Cryptocurrency, Housing, Inflation, and More

In this episode of Industry Focus: Energy, NPR's Jacob Goldstein returns to the show for a wide-ranging conversation with Motley Fool contributor Jason Hall and analyst Nick Sciple about the cryptocurrency market, inflation, housing, and more. 

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.

This video was recorded on June11, 2021.

Nick Sciple: Welcome to Industry Focus. I'm Nick Sciple. Every now and again here on the podcast, we like to share a peek behind the curtain, share some of our members-only content, that we make here at the Fool. Back on June 11th, Jason Hall and I sat down once again with Jacob Goldstein, host of NPR's Planet Money, and author of the book Money: The True Story of a Made-Up Thing, for a wide ranging discussion on cryptocurrency, inflation, the economy, and more. This conversation first aired for Discovery members back in June and we're excited to bring it to you today. We hope you'll enjoy our conversation. 

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Yeah, it's a big change. How has the role of cryptocurrency changed in the past month, with the emergence of Bitcoin (BTC -3.57%) on company balance sheets, or Dogecoin, maybe increasingly on company balance sheets? What do you make of this?

Jacob Goldstein: It's mysterious ultimately to me still, I think.

Jason Hall: You're not the only one, you know. 

Goldstein: The Tesla thing is perfect. It's like, "We're going to buy a bunch of Bitcoin, you can use Bitcoin to buy Teslas. Wait, actually Bitcoin is bad for the environment, and Tesla's supposed to be good for the environment, so you can't use it to buy Teslas, but we're going to keep the Bitcoin anyways." It's like, what's the coherent story I'm supposed to extract from that? I don't know. That to me is where I land. I have to say it, I don't have some grand theory of cryptocurrency that explains it all. The big puzzle to me, still with cryptocurrency, is when are we going to see the killer app? It is this interesting technology that's clearly really clever, really solves a lot of technical problems, and yet Bitcoin was invented essentially in 2008, that's a long time ago, in technological time. About the same time as the iPhone, and it's price has gone bananas in the last few months. It went way up, it didn't back down some, it's still very high. But what is the killer app? So far, I guess the killer app is ransomware. Let's be honest.

Hall: Right.

Goldstein: If we think about what's been happening, it's been ransomware for a long time. But just in the last few months since we talked last, there was the Colonial Pipeline hack. There was the JBS, that meat company hack. It's like, what is Bitcoin really good for? All right, it's really good for crime, which we've known all along, but it's become more salient.

Hall: Well, the interesting thing too, you talking about those two things, very recently, with the Colonial Pipeline, the FBI has announced that they were able to recover a substantial amount of that money. It happened when the pork traders of the crime actually turned it into money. It's when that transition, they were able to follow the large blockchain transactions. My question for you, because this is a great line from your book is, "Money is something that enough people believe is money," just to paraphrase you, are we there?

Goldstein: With Bitcoin you mean?

Hall: Right. Outside of El Salvador because they clearly say, yes it is.

Goldstein: They wanted to be, which is also interesting and we can talk about that too. No, would be my shortest answer to that question. It's useful to think about money not in such a binary way. Dollar bills are money, fine. Your money in a checking account is money, but it didn't used to be as money-ish as it is now. If you go back 100 years when the government didn't guarantee everybody's money in a checking account, when you put your money in the bank, you were lending it to the bank, and if the bank went out of business, you didn't get your money back, so it was more like a loan to the bank. Similarly, with Bitcoin, it's certainly money-ish. It certainly could be money. Once in 2011, I bought a falafel sandwich and a smoothie with Bitcoin. So I once bought something with it.

Hall: Most expensive it'll ever be.

Goldstein: But of course, if I had not bought it, $100,000 as of earlier this year, which speaks to the non-moneyness. A thing where you feel like a champ for spending it, is not money. You don't say, "If only I wouldn't have spent that $20 then."

Sciple: It's interesting too. It also reminds me, I think there was a line in your book that was like, "As soon as you need shells to get married or things like that, people start hoarding it." If we all decide it was money, in a way, in that interstitial period, that behavior would manifest, wouldn't it?

Goldstein: Yeah. Again, money is not as binary as we usually think, and so a government accepting something in taxes, that's another classic sign that the thing is money. Because then it's like, "Well, I'm going to have to pay my taxes, so I might as well get some Bitcoin. I might as well accept Bitcoin in payment for my services. The volatility of Bitcoin's price, I think, goes against its moneyness. The idea that a dollar is going to buy twice as much stuff next week, or half as much stuff next week, suggests that it's not working well as money. The notion that "I'm going to get a bunch of dollars so that in a year I can buy a bunch more stuff with the same amount of dollars." That's not how money works. When people say money is a store of value, that's not what they mean. When people say Bitcoin is a store of value, what they mean, I think is, Bitcoin is a speculative asset. It's an asset class. That seems valid. People compare it to gold. Although gold is weird, gold is a weird asset. It doesn't throw off a stream of income. It's this archaic thing that has value for unclear reasons, Bitcoin is better gold, it seems like the best Bitcoin story I know.

Sciple: Yeah. I think to your point of it, it's in this weird role right now. I remember just in recent weeks, there was the Bitcoin Conference in Miami, and I think at one point they were handing out a prize. It said you could win X dollars worth of Bitcoin, and obviously, you recognize the irony of this, a conference about how Bitcoin is the future of currency, pricing their price in dollars. How do you feel about this weird place Bitcoin is in and just crypto in general?

Goldstein: To me, still an interesting question. People compare it to the early days of the Internet or of the web. That to me seems like an interesting comparison, and so then the question becomes, what is the first killer app? That, I think, takes us beyond Bitcoin to crypto more generally. I think there is a good case, that Ethereum is more likely to be useful, smart contracts and that sort of thing. They're things that on their face seem like natural fits for Bitcoin, like remittances, workers sending money back to their home country, and to return to the El Salvador thing, a huge part of El Salvador's GDP comes from workers who come largely to America and send money home. That is an industry, Western Union, that kind of thing, where there are very high fees. If you could use Bitcoin or some other currency to make remittances cheaper for these people who are putting themselves at risk in traveling, and working, and trying to support their families, that's great. That's finance doing what it's supposed to do. Making life better for ordinary people, who are not trying to get rich in some crypto casino, but rather just trying to live their lives. The thing I really want to see in crypto is just some simple, boring, useful thing that helps ordinary people. It's striking to me that we still have not seen that.

Sciple: Yeah. It is striking. It's one of these tough things because I think you've talked about this in the book of Money is Trust and all these people putting their trust in Bitcoin, I think as a future currency more and more folks, but its ability to perform that role. If you have a 2% margin business and this is the currency, the flex rate is 10% a day, I don't know how you run a business on that. But yet more and more people are putting trust in this. It's a weird place to be. I guess another way to go from that is, what does that say about trusting and things like the U.S. dollar or trust in things like other currencies around the world.

Goldstein: Well, a few things you mentioned, if you run a low-margin business, what does the volatility of Bitcoin mean for you? There is a universe where a Bitcoin or some other cryptocurrency is just the pipes where you, the businessperson, are still getting paid in dollars, but you're moving money around or in the case of remittances, the El Salvador worker in the U.S. is getting paid in dollars, going to the crypto money transfer store on his phone or whatever. The money is moving via crypto but is dollars on either end. That works fine and you can reduce your exposure to volatility that way. The volatility isn't inherently problematic. In terms of trust more generally, money as trust is a big idea. Certainly fiat currency, it's clearly backed by nothing. People use dollars because they assume that I get paid in dollars because I assume I can buy my groceries in dollars and I can. What we're really trusting when we trust the dollar is the U.S. government. We're trusting the American economy as a going concern. People often say they don't trust the U.S. government, but like everybody kind of does. If you are living in the dollar economy, you are on the hook for what happens in America. 

I don't think crypto currency is much of a threat to the dollar now. It's interesting. We could talk about Central Bank digital currencies. That's another thing that I feel like just in the last few months, we've been hearing more about. I believe in the last few days anyway, there were hearings in the Senate about Central Bank digital currency in the U.S. Obviously, China has made a tremendous amount of progress with the Central Bank digital currency. The basic idea of a Central Bank digital currency is antithetical to crypto on a certain level. Because the origins of cryptocurrency, and like this is a story I tell in the book. It's very libertarian. It's very like we need money that is not tied to the government.

Hall: It is the inverse of a government-created digital asset, right?

Goldstein: Yes, it's private and it's untraceable. Like the dream of these libertarians who were very clever and solved all these hard technical problems to essentially invent Bitcoin was, "Let's have anonymous money, that is digital and that has nothing to do with the government." Then cut to China, creating a Central Bank Digital currency being the farthest along. China is the greatest surveillance state ever invented. Clearly part of the reason they're doing this is because it will allow them to track every transaction. Cash is inherently anonymous. If I give you a $100 bill, nobody has to know about it. But if I send you $100 in Central Bank digital currency that is eminently trackable. It's like the bizarre real-world version of crypto on a certain level.

Hall: It's going to be really interesting to see. The Fed announced that they were going to be doing some studies of this over the summer. So it's going to be really interesting to see what comes out of that. I think one of the things that maybe you can weigh into in terms of thinking about those use cases, thinking about the thesis that so many people that [...] the currencies right now is the fact that it's going to go up in value. Again, like you said, that's very antithetical to what currencies are supposed to do as this predictable store of value. Thinking about a few things. Recently, here's a few things that have come out. Interactive Brokers, which is one of the larger low-cost brokers, has announced that later this summer they're going to be allowing cryptocurrency trading. Coinbase recently went public, which is by far the dominant trader trading platform. It's just come out in the news that they have partnered with a small 401(k) provider. For the 400 businesses are so that they do to allow for people to be able to buy crypto assets in their 401(k)s. It's interesting thinking about it in terms of money versus assets. Maybe that's where we are now. But do you think it's going to continue to move forward? Do you think it is going to continue to proliferate? Where do you see this in the cycle of it being a thing at all?

Goldstein: Well, in terms of asset prices, let me say I have no idea. I don't know what it's going to do. It seems obvious that a lot of the movement now has nothing to do with, is it money or is it this, or is it that. It's just here that this thing that is worth X or 100X, what it was a year ago or a month ago. I want to buy it in case it goes up another 10X. A lot of it is just not that intellectually interesting. There's all these divisions within the crypto world now, Ethereum people look down on the Bitcoin people. All of the serious, thoughtful crypto people hate the Doge people. Because Dogecoin is clearly a joke and it went up a lot. It makes serious crypto look bad. Because if you're on the outside of crypto and you think it's a joke, you're like, look this stupid joke coin just went up 1,000% or whatever it was. Clearly it's all ridiculous. They're like, "No no no," but Ethereum and smart contracts die. It was like, yeah, whatever, it's a dog meme world. There is this whole spectrum. I do still think that technology is quite clever. When you look at all of the hard problems it has solved, I believe that blockchain could be useful. It's interesting that it's not useful yet, but I'm not going to say it's going to go away. Lots of people who are way smarter than I am and know more about it than I do. 

Really, I honestly believe in it and are not just trying to get rich quick. It seems like it will persist, it seems likely that people will figure out useful things to do with it. What I have no idea is like, what will the value of any of the coins be. It's a strange duality between like some potential set of future uses. Then like the crypto casino. There's all this weird like yield farming, there's just a huge amount of money churning around without anything really happening. To go back to another theme we were talking about last time, it's like this distinction between the real economy and finance. The point of finance is not just for people in finance to get rich, it's for finance to help you do things in the real-world. To buy a house without having to save money for 30 years or whatever. Basically to move money around the time. Would it let you get some interest if you have money now and want more money later. It's weird in crypto how like there's all this financed up, but it all, it never pokes out to the real world. It's just like crypto within crypto, within crypto and you're lending your crypto to other people who are going to buy more crypto and like, where's the actual world people doing things in this whole story.

Sciple: You mentioned the Doge meme world, so I want to zoom out from crypto and maybe more to the broader world of finance because that mentality has moved into the GameStops for the world and the AMCs. We're in this universe of what's going on social media is infecting what's going on in the financial world as someone who follows finance and how it intersects with real people, what do you make of it?

Goldstein: I will say you used the word infecting, which is an interesting choice of words. I might say it's a more neutral choice. It is interesting. I did a story about GameStop when I was first popping early this year and talked to a guy who made, I don't know what I think a million or a few million dollars. Who was like just some guy. That's the amazing thing about this kind of lottery world. I don't know. Does it take all the air out of it, if I say it's not that big of a deal? It's like a few stocks with relatively small market caps. I'll tell you my priors are like, I think the stock market is pretty efficient. I know there's like a cartoon-ish efficient market hypothesis that people like to make fun of. But I don't mean that version obviously stock valuations move more than fundamentals would suggest. But I think the stock market works pretty well. The emergence of meme stocks is interesting, but it just seems like a casino sideshow, that's fun. It's also interesting how much GameStop has gone back up. How it does seem to be turning into a real company, like they're hiring people from Amazon, and that guy from Chewy is the Chairman of the board. It would be a fun end of the story if GameStop actually did pivot to be like a smart online video game company that had huge revenues to justify its valuation. From a narrative standpoint, that would be a fun outcome. Rocket emoji, rocket emoji, diamond hands.

Hall: Let's think more broadly about what's going on with money itself. The U.S. money supply has increased in an enormous amount over the past year.

Goldstein: Speaking up to the moon, dollars to the moon.

Hall: Right. But while that was happening, initially, we didn't really see inflation or deflation or any of the things that a select group of economists and financial folks have been saying over the past decade is that, between deficit and increasing the money supply, eventually there's going to be repercussions. We're just coming out of May as being almost a decade and a half, the highest inflation month ever. Lumber prices are triple where they were, I think the average home costs $25,000 more to build than it did a year ago, vehicles, there's all of these things happening. I'd just be curious to hear just your thoughts here.

Goldstein: Yeah. This is maybe the most interesting question to me right now, not as sexy as cryptocurrency, but I think more important. As you guys, I'm sure know already the big, whatever trillion-dollar question is, to what extent is this inflation we're seeing now, just some weird transitory coming out of the strangest economic year in our lifetimes, the pandemic to shut down the reopening, and to what extent is it a change in the inflation regime? Most people seem to think it's transitory. The fact that year-over-year inflation was, what was it? About 5%, the number that just came out. Again, that's comparing what happened in May of 2021 to May of 2020, but maybe 2020 was a super weird year. You're comparing prices for things like used cars in the middle of the biggest economic shutdown of our lifetimes to prices right now. That's a weird comparison that we shouldn't infer too much from. That's the transitory story. Will it be a change from a low-inflation regime to a high inflation regime? It is an interesting question. One of, I think, the big insights of the last several years about how inflation works is, a tremendous amount of inflation is driven by what people think inflation is going to be. Inflation expectations are strangely a crucial driver of what inflation actually is. 

Part of the theory for why inflation stayed so low all through the thins was, people expected it to, and therefore workers weren't demanding raises, therefore, multiyear contracts didn't have big inflation hikes built-in. I think we're going to be in a high inflation regime. Story goes, well, people keep seeing five%, they're going to expect high inflation and that's going to drive high inflation. I'll say I was just talking to a forecaster this week, and she made a really interesting point in terms of which of these is going to be, she thinks it's going to be transitory. I'll say, I don't want to do false equivalence here. It seems like most of the smart money, and if you look at market-based, 10-year break-evens, whatever, market-based measures of inflation expectations, they are still quite low. I want to say that clearly because I feel like, in terms of pundit, he said, she said, you don't get that sense, but I haven't looked at 10-year break-evens for a little while, but they're like 2%, maybe a little over 2%, they're low. A point this forecaster made was, if you look back to the 70s, which is the classic American inflation story, something like 80% of workers had cost of living allowances built into their contracts, built into their work. Then what you start to see is, if there's 5% inflation, they get a 5% raise and then their employer raises prices 5%. That locks in this wage price spiral where it keeps going and going and going. We don't have that now. Most workers who don't have a CPI adjustment built into their contract and therefore it makes it less likely that inflation is going to just take off.

Sciple: When you were saying that the idea of expectations cause inflation, maybe you think back to the colonial pipeline thing where expectations of gas shortages created gas shortages. Maybe you're seeing that happening, there is a little bit of a structural shortage in the housing market but there are these expectations that there's going to be a lot of bidding going on in housing. What do you make of what we're seeing in housing?

Goldstein: Well, I'm in contract to buy a house.

Hall: Congratulations or condolences? You tell us here.

Goldstein: We don't know. In six months have me back on the show and we'll know whether it's congratulations or condolences. It's funny because I am cheap, I shop, I like deals. If I'm going to buy something online, I see if there's a promo code. Here I am making by far the biggest purchase of my life at a moment when I'm definitely not getting a deal. It's a little scary. Clearly low interest rates are part of what's propping up home prices. It's amazing how low interest rates are. The apartment I live in now, I bought eight years ago and I can't believe it. I'm going to lock in this rate for 30 years because it's never going to be this low again. It was 3.75%, and on this house I'm buying now, it's like 2.9% or something, no points. Obviously the lower the interest rate the more house you can afford, that's part of it. The shortages I think are part of the reopening hiccup, I think they're going to be transitory, I don't know. One thing people in housing talk a lot about is demographic tailwinds, millennials waited a long time to buy houses. It's also the case that home-builders were super chastened by the financial crisis and the housing bust, and so they were very slow to add supply. It seems my hope, my motivated reasoning based on the fact that I just bought a house is like, this is not some like the 2006 bubble. It's just everybody catching up and that home prices aren't going to keep going up as fast as they're going up, but it doesn't seem like a crash is imminent, knock wood.

Hall: Yeah, it's interesting. This is actually a sector that I follow really closely and Nick does too maybe to a lesser degree. But everything you said lines up looking from the investing side, we're looking at basically a decade where builders did not build entry-level housing. Entry-level housing is also where the demand is from those millennials. So many of them were coming out of college or even just going into college in the worst economic crisis in the past century. Here we are today with this massive tailwind of demographics trend that's pushing, you have the buyers, so you have the demand, and then there is just such weak supply. I think you're right.

Goldstein: That's encouraging. Let me just say thank you for saying that, it makes me rest a little easier.

Hall: Yeah. Well, I'm glad. Of course that means since I'm a stock jockey, I'm probably going to be 50/50 on whether or not it proves to be true.

Goldstein: Okay. I think you're 51% likely to be right.

Hall: Perfect. The affordability thing I think is an important thing you talked about, because you think about the tension between interest rates and affordability, particularly with housing. There's nothing else so that affects more in terms of when people make the decision. Because at the end of the day, people are looking at the payment. They're looking at how much it's going to cost compared to renting. That's the calculus that people do. I'm not sure how much time you spend looking at interest rates, but I'm curious just to your thoughts, thinking about inflation, thinking about the Federal deficit, money supply, all of those things that are tied together and there's a lot of tension between that and interest rates. Is that an area you'd like to talk about for a minute?

Goldstein: Yeah. You didn't say the Fed in that sentence, but I feel like the Fed is the center of a lot of that, right?

Hall: Yeah, right.

Goldstein: I will say it's striking to me that the Fed is still buying billions of dollars of mortgage backed securities every month, that which they started doing during the crisis. That seems weird to do at a moment where home prices are rising by 10% or more year-over-year. Set that aside, clearly, the Fed is very committed to keeping a super accommodative monetary policy, to keeping interest rates super low. If you look at the longer arc, look at the last 10 or 15 years, there was this moment that we have forgotten now but it's a really important moment in 2019 say, right before the pandemic hit, where unemployment had gone down lower than anybody thought it could get. People had thought like, oh, 5% unemployment, that's full employment. When that happens, inflation is going to start going up. Then it hit 5% and inflation didn't go up. It kept going down and it eventually got to 3.8%, it got to below 4%, and inflation was still low. When unemployment got that low, wages finally started going up especially for people in the lower part of the income distribution. 

This is the magic of full employment. This is like market based power for labor. There is this dynamic between labor and management, and the lower unemployment is the more bargaining power workers have. I think the Fed really saw that. They recognize that we're in this strange moment now. Even though the economy is booming and inflation is high, it's also the case that we're many millions, six or seven million jobs in the whole. The Fed, I think, it's going to keep interest rates low. They've said basically, they're going to keep interest rates low until we get those jobs back. They're committed to this idea that inflation is weird and transitory. I think they can hold that position for many months to come assuming inflation doesn't just go bananas.

Sciple: Yeah. I think we've spent a lot of time here zoomed in on this cryptocurrency, inflation, the Fed, these trends we're seeing, and housing. I want to maybe zoom out, think about the future here. Where are things going? Listen, they're going to write books about what just happened in the past year with the pandemic. This is a moment in history that is going to be changing in the way The Great Depression was changing and things like that. How do you think finance or money or our relationship with it has changed in this past year in a way that is going to be fundamentally different going forward or will be in those books that we read in the future?

Goldstein: Yeah, that's a great question. The first thing I think of when you ask that is how much money the Federal government borrowed and spent largely by just giving it to people? To me in terms of macro finance the fact that the government, in a pretty much non-controversial way, in any bipartisan way, which is extraordinary in this very partisan moment, borrowed trillions of dollars and then just sent it in the form of checks to people. That's wild. That hasn't happened before. That kind of spending on that magnitude hasn't happened in decades and it just happened and it basically worked. It reduced suffering and the deficit went up, and at least so far inflation has stayed low. To me that is potentially the signal shift. The other thing that is really striking to me and not just to me to anybody who is paying attention I think is, how resilient the economy was for one? If you go back to last spring, it felt like we were all about to die and there was going to be a great depression. I think the roots of a lot of the shortages right now go back to that moment. Automakers were like, "Oh my god, nobody is going to buy cars so we don't need to buy microchips because we're not going to make the cars."

Hall: The global supply chain basically shutdown.

Goldstein: Shutdown because everybody thought everybody was going to stop buying stuff.

Hall: Right.

Goldstein: So they canceled their orders. That didn't happen. Similarly, asset prices just came roaring back. When you talk about zooming out and thinking like, OK, when we look back at this era, what is going to be striking? The sort of everything boom is weird. Everything is not going to boom forever. That seems like part of the crypto story, to return to crypto. Obviously, the stock market is moving but crypto too. It seems like there's just all this money looking for returns. That is a huge story, it's like the water we're swimming in.

Hall: Right. Particularly you think about what's going on in so many other developed countries with negative interest rates. This hypermarket that we have in so many ways.

Goldstein: Just so much money.

Hall: Yeah. 

Goldstein: There's the loose monetary policy.

Hall: Literally so much money.

Goldstein: So much money. If you want to really geek out, I was looking at the Fed's reverse repo program. That might be a bridge too far, but basically it's this thing the Fed does to put a floor on interest rates. When banks literally have more money than they know what to do with the Fed is like, "Okay, we'll borrow from you," the banks, "overnight because you don't know what else to do with your money." They do that to put a floor on interest rates, but that is upside down. The Fed is the lender of last resort, typically it's what we think of. In this instance here, the borrower of last resort. It's like there's so much money, banks don't know what to do with it. That's weird.

Sciple: Yeah. I've got your book title. It's the water in which we swim. We're swimming in money yeah, welcome to the Scrooge McDuck era.

Goldstein: Okay. I'm ready for the gold coin bath, the crypto bath.

Hall: That might be less painful than diving into a giant pile of gold.

Goldstein: Yes, although what is a crypto bath? It doesn't exist, but it's worth a lot.

Sciple: It's a virtual sculpture.

Goldstein: We do it NFT, like the NFT of my bathtub.

Hall: There you go. I don't think we could close it with a finer description of what's happened over the past six months. Jacob Goldstein, thank you so much for coming back on and talking with us.

Goldstein: It was so fun. I hope we can come back in another six months and talk about whether my house was a good or bad call.

Sciple: Can't wait.

Hall: Me too. I think there's probably going to be a lot of other things that would have happened over that period to talk about. Again, Jacob Goldstein, NPR's Planet Money podcast host, author of, I'm going to say it again, one of my favorite books that I've read over the past year, Money: The True Story of a Made-Up Thing. Go find it at your favorite bookseller and buy it today. Jacob Goldstein again, thank you so much for coming on.

Goldstein: That was really fun. Thanks for having me.

Sciple: As always, people on the program may own companies discussed on the show and The Motley Fool may have formal recommendations for or against the stocks discussed, so don't buy or sell anything based solely on what you hear. Thanks to Tim Sparks for mixing the show. I'm Nick Sciple, thanks for listening and Fool on.