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Book your [email protected] or call your travel agent WestJet where your story takes off. I'm Tom Dilue and this is Impact Theory. Today we're diving right back into part two of my conversation with visionary entrepreneur and cryptocurrency advocate Arthur Hayes. Over the last 40 to 50 years, the financial ecosystem has been predicated on a scenario where there's never been a situation where long end so called 10 to 30 year bond yields in the US rise, so they go up, but they go up faster than in short term yields.
It's called that's never happened for sustained period time. No. Over the last 40 years. It's called the bearstype.
Right? So if I'm a bank, I'm an insurance company, independent, independent company and I'm going to model what I think the future can look like. I'm going to model the way the futures look for the past 34 years, which is every time the there's an issue and yields go up, the government comes in, prints money and squashes that down. They swash them all silly down the markets because they want to save the banks since they don't want anything, anything to blow up.
But now, because we're in a situation, at least in the US treasury market where the US government is issuing the most amount of debt ever, right? Federal deficits like 78% of GDP. It's as if we're in a war. This is, you know, the largest, longest sustains of deferences in war too.
But we're not in a war, you know, at least not an over one. If you have US$7.7.75 trillion of debt must be rolled over 20, 26, massive amount of debt that's just on the US side. So who's going to buy it? Right?
The traditional buyers were one, China, Japan. Right, China. Japan not buying any more U.S. treasuries.
China because it doesn't want to become more tethered to the dollar from a geopolitical safety issue. Japan because it's also facing an issue in their bond market where their currency is getting trashed because they are also trying to save their bond market. Japan thankfully to themselves have saved a lot of money over the last 30, 40 years and so they're now starting to draw down that money. They're not buying new Treasuries, they're starting to sell Treasuries.
China started not Buying any more treasury sort of trying to sell Treasuries. And if you look at the official data from the US treasury, you can see that the balance of Treasuries on why China and Japan are declining on the oil exporter side, right. Talking about opec Russia is a big number of opec. Russia is obviously not buying more Treasuries, it gets banned them from the Western financial system.
Saudi Arabia is not increasing its treasury division, it's also decreasing. So the oil exporting nations who previously earned dollars internationally and part of those dollars in the US banking system to buy Treasuries, they are no longer buying Treasuries. The US banking system, the US banking system is functionally insolvent because the regulators made the rules in such a way that it was profitable from an accounting perspective and economic perspective to essentially take in deposits and buy low yielding Treasuries. And they could do it with almost infinite leverage and a few basis points difference in the change in the price.
And everybody make a lot of money, everybody gets a big bonus, right? So the banks collectively bought all these treasuries in 2021 and obviously the prices went down a lot since then. And that's why we have the regional banking crisis. So at a structural level, the US banking system cannot buy more debt because they can afford to, because it's functionally insolvent.
And so, and you know, that is the Federal Reserve. But the Federal Reserve has committed to doing quantitative tightening which means it's letting the Treasuries roll off of its balance sheet. It's not accumulating more Treasuries. So the treasury has to issue all this new debt, it has to roll over all this new debt.
But the major buyers of this stuff for all their own, you know, disparate reasons cannot purchase it. And so what we're seeing in the markets is relationships that held clad are breaking down. If you take a look at the 10 year U.S. treasury versus gold, you would think as yields are rising, the U.S.
treasury market that gold would begin to clobber. That's how it's worked in modern financial history. Because if the interest rate is high, money says I want to own that, I want to own the four and a half percent treasury versus owning gold which pays me nothing. But nowadays golds are holding firm.
It's not like rising crazy in a crazy fashion, but it's not getting clobbered either as US Treasury 10 year yields are at you know, 454 basis points last time I checked. So hold on, that, that Makes a prediction, at least as my mind grasp it, that people think that the bank is going to default because, sorry, the government's going to default. Because if you're getting whatever risk free money of right now, it's like something like 5%. If you can have risk free money at 5% and people are not fleeing gold to get into that risk free money at 5%, that says to my limited mind that the market no longer believes that it's risk free.
Is that an accurate assumption? US is risk free at the US dollar respectively. Why would people stay in gold? Because they say I'm not getting paid enough.
Right now I use a term of real yield and if you ask the economist, it's a different answer depending on you ask. My definition of the real yield is I take the government bond yield and I subtract nominal gdp, right? So if I'm lending money to the government, from a philosophical standpoint, I should receive at least the yield of the growth of the economy. So if the economy's running 10%, I should be paid 10% too because I'll contribute to that, right?
The government is doing its thing, you know, and the economy's growing, I should get paid the same amount. Now from the government's perspective, like hold on, I can make a profit if I can somehow engineer the economy to grow at 10%, but I only pay 5%, that's a negative yield. The government or conversely, if the yield is 10% and the economy is running at 5%, then me, the bondholder is earning a profit. But right now the economy in the US if you take a look at the latest Atlanta Fed GDP now cast and they have a real time guesstimate on within GDP is running.
Nominal GDP this quarter is running around 9%. The 10 year yield is about 4.34%. So I as a bondholder, I'm getting shortchanged now people starting to realize hold on us economy on paper is growing like gangbusters. I should be getting paid more money.
If I'm not gonna get paid more money, I'm not gonna own these bonds because I can own something else that's gonna give me a better return, whether that's stocks, gold, crypto, whatever, right? Just to, just to take a non controversial one, would gold ever outperform that number in terms of the yield? Yeah, because the way you're explaining it sounds like people are cutting their nose off to fight the face. Like if you're gonna get 5% risk free with a treasury and you're gonna get next to nothing with gold, then why on earth would you, even if you could get 10%, even if you have a moral just, you have moral outrage at the government for keeping half of that yield for themselves.
Which I admit if you loan the money to the government, it's pretty fishy that they would keep that for themselves. But. But if you're getting a better yield than you would get from gold, what on earth are people doing? Just saying, I'd rather get nothing because I'm angry.
I don't understand. So you know, most people own bonds are holding the bonds of price, right? As the yields rise, the bond price goes down. And so as yields go from 5% to let's say 10% to the fact it keeps raising rates.
Right. As a whole of the bond, you've lost money because yields are rising, the bond price goes down, right? So as yields rise, I lose money because I locked in the lower rate and it's going higher. The bond price goes down versus gold, which you know, could go up, right.
Or just could stay flat at the day and I'm fine. So if you take a look at returns of 10 year bonds starting in 2021 when the Fed started raising rates, you've gotten absolutely killed. It's been the worst bond bear markets in hundreds of years, only bonds. It's been a terrible charitable investment over the last few years because inflation's going up and the bond market's saying actually I demand more yields.
And it just keeps going higher and higher and higher and higher to attract more and more buyers. Now if the US government is perfectly willing to put the 10 year treasury yellow to 10%, they have a flood of money into the market. That's awesome. I'm going to pay the same growth as the US economy but right now, not because the government can't afford it.
Right now the treasury is already spending something like 34% of the budgets like interest payments on annual. 34, 34%, yes. So it's a $1 trillion annualized right now is the interest expense as of second quarter of the time the charity published a statistic. So issuing more debt and they're paying more money than that.
And that number is going like that in terms of the interest expanding out the people who own bonds. Right. But on the long end, this is how bonds work. The longer the maturity, the more sensitive you are to interest rates.
Especially if the bond, the yield starts at a low level. Going from 1% to 5% on a 10 year treasury absolutely destroys you as a long bond holder. Which is why a lot of these bond funds have done terribly well, have done terribly over the last few years because of how bond math works. And it's a nonlinear change when you raise interest rates and how the bond price performs.
Gold is pretty much held constant over that time. Lost money. But if you were holding a long bond at 1, 2% and now it's at 5, you've got crush. And that's exactly what happened with the banking system.
You know, svb, First Republic, Silver Day Signature. You know, a lot of this year they've gotten crushed on long, long bond trading. Okay, I want to walk people through that. So I, when it comes to math, I have a very simple mind.
You're going to correct me where I go wrong. But I think people at home, some of them are going to benefit from what I have struggled over the last year or so to put together in my mind. Again, you're going to. When I go wrong, you need to jump in and let people know.
But here's how I understand bonds. If you hold a bond to maturity, you're not going to lose your principal. So what you're losing is potential earnings. So you would not be able to sell that bond.
So for those like this, you buy a bond, that bond has a interest payment. And that interest payment, let's say it's 2%. And if you buy that bond for 10 years to get the 2% and a year later a new bond comes out for 10 years that pays 5%. Now if you try to sell that bond in the secondary market, you're going to go, why on earth would I buy that when I can for the same price, I get a better yield.
And so you have sort of lost money in that you can't sell it before the mature date. You're now gonna have to hold it all 10 years in order to get all of your money back. But if you hold it for all 10 years, you will get your 2% and you will get your money back. Assuming that this is a government bond and they don't default.
So that I wanna make sure people understand the difference between you're losing potential revenue because you didn't have any tied up in a 10 year bond and you can now put it into that other 10 year bond that's earning 5%. Obviously you'd be better off. You don't lose your money unless you need to sell. Now that brings us.
You'll notice he's not interrupting me. I'll give even more even closer to home. Example, people who love mortgage in house, right? I think this is even more understandable.
Like everybody Russia bought houses in 2020, 2021 of the Neal earn on a mortgage. Three year mortgage rates in the US around three, three and a half. And now there's another job in another location. And maybe you're looking at a high tax state, right?
And you need to buy another house. Same value of the house that the price of the house is the same but you need a new mortgage. Now the mortgage rates are 7, 8% and you're like holy shit, I can't afford this house anymore because my, this mortgage, this, this bond that I have at 3% is more valuable than the bond and the mortgage at 7, 8%. Therefore I can't find another loan that can service with my income because of the change in interest rates.
And so that's I think an even more hit home example. The majority of the public who own a house or apartment or whatever, it's oh, I had a mortgage at 3%. I can't in the same value of the house. I can't afford that house and have a location because I have to DO mortgage at 7, 8% is bond math.
That's the exact. And you can put the same thing for Treasuries. Mortgage is a bit more complicated but at a high level that, that's exactly the phenomenon you're describing. Now the mortgage that would be completely inverse, right?
So on a mortgage I want my rate going down. On a bond I want my going up. Yeah, makes sense. Okay, so now let's take that.
So we understand that I buy a long term bond and back in 21 when all the banks gobbled up all this US debt, they had to go long to get a return, which a bank is incentivized to do. So they're going to take the deposits that are getting. Everybody's getting stimulus checks. Everybody's depositing into a bank.
The bank's like amazing, I'm going to invest. The first of the Fed is like we're not going to raise rates. Oh my God, it's going to be like this basically forever. And so they buy all these long term bonds on the word of the Fed that they're not going to be raising rates.
So they think okay, well if rates aren't going to go up then I don't have to worry about the value of this going down. This will get me a higher yield by me taking a longer term. We need to get back to you because you were talking about how it's very atypical for short term to raise faster than long Term, So that's a sign that something weird is happening. But in 21 that hadn't happened yet.
So long term was the way to get the extra interest payment. So the banks gobble up these long term Treasuries. So they're buying debt. I'll add.
One little caveat here is you can actually hedge this stuff. So it's not as if there is instruments where they say, like, okay, I bought a bond at 2, 3%. I'm worried about a future where the Fed raises rates. Let me go out in the market and hedge that.
The biggest system could easily hedged a lot of this risk because some banks did on a lot of banks didn't. But that comes at a cost. So I can either have a higher bonus or a lower bonus. The Fed says, don't, don't worry, I got this.
Inflation's transitory, never raising rates. You know, we'll Never go above 2% inflation, blah, blah, blah. Why would I go ahead and hedge along the rates? Why do I want to go ahead and hedge rates went up and reduce my bonus?
So I'll stop there. Dude, that's horrifying if that. And look, I'm sure it did. I don't want to play naive, but that's horrible.
Okay, so if that's right, then to get their bigger bonus, they buy these longer term Treasuries, they lock themselves in. Now the Fed does raise the interest rate. Now that bond, they can't sell it early and therefore they're losing that potential income. Wouldn't necessarily be a problem except for the fact that people begin to realize, hold on a second now.
The risk free rate of a U.S. treasury that I can give myself is 5%. So I don't want to leave it in the bank where they're paying me next to nothing. I want to go get my 5% risk free with government.
So hey SVB, I will take my money, thank you very much. And now SVB has to cover that so that they can give you the money back. And now they're forced to sell these long bonds at a loss and all hell breaks loose. Yep, that's exactly it.
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That is brutal when said that plainly. Okay, so now my question is they create the, I just had it, the BTFP Bank Term funding program which basically says hey everybody, don't worry, your deposits are safe. But the problem is that puts them on the hook for up to $4.4 trillion that they would have to print their way out of. So do we still have a banking crisis or do we only have a looming potential inflation crisis?
There is a political choice there, there, you know, either as people say. Again, I looked at the deposit rates yet, but if you are a non too big to scale bank, there's eight of them. It's very hard to attract deposits and it's very hard to raise your deposit rate because again you have this portfolio stuff and your, your deposits are not guaranteed. So I'm a J.P.
morgan City bank of Wells Fargo. I forgot the other ones, the big banks, they have an unlimited deposit guaranteed. Now they have to pay a bunch of other charges for that. But if I'm gonna deposit in those banks, I know there's no question the politicians told me I will get 100% of my money back, no limit.
If I'm not in one of those banks. I have to think to myself, okay, is this bank gonna get saved? Is this gonna be the Lehman Brothers or is this gonna be the Goldman Sachs? Which one's gonna be right?
They let me fail. They let Goldman fail, right? And so it's the thought and so we like, why am I taking the risk? Get me the fuck out of here, I'm giving my money to Jamie Dimon, right?
And so that's the issue people are fleeing because number one, the political choice has been we are not gonna extend the blinking guarantee to all these other smaller banks because of moral hazard and all these things rolling it to these banks over here. So then the rational response to the public is well, I don't wanna be in that bank. I don't wanna have to take a risk that they decide that this is the bank they're going to bleed a capitalism on. I go over here, let me go into socialism, I get my money back.
And so I think that's driving part of it. And the other thing is the rates are still going up, right? Five and a half Percent. You know, maybe this fever is a couple more times really 6%.
I can literally two clicks, go online, go to my money market account, deposit money with the government essentially and get more money than my bank can mathematically pay me. So yes, there's a vacancy crisis. It was smoothed out a bit with the big term funding program, but if not, as people have stopped noticing that in less than five minutes they can, you know, go from 0% to 6% interest income. That didn't stop.
So the banking crisis is still there. The acute political choice that the regulators and the government's gonna have to make is still there, it's still looming. Who was going to pay for these losses on the bond portfolios of all these banks? I don't know what they're going to decide, but I think they're going to decide to print the money and make sure that the electorate gets their deposit back in nominal dollar terms.
So that's just my opinion. So the bank term funding program does not cover regional banks? I thought it did. No, no, it covers, it covers banks that have eligible securities.
So that essentially means U.S. treasury bonds and mortgage backed securities. Now the big thing a lot of people are focusing on is the commercial real estate, right? That's not included.
So it's not as if I lent money to some real estate developer in some market who's going to build office buildings. I can't take that loan right now and give it to the Fed and get back 100% of my money back in dollars. Right? I can take Treasury, I can take mortgage back security, I can swap that for dollars.
I can't swap commercial real estate, which is a problem because small regional banks were the engine of commercial real estate lending boom over the last decades, what you want to call it. So now as we're changing the way we work and 2, 3 days work from home for a lot of folks, these office loans becoming kind of irrelevant and the market has frozen. So now it's a question of okay, what deals get done, how big is the price of plan going to be? And are basically have to write down this perception of their balance sheet and oh shit, they're dissolved again or at least we know they're resolved again.
Or what's the Fed going to do? Are they want to expand the BTFP to include commercial real estate loans? Because this was, you know, this is the thing that's going down in price. Or they can expand to auto loans or they can expand to personal loans.
All these things that the banks have been lending out where the ability to pay or the asset value is declining that aren't U.S. treasury bonds and mortgage backed securities. Is the BCFP going to be expanded to cover those? Because if those would enterprise, the banking system still installed them.
Right? And so yes, they solved one portion of the market, the one they really care about, which is mortgage backs and securities. They want Americans own a House and U.S. treasuries, they want Americans to invest in the government and all this other stuff.
They would rather not have to bail it out. But again, the banking system is choking on all this stuff and they're going to have to make a political choice at some point. Either they're going to let the Nazi Bigfoot banks actually fail and a lot of Americans with small deposits not get their money back or they're going to come in and say the day and bail everybody out for more dollars. Okay, I think this is the part in our program where we point out exactly what inflation is.
When it was first described to me as an invisible tax, I was like, it didn't make sense to me. And now understanding it better, I realize that what you're doing is you're saying, okay, we're going to make everybody's money worth a little bit less. So by making more of it, then the value of any $1 just reduces a little bit. And so it becomes a way to spread the taxation across everybody.
So the real question the government is asking is okay, this bank, whatever they did something that isn't well, so we already know the mortgage backed securities and Treasuries, those are going to be one for one. But if they have something other than that, they're asking the question, do we want everybody to have to cover this thing that didn't end up working out, this investment didn't work out, or are we just going to let them roll over and die? As you look at that and when you think about this three to six month big disturbance, is that the thing that you think happens, that we get some something triggers a run on these small banks? Could be commercial real estate starts, something kicks off and it starts going down.
Or are there other things on your bingo card other than the regional bank failures? I mean usually it's the problems are known, it's a question of whether or not we're focusing on we being the market. Right. So the market knows the commercial real estate's a problem, but we haven't really seen a big price markdown because no one wants to trade.
The sellers don't want to realize a loss and they have to mark the rest of their portfolio down and thus be insolvent. And the buyers that want to buy this price, they want to see buy it. So nobody's trading, right? So it's that calm situation where okay, well the price of silver was, you know, 12 months ago.
Put these on transactions, right? So what's in a few transactions when people have to sell for whatever reason, we don't know what that's going to be, then we're going to go. Then it's the fiduciary responsibility is okay, well there are these transactions in the market. I now need to mark down my portfolio report to my regulators.
Oh shit. My capital buffer is declined, therefore I'm insolvent. And what usually happens is, you know, because of the politics they'll let somebody fail. Some of the there's going to be at least one failure and then the market's going to fucking throw a fit, shit's going to be straight, all sorts of fucked up ways and then you know, on one weekend like okay, we can't let the next one fail, right?
They let Silvergate fail in March of this year but they didn't let sdb. Am I feeling mean? Somebody went bankrupt and the depositors are not guaranteed to get the money back by the Federal Deposit Insurance Company whereas with SCD and signature and first public they were bailed out. They being the depositors are bailed out.
Now obviously the bank magnetic replaced place in equity holds lots of money but the depositors were bailed out. So usually one person fails. There was a lean and there was a bear before there was Goldman, Warner, Stanley, everybody else sitting here. So they'll probably let somebody fail first because the politics demand it.
Once the fear of looming collapse is instilled in the regulators, they're then going to say we have to print the money because the system is going to fail. What that's going to be I don't know. I just see that for whatever reason financial crises happen in the fall and in, you know, the winter in the northern hemisphere perspective. And so we haven't been solving these problems.
They're only getting worse, exponentially worse. And the countries that would usually bail out the American financial system by buying assets for their own reasons can't do so. And so as we progress further into the season where traditionally crisis happens, there's going to be something. I don't know what it's going to be.
That's just my base case and I want to prepare myself and make sure that I will make money in a situation where shit gets all fucked up. Yeah, Okay, I didn't know that there's a preponderance of problems in the fall and winter. Is that the obvious guess for somebody that's never heard that before would be has something to do with energy prices as people have to crank up their. Usually.
So in the past it was agricultural issues, right? So the farmers, the credit tightens and certain parts of the year, depending on when the farmers need credit to buy more equipment to steal a bunch of planting, right. They receive a bunch of money and now they need to draw down on credit. And so that's why you get the spikes in credit as we move through the agricultural cycle.
And that's part of the reason why you have different Federal Reserve banks in different districts is to try to smooth out that the demand and supply of credit between the banks in the east and the agricultural regions and sort of the center of the country. And you know, every other country is kind of the same. Right. Farmers are always in debt and always borrowing money and they're receiving lots of money depending on how the harvest goes.
And I think that's part of the reason why we usually experience prices in harvest season and then winter project. Now, you said the problem is usually known, but it's a question whether the market's paying attention to it or not. What are some of the problems that you're already aware of, whether the market's focus on them or not, that could be those early dominoes that fall. So we already know that the US Banking system is insolent from this perspective.
We already know that the major buyers of the strategy are not buying the tradingies issue, a lot of it. That's no, we already know that commercial real estate in the US is a problem that nobody's trading right now because of what it's described globally. We already know that China has this massive real estate issue and is deleveraging, which means that China cannot contribute to global growth in the ways that it used to, meaning doing massive government stimulus and essentially buying stuff in the rest of the world to build up their country. Right.
China's economic powerhouse of global growth, which leads into the US and European economies since the early 90s, they have lost their capacity to stimulate in the ways that they're used to. Japan is a problem. Either they want to save their rent bond market or they want to save their currency. Japan holds one of the richest countries from an asset perspective on the balance sheet.
Are they going to sell down their Treasuries, their fancy US real estate, their equity positions to essentially help fund the ability for the citadel to manage the depreciation of other currency. So these are all known things. There's nothing hiding. Which one is the one that causes the spark for everyone to start focusing on freaking out?
I don't know. I think the train wreck will happen so slowly that it might be more imperceptible than we think. How long can we print money before that bad thing happens in the bond market? And I'll set the table with Japan.
As far as I know, they print money like fiends. Is there an obvious breaking point or are we like at a 10% of what we can print, Mark? 90% of what we can print. So let's use two countries and the big narrative, and this is of the Keynesian modern monetary theory.
Mm, cheat. COD is the government. There's infinite capacity for the federal government to have debt. And the first example is, look at Japan.
They have, I don't know what the debt to GDP of at the government level was like 300% or something. And look, this is perfectly fine. You go to Japan, everyone's nice, food's great, trade run on time, super safe, blah blah, blah. What they don't understand is what Japan actually did.
There's a great report by Jojobaikin, I forgot what it is. And it's. They label as Japan the best trade, the biggest carry trade ever run. So everyone always looks at the central government's debt to GDP and says, oh, it's ridiculous.
They forget that, you know, they think Japanese. If you've ever been to Japan and done any business there, you realize that Japan is a socialist country with hoisted with capitalism is hoisted on it. They're, they're very collectivist culture. I'm not saying that in a negative way.
That's just how they are. So you have to combine things that you otherwise wouldn't believe as one. It's one to get the real financial picture of Japan. So you have to look at, okay, yes, you have government debt, then you have the corporate and private sector of Japan.
The people of Japan, they own something like US$3 trillion worth of assets around the world. Japan is probably the richest country in the world on sort of an aggregate basis. Because what happened after the war, the US made Japan a colony for a bit, lent them a bunch of money, helped them get off the feet. We're going to give you access to our market.
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Great. We're going to essentially subsume the individual and promote the collective. So everyone, we're going to financially repress you, but we're going to get really, really good stuff. You're going to have a job for life.
We'll pay for your education, health care, cheap transportation, good food, work really hard so that these major companies can sell great stuff to a narrative. And that's what Japan did. They started with America, they went to Europe, they went to China and Southeast Asia. They have the largest hold of U.S.
treasuries, which is just the savings of the nation. Plus they own a total of $3 trillion of its assets, mainly in the United States, but around the world with all their savings. So if you add that back to their debt and then you add back the private savings of people, which is estimated of like $5 trillion, which is money on just sitting in bank accounts of the Japanese people because they haven't spent anything for the past 30 fucking years because of the deflation that they've been having. You get a much different picture.
You get a debt to GP of around like 100%, something much different. So Japan can print all this money because it owns the fucking world. They're not that broke. And so people say, oh, Japan just prints all this much money.
It's okay, it's okay because they're extremely productive. They had a captive market in that the richest country in the world from a GDP perspective, America. They could freely sell anything they wanted into America and that's how they got so wealthy. So that's a Japan example on the why it doesn't really work.
Then you get to China, China says we're completely state socialist. Again not saying that in a bad way. The central government owns essentially all the most productive companies and we are going to get finance away out of the poverty of the 1949-1980s. Right.
Massive transformation in the society. And there was an infrastructure project that China didn't love and they brought up something like a 300% debt to GDP. They built all this stuff. Now if you believe that debt, you can print as much debt as you want.
Then why isn't trying to respond to this property bubble by printing as much money as they can and just doing the same thing they did for the past 20 years? Because they've reached the capacity of the amount of debt. They know that the board that I spend, I produce no value and I just make the problem bigger. I create more angst amongst the population.
I create more desire for people not to have children. I create a climbing population because people you know, cannot make ends meet because I just overproduced and there's just not enough real return there. So there is an internal capacity. So there.
China and Japan are probably the two examples that prove the point that I'm trying to make, which is there is a capacity for debt. It's not some number that we know once you go higher than this that things you know automatically happen. There's a paper by Ken Rogoff, I forgot what it is. He did a study and basically the study was that once you get above about 130% debt GDP on a government level, then you're almost.
You're assuming you have a financial crisis sometime in the near future. Now again, you can't put time frame from it. The US has around 130% so it's on that path to doing so. Does it have capacity to load itself up with a lot more debt?
Absolutely. China's at 300% GDP, right? So you can see you can go that far or even farther maybe. But again then you start to have decaying society.
You get to have this moral angst that is amongst the population who feel it. They can't put their finger on why they don't feel confident or why they feel angry. But the reason is that the government has again taken away their dignity by Fucking up the money monetary supply. So again, I don't know what that number is.
We're in the territory where something could happen. And so my thought is as an investor, I want to be long that volatility by being long a put option on the sovereign bond market, which is crypto. I don't know when it's going to happen, but it's going to happen if they continue doing these same things. So why not buy something where I haven't seen upside if it fucks up?
And what's my downside? It's a super liquid asset. As soon as, if it's not working, then I sell a bit of it, whatever. So I have an asymmetric return.
Debt, the debt flywheel. How is it possible, given our need to, at a minimum, make interest payments, that we aren't already in trouble? So I think right now our interest payments are already our third biggest line item. It's more than our national defense.
We're adding a trillion dollars to our debt every roughly 100 days. That will compound. So what takes 100 days now will be 95 and then 90 and then 80 and then 60. I don't understand how we're not at the end.
What am I missing? Because there's so much money trapped in the tri fi Western financial system. It's there to be inflated, it's there to be taxed. Every dollar you have in your retirement account, every dollar you have in the Trifi bank account, every stock that you hold that is required to trade on the clearing functions of the US or European governments is ripe to get taken by the government by an inflation tax.
So that's how they're able to do it. Because the capital is sitting around and not doing anything. The pension funds are forced to own government bonds. The banks are almost forced to take their excess reserves and buy government bonds.
And so that's how they're able to begin going. There's all this capital sitting around that they can inflate away. Now that's why crypto is such a fundamental problem, because it's an escape club outside the system. I take my fiat, I sell it and I buy Bitcoin.
Can't take it away from me. You don't even know I have it. And so that's why the ETF is such a key component, which is, okay, recognize that we have a problem. We're not going to change our spending.
We don't want to outright ban the thing. Okay, now it's time to allow these fund managers to adjust this fiat into a Derivative, but keep the bitcoin within the system, you know, so that is why you can afford to do this. And of course the US is a reserve currency issuer, largest military in the world. Again, you have the ability as the empire to do this a lot longer than other countries can.
Now, to the extent that other countries stop saying I'm willing to say oil or food or whatever in dollars, then the ability to keep this game going, the time frame diminishes. Yeah. What do you think about the petrodollar being used to have at least a response to our financial warfare, which may be a little unfair, but when we, for people that haven't thought through this yet, when we inflate the currency that spreads it to by Japan that own trillions of dollars in bonds, so we're exporting the inflation tax, do you see people weaponizing that, do you think? Because I've heard people say, oh my God, the dollarization is imminent.
And I've heard other people say get out of here, there's literally nothing else. So people would flee the dollar to what? So I think that they're missing the point. So de dollarization started in 2008 when the US authorities decided that they're going to save the banking system by this massive money printing.
If you look at the charts and you take a look at amount of gold that foreign central banks started buying with the NADIRS in 2008, now it's ticking up. Similarly for the effect of foreign central banks on buying US treasuries, the height 2008, now it's tapering off. So delateralization is happening slowly at the margins. The Roman Empire, the British Empire fall like overnight.
It's like overnight you stop using these currencies. It's a slow process. It happens at the margins. We're already seeing it in 2023, 20% of all oil sales were in the crisis other than the US dollar, highest ever.
So the petrodollar is breaking down slowly at the margin. Of course, the Western world and the US major allies are going to continue using the dollar, whether China or Saudi Arabia, whoever uses it or not. That's not the question. The point for an investor trying to save is, okay, align myself with the trend, but don't get blown out of water if it takes a long time.
If de dollarization is a trend, if the trend is to have a multipolar situation of currencies being used, what do I know that central banks and countries have used in the past to trade between themselves to settle debts and trade Flows gold. Okay, that's my own gold. I own gold because I know that countries who are not going to use the dollar to settle their trade amounts will use gold and are using more gold. I want to be alongside that trade.
Okay, well what about the people? The people don't want to continue to be fucked over by inflation whether the rich or poor. Here's a global decentralized digital system that anyone Richard pork and access. Okay, I want that system too.
Another put option on the current order of things. And again I think people try to get more listed about it like right or wrong. Like I believe America is good at it doesn't matter. Oh.
All I'm saying is we're going to change and I want to be long the change and I don't know what's going to happen in the future. I just know it won't be like it was yesterday. Is there anything right now that is a plausible replacement for the dollar? Is it BRICS I know is trying to back their currency with gold?
I think central banks are buying up gold. Is it a return to a gold standard? Is there another governmental currency that has more respectability, less inflation? I would say that, you know, it might be the most likely outcome is that countries will continue to use a dollar, whatever currency because it trade amongst each other.
So let's say that I'm, you know, I have some oil but I also import food. So if I sell more oil than food I need to import, I say okay, don't pay me the difference in dollars, pay me in gold. But I can still invoice my oil in dollars or whatever depending on who's buying it. So I don't think there's going to be one particular global reserve currency.
I think there'll be different economic spheres and the trade between those economic spheres, the nets of that trade will be settled in gold. Interesting. Okay. Are you surprised at all that gold does not go up in a similar fashion to Bitcoin?
No, because gold is different. It's bigger door, it's not digital. It's not the new new thing. The drivers of gold are very, very slow and methodical central bank purchases.
The crazy volatility in gold will be when let's say that the US government wants to help the situation, they devalue the dollar in gold and say okay, I think the gold and the Fed's balance sheet is held at $35 an ounce. Same price it's been since 1970s. Right. They say now our gold on the Fed balance sheet is valued at $10,000 an ounce, which is basically them devaluing the dollar.
Gold shoots up massively. And now all of a sudden a lot of these financial problems go away because the Fed has so much gold evaluating at a certain price. And now the dollar is seen as a stronger currency. So that's a situation that could happen which would massively one off increase the price of gold by 3 to 5x.
And other countries could do the same thing who hold gold at an artificially low value, but could revalue it higher on their own balances. So that is probably the gold bull market scenario that I'm sort of. That's why I don't think that's the optionality that I'm playing is a revaluation by central banks to make their currency seem stronger than in gold terms. I've never heard that before.
What would trigger that? Oh, a war budget crisis. I mean, same thing that, you know, the government's done in the past, right? The.
When the gold window closed, I think FDR depreciate the dollar in gold terms by like 80% overnight or whatever it was. But obviously you couldn't own gold as a person. You did it after that. So, okay, we took all your gold now.
Yeah, you fucking gold. Guess what dollar is worth. The gold is worth three more dollars now. Sorry.
So I think that's a situation that could occur. Okay, let me see if I understand this. You're. I don't understand this.
Why would you want to make gold more expensive? What do you plan to do with that? Buy more gold? Buy more dollars?
Like what are you doing? No, you already have a bunch of gold. So the US is a very stark example. The US Federal Reserve has however many metric tons of gold, a lot of it, it's held at, I think it's $35 now.
So whatever that price is, very low value gold right now is valued at. But are they artificially holding that price down? Who the hell are we saying this is what we value gold. So our balance sheet, if you think about what's a dollar worth, it's worth the assets that they hold.
What's the only real asset that the federal government has in the amount of trade sense, it's gold. How much gold do you have? What do you value that? So us being the reserve currency issuer could say overnight we think that gold is worth $20,000 an ounce.
And guess what we have. I don't know how much they have, but. And so all of a sudden, oh shit. They just devalue the dollar in gold terms.
But they Own a bunch of gold. So now the dollar, instead of being a US treasury backed currency and the US treasury trash because of all this spending, it's now gold back currency. And guess what? They've got a lot of gold and it's worth $20,000 a house.
So hold on, hold on. Sorry, sorry, my brain is just too small for this. But I really want to understand this. So are you saying that they are repegging the dollar to gold in this scenario?
Yes. Well, it won't be a peg per se. It's what do you think a dollar is worth? Right?
If you believe in this de dollarization thing and that country's like, I don't hold the dollar because it's inflating weight, has no value, it has no assets backing that. I don't believe in the US Jerseys. Well then the federal government and the Fed say, oh actually guess what? We got all this gold.
It used to be worth this, now it's worth that. This new price we believe gold is worth is massively above the current price of gold. For certain individuals, we'd be willing to exchange gold for dollars. Not everyone obviously.
Only certain individuals, certain sovereign nations. And all of a sudden the dollar becomes strong currency again. Because why on earth, why on earth would a government do that? Like if I saw that you just changed the value of your dollar massively, why then would I exchange gold?
Because I'm thinking, ooh, dollars are still great. I still want to have dollars and I have gold and so now I'm going to get those dollars. Like to me again, I'm sure I'm just missing something, but to me I would see that as such a wild manipulation of the currency. I'd be like, I don't want anything to do with a currency that just changed.
Redefine. Oh, bitcoin. But this is how fiat currencies have worked in the past. And this, and this was done incentive it is because the US needs a weaker currency.
A weaker currency helps you sell your ass. I get, I get our incentive. But something that's only worth what someone else is willing to pay, why is someone else willing to trade their gold for dollars in that scenario? Obviously someone is or they wouldn't do it.
Well, no one. Don't ask for anything. I'm saying the government itself says that we believe gold is worth this price. Right now they say it's worth $45 worth whatever it is on balance sheet.
Now it's worth. We will change gold at this price way up here. And they're able to do that because they own a fuck ton of gold. If you didn't own a lot of gold, then I would agree with you.
Why would you do that? This is more with a way to engender a belief that the dollar has a large gold value. Well, okay, here's what we value gold at on our balance sheet. And we're able to do this through the central bank.
And you can exchange gold at this price. Now it's much higher than the price that it is around the world. Now that only works if you have a lot of gold. US has a lot of gold, China has a lot of gold, Russia has a lot of gold.
So there is a thinking out there that any number one of these countries that have been accumulating a lot of gold would say our currency is very strong. Guess what? We're going to bid for gold at this high price. Therefore sell me oil in my currency because you know that you're gonna get gold at a very attractive price because this is what it's worth.
Sell me medicine, sell me wheat, whatever it is. So the confidence came amongst other trading partners to say my currency is worth a lot of gold. Because gold has historically been the real currency of the world. Not these fiat things, man.
Again, so that seems false. What you're saying is my gold is worth a lot of currency. My currency is worth a tiny bit of gold. If my currency used to be $35 buys you an ounce of gold, and now it's $1,000 buys you an ounce of gold.
The gold got expensive. The currency devalued in its purchasing power anyway. But I also have a trillion dollars of debt. So now my currency devalued in gold terms, but I owe a fixed amount of debt.
Right. So the reason why, another reason why you buy your currency is, well, I owe all of that. I owe a lot of it. And now it's worth less.
I've decided it's worth less so I can pay back. But you're getting paid back in depreciated dollars. Now, obviously going forward. People who trade going forward have a different deal than people who have traded stuff in the past.
So again, yeah, I agree with you. It's a fucked up way for people who invested in your bonds. But again, it's another option that you can use as a sovereign country is devaluing your currency in gold terms to pay back an unsustainable debt loan. If you don't want to outright default by saying, I'm just not going to pay back.
Instead of saying that, they say, I've got the value in gold, I'm going to say. Psych. It's worth like one tenth of what you thought it was worth. That's crazy.
I can't believe that they can do that. Insane. Okay, let's talk about all the liabilities. Since we're on the subject.
Do you think that the U.S. so going back to this idea of Argentina comes in, they slash spending. For the US to get back on track, they would have to slash spending. Social Security is basically a pyramid scheme.
Would they be wise to lop off Social Security? And could you see that actually happening with any sort of political plausibility in the United States? Given that boomers are more politically active, I would say that it would probably be a death sentence for most politicians to try to take away those health benefits. Now, a very skilled politician is able to get a lot more younger people out to vote and explain to them how they got fucked over by the old people in the country.
If that person is able to do that, but that kind of work, then yes, I think that a reformation of the United States healthcare system could be on offer. But if you're not willing to put in some political work to reenergize younger constituents, there's no fucking way to be able to do it. Did you see the video that Ben Shapiro posted about retirement and Social Security? No.
It's very interesting. Lighting the Internet on fire. And he basically said, look, Social Security is not going to play out the way that you think. You're probably not going to be able to reap the benefits.
Not with people retiring as early as they are. You should, you know, look at pushing retirement back or removing retirement altogether. If you look at managing a fiscally responsible country, is that an option on the table for you or do you think that there are better ways to get that done? Absolutely.
You should remove. I think these programs are great for the people, the boomers, right. They're the base beneficiaries of all these around the world. These sort of like Social Security programs, depending on how you pay for them and removing them will remove that dead weight.
But I think at the other end, you also need to sort of reform, like the global sick care, which is the health industry, and the misaligned incentives. Right. People shouldn't be dying the way they're dying based on the shitty food that we eat and the overspread medicines. And that's why people, yeah, I need to have this healthcare because everybody get sick.
Why does everyone get sick? Because eat fucking processed food and all this dog shit that's put out to us as healthy. There's a reason why everybody spends the majority of their money in the last two years of their life dying of horrible cancers and heart disease and all this kind of shit, right? We're poisoning ourselves every single day with these fucked up food chains.
So I think it's not just let's remove the retirement benefits and healthcare as well. Let's get out of the problem of why we treat people the way we treat them in the healthcare systems around the world have a better relationship with food. One thing I don't think people really understand is that you can obviously, because we print to make all these problems go away. But if healthcare costs, you know, let's say 10x what it needs to cost if people were actually healthy, you are quote unquote bankrupting the country and that you get to a point where there's no way that the productivity of the country could possibly match that.
So you've got the interest payments just absolutely insane. You've got sick care management insane. You've got Social Security, retirement. All of it becomes really unmanageable.
I have, until recently I had no visceral relationship with how those expenses actually played out in terms of the budget until I started looking at how much the government spends versus the actual GDP of the country. That stuff gets very scary and that's why we race towards war. We flood into crypto. It all comes back there.
All right then let me ask you, where does etho, we've talked about Bitcoin. Where do you think ETH goes from where it's at now only 33,000. Whoa, that's mahusive. What do you think gets this there?
Just the knock on effect of everything that happens to Bitcoin has a trick down to ETH trickle down. You have the eth etf, possibly the Ethereum is the decentralized computer and the decentralized computer has a commodity, the ETH, the currency that pays an intrinsic 4% yield, which is the staking yield of ETH. It's the only, you know, crypto asset of that size that has this intrinsic yield and that's going to draw a lot of it's Internet bond, it's the bond of the Internet computer and pays you a yield to own it. And so I think that's going to be a very powerful narrative as people start to think more about what actually, what ETH actually is.
And they're going to allocate and say, oh well, not only do I get sort of this deflationary network value increase in ETH currency. I'm also going to pay for eth. Where else do I get that sort of return? That's great.
I want to allocate to this. There's also different interest rate strategies you can do around that. But I think that's going to be a big narrative for people who are going to get into ETH and understand, oh great, I get to participate in let's create a new digital Internet on defi and I get 4% yield. Why do you think that right now ETH seems to be more to the upside.
I don't know if this is true to the dollar, but it seems to be more to the upside than Bitcoin. So I'll see. Bitcoin did, but ETH just keep going. Not it hasn't had its own dips, but are people pricing in the future in a greater way than the pricing?
The reality of bitcoin today, Apple thinks it's a smaller asset. Right. So smaller things move faster. Just love large numbers.
So I'm not really. Yeah, I don't think so. So do you think it's rate of, rate of increase will speed up if an ETF goes for sure, just like Bitcoin, there's more, more assets and you know, if people are actually using the Ethereum network post the the merge, it becomes the supply. ETH actually declines.