Lyn Alden: Long-term debt cycle threatens geopolitical stability, emerging markets yield over $115 billion, and the Federal Reserve’s independence is at risk | Bankless

Key takeaways

• We are currently in a challenging phase of the long-term debt cycle, which could lead to significant geopolitical and economic challenges.
• Sovereign debt crises and wars are interconnected, often leading to systemic instability.
• Emerging markets have generated substantial yields for investors, highlighting significant opportunities.
• The fourth turning concept illustrates the cyclical nature of societal change and its impact on economic structures.
• Sovereign debt crises often result in currency devaluation rather than nominal defaults.
• Public trust in major institutions is at a low point, exacerbating crises.
• Rising polarization during a sovereign debt crisis can lead to unpredictable outcomes.
• Sovereign nations often resort to industrial policy to address major imbalances.
• The Federal Reserve’s independence has been historically compromised by Treasury interventions.
• The Federal Reserve’s actions during World War II were driven by the need to manage inflation.
• The Federal Reserve operates as a hybrid of public and private interests, affecting its decision-making.
• The Federal Reserve’s independence is increasingly compromised due to high debt levels and political influence.
• The current economic situation in Japan is expected to last longer than anticipated.
• Political polarization and inflation are consequences of long-term economic imbalances.

Guest intro

Lyn Alden is the founder of Lyn Alden Investment Strategy and a general partner at Ego Death Capital. She previously served as head engineer at the Federal Aviation Administration’s Cockpit Simulation Facility and authored the best-selling book Broken Money on the history of money and technology. Her macroeconomic research focuses on fiscal dominance, monetary policy, gold, and Bitcoin.

The implications of the long-term debt cycle

• “We are on the rough side of the long-term debt cycle, which could lead to significant geopolitical and economic challenges.” – Lyn Alden
• Sovereign debt crises and wars are interconnected, often feeding off each other.
• “Sovereign debt crises tend to lead to more war and war also can lead to sovereign debt crises so these things kinda feed off each other.” – Lyn Alden
• Understanding the concept of the long-term debt cycle is crucial for anticipating global events.
• Sovereign debt crises often result in currency devaluation rather than nominal defaults.
• “When it’s on the sovereign level it can’t really go anywhere other than currency devaluation because most sovereigns at least the ones that have their own currency will rarely ever default nominally so they’ll default their purchasing power debasement.” – Lyn Alden
• Rising polarization during a sovereign debt crisis can lead to unpredictable outcomes.
• “There’s rising polarization and so a lot more big outcomes can happen.” – Lyn Alden
• Public trust in major institutions is at a low point, exacerbating crises.
• “When you look across the board at public trust in media public trust in congress public trust in big corporations they’re all… really kind of low end.” – Lyn Alden

The role of emerging markets in the current financial landscape

• Emerging markets generated over $115 billion in annual yield for investors in 2024, with yields ranging from 10% to 40%.
• “In 2024 emerging markets generated over a $115,000,000,000 in annual yield for investors with yields ranging between 10 to 40%.” – Lyn Alden
• BRX changes the DeFi landscape by turning emerging market money markets and sovereign carry into composable primitives.
• “The problem defi can’t access them brx changes this built on mega eth brx takes emerging market money markets and sovereign carry and turns them into composable primitives you can access straight from your wallet.” – Lyn Alden
• Understanding the significance of emerging markets is crucial for investors seeking high yields.
• The fourth turning concept illustrates the cyclical nature of societal change and its impact on economic structures.
• “It’s a framing of cross generational intergenerational like roles that they play across about like eighty years.” – Lyn Alden
• Sovereign nations often resort to industrial policy to address major imbalances.
• “A sovereign that’s in a major imbalance rarely just says well we’re gonna let the market do what we’re gonna do they start using the tools that they have available to try to contain or redirect that issue.” – Lyn Alden

The Federal Reserve’s independence and its historical context

• The Federal Reserve’s independence was significantly compromised during the 1940s due to Treasury interventions.
• “Basically after the great depression began… the federal reserve lost a lot of its independence… we had kind of a more treasury takeover of things.” – Lyn Alden
• The current clash between the Fed and the executive branch mirrors the significant tensions of the 1940s.
• “This was the most direct clash between the fed and the executive branch since 1951… the twenty twenties equals the nineteen forties thesis is still on track.” – Lyn Alden
• The Federal Reserve’s actions during World War II were driven by the need to manage inflation.
• “The fed was totally captured by the treasury so they did yield curve control they said look we have to rack up all this debt to go fight this war but we can’t have market clearing interest rates when we have all this inflation happening when we have a 100% debt to gdp going on.” – Lyn Alden
• The Federal Reserve operates as a hybrid of public and private interests, influencing its decision-making.
• “The fed of course it’s a it’s a public and private hybrid so we’re talking about the the federal reserve board of governors here and including the chairman.” – Lyn Alden
• The Federal Reserve’s independence is increasingly compromised due to high debt levels and potential political influence.
• “I wouldn’t say that the fed has true independence at this point even though they still have some degree of control and the further we go into fiscal dominance kind of the tools of the fed start to narrow themselves even if they’re not captured.” – Lyn Alden

The impact of geopolitical dynamics on global finance

• The current trends in gold prices may indicate a shift in the monetary order.
• “When gold does what it’s done over the last you know months… it really starts to feel present.” – Lyn Alden
• The current dynamics of trade policy and inflation are influencing the desirability of gold and precious metals.
• “I do think that we… are seeing pretty tangible things… more countries saying well maybe I wanna hold some gold more than I have been maybe I want to diversify reserves a little bit.” – Lyn Alden
• There is a financial cold war between the United States and China affecting treasury holdings.
• “China over over time is holding less treasuries… there’s a little bit of a financial cold war going on between the united states and china.” – Lyn Alden
• The multipolar world, particularly with China’s rise, is likely to gain prominence over the US dollar system.
• “I do think the more multipolar side wins which is more of the china side like the more that they get some degree of kinda dollar independence and and mutual reserve assets like gold get elevated.” – Lyn Alden
• No single fiat currency, including the dollar, is large enough to serve the entire world anymore.
• “There’s really no currency in the world including the dollar like let’s say no fiat currency in the world including the dollar it’s big enough to serve the whole world anymore.” – Lyn Alden

The evolving landscape of crypto

• Bitcoin remains the dominant crypto and its value proposition as a decentralized ledger continues to hold up.
• “I would say in this cycle you know big bitcoin is still you know dominant crypto… I see that part of this is on track.” – Lyn Alden
• The demand for decentralized ledgers is growing slower than expected, indicating a lag in recognition of their value as monetary assets.
• “I do think the world’s kind of maybe a little slower to recognize its use and a monetary asset… these things can take quite a while to play out.” – Lyn Alden
• The four-year cycle in Bitcoin may not be as impactful as it once was due to changing market dynamics.
• “Fundamentally, I don’t think there’s any reason to have a four year cycle expectation in play… I think it takes a couple cycles for the psychology to catch up.” – Lyn Alden
• The impact of Bitcoin’s halving on market dynamics has diminished as new supply becomes less significant compared to other market factors.
• “As the supply… has gotten so small relative to other factors… these are all much bigger factors than the new supply that comes from bitcoin in a having.” – Lyn Alden
• It’s prudent to have conservative expectations regarding government purchases of Bitcoin.
• “I think it is right to be cautious on expecting one big pool of money to come in and save a cycle… I wouldn’t bet on that and so then I think you wanna have conservative expectations.” – Lyn Alden

The role of network effects in crypto success

• Network effects are crucial in determining the success of a crypto as a store of value.
• “I put in a couple major arguments one is that network effects really matter and that you know once you have liquidity network effect once you have a security network effect brand network effect even to some degree it needs a you can’t just be marginally better you have to be way better to dethrone it.” – Lyn Alden
• Simplicity in protocol design tends to lead to better outcomes in the crypto space.
• “The second one is that in protocol design generally simplicity wins.” – Lyn Alden
• The winning foundation for internet protocols will be a simple, robust design with minimal governance.
• “My general view is that you know this is the the protocol of money and that i’ve been in that more layered design camp which is i want the foundation or expect that the winning foundation will be this kind of simple dumb one that is kind of maximizing for you know pretty tight bandwidth requirements pretty tight storage requirements minimal governance or governance like things to keep it going to keep the wheels on the cart.” – Lyn Alden
• I continue to hold a structurally bearish view on the broader altcoin market.
• “I’ve been kind of structurally bearish on it which is hey that these cycles happen but that they’re unlikely to accrue kind of multi trillion dollar market caps and I continue to hold that thesis.” – Lyn Alden
• I tend to be more of a bearish bull regarding Bitcoin price targets.
• “I tend to be in the bitcoin camp I tend to be more of a bearish bull which is that people have very high price targets and I’m like okay let’s take out the sovereign reserve let’s do this let’s say 150 k before we talk about you know $2.50 k.” – Lyn Alden

The future of global economic power and trade relationships

• The next monetary order is uncertain, with the US dollar’s dominance as a reserve asset potentially diminishing.
• “What I think a lot of people are trying to figure out is what happens next, what is the next monetary order… the dollar is still the world reserve currency from a medium of exchange perspective, treasuries and US bonds dollar denominated assets are going down in particular relative to gold.” – Lyn Alden
• China is strategically accumulating gold to position it as a store of value while avoiding the yuan becoming the world reserve asset.
• “There’s this idea maybe that China is helping with the gold price buying lots of gold… they want gold to be the world reserve asset they don’t want the yuan to be the world reserve asset though.” – Lyn Alden
• The multipolar world, particularly with China’s rise, is likely to gain prominence over the US dollar system.
• “I do think the more multipolar side wins which is more of the china side like the more that they get some degree of kinda dollar independence and and mutual reserve assets like gold get elevated.” – Lyn Alden
• No single fiat currency, including the dollar, is large enough to serve the entire world anymore.
• “There’s really no currency in the world including the dollar like let’s say no fiat currency in the world including the dollar it’s big enough to serve the whole world anymore.” – Lyn Alden

The impact of AI and technological advancements on markets

• AI may lead to significant deflationary pressures, potentially allowing for interest rate cuts without risking inflation.
• “The new fed nominee… is saying that ai is likely to be so disinflationary that we can probably cut rates and not risk inflation because you have other deflationary force.” – Lyn Alden
• AI will disrupt Google, but the impact will be slower than expected and will primarily affect non-transactional searches.
• “I also thought that disruption would go slower than people think because… AI disrupts a lot of Google searches about non transactional things… Google doesn’t care because they don’t make money from that search.” – Lyn Alden
• Significant events related to technology and IPOs are expected in 2026, particularly with companies like OpenAI and SpaceX.
• “Some very big things are happening in 2026 with all of the current events and the modern technologies that are unfolding.” – Lyn Alden
• The value capture at the corporate level will be thinner in the future compared to the capital-light social media era.
• “I do think that the value capture at the corporate level is gonna be thinner than the whole capital light social media era.” – Lyn Alden

Investment strategies and market dynamics

• Energy stocks and Japanese trading companies are strong investments due to their real-world assets and financial strength.
• “My energy stocks held up quite well because they were geared toward that possibility… i analyzed that back in 2020 and went long as well because the thesis was so strong and these things have just been explosive.” – Lyn Alden
• In ten years, the focus should be on assets that are undervalued and generate cash flow, rather than just the winning AI stack.
• “What is still here in ten years that is like short currency and long all the stuff we’re still gonna want in ten years and that is like trading at 12 times earnings because no one is thinking about it right now.” – Lyn Alden
• Investors should consider a blend of US and foreign equities, particularly in light of valuation differences and potential capital flows.
• “I have been over the past couple years a little bit leaning more foreign… partially because of the capital flows that can weaken the dollar and kind of start a flywheel in the other direction.” – Lyn Alden
• India is likely to outperform the average emerging market in the 2026-2027 period.
• “My base case is that india probably does better than the average emerging market in 2026 or let’s say the combined 2026 2027 two year period.” – Lyn Alden