hyperfinancialized with the weakest balance sheets in the world and behind that are the banks.”
So you start wiping out the household balance sheets by property prices falling and you have the biggest financial collapse in all history — maybe since the 1930s. Raoul Pal
“Central banks know the trick now. They have learned this from 1987 and 1997 and it is to cut cut cut cut interest rates. So now they are at 0%. Now they realized they need to do something else.” Money printer goes brrr and we will call it Quantitative Easing (QE).
Quantitative Easing (QE) is a form of unconventional monetary policy in which a central bank purchases longer-term securities from the open market in order to increase the money supply and encourage lending and investment.
Quantitative Easing (QE) is a form of unconventional monetary policy in which a central bank purchases longer-term securities from the open market in order to increase the money supply and encourage lending and investment.
The Balance has an excellent article Explaining Quantitative Easing (QE) with detailed explanations and timeline.
Because printing money sounds bad right? Everyone kind of knows if there is too much of something it becomes valueless so we call it Quantitative Easing (QE). Raoul Pal
What’s more is that:
They do that because in a debt crisis you can’t have the collateral go to zero. That’s why half of the banking system was going bust because they were using mortgages as collateral. Raoul Pal
So you have to bid for the collateral. Money printing becomes the new thing.
Raoul uses the LFPR i.e. demographics to forecast where the fed balance sheet is going.
According to Raoul the Fed is merely papering in the cracks of the demographics. The demographics is what built the debt to make up for the wages that were caused by the demographics.
It’s all trying to offset an aging population. Raoul Pal
“Most Western countries are trying to rebalance the balance sheet of the economy by printing money to offset the demographics.”
The Making of the Everything Bubble
But out of 2008 comes the rise of asset prices and the collapse and the wages don’t go up so now it’s become even harder for anybody to catch up. And now they cannot get access to credit either.
“Asset prices have not risen. It is the fall in the denominator that is causing all of this to rise i.e. the debasement is making you poorer.”
The debasement is making you poorer. Raoul Pal
It’s an everything bubble but why is nobody getting rich?
“If the Fed balance sheet is a function of demographics and if we discount the dollar by the amount the balance sheets have grown everything becomes logical. Asset prices have not risen at all.
Raoul Pal illustrate by using the S&P 500 / Fed Balance Sheet, Gold / Fed Balance Sheet, and Real Estate / Fed Balance Sheet.
Raoul’s conclusion is that every low supply asset was going up in dollar terms. But when you look in money printing terms, they were basically holding their own after the massive collaps of 2008.
Asset prices just follow the balance sheet. Raoul Pal
This is debasement and it makes it deceptively look like the value of the assets is going up. It’s not!
Here is a chart provided by Raoul which which illustrates this point. It shows the S&P 500 versus the Fed Balance sheet. (Btw the only asset that offsets monetary printing is Bitcoin).
It’s not obvious to people how they’re getting screwed, but everyone knows they are getting screwed. Raoul Pal
“It’s the change in the denominator, the devaluation of the fiat currency overall that means you cannot buy as many assets as you could, and therefore your structural savings are worse.” And with record low interest rates, you now have no chance of making money.
Around 2010 another catastrophe happened.
The Baby Boomers cannot afford to retire so they are still in the labour force and now their 86 million kids are also entering the workforce. Now you’ve got the two largest demographics in all recorded history in the labour force at the same time and technology is exploding. What do you think is going to happen to society?
This is the Fourth Turning. It is the transition of power from one demographic to the other. And this is playing out in real time.
And this is going to be the destruction of the rules based global order system and we are rebuilding from scratch — this is the rise of crypto. This is the rise of blockchain. And you cannot avoid it. Raoul Pal
The rise of populism follows aided by social media and Facebook in particular.
The Fourth Turning and “The Pandemic”
“Corporate debt explodes as interest rates are low. The Fed figured this out very fast. They are like if we have a corporate debt bubble and a household debt bubble, and a financial debt bubble then nothing in collateral can go down otherwise we are all done. This is the game we are all in. So there can be NO default.”
We have left the world of supply and demand economics and moved into a world dominated by central bank policy.
“Central Banks are doing the rational thing — if they don’t do this everything is gone and we are all out of the job and all wealth is gone. They must do this or else the whole ship sinks.”
However Austrian we want to be, it cannot happen. Raoul Pal
“Going into the pandemic the world collapses, the world stops, and the Fed and the government cross the Rubicon. They shake hands and say okay we are out of bullets. It has to be a fiscal stimulus and we will stop anybody defaulting. We will give you money — you cannot default.”
The Fed and the government cross the Rubicon. They shake hands and say okay we are out of bullets. It has to be fiscal stimulus and we will stop anybody defaulting. Raoul Pal
“That wasn’t to put money into the system. That’s because if they had gone bust it’s all over because that is the collateral for the system as well.”
The Government is incentivized to keep doing it.
They couldn’t get the pension system to go bust. They delivered this to the Boomers and screwed the Millenials. Raoul Pal
It is a big mess and it’s been in the making for 100 years.
Debasement hides reality. Raoul Pal
“People figured out they are getting screwed. If gold defends your wealth but Millenials have nothing to defend.”
What are the solutions going forward?
This brings us to the 2008 Satoshi Nakamoto’s Whitepaper i.e. the blockchain revolution and how the technology behind Bitcoin is changing money, business, and the world — and that’s all she wrote! Here we are!
“People realize that here is a technological construct that has ubiquitous global scarcity and therefore if we all perceive it to have value then it shall be so and so this migration begins to this parallel financial system being built in front of your eyes.”
Migration to Bitcoin begins.
The rise of DeFi as people don’t trust financial intermediaries any longer.
Bitcoin allows the secure recorded ownership of everything where it is traceable to who owns what. That was the problem that we had. Nobody knows who the hell owns what in an over leveraged system.
What you will see and ongoing gradual debasement and an ongoing gradual debasement. Raoul Pal
More people opt out and the last people who see it last are the ones who get hurt the most.
Well well well
This quote relates well to quote Chamath Palihapitiya on the All-In Podcast:
In November of 2021, we have the stock market at an all time high, we have crypto at an absolute all time high, we have the art market at an absolute all time high, and we have inflation at a 30 year high.
“The two most important founders of our generation i.e. the two smartest people who have consistently won — Jeff Bezos and Elon Musk, collectively sold 11 billion US dollar of their holdings and if you can’t take all of that and decide for yourself what’s right for you and your family you are doing yourself a disservice.”
“If the smartest people in the world are now selling their core holdings that they told you they would never sell and you are not reconsidering your position on things you are either much smarter than them or you are being really really reckless.”
Austrian economics is not a viable approach anymore.
“What is about to happen is the Exponential Age where technology takes over everything.”
Where all of this is going is the Metaverse. Raoul Pal
Velocity of money is leaving the old system and entering the new system.
86 million Millennials are pissed off- progressive left policies will gain prominence.
Everybody shifts left. Raoul Pal
Why would I invest outside of crypto? I cannot see anything that is going to give me that rate of return. Raoul Pal
In summary, Raoul Pal’s brain dump is mind-blowing. It’s his entire framework of what’s in his head. I had to watch all four videos a couple of times because I really wanted to understand Raoul’s macro framework that is underpinning his crypto narrative. I urge you to do the same. I am not a macro wiz but I kind of get it now. I took these extensive notes and I feel like I have a better understanding of how the world comes together and why we are where we are today, and where it’s all heading.
I hope these notes will also be valuable for your learning.
Happy macro’ing ya’ll.
Frei Bier / Twitter: @FreiBIER13
Medium: https://freibier.medium.com
DISCLAIMER: My writings are merely a reflection of my learning journey and my attempt to compartmentalize the cryptoverse. I am learning out loud so feel free to correct me or disagree with me. This is not investment advice but my hope is that you find value in some of my links and ideas.