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Language: en
The US is adding $1 trillion dollar to
the national debt every 100 days. And
the interest payments alone now cost
more than our entire military budget.
Our rate of debt accumulation has pushed
us into something called fiscal
dominance. A runaway spiral where
government debt creates so much new
money and thus inflation that the Fed
can no longer control the economy. In
this environment, if you don't own
assets, you are being left behind. and
most people don't own a meaningful
amount of assets. Today, I'm joined by
Lynn Alden, one of the sharpest economic
minds around. In this interview, she
breaks down how fiscal dominance works,
why the middle class is evaporating, and
what you can do to protect yourself from
being steamrolled by a system that is
stealing from you. Without further ado,
I bring you Lynn Alden.
The government spends so recklessly that
the average person is now stuck in a
world ruled by something called fiscal
dominance. It impacts our lives way more
than they realize. Can you explain it
though in a way that makes people sit up
and realize that they need to do
something about it? Uh I think one way
of kind of thinking about it is uh that
if you're in any way involved in a fiat
currency system as we all are uh you're
being diluted uh and uh it's happening
to everyone at different speeds
depending on where they live in the
world. Uh obviously you know this is
going to be mostly I think American
listeners. We're actually saying right
before we started recording uh that uh
it's a very macroheavy decade uh and so
uh people can kind of ignore finance but
finance won't ignore them. to talk about
fiscal dominance. It hopes to kind of
helps to kind of set the stage for like
what is the contrast which is monetary
dominance. So in most financial history
that that people are kind of familiar
with over the past several decades, it's
central bank policy and it's it's their
effects on bank lending that determine a
lot of the aspects of the business
cycle. And what's different about fiscal
dominance is that the fiscal deficits
are so large and there's such a large
existing stock of total debt that the
Fed's policies don't work the same way
anymore in terms of either trying to
accelerate or decelerate inflation. And
we get kind of locked into a more
persistent type of debasement um that
you kind of somewhat see in emerging
markets. Uh and so we get kind of a
version of that like a lighter version
of that in a developed country. Uh and
so the reason people have to care about
it is because when we're running very
large deficits, uh there are those on
the receiving side of them, uh and those
who are not. And if you're not on the
receiving side of them, uh it really
pays to have some sort of protection
against it or to be aware of how the
mechanics of that are working.
>> Okay. So, one thing that I'm always
trying to get my audience to understand
is that the reason that the middle class
has been eviscerated is that inflation
is not a law of nature, which much to my
embarrassment is basically what I
thought. That was just sort of the
algorithm running in the back of my
mind. I didn't realize that we were
creating inflation. Uh it's not a law of
nature. Uh but it does when you called
it debasement, it reduces the amount of
things that you can buy with a dollar is
an a really easy way to think about it.
Um, so the way that that eviscerates the
middle class is that it basically forces
you to own assets to avoid that the
negative effects of that inflation, the
debasement. Um, so when we think about
shifting into fiscal dominance, um, why
is that so much more troubling than
being in monetary dominance where the
Fed can remain in control? Like what you
you've talked about this as the train
has no brakes. So how what are the
breaks historically and then what have
we done that has ripped those brakes
off?
>> Right. So throughout most of uh kind of
the past uh several decades uh when the
central bank uh perceives that that
inflation's higher than they'd like it
to be and and a lot of this is arbitrary
like even their targets of where they
want inflation to be uh are pretty
arbitrary but in the US and globally
they've decided on certain numbers.
Currently 2% is their at least the way
they measure it their target. when it
gets too high, they have a variety of
tools to try to slow down that
inflation. And primarily what they go
after is to try to reduce the amount of
bank lending because in our current
fractional reserve banking system built
on top of central banking uh when a bank
lends money, it actually creates money
uh broad money
>> thin air.
>> Exactly. Yes. Uh and so for example in
the 70s uh which were a well-known
inflationary decade um there were
multiple things that contributed to the
inflation including for example oil
shortages uh but a key background thing
was that there was an above average rate
of bank lending happening and therefore
an above average rate of money supply
growth happening uh and that had a lot
to do with demographics. The baby
boomers who were young at the time were
entering their home buying years uh
which is kind of the peak period of of
credit formation. Um, and so that was a
more inflationary time. And what central
banks typically do uh when they when
they're experiencing this higher level
inflation is to try to slow that down
somewhat. They'd rather have a recession
than let it just get completely
untethered uh from expectations. And so
they raise industries
>> bubbles bubbles like form like what are
they trying to protect against?
>> Uh they're trying to protect against
people totally losing faith uh in the
currency. Um because uh weakness can get
more weakness kind of like how uh in
like in nature if an animal's weak
predators will go after that one. The
same thing happens to currencies uh
especially emerging market currencies
but but it can happen to developed ones
too which is if a currency is weak and
it's devaluing quickly and the and the
money supply is growing quickly and the
interest rates are not sufficiently high
then actually more people will come in
and borrow it uh and buy almost anything
else with it. they'll buy another
currency uh potentially that yields
better or they'll buy gold or real
estate or pretty much anything that they
perceive as being more scarce and likely
to appreciate relative to that currency
and that ironically creates even more of
that currency. So weakness begets more
weakness and they try to short circuit
that by raising interest rates uh to try
to one strengthen that currency relative
to some others and two to make it less
desirable to borrow it uh under more
circumstances. So, so some entities are
borrowing it, but they're basically
increasing the hurdle uh to make it less
desirable to borrow and that that's is
an attempt to slow down uh the money
supply growth. Um what what's troubling
about fiscal dominance uh is that uh so
during the 70s when they raise interest
rates like that, it has kind of two
effects uh but one's bigger than the
other. So the bigger effect is that it
slows down bank lending, which is what
they're trying to do. The negative
effect is it actually increases the
federal deficit because the government's
interest expense is now higher. They're
paying higher uh average interest on
their existing debt and so they're
actually ironically increasing their
deficit which could be inflationary but
but their total bank lending is a much
bigger negative effect than that
deficit. The problem in fiscal dominance
is that's reversed. So in the current
era an the US government's average uh
annual fiscal deficit like how much uh
the difference between our our taxes and
our spending that's a bigger amount than
net new bank loans in a given year and
it's even bigger than the sum of net new
bank loans and net new uh corporate bond
issuance. So basically yeah public
sector uh credit formation is is now
bigger than the private sector uh by by
you know several ways of measuring it.
And the problem is that when you have
over 100% debt to GDP, unlike the 70s
where they had 30 something% debt to
GDP, so now you have over 100%. When the
Fed raises interest rates to try to slow
down bank lending and try to harden the
currency, they actually blow out the the
fiscal deficit by an even bigger number
than they slow down net new bank loans.
>> And just for sorry for people that
aren't super familiar with the word
fiscal, uh fiscal literally means the
government spending. So when we say
fiscal here, we're just talking like
government debts are getting crazy. And
so if you try to rein in the private
debt creation by raising interest rates,
you're actually raising the amount that
the government has to spend to meet the
hurdle of the everinccreasing debt
because they're bringing on more the
interest payments begin to compound. Uh
and so hence the runaway train that's
wild
>> and you get a fiscal spiral. And and
what the what some people like listeners
might be thinking right now is that
people have talked about this for
decades, right? They've talked about uh
that that's going to be a problem one
day. Uh and it's always it never really
seems to materialize. And one thing I've
been kind of emphasizing uh when I point
this out is that some things have
materially changed uh in recent years
compared to when that was being said. So
the the peak zeitgeist for the public
debt being a problem was back in the
late 80s and early 90s. That's when the
famous like national debt clock went up
in New York. Uh that's also when Ross
Pro ran like the most successful
independent presidential campaign uh in
modern history and it was largely on on
the debt and deficit as a big topic. Um
and that was kind of the peak zeitgeist.
And if you look at uh interest expense
as a percentage of GDP like federal
interest expense, it was basically
peaking back then because we had growing
deficits and we also had very high
interest rates. Uh and so it was pretty
um uh fiscally problematic. But over the
next 30 years, uh we had the end of the
cold war. So the the fall of the Soviet
Union, we had the opening of China. Uh
so we had these pretty big
disinflationary forces in the world. We
had all this kind of eastern resources
and labor, western capital, all these
things were able to come together. It
was very disinflationary and productive.
Uh interest rates are able to fall for
the next 30 years. And if you increase
your debt, but you cut your interest
rate in half, uh, your interest expense
remains manageable. And that's basically
what happened over and over and over
again. And what changed more recently is
a couple main things. One is we we kind
of ended a 40-year cycle of ever lower
interest rates. We kind of bounced off
zero. Uh, so even if we just go sideways
now, we don't really have that offset
the way we used to. So we used to have
rising debt, falling interest rates. Now
we have rising debt and interest rates
that are roughly sideways. Um and so we
don't have that offset. And then two,
our demographics changed. Uh so now the
baby boomer generation uh which in the
70s and 80s were in kind of the peak
home buying uh period. Now they're in
draw down of the entitlement systems. So
social security, Medicare uh and so
they're they're they're and that's being
spent largely into the economy. And so
those two really big factors are what
changed over the past 30 years or so
compared to when people were were
warning about this decades ago.
>> Okay. So how from a like raw numbers
perspective, how does it compare back in
the 80s and 90s when Ross Perau is
making a ton of waves by saying this is
a problem and now? So the federal debt
bottomed uh in the in the lower 30%
range uh for debt to GDP uh and then
throughout the 80s that was increasing
uh into the early '90s. uh it was still
fairly low back then. Uh and that's when
interest rates uh were high. But
starting in the late '9s, uh that's when
the combination of of slower interest
rate uh like lower interest rates slow
down that interest expense by the
government. And then also um they did a
variety of kind of smaller things to
actually give us kind of a a period of a
surplus briefly. That was also peak
demographic. So it wasn't just a policy
mix that made that possible. That was
the combination of obviously the tech
boom at the time of you know very high
level of productivity growth and then
also the the baby boo generation was
kind of in like their peak earning
years. So if you look for example at uh
labor participation rate it peaked
around like the late 90s early 2000s in
the country kind of the the multi-deade
peak was right there when we had that
surplus. So it's kind of like everything
going right together. Um, and in terms
of raw numbers, uh, right now basically
we're running this kind of six to 7% of
GDP deficit, uh, which you normally only
see in recessions. Uh, so the the
biggest ever depit we had was during
World War II. Uh, the second biggest was
was around the the COVID era. Uh, and
generally speaking, you only hit these
kind of higher singledigit uh, levels
and and occasionally double digits
during recessions or wars. So the fact
that we just have it as a baseline now
largely because of interest expense uh
kind of normal military spending and
then the entitlement systems uh that's
where we're kind of entering a a
territory that's pretty unusual. And
another quantification point of course
is that our interest expense now exceeds
military spending uh which is generally
not a good look for
the history of empires doesn't doesn't
look great at that point.
>> Yeah. Putting it mildly. So um I don't
know if you know the exact number but um
to orient people we are now at 122% debt
to GDP ratio. There's sort of a red line
uh when you look at historicals of 130.
So when countries hit 130% debt to GDP
ratio they tend to um move pretty
rapidly into internal violence. Uh and
the reason being that you're you're just
getting into that inflationary spiral.
you're doing like what we're doing now
where you're hollowing out the middle
class, you're getting this insane amount
of wealth inequality which just
absolutely drives people nuts um from a
psychological perspective and and they
tend to get revolutionary literally. Um
where were we like when this was peak
zeitgeist and you've got Ross Perau
doing his thing and there's all this
popular support behind him screaming
about debt to GDP. Were we anywhere near
where we're at now? I know that was back
in the 40s 50s 60% range for debt that
GDP.
>> So what what is happening now? Like how
have we been bamboozled because I feel
like I am trying to get people to pay
attention to this and they're not
there's not you're you're now in a
populist moment where you're getting a
Trump a Trumpian figure that rises up.
uh instead of somebody who's saying
we're going to be fiscally responsible
and reduce government deficit, he
literally tweeted out uh hey, I know you
guys want to cut spending and so do I,
but we can't cut too much because we
have to be reelected. I was I was so
traumatized by that tweet. So why back
then were we able to get people to
realize, hey, this is an escalating
problem and now like I feel like I'm
banging the drum as loud as I can.
You're far more eloquent than I. But
we're not able to get like the average
person to be to recognize
I'll say it and you may not even agree
with this but to recognize that the
government is the problem. The policies
that we are voting for are the problem
and if we don't unwind the deficit
spending we will never escape this
problem.
>> So I think I think the reason why it's
harder for people to get it is because
it's gone on longer than a lot of people
expected. Uh, and like I said before, it
kind of becomes if it takes so long to
manifest, people say, "Well, maybe those
people were overblowing the concern."
So, back in the in the late ' 80s, early
90s, I mean, we were hitting like uh a
trillion dollars in debt for the first
time, that was a pretty big
psychological number. And then you
quickly add the second trillion uh
around that time frame uh and and and
just more awareness of it. And what had
what had kind of differed at that point
was you had multiple decades of
declining debt to GDP after World War II
and in that kind of like the the late
'7s early ' 80s period that's when you
started to have that trend reversal. So
that that started to uh concern people.
And then like I mentioned before, the
interest expense as a percentage of GDP
was pretty high. Even though the public
debt was lower as a percent of G of GDP,
just because if you're paying 10%
interest, uh it's it's easier to have a
high interest expense than if you're
paying an average of 2, 3, or 4%
interest. Um and so a lot of people back
then were warning that was going to be a
grave issue. And and you know, to the
the kind of the devil's advocate would
say, well, what happened to those
people? they were saying, you know, it's
it's an imminent problem in, you know, 5
10 years, and here we are 30 30 plus
years later, depending on what starting
point we're we're looking at, and it's
not been a crisis. People also point to
Japan, which has well over 200% uh debt
to GDP, and say, well, if it's if
nothing's catastrophic is happening to
them, why should we worry here? Uh, and
what I kind of say to push back on that
is it's it's less about an event. it's
less about this one big crisis that
happens like the whole world agrees to
sell off US bonds at the same time or
something. Instead, it's more of this
gradual negative impact. Uh and so, for
example, you mentioned the rising
populism. Uh I would generally argue
that's a that's a byproduct of some of
these these trends that have gotten in
place for quite a while. So the fact
that the that the deficits are running 6
to 7% of GDP every single year like
clockwork now that is already having
effects uh particularly for example that
that fuels the basement. Meanwhile the
Federal Reserve is trying to keep
interest rates tight which ironically
locks uh you know younger families out
of the the home buying market uh because
the these actually these consequences do
matter. Uh and so as these kind of big
uh policy gears are switched, there are
winners and losers from them. Uh and you
generally get uh just that more rising
populist aspect and then you get often
less productive at certain things. You
get more violence, you get less um kind
of just unification in the country. Uh
and it's it's you know Japan for
example, I mentioned them that people
point to them and say well they they
managed to not have a crisis uh despite
having higher debt to GDP. And the issue
there is that they have a lot of things
going for them uh that are somewhat
different. So for example, they have a
structural uh trade surplus. They kind
of offsets some of their uh debt issues.
Uh they've also got a very homogeneous
population. Therefore more kind of
culture unified, able to get through
things. And then two, they they have had
basically not a good economic run for
quite a while. So they are suffering ill
effects uh of their policy uh as well.
And so basically I think that as the
whole world kind of enters this more
fiscally dominant environment at least
the whole kind of developed world um the
effects will probably be persistent and
and here and it's different than saying
you know things blow up 5 years from
now. It's saying that the effects are
already here. They're already out there.
They're already affecting grocery
prices. They're already affecting uh you
know how easy it is to move around
society and things like that. And it's
that it's probably going to keep
happening for quite a while.
>> Yeah. Uh that's a really good point.
This is something I don't think people
understand about the Japanese in
particular. So you'll often hear the
stat thrown around that 98% of the
countries that have existed in a
meaningful period over 130% debt to GDP
uh have ended in revolution. The 2% is
Japan. So Japan is like the the one
release valve, but then they also stayed
behind at the World Cup to clean up the
stadium. Uh no other country does that.
So to your point about that unification,
what what ends up happening in in these
countries and the reason that I'm so
eager to get my audience to like really
take this idea seriously that you cannot
evaporate the middle class without
massive consequences is I I always
thought that the end result of bad
fiscal policy was going to be that you
go to war with somebody else. That the
outside world recognizes your weakness
and they attack you. But what actually
ends up happening is you attack
yourself. And so people begin tearing
themselves apart from the inside and
they specifically do that because of
wealth inequality. And when you look at
the mechanism that's happening between
uh why the middle class goes away is it
isn't that they all get made poor. It's
that part of them understand like just
rough math half of them understand oh I
have to own assets like they get what
inflation is. I have to own assets to
escape this because the the dollar is
going down in value. So, I need a thing
that holds that value. It could be a
house, could be Bitcoin, whatever. But,
I need an asset that's going to it it
will optically look like it's going up
in value, but it's really your dollars
going down, but they get that. So,
they're now going they're being pulled
up into the upper class. And then half
of the middle class don't understand
that. And the only thing that they get
intuitively is own a house. I can live
in it. It if you could live inside of
Bitcoin, this would be very different.
uh but you can't and so they get a house
like just intuitively you don't have to
tell them that it's an asset they don't
have to understand inflation they just
know I want to buy a house I want to
live in it and so in doing that when
that works they can stay in the middle
class once you you mentioned this a
minute ago once that house becomes
impossible for them to buy now all of a
sudden they get pulled down into the
lower class because inflation is eating
away their ability to store wealth and
it's like man if we can get people to
understand that okay that creates It's
this wealth inequality. The wealth
inequality makes the have and have nots
hate each other. I mean basically the
have nots hate the the halves and then
they they end up revolting literally it
becomes bloodshed the whole nine. Like
it is absolutely wild. And so heard that
it just happens so slowly. This is how
you boil a frog. And so now everybody is
like ah I've heard people screaming
about this forever. But it's like if
you're mad you're mad because it did
come to fruition. It came to fruition
slowly, but it actually did happen. And
so we're now in this moment and um when
you look at that,
how do you contextualize someone like
Trump? So are Trump's policies going to
help us out? Are they going to hasten
the decline? Like where do you fall on
that? I I tend to be of the observation
that I think he identifies a lot of the
issues correctly in in the sense that uh
you know for decades for example the
trade deficit was ignored by politicians
of both the right and the left. Running
a trade deficit for a period of time is
fine for a country to do. There's all
sorts of reasons it can happen but the
US has kind of a spec a specific uh kind
of built-in mechanism to always run a
trade deficit. is is actually kind of
tied to our reserve currency status is
basically so much external demand for
our currency that the way we ironically
get currency out into the world is by
running this really persistent trade
deficit with the rest of the world. But
when you have that for four decades in a
row, uh you basically hollow out certain
parts of the country and kind of
reinvest it into the the cities
basically. So you kind of hollow out
like you know Michigan and you
reinvested in New York and Silicon
Valley. Uh and that's kind of where all
that wealth winds up. Uh and then the
same thing happens with the with the
fiscal deficit as well. And so I think
he's identifying some of these things
like the trade he kind of elevated the
trade deficit as being something that
hardly anyone talked about to now kind
of um front and center in politics. Uh
but I also tend to view that the that
the things done don't tend to
necessarily address the actual things
he's identifying. So in in in both his
first term and his second term,
generally the fiscal policies would
would even further help the the you know
the top couple percent out. uh more so
than
>> tax breaks, continued spending.
>> Is that the specific part of the fiscal
policy you're talking about?
>> Yeah, that tends to be skewed toward the
the wealthy, either the older or the or
the super high net worths, for example.
Uh and then, you know, that the the
tariff policies are tricky because even
though I think that addressing the trade
deficit, it is a real thing to do that
we've actually not really seen a lot of
politicians interested in, um the
mechanisms to do it don't seem
particularly well thought out. uh and I
think that therefore the that the
probability that they meaningfully kind
of improve things in in that sense over
the next four years uh is pretty low. So
I think that's the challenge and the
problem is that the when you have this
kind of when you when you reach this
part of the economic cycle so when you
have a very topheavy entitlement system,
you have a very topheavy public debt, uh
you have these issues. uh every kind of
year or every kind of um uh
congressional presidential cycle we
spend still not getting it right kind of
digs us further into the into the hole.
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theory. And now, let's get back to the
show. Okay. So, I've heard you talk
about the tariffs as like, okay,
nothing's going to stop this train, but
tariffs at least are effectively attacks
that help slow the train down a little
bit. Um, given that you've said that,
but you also just said that I don't
think this guy is really thinking
through these policies. Well, um, help
us understand your take on tariffs as a
tax and whether that's the right way to
look at it. And then if that's not quite
the right way to do this or or maybe not
the right way at all, what would be the
right way to use policy to slow the
train?
>> A big factor in why the deficits are so
hard to to resolve, not the only factor,
but a big factor is the political
polarization that's embedded in it. So
there are a lot of things that
politicians don't want to cut. And then
there's and then there's a lot of
defenses against raising taxes as well.
Tariffs were kind of interesting because
with emergency powers uh from the
executive branch, they kind of bypassed
that polarization. So instead of
Congress voting on this, uh, the
president was able to do it. Now, you
know, in in weeks or months, I mean,
it's potential that courts could take
that power away. I'm not a legal expert.
It it's it's currently kind of being
looked at, analyzed, working straight
through the court system, but as it
were, as it is right now, that's
basically a pretty unilateral tax
increase. So, it's able to bypass some
of the uh polarization that happens. In
terms of quantifying it, I mean, they're
currently running about 30 billion a
month in tariff revenue, uh, which
analyze gives you 360 billion. Uh, some
of the latest tariffs are not really in
that figure yet. So, we might end up
seeing 400 plus uh, billion in annual
tariff revenue, but that's up against a
$2 trillion annual deficit. So, you're
you're talking something like a 20% dent
into it. Uh, the other factor that's
complicated is that it's being marketed
as a tax on the foreign sector. Uh but
right now the the majority of evidence
shows that it's it's being paid both in
the literal sense but also even
economically paid by Americans in in
multiple ways. It's sometimes in the
form of higher prices, other times in
the form of of businesses taking a
margin hit for example. So far we've not
seen a reduction in import prices um to
offset the the tariffs that are being
paid. So this is primarily a new tax uh
on Americans. uh on average it will tend
to be more felt by those again in the
lower income spectrum. Uh because uh if
you're wealthy generally your
consumption is a smaller share uh
compared to your wealth and income
whereas if you're on the lower end of
the income spectrum most of what you
earn goes toward consumption which is
now potentially at least the import
portion is more tariffed and so th those
potentially minor price increases
actually matter a lot more. how I would
actually go about addressing it. That's
always the hard part because I I for
example, I'm first to say it like that
the central bank gets a lot of criticism
and I'm pretty critical of central
banking in general, but for example, I
wouldn't necessarily know how to handle
it better than the current Fed's doing
because when they're stuck in fiscal
dominance, u a lot of their tools are
taken away. um you cited that statistic
before that once you reach roughly this
high debt to GDP uh 98% of the time uh
it you you you know have an issue and
that specific study what that points out
is that uh 98% of the time over the next
15 years there's some sort of default.
It could be a literal default which
sometimes you'll see among say emerging
markets generally uh entities that
cannot print the units that their debt
is denominated in. Uh but if it's if
it's the country's own currency they're
more likely to default through
debasement. they basically default in
terms of purchasing power. And to some
extent, we've already started that
process. The last 5 years were like the
worst ever period for like bonds uh in
like modern American history. For
example, bonds underperformed
practically every other asset. Um and so
I I think the first step is actually
just being fully aware of what's
happening. Um and I unfortunately don't
have good answers for how to resolve it.
I think the trade deficit is potentially
more resolvable than the fiscal deficit.
Which is to say if they start doing
policies that that discourage the the
global capital kind of stuffing itself
into US capital markets that can
alleviate some of the artificial
strength on the currency that makes it
really hard to to you know manufacture
things here uh profitably. Um and so
that's a that's an angle that could be
tackled. U but so far that's that's not
one of the levers that they're pulling.
And it's interesting because um uh
Trump's uh uh chair of the Council of
Economic Adviserss uh he actually wrote
a paper on how one might go around um uh
reducing the the the trade deficit. Uh
and he published that in November 2024.
So right when when after Trump was
elected and that's kind of like their
steelman approach for how they're going
to do this. That's basically the Harvard
economist view of okay if you want if
you want to try to enact Trump's goals
how do you go about doing that? And that
involves some degree of tariffs, mainly
to bring negotiating up with other
countries and then use a variety of
other things to dissuade all that
capital being stuffed into US capital
markets. Um, but they haven't done that
part yet and I don't I kind of don't
think they will because that's the part
that is also pretty painful. Uh, most
>> Why would that be painful?
>> Because holders of assets generally like
the fact that there's a lot of foreign
capital coming up and bidding up their
assets. Uh, and so it's one of those
things where there'd be some parties
that are benefiting from it, other
parties that are hurt by it, and kind of
like any other polarized topic, there
there there'd be defenses against that
happening. Uh, basically that that they
wouldn't perceive that as something they
want to probably do.
So, I get why as somebody who um has
like gets the asset side of the
equation, you got a ton of money and
assets, but if the case could be
persuasively made that, hey, keep uh
pushing on wealth inequality and the
French have a story to tell you about
the French Revolution where wealthy
people got their heads detached from
their bodies. or hey compelling argument
would be let me show you how stopping
the inflows of capital into the American
financial markets actually help the poor
and working class and that lets you keep
your head which is my message. Uh how
exactly would pumping the brakes on the
amount of money coming into the US
financial market actually be pro- middle
class and working class?
>> Yeah, good question. Basically we can
back up and kind of explain the
mechanism. So right now the dollar is
the global reserve currency which
basically means that the whole world
wants it for a variety of purposes. They
want to hold it. Uh they want to use it
for international contracts. Uh they use
it as a basis for most currency trades.
So most currencies are actually not very
liquid with each other like say Egyptian
currency and Korean currency. Not a very
liquid market but they're all pretty
liquid with dollar. So you can always
trade one for the dollar, dollar for
another one. Um and uh international
financing. So if if a entity in France
lends to an entity in Brazil, it'll
often be for example in in dollars. So
there's this kind of global demand for
dollars and the mechanism of of how they
get that is that basically the US runs
these really big trade deficits with the
rest of the world and that's importantly
something that the US has purposely
facilitated. So it both happens
organically but then also the US kind of
leaned into that historically. Um and
then the way that works is they
basically overvalued the dollar. So most
currencies they will trade on things
like interest rate differentials. Uh
they'll trade on things like the you
know the their current account balance
and all that. The US dollar because it
has this extra demand for it. It tends
to run this more persistent trade
deficit. So we we overvalue our
currency. We give ourselves a lot of
extra import power but we make our
exports less competitive uh than even
our other developed peers generally
speaking. Uh and so we run these
persistent trade deficits with the rest
of the world. we we kind of spew out
dollars into the world and then the rest
of the world takes those dollars uh and
then they buy our financial assets with
them. So they buy our equities, they buy
our real estate, um they they bid up our
asset values. And the problem is that if
you know if you live in New York or or
you know parts of California, you're
probably doing great. It's your assets
that are getting bit up by this this
recycled trade deficits coming back into
our markets. But if you're anywhere in
the rust belt, it it became the rust
belt for this reason. Basically, if
you're anywhere in kind of artland, um
you know, your economic prospects have
been more impaired. Uh and so it it's
kind of siphoning from one place putting
into another. And you know, any sort of
attempt to reduce capital inflows into,
you know, into stocks uh into uh you
know, asset values, that's generally
going to be uh pressured against. Um but
by bidding up home prices at very
expensive levels uh it makes uh you know
it's good for those that have a home and
it's good for those who've been able to
lock in a short uh like a long duration
uh fixed rate mortgage against it. Uh
but it's very bad for those who are
trying to enter the home uh uh buying
market for the first time. This is also
generally something you see in countries
like Australia or Canada uh where they
have a policy of kind of trying to keep
uh prices elevated uh just because so
much of the the the country kind of has
their wealth in real estate but then the
losers of that are those that are trying
to buy a house not for investment
purposes but for the actual utility
purposes of of using it. Uh so generally
speaking, the trade deficit has kind of
been rewarding to those with financial
assets at the cost of those who who you
know want to work in the in the main
street economy in many ways.
>> Okay. So I saw how that would play out
uh in the housing market. That obviously
to me is a thing that screams from the
void to be addressed. Um again going
back to that idea, this is what the
average person understands intuitively.
You don't have to explain to them assets
and all that. Um but if we were stopping
things from coming into the
financialized side of the economy, how
would that um alleviate pressure
directly on housing, could we not
through policy make housing less of a
problem? Like for instance, deregulating
so it's just easier to build more
housing. Um would we have to stop things
coming in, stop uh people from cramming
dollars back into the US financial
system?
Uh so a lot of it is that basically the
dollar is kind of artificially
overvalued uh because of this demand for
it and that's what kind of directly
makes it hard to make things here. So
right now with a lot of our policies
we're addressing the symptoms of this
structure.
>> It's really about driving manufacturing
back to the US giving the average person
a place to work and the like sort of
heartland company that makes this is a
terrible example but steel brake pads
whatever. And now that's going out to
the outside world. So more than it's
necessarily
um influencing just asset prices. It's
just making it possible for somebody in
the middle class to earn a living to
have that small company that exports
that thing. Is that the idea?
>> Yeah, it basically balances the economy
a little bit more. Basically, the US has
a lower share of manufacturing relative
to GDP than many other countries because
that's the part we've kind of exported.
And if you didn't have this capital
recycling structure at the scale that we
currently have it at, some of that would
be able to flow back in. Uh now
realistically, a lot of that would be
automated, but basically you have a more
balanced economy at at that point and
you're kind of less extracting it from
certain states and then kind of
reinvesting it into other states. Um
there's also a really big um uh wealth
effect that happens that basically that
that the higher asset prices go it kind
of fuels consumption uh from those with
assets uh at kind of the cost of of
those who don't. So we have these kind
of really big mechanisms in place and
some of them seem good on the surface uh
but then there are losers from them. I
mean even for example the home buying a
lot of times you'll you'll hear about
Black Rockck buying homes for example
but a lot of the funds that's kind of
the one example but there's a lot of
funds and and pools of capital buying
homes and some of that is actually
foreign capital uh because in addition
to buying our equities and buying our
our private equity they're also in many
cases buying our property. So basically
you inflate the property values at the
cost of of you know people that want to
enter them. So, we had this kind of
unusual current cycle where um home
turnover is very low right now. So,
there's relatively few sellers, uh
relatively few buyers, there's not a lot
of activity happening, and yet prices is
still pretty elevated uh because there's
that kind of persistent bid there. And
that's that's kind of at the it benefits
those who have houses obviously, uh but
it's it's harmful for the those who want
to get them. And so that's why we end up
having one of the highest historical uh
ages for you know first time buying a
home.
>> That's very interesting. That feels a
little counterintuitive. Let me make
sure that I understand this. So if you
had said that the um appetite for
property has remained high even though
interest rates are high and that's sort
of illogical and how could that be?
We're hollowing out the middle class
who's buying these houses. Oh PS this is
foreign investors. I would have said
okay yeah cool that makes sense. But if
you're saying that activity is actually
low, um how is the perpetual bid from
foreign investors meaningful if nobody's
buying and selling?
>> Uh because there is still some buying uh
and a lot of those are able to do cash
buys. So right now the limiter to to um
a lot of uh changing of of home
ownership is the fact that the mortgage
rates uh someone would have to get out
of a low interest rate mortgage. They
would end up in a higher rate mortgage
if they move. Uh, and then the the buyer
has less kind of financial firepower
because their monthly payments are so
high. But it it it doesn't really affect
too much the cash buyers. Those either
because they're wealthy or because
they're investment funds that are able
to come in and just pay the cash value
for the house and therefore uh around
the margin still keep those home values
uh pretty high.
>> Okay. Uh so given that one of the things
that's really impacting both the ability
for somebody to own a home and the
government debt, the fiscal debt, uh is
Trump right to call for the lowering of
interest rates or is Jerome Powell
actually wise to be holding off
>> in fiscal dominance? Almost everything
the central bank does is wrong. That's
the problem is that because if they hold
interest rates high, so we go back to
kind of what we said earlier. The
primary purpose of raising interest
rates is to slow down bank lending. The
problem is that the the whole period of
inflation we've had for the past five
years was not caused by excessive bank
lending. It was caused by those fiscal
deficits. Uh originally it was
intentional stimulus and now it's just
kind of this this background higher
deficit. So the Fed in some ways has
been trying to raise interest rates to
slow down bank lending to offset the
real problem which is the the federal
deficits. Uh but by doing so, because
the debt's over 100% GDP, by keeping
interest rates high, they're also
actually keeping the deficit high
because they're keeping uh federal uh
rates high. Uh and yet if they if they
cut interest rates while you have stocks
at all-time highs, gold at all-time
highs, Bitcoin at all-time highs, uh you
know, property values at all-time highs,
then they're adding fuel to the fire,
too. And that's why you get to that
statistic where 98% of economies when
they reach these debt levels tend to
have some sort of default which which
can be through purchasing power because
their own central bank kind of runs out
of options. Um and so I I think that you
know it's probably due for a mild cut uh
just based on the on deterioration of
economic conditions but I view that as a
much like a smaller lever uh to pull
than the fiscal situation. uh kind of
one way of putting it is that when the
money's weak, people will monetize other
things and then by doing so they make
those things uh less available to those
who just want to hold them for their
actual utility use not their monetary
use. Uh and so by monetizing our equity
market, by monetizing our real estate
market, uh at because our money's weak,
it causes all these more structural
imbalances and therefore they causes
periods of malinvestment and it causes
that kind of along with other policy
decisions is those high uh levels of
wealth concentration.
>> Okay. So, if I'm understanding you
correctly, the way that Jerome Powell is
looking at this, uh, he knows what you
know, which is I don't really have any
great options. But the one thing that if
the real problem is the government is
taking on too much debt that's causing
them to print a bunch of money that's
causing the high inflation, um, then it
seems like I should be trying to pull
down the interest rate. Obviously, I
need to find a sweet spot, but I should
be trying to pull down the interest rate
um knowing that I'm going to have a
bigger impact on the government,
certainly at first, than I would have on
the banks than suddenly going crazy
because I have a bigger problem with the
acrruel of uh compounding interest
because we're adding right now a
trillion dollar every 100 days to the um
government uh deficit, which is just
absolutely insane. So, why wouldn't that
alone be a signal to like, bro, look,
there's obviously a breaking point and
then you're going to trigger the private
market too much, but uh we we've got to
bring this public debt uh interest
payment down. I think because the optics
are so bad, like a key part of central
banking is that they're supposed to have
some degree of kind of optical
independence, which is that they're
they're focusing on their mandates, you
know, employment levels, uh inflation,
things like that. And they're not really
supposed to take in account uh the the
fiscal situation of the country. Uh and
yet in practice, of course, you find
that that they, you know, when the when
the rubber meets the road, they do. So
when there's a war, when there's a
fiscal crisis, the central bank's
options shrink because at the end of the
day, they have to kind of support that
bond market. And so we saw this um you
know in in recent years and basically
from their perspective, they can't say
out loud that because the the debt's a
problem that we have to kind of change
how we would otherwise do things. And I
think actually like that going back to
my prior point where I would say it's
hard to criticize the the head of the
central bank even though I'm kind of
critical of the whole practice of
central banking. The one thing I think
that it's fair to be critical of is the
asymmetric um uh talking point they've
had around the fiscal deficit. So for
example during co during the depths of
it the the federal uh the head of the
Fed called for more fiscal. He basically
said our tools are limited here given
what's happening. We need more fiscal
spending. uh and they got that there was
of course very large uh stimulus efforts
and now on the other side of that they
won't go out and say that the opposite
they won't say that our our ability to
control inflation and kind of tweak all
this is being hampered by the fiscal
side that basically our tools are not
geared to to doing that and if anything
could make it worse uh so they have to
kind of show confidence and say look we
got this our tools can fix this but the
problem is that I I think it it doesn't
uh that basically that their their tools
are largely unrelated to what the core
issue is. Uh and and you know, I think
that the first step is basically to say
that uh and they're not doing that part.
>> That's interesting. So, let me give you
uh my layman's counterpoint to this,
which would be I'm the Fed. I'm Jay
Powell. I look at this and I know one
simple thing. If I jack up interest
rates, you're going to have to spend
less because you're going to hit a point
where it is just absolutely untenable
for you to keep spending what you're
spending. Um, is it that Jerome Pal
knows, oh, we'll hit a political crisis
first, they'll oust me, they'll find
some way, they'll oust me before that
because other than that, like this is
one of those where he once said
something akin to um I want to be in a
position where uh I can raise interest
rates because it's essentially breaking
the leg of the economy and I know how to
heal a broken leg. Uh so he like gets
that that's exactly what would happen.
So why isn't he doing that if if he's
really trying to control inflation? He
has to do that.
>> Yeah. I think I think that's what he has
been trying to do which is by holding
interest rates high. Uh it makes the
dollar fairly strong compared to other
currencies. It kind of puts pressure on
the rest of the world. Uh it does keep
commodity prices in check. For example,
you know, oil generally speaking, it's
hard to have out of control inflation if
oil prices are pretty low, which they
are. Uh so it's having those effects,
but then the problem is it's grinding
out more and more of this public debt uh
which is actually ironically spewing
more dollars into the market. The
problem is that in in kind of no world
if there was like an acute bond crisis
would they kind of blink and just let it
happen because one of their kind of
shadow mandates is financial stability
and that goes at the heart of financial
stability. A really good example is the
Bank of England uh which which was under
similar strain. So back in 2022, uh
inflation there was like 10%. Um the the
Bank of England was going to do a speech
around balance sheet reduction. Uh so
quantitative tightening and then the
guilt crisis happened. So for people
that that aren't familiar, uh the UK
sovereign bond market kind of broke. Uh
it was just kind of this leveraged uh
vicious cycle. So yields were rapidly
rising causing more entities to sell.
And ironically, the the Bank of England
had to cancel their speech on balance
sheet reduction and they had to go and
buy the bonds uh despite the fact that
inflation was 10%. Uh so they they did
something that is normally only done
>> uh in a low inflation environment. Uh
and t