The Vagaries of Debt: Patrick Madden on Student Loans, Government Debt, Asset Allocation, Inflation and Deflation, Bitcoin and Gold

This image has an empty alt attribute; its file name is P_Madden.jpg

Patrick Madden is an executive director of currency trading at a leading investment bank on Wall Street. He graduated from Yale with a degree in economics and received his MBA from Columbia. 

Madden and I discussed student loan debt, the philosophy of debt, government debt, inflation, the deflationary effects of technology, gold, Bitcoin, income inequality, macroeconomics, and asset allocation:

Ryan Maloney: Envision a small university with a brand that’s not well-known; it doesn’t have a huge endowment; it’s really dependent on students coming and paying their tuition; and maybe it’s running a deficit, in which every year it needs to find a way to pay off tens of millions of dollars just to get by, or else take out a loan. There are colleges everywhere in this situation, and at the same time you have students coming in and funding this education with debt. . .

Patrick Madden: Okay, so why do the students do it then (go to college)? Why do they do it? What’s the value to them?

Maloney: They think they need to in order to have a credential in the job market.

Madden: So you think it’s more the credential than the learning itself? As a mechanism to show employers that you can do work and be responsible?

Maloney: Yes, at this point in history. I don’t think a degree indicates that you’ve learned anything necessarily, but I think it signals to employers that you spent a lot of time doing something and that it was worth going into a lot of debt to get. And I think we’re at a point, as a society, where we can’t pay it back. It’s weird that there are these small universities in a lot of debt– they can’t balance their books– while at the same time their students can’t pay for it. There’s all this debt in the system, and I think of it as a bit of a bubble. And now with Biden coming in there’s pressure for him to cancel all this debt. I keep thinking higher and higher up the chain and it’s hard for me to see how this ends. Everything looks really nice right now on campuses: nice buildings, nice amenities, nice people, you name it. I think Warren Buffett talks about tides coming in and going out as it relates to debt: when the tide goes back out you’re going to see who’s naked, I think he says. There’s a book by David Graeber called Debt: The First 5,000 Years.

Madden: Yes. I’ve got it right here. I didn’t want to like it but I really enjoyed it.

Maloney: It really changes how you think about debt. Can you talk me through this? What’s going on here?

Madden: The first thing I find interesting is that there are all different kinds of debt– debt for a company, mortgage debt– but student debt is the hardest thing to discharge. You can’t default on it. If you lose your job, and you say, Well, I can’t pay the debt, it’ll just go into forbearance. And when you get a job again the government has the ability to take a part of your paycheck to keep paying it back. And meanwhile, while you weren’t paying it down you were accruing more and more interest. And then you compare that with mortgage debt: in the U.S. if you walk away from your home then sorry, you walk away; the bank seizes your home and you just move on; you liquify; it’ll hurt your credit score but it doesn’t stay with you. Student debt just stays with you. If a company has debt and doesn’t pay its interest there’s a procedure for it: it goes bankrupt; the creditor seizes the assets; they can sell it. The owners of the business lost their money, but they move on; they have a clean slate. And so it’s odd with student debt that you can’t do that. And the people who signed the contracts: it’s not clear that they knew the stipulations for it. I never thought I’d say it but I have sympathy with the plan to cancel student debt. The federal government is the creditor and now they see that people can’t pay it back. So what happens with countries who can’t pay their debt back; companies that can’t pay their debt back? They go into negotiations with the creditors, and the creditors say, Okay, maybe you can pay us something back, or maybe you can’t pay us back at all. But there’s a resolution.

Maloney: Say something like this does pass: the federal government cancels all student debt. The federal government is already in a lot of debt. Lately I’ve been trying to figure out who owns all this debt.

Madden: Some high percentage– and I don’t know what percentage we’re at right now; maybe a quarter, to a half; I’d have to check the numbers– but a high percentage of it is owned by foreign governments: China, Japan, Korea. We’ve been running a trade deficit ever since Clinton left, and all that means is we’ve been buying more things than we sell. Every time you buy a basketball from China you’re sending dollars to the Chinese. Let’s say you buy a hundred basketballs from China and they get a thousand dollars: the only thing they can really do with those dollars is go out and buy U.S. Treasuries. We buy so many goods from other countries; we give them our dollars; and then they turn around and use those dollars to buy U.S. Treasuries.

Maloney: I told you I was reading this book, The Price of Tomorrow. The author (Jeff Booth) says something exactly like that in there, and I didn’t realize– I thought China had an advantage on us because they own all our debt. We do owe them, but at the same time they’re giving us money to buy their goods, so they need us, too.  Does China have some advantage over us?

Madden: Well, Americans own a lot of it too. If you’re retired right now and you’re seventy-five years old; you have money but you think the stock market’s a little too risky for you; you buy bonds and you receive interest. A lot of it is foreign, but a lot of it’s held here in the U.S.

Maloney: Why does anyone bother buying U.S. Treasuries if the interest on them isn’t even beating inflation right now? Particularly foreign governments: wouldn’t they know that the U.S. can’t pay them back with dollars as valuable as the ones they purchased the treasuries for?

Madden: It makes no sense to us, but there are regulations and other soft restrictions that prevent owners of dollars from buying anything other than US Treasuries. Foreign governments want stable reserves, so in that case you are restricted to sovereign bonds. And while the interest on U.S. debt might be low, it’s even lower, or negative, in other countries. Could they buy equities? Sure, some central banks do that. But I don’t think people would be too happy if China started using their dollars to buy real estate in California. Pension funds and insurance companies are required to hold government bonds. Banks are required. If you are 80 years old and just want to park your cash somewhere, low interest in government bonds is better than no interest at a bank.

Maloney: It seems like we’re inflating our dollars to solve this problem, kicking the can down the road. How long can that go on for?

Madden: Well, that is the stated goal of the Fed: to increase inflation and be successful in doing it. It’s not clear to me that anyone really understands it. If you’ve got the smartest people at the Fed for the last ten years trying to generate inflation, and they’re consistently below their target, then it’s like, Who really understands it? Or take Japan. They invented quantitative easing. They’ve tried all kinds of fiscal stimulus to the point where their government debt levels are obscene; their government debt-to-GDP is something like 250%; their interest rates are at zero; they have no inflation. There’s a school of thought that suggests that the more debt you have the less likely you are to get inflation because you have to pay interest on your debt, and eventually that debt comes due so you have to save for that time. In that case you’re not investing; there’s no speculative behavior; you’ve got a lot of debt. Imagine if you went and bought the biggest house that you could possibly afford and you have big mortgage payments every month: then you’re going to be conservative with your money; you’re not going to go out and spend it; you’re going to hold onto it and save every last dollar to pay down the interest. So the short answer is: I have no idea. People thought there was going to be a lot of inflation after 2009 and there wasn’t. Now people think there’s going to be more inflation again because the government is intent on spending money, giving cash away to the people. If it’s spent, then yes, you could see a little bit more inflation.

Maloney: I was listening to Michael Saylor (MicroStrategy) talk about Japan in a recent podcast with Preston Pysh. He used Japan as an example, specifically Tokyo, as a place that has massive inflation, citing the cost of living. It seems like there’s a fringe distrust in a government’s official inflation statistics. These fringe people suggest we’re experiencing a 15-20% inflation rate in the U.S., not whatever numbers the government reports.

Madden: Home and rental prices have been going up in big cities for years now. In fact there was hardly a dip during the Great Recession. But that’s not going to be measured well in national statistics. I don’t think the government is lying about the level of inflation, they just might be measuring the wrong things. I was reading just a little bit about that guy you mentioned (Jeff Booth). There’s huge deflationary forces. Technology is hugely deflationary; declining birth rates are hugely deflationary. So they’re fighting against these tides that they can’t understand or win against.

Maloney: Can you explain what that is? Why is technology deflationary? I know they have huge market caps; I know they’re “stealing” jobs; but it’s not very intuitive to me why technology is deflationary, before I started reading this book, I guess.

Madden: I think there are two ways to look at it. One is, How much do you spend on a TV now? You go out and buy the best possible 42-inch, 4K TV; it’s going to cost five hundred bucks. Years ago that would have been three thousand. The underlying mechanism isn’t totally clear, but the way they’re able to manufacture chips, and screens– they’re able to bring costs down again and again and again. And another way to look at it is, If you look at an iPhone: how many devices has it replaced? I have this iPhone so I don’t need a phone in my house; I don’t need a camera; I don’t need to buy a calculator; I don’t need to buy a calendar; I don’t need an outdoor thermometer. It does the things a hundred other products do. It’s an eight hundred dollar iPhone versus thousands of dollars of other stuff. And they keep packing more and more in there. You just don’t need to go out and buy it; it’s all in this six-inch piece of silicon.

Maloney: So let me see if I have this straight: there are fewer goods becoming cheaper, but the Fed is printing all this money; so there’s all this money chasing fewer and fewer goods, which means things are going to cost more in the future. Is that true? Or do we just not know?

Madden: That was the fundamental argument, which I believed and so many prominent economists believed in 2010, and it just didn’t happen. It’s a simple argument: there’s so much more money and there’s a fixed amount of goods, so it was almost a no-brainer that the cost of goods would go up. It didn’t. People posit a few reasons for it. One is that all the Fed did was lower interest rates. It went to the banks and said, I will buy all the treasuries from you, and so anyone who had a treasury could sell to the Fed and they’d give you cash in return. And it’s not like they gave the cash to you and me; they just went to the banks and said, Okay, you guys have these assets on your balance sheet; we’ll give you cash for them. The banks said, Okay, thank you; here are the treasuries; I’ll take the cash. It was a simple transaction. But the banks didn’t go out and lend that money, for any number of reasons. One was they couldn’t find creditworthy people or companies to lend to. And the second was there were huge regulatory changes after 2009– they didn’t want the banks to go bankrupt again and have to get bailed out. They just needed a lot more cash than they required before. So yes, the Fed printed a lot of money but it just stayed on banks’ balance sheets.

Maloney: What does inflation and the Fed printing money look like in the future?

Madden: There are a few ways it could go. One is it could look exactly the same in that the Fed prints money, buys more treasuries, and that’s that. The difference is when the federal government gets involved, because the federal government, if they decide to issue a lot of treasuries– if they say ten thousand dollars for every man, woman, and child and the Fed says, Okay, no problem, we’ll print that for you and we’ll hand it out to everyone– then that should become hugely inflationary because that is your scenario where the Fed directly bankrolls the government. It’s similar to MMT (Modern Monetary Theory). Before the cash just sat with the banks or wound its way into financial markets. Now it is specifically in your pocket. Before it never got to your pocket. So how the government acts in concert with the Fed could potentially change the equation.

Maloney: I guess what you’re saying is surprising to me. I would think cancelling all this debt would have bad long-term consequences. Are you saying that’s not necessarily the case? Or that we just don’t know?

Madden: It could. The federal government is owed a lot of money by everyone who took out student debt. And it’s something like two trillion dollars worth? Okay, so the U.S. government is out two trillion dollars. What does it go and do? Well, what it does is it just issues more treasuries. It’s the same way they’re sending out stimulus checks to everyone. In theory it could be inflationary, because let’s say you held one hundred thousand dollars of student debt, and that was a cloud hanging over you; and every paycheck that came in was going to pay the interest on this debt. There’s no way to ever get out of it. Then the government calls you tomorrow and says, Hey, don’t worry about it. Well this is amazing. Now all this income that’s coming in: you can invest it; buy a car; buy a house; whatever you want. Who holds student debt? It’s a lot of young people; it’s a lot of productive capacity; it would free them up to take risks, to do all kinds of things. You cancel student debt or you hand out stimulus checks to people: it’s still the government spending money it doesn’t have.

Maloney: We had texted back and forth a little bit about gold as an asset. I didn’t really understand it. I didn’t understand why people would buy gold. And now we have Bitcoin on the scene, and I bought a little bit of it just to see what would happen. As a currency trader on Wall Street I would think people around you are talking about it, developing strategies for it. What are currencies like gold and Bitcoin? Should they be considered assets?

Madden: It’s a fascinating discussion. There are so many smart people who believe Bitcoin is the next big thing and the price is going to one hundred thousand and it’s the next form of currency. And there are equally smart people who think it’s worth nothing, that it’s nonsense. The thing with gold, for example: in certain periods of history, when society breaks down it’s the last form of cash. The currency becomes worthless, so people say, Give me an ounce of gold, or, Give me a barrel of oil. You get into a bartering system. It’s not clear to me that the U.S. will ever. . . we’d have to fail pretty badly to ever go down that path. The thing that gold has is it’s been around for five thousand years; people before the Romans were using gold as a store of value and a medium of exchange. Bitcoin has only been around for ten years, so it doesn’t really pass the robustness test. But it has a lot of attributes that are like money. Unlike gold you can transport Bitcoin easily: to your friend in South Africa; you can send it to your brother in China; it can slide so easily across borders; and people know what it is, Here you go; here’s one Bitcoin. Nobody really understands the mechanism behind it– I know I don’t– but the supply is totally constricted. There’s only twenty one million Bitcoins that can ever be produced. So it has a lot of valuable attributes. So I can see why people think it’s going to be big, but I don’t think either of them are ever going to replace currencies because ultimately you need the government to accept it. How do you pay your taxes? You pay in the local currency. The government doesn’t accept Bitcoin; the government doesn’t accept gold. But that’s besides the point. How do you value it as an asset? One of my professors in business school would ask us, What’s the value of an asset? over and over and over again, and one of us would have to respond, It’s the present value of future cash inflows and outflows. That was pretty much the entire course. It was the best course. And Warren Buffett talks about this too: a bird in the hand is worth two in the bush, or, Would you rather have a dollar now or two dollars later? What’s the certainty of receiving those two dollars? What’s the interest rate in the intervening time period? You have to take all of that into account. But with Bitcoin there’s no cash flow. You buy it now; it doesn’t generate interest. You get a bar of gold; that’s it; you’re always going to have a bar of gold. Someone asked him (my professor) one day, How do you value a commodity? How do you value gold? He said there’s really only one cash flow, and that’s when you sell it. Let’s say you were planning to sell it a year from now. The only cashflow is what you can sell it for. Well, how do you know what that’s going to be? You have no idea. It’s whatever someone’s willing to pay for it.

Maloney: Can you say again what an asset is? You described it as something that has a future cash flow.

Madden: An asset can be literally anything. It can be a share of a company; it can be a bond; it could be a barrel of oil; it could be anything. It’s just something that you hold that’s tangible. But it could be something that’s financially tangible: it could be a contract; it could be a gallon of milk; it could be the corner bodega; it could be a McDonald’s franchise. The key is, How do you know what it’s worth? If I came to you and said, McDonald’s wants to open up a new franchise in Orchard Park, and, Hey, do you want to own it? You’d be like, Yeah, absolutely; I’d love to own a McDonald’s. And they say, Well, how much are you willing to pay to own this McDonald’s? And then you go, Okay, what are my profits going to be? McDonald’s comes to you and says, Well, if you open this franchise you’re going to make one hundred thousand every year in profit. Wow, one hundred thousand; that’s nice. So how much would you be willing to pay for it? You’d certainly be willing to pay a dollar; you pay a dollar and you get one hundred thousand a year later, and every year thereafter until the end of time. You’d be willing to pay one thousand; you’d probably be willing to pay one hundred thousand; you might be willing to pay five hundred thousand. And so that number– how much you’d be willing to pay– that’s what you’d determine to be the value of the asset.

Maloney: If you, personally, buy a share of a company, do you spend time looking at their financials?

Madden: Yes. I think you wrote about Tesla recently. Tesla is a great example of this. How do you value a company that doesn’t even make any money right now? But let’s say I told you that Tesla entered into an agreement with the government: the government said, Okay, I’m going to buy ten million Teslas every year starting next year. And they told Elon Musk, I’m going to guarantee you make ten percent profit on every car you sell. Elon Musk thinks that’s a great deal: he sells the cars for a hundred thousand and the government gives him a hundred ten thousand; Musk keeps ten thousand per car. That’s ten million cars at ten thousand per car; that’s a hundred billion dollars Tesla would make every year, starting next year. So you look at that and say, Well, I’d probably be willing to pay a lot of money for a company that’s guaranteed to make a hundred billion dollars starting next year. That’s a simplistic example, but people are saying, Hey, Tesla’s way ahead of everyone. You wouldn’t be able to just look at the numbers– to really be sure about this you’d have to go and visit every car company on the planet. To be absolutely certain you’d have to make sure BMW– or Nisan, or Honda, or Toyota– isn’t going to make a competitor to Tesla. If they came out with an equivalent car in five years you’d be pretty nervous about whether or not Tesla can make money in five years. But if you look that far ahead, and you’re an expert in the car market and you think they can do it, you’d be willing to pay a lot of money for it.

Maloney: I remember when I was coming back from Alaska I saw you, and it was right after Occupy Wall Street. You had a different opinion about it than what I was used to hearing, probably because you’re the only person I know who works on Wall Street. I think the sentiment from Occupy Wall Street has probably gotten worse since then, in terms of peoples’ anger. I’m curious to know what you thought of Occupy Wall Street then, and what you think of that populist anger now.

Madden: What did I say then? I don’t remember. Did I have a positive view on it?

Maloney: I think you had a slightly neutral to negative view of it. And I could be completely mistaken here. I think I remember you saying– and again, I could be putting words in your mouth– that people don’t understand the causes of this. Maybe that they have a right to be angry but perhaps that their anger is misdirected.

Madden: Oh, yes. The banks had a part to play in the subprime mortgage crisis, but there were other participants. Banks were the scapegoat, but pursuing policies to put every American in a home– that led to it.

Maloney: Can I stop you right there? Can you say more about that? We have this idea that it’s an American dream to own a home.

Madden: It’s similar to student debt. Some obscene percentage of outstanding mortgages are owned by the government– by Fannie Mae and Freddie Mac. They’re actively loaning people money to buy a home; they’ve been doing that for decades. And because it’s guaranteed by the government the interest rates are much lower than they would get if the free market were doing the lending. Now you can get a thirty year mortgage at three percent, because the government guarantees it. And ultimately if you default on the loan the government can just print the money and make up the shortfall. So you have that actively pushing people to buy homes; you have Wall Street that’s doing all these subprime mortgages; everyone was kind of in on it. Then the people themselves were taking out debt that they couldn’t repay, and maybe didn’t even understand because the terms and conditions weren’t explained to them. Then you had the rating agencies who were sitting there saying, Oh yeah all this debt is perfectly fine, even though it was debt given to people who could never pay it back. Now it seems like the populist anger is going to be directed at the tech firms.

Maloney: Can you talk about that? I think that’s interesting too. I totally agree with you.

Madden: A former boss, a Wall Street analyst, once said to me, The popular opinion is always going to find some industry to vilify. Whether it’s lawyers; whether it’s Wall Street; there’s always going to be someone, and now it seems it’s the tech companies. I don’t know for what reason. Now it seems like there’s anger at Amazon, which is one of the most well-respected companies in America. There was just an article in the Journal today about how they crush competition. That’s what companies do. The thing with tech is that there’s a clear winner-take-all outcome. Nobody’s going to replace Google in search– because they have all the traffic their algorithms get better and better and better. It’s impossible to take them down. You look at Apple: you buy an iPhone– Buffett talks about this– people really love the iPhone, and when it’s time to get a new phone you’re just going to get an iPhone because your friends have it. You know how to use it; the familiarity’s there; you can share pictures with people; it’s even as stupid as being able to send emojis on an iPhone to other people; they totally locked you in. It’s these natural-born monopolies that America throughout its history has found distasteful, and now we’re starting to get after them.

Maloney: I heard you mention that book Debt: The First 5,000 years, that you didn’t want to like it. You also mentioned that you found yourself agreeing with the populist anger. I’m a bit like you: I can see it both ways. I can see why people don’t like Amazon, but I can also see how much Jeff Bezos’s company is benefiting everyone. This hypercompetitive atmosphere we have in this country; and this concentration of wealth that seems to get worse– if you only read news headlines and you don’t look too deeply into it. How do you think about that?

Madden: First I want to go back to the debt thing: don’t you think we grew up– our parents, our grandparents– it was always save, save, save; don’t overextend yourself; don’t take on debt; don’t borrow anything that you can’t repay. To default on your debt is such a, you know– you always make good on your promise. Debt is like a promise that you have to keep. Heck, he talks about in the book that we used to put people in debtors prisons; we used to put people in jail if they didn’t pay their debt. That seems extreme, but maybe at the time people knew exactly what they were doing and suffered the consequences. But today, how can a seventeen-year-old taking on student debt know the ramifications for when they’re thirty-five? We’ve used debt in certain ways these days, and maybe it’s worth finding a way to discharge it. But going back to the concentration of wealth: there are so many different metrics. Certainly the concentration of wealth has become extreme in relation to other points in history, but then what are the social mobility stats? Is there a possibility of making that amount of money, or is it the same one percent of people just increasing their wealth? If you’re saying the one percent can go to the bottom ten percent and the bottom ten percent can go to the top one percent, and that the top one percent is holding a bigger and bigger amount of money– if that money is changing hands then maybe it’s not such a bad thing. This year the number of new businesses started has been incredible with all the upheaval. The ability to create a new business: that would seem to me to be more important than a focus on how much the one percent– or how much one person has– and trying to capture a portion of it.

Maloney: I read this book called Basic Economics by a guy named Thomas Sowell. I don’t know if you’ve heard of him. He makes the same point, that when we throw these statistics out we’re not being very careful about who’s in the statistics, or if they’re changing over time.

Madden: That’s probably where I got that argument from (laughs).

Maloney: When people say that middle class wages haven’t increased since XYZ time ago, well, Who are the people in the middle class at that time versus now? Are they the same people? We don’t know. 

One more question for you, if you don’t mind, before I let you go.

Madden: Before you ask that last question, you have to tell me why you bought Bitcoin.

Maloney: When we talked a few years ago you mentioned the podcast We Study Billionaires, and at the time it was too advanced for me. I was just index funds, index funds, index funds. And lately– within the last month or two– I’ve been getting really into finance. I really like it. And Preston Pysh came out with this new Bitcoin podcast. I thought there were some good points in there. I don’t know everything, and he could be totally wrong, but I went down that rabbit hole. I’m not comfortable with putting money in it that I’ll ever need, but I would say it’s an experiment.

Madden: If you really want to go down a rabbit hole of index funds and passive investing, look up this guy Mike Green who’s done a bunch of podcasts recently. He runs a fund called Logica.

Maloney: He was on We Study Billionaires. That was one of the ones I had trouble following.

Madden: You’ve got to listen to it three or four times.

Maloney: And then he’ll come in and say Ray Dalio’s theory of the debt cycle is totally wrong. I’m like, Jesus.

Madden: Oh, yeah! So we’re listening to the same thing then. Because he was just on there.

Maloney: I just spent two hours studying this debt cycle, and now it’s wrong?

Madden: He just casually dropped that in there, and I’m like, Whoa, I’m not sure about this.

Maloney: So I’d say, yes, I’m invested heavily in U.S. stocks, and Bitcoin is just something I’m playing around with. But my last question was are there any books, any learning materials, anything you’re into right now you could recommend?

Madden: I like reading Warren Buffett’s annual letters; that’ll keep you on the straight-and-narrow. There’s another podcast called The End Game, with Grant Williams. And Grant Williams in general has a lot of interesting things to say. I’ve always tried to follow him. Honestly, I try not to read too much finance.

Maloney: Really?

Madden: At some point it’s just not clear that anyone knows anything. Okay: you’ve got Ray Dalio– who’s made billions of dollars– talking about his debt supercycle phases; and then you’ve got Mike Green, who everyone thinks is super smart; and they totally disagree.  Then you’ve got on that End Game podcast, back-to-back: this guy Lacy Hunt– he runs this fund– he’s been saying interest rates are going to go down for the last thirty years and he’s been totally right about everything, and he says they’re still going to go down; and then against that you have people saying that there’s going to be inflation and interest rates are going to go up. Economics, and peoples’ behavior in the financial world, is just so hard to predict. Buffett just says, Well screw it; I don’t need to bother with the macro world. I still find it fascinating; that’s why I still read about it and listen to it. But it’s not clear you can predict much of anything.

Maloney: There’s this guy I’ve been following– his name’s Naval Ravikant.

Madden: Oh, yes. I like him.

Maloney: He always says to learn microeconomics, not macroeconomics, because macroeconomics is just people battling about different worldviews.

Madden: Totally. Not only do they not know what’s in the future, they can’t even agree on what actually happened in the past. Going back to that guy Mike Green again: he says Paul Volcker was the worst central banker of all time. I thought, Did he really say the worst? Because there are so many smart people who think Volcker was the best central banker of all time. But Green made a compelling case. And it’s like, If we can’t even agree on what happened how can we possibly determine what’s going to happen in the future? We can play this game over, and over, and over again, and still not know what’s going on; and people still have such high conviction in it. And if you can kind of distance yourself from that, and maybe look at things from a different point of view– or maybe an agnostic, accepting point of view– you can sometimes get good insights.

[. . .]

The longer I do this the more interesting I find questions on asset allocation. What do you do with your extra cash? Do you go down the Buffett route and just say, Hey, listen, I’m going to buy shares of companies; I’m going to study them; I’m going to know them; I’m going to understand exactly what the cashflows are going to be and invest in that. Do you get concerned about the Fed printing too much money? Should I be buying all these dollars? Would I rather have gold? Or Bitcoin? Or land? Those are the fascinating questions to me.

Maloney: Me too. Like: if we enter this deflationary period should I bother buying a house? I don’t know.

Madden: There aren’t many worse things you could do– if we were in a deflationary period– if you got a big mortgage and bought a house. Because you owe a fixed amount of money and the asset against that is going down.

Maloney: Or should I just do what I want and live my life? But like you said, it’s fascinating to think about. It’s fun. It’s mental gymnastics.

Madden: It’s fun to think about, but then sometimes you’ll go down a rabbit hole. I think I spent the entire month of October– every night before I went to bed– thinking about whether or not I should buy Bitcoin. I didn’t; I wish I had; but in the end I was never going to have a consequential part of my wealth in there. It was just the mental exercise of going through: Okay, why would I buy this? What’s the purpose? What’s its value?

Maloney: Are people on Wall Street thinking about Bitcoin? Would you be considered crazy for thinking of buying it?

Madden: No, not at all. It’s like a quiet acceptance. People are watching it. I’ve got to think people will start trading it more widely but it hasn’t happened yet. If you want to buy it you still have to go through Coinbase, or Binance, or one of these cryptocurrency sites. There’s this guy Bill Miller– he’s a legendary value investor– he had an interview six months ago that was like, If you’ve got extra money left over then you can afford to have some Bitcoin and see what happens. We were at Governors Island a couple months ago, which is this small island of the southern end of Manhattan. It’s really not used as much of anything except music festivals once a year. But it’s a very strategic piece of land: there was a U.S. fort on there; it’s pretty much where you would defend Manhattan from if ships were coming in. In the 1600s the Native Americans owned the land, and the Dutch came over and said, We want to buy the land. And it was something absurd: the Dutch gave them something like two hammers and five nails for the entire island. But to the Native Americans at the time that was their valuable currency. It was what they bartered with; they could presumably use it and go buy other things. Little did they know that the world had totally changed. If they had accepted gold for that, and kept it, that would be worth some huge amount of money today. Or if they said, We don’t want these hammers or nails but we’ll trade you for another piece of land, they would have kept their wealth. So sometimes I wonder, If you’re holding dollars right now are you like the Native Americans of Governors Island? You’re holding these dollars that the government is intent on making worthless. Should you be saying, You know, I’d prefer to have land, or gold, and maybe a few shares of Apple?