Become a Creator today!Start creating today - Share your story with the world!
Start for free
00:00:00
00:00:01
TILP #02: We're in a debt spiral and we ain't in Kansas anymore! w/ James Lavish
92 Plays1 year ago
Jim Crider is joined with/by James Lavish to discuss and understand what a debt spiral is, how/why the United States is in one right now, and where the near future might lead.
James' X account: @jameslavish
"The informationalist" newsletter: https://t.co/iV8AMLvMfH
The live US debt clock: https://www.usdebtclock.org/
Recommended
Transcript
Introduction to Intentional Living Podcast
00:00:00
Speaker
Hi, I'm Jim Kreider and this is the Intentional Living Podcast where we have conversations about how to use your resources, your time, your money, your talents for what's important to you in life in an efficient and effective manner. I'm glad you're joining with us today and I look forward to this journey with you.
Introduction to James Lavish and Topics
00:00:24
Speaker
In today's episode, I'm joined with James Lavish. James is a charter financial analyst, a hedge fund manager, and the author of a weekly newsletter called The Informationalist. Now, James and I today, we talk through the current macroeconomic landscape, the looming debt spiral, and Bitcoin.
00:00:42
Speaker
If you'd like to learn more about James or follow his writings and thinkings, you can follow him on Twitter at James lavish or go online to James lavish comm slash newsletter to subscribe to his weekly newsletter. We'll also have those links below. Let's get started.
Understanding Debt Spiral
00:00:57
Speaker
Yeah, so James Lavish, thanks for being here. Hey, man, it's good to hear. Can you hear me? Is this good? Yeah, I can hear your girl good. Now, I'm glad you're here. I love your thoughts and your writings.
00:01:13
Speaker
I mean, you're on tons of podcasts. And I'd love to have a conversation with you today about just your views on the debt spiral and what in the world does that mean to non Bitcoin, Twitter people and where you are in the macroeconomic landscape? And what do you think the end game of where we are
00:01:32
Speaker
right now will result in, I guess, this is like six things. But also like, how in the world do we get to where we are right now? We've got quite the mess on our hands. What's the way out? Can the Fed fix it? And how did we get to this place? So here, talk through all of that. You have 20 minutes. I'm just kidding. The answer is no.
00:01:53
Speaker
There's, I mean, look, well, first of all, thank you for having me, Jim. I appreciate it. I'm honored to be one of your early guests on this new show and I'm sure it will do fantastically. So, and happy Friday. I'm in kind of a Friday mood. So I'm going to warn your, your viewers who may be used to me going a little bit debt spiral doom loop.
00:02:18
Speaker
podcasting. But I mean, if it gives you any idea of how my mood is today, I'm wearing a Pink Floyd t shirt. I mean, I'm still kind of I'm in I'm in business mode here because it's it's a workday. But you know that the James that I know on a personal level is laid back in Colorado, taking it easy. So this seems right in line with with my familiarity with you. So nothing other than they're here.
00:02:43
Speaker
I get, sometimes people ask me if I could just take an hour or two on a Monday morning off to just not freak them out for the whole week, but yeah. Honestly, I just like to tell the truth. And really what's been going on the last year in particular is I've been trying to, I've just been trying to help
00:03:09
Speaker
people see what's going on, you know, and trying to get and make it relatable to them to understand where we are, where we're going. And I mean, I'm ultimately I'm an optimist and I'm a, you know, I'm a diehard optimist forever, perpetual. And I believe that we're going to find a way out of this. I believe that Bitcoin in
Role of Treasury and Political Challenges
00:03:34
Speaker
particular is
00:03:35
Speaker
a key component of that. But your main question is like, where are we? How do we get here? And where are we going in the macro world? And it all comes down to money. So when I talk to people about what I work on and what I focus on, I typically just try to explain to them how the money is broken and how the system is broken. And so, you know,
00:04:05
Speaker
You know what it's like when you have a family that some people believe in this political party and other people believe in this political party. And you can tell it's Friday because I keep saying, I'm in real chill mood.
00:04:22
Speaker
But the bottom line is it's not either political party. You and I and Jeff Booth had this conversation, I think, when we're standing there in the lodge in Telluride a few weeks ago. And the bottom line is it's the system that's broken. It's the system of money that's broken. It's the incentives that drive the decisions around that money.
00:04:47
Speaker
that is broken. And so when, when we look at these massive and gargantuan and mind numbing numbing numbers of the, the treasury piling on $2 trillion of debt in just the last few months, it's almost inconceivable. You just can't wrap your brain around it. And you're like, well,
00:05:09
Speaker
How is that possible and who's buying it and what's going on? And what does it mean? I mean, are we collapsing? The answer is no, we're not collapsing, not today, but we are setting the stage for a monumental collapse. And that's the problem. And that's what I want people to understand is that we can't do this forever. And the treasury itself
Federal Reserve's Role in Currency and Inflation
00:05:32
Speaker
knows it. So people are blaming the treasury, but let's call it what it is.
00:05:37
Speaker
The system is broken. You have the White House and legislators. They're up in D.C. and they make law. And in that law, part of that law is the budget and what we spend money on as a country. And they spend too much money.
00:05:56
Speaker
Now, the Treasury's job is just to facilitate that spending. It's to make sure that whatever is signed into law and whatever we have agreed to spend money on, the Treasury can facilitate that. And they do that by trying to balance a budget and by issuing debt in times of need.
00:06:19
Speaker
Well, we've been in a time of need for a long time now. We've been running perpetual deficits because we spend too much. We don't produce enough.
00:06:29
Speaker
And that's really not even the problem. We produce plenty as a nation. I mean, you and I are sitting here on a Friday working hard, and we actually are working. People say, they'll look at the sale. You're doing a podcast. They may not understand all that goes into it. I understand. I've done it. I understand what goes into this work. And it doesn't just start with flipping a switch, and you have a lot of components that go into this.
00:06:53
Speaker
you're buying software, you're interacting with people, you're trying to maximize your reach, you know, you're spending money on devices and inputs. And there's a lot that goes into it. And that's production. And we're blessed to be doing these things, you know, pontificating on these things on a Friday. But
00:07:16
Speaker
There are people out there, you can't hear it, but there's construction going on two streets away from me. And there are people out there working every single day. And so the government taxes that, and then they take that, and that's their income, right?
00:07:34
Speaker
But they're spending way more than they then they take in an income and so Enter the Fed so the Fed's job is to Maintain and restore sometimes confidence in the US dollar and how do they do that? well their job is to
00:07:53
Speaker
They say they've got two mandates full employment and Low inflation right and their definition of low inflation is a constant 2% annual rate. I Don't know where that came from. I mean I actually I know it came from It came from Europe You know half a century ago, but that's what we've glommed on to as a as a guy
00:08:18
Speaker
world as a global financial system that 2% inflation is that's normal. Okay. Well, we'll talk about this, but there is no normal, right? That's not normal. The inflation is not normal. So, but the fed's job is to make sure that people have confidence in the dollar and
00:08:38
Speaker
that they have confidence in owning treasuries, which means that they have to make sure that people believe that inflation is not so far out of control, that when they invest in a bond or they hold dollars, that it's not just melting away on them, that that's actually worth something at the end of that period of holding those dollars or holding those bonds.
00:08:59
Speaker
That's kind of where we're at. Those are the three main players in the United States financial system. We're not even talking about the banks. They're another massive player and huge influence on that first set.
00:09:16
Speaker
and on that last set, right? So they are a huge behind the scenes influence. But those are three main players who are making chess moves to keep this whole charade going. And the charade is the debt charade. And that's where we're at. And that's kind of what we're looking at today. And that's what I've been trying to teach people over the last few years.
00:09:41
Speaker
There's a long answer for a Friday afternoon, but here we are. You're good. Actually, I usually wait till about 2.30 or 3 for my afternoon latte,
Consequences and Management of Debt Spiral
00:09:50
Speaker
but I accelerate that one over up to noon to keep it going. A little tired Friday, but this is great.
00:10:01
Speaker
Is this new? How did we get to this place of debt and all these parties with mixed interests? Is this a symptom of 2008 financial crisis and suddenly this is a band-aid or is this symptomatic of something that's been happening for longer? Are we the first people who've encountered this or is this only happening right now in the US or is it elsewhere? Another question is this, maybe it's happening just here or other places, but this is the first time in history that this has happened.
00:10:31
Speaker
It's a good question. Sorry for my questions and whatnot. No, it's not the first time in history it's happened, but it's different in a number of ways. The real problem, if you go back to the main problem is, and if you ask people, and you just walk around the street, you ask people, what's the US dollar backed by? They'll say two things. They'll say gold, or they'll say the military. Those are the two things that people usually will fall back on.
00:11:01
Speaker
But the reality is the US dollar is backed by nothing. He's backed by the good faith of the US government. That's it. And so what happened is 1971 Richard Nixon made a play that he knew that the way we were spending money, we were never going to be able to keep up with it. And so he took us off the gold standard, officially took us off the gold standard. And and when he did that,
00:11:30
Speaker
It means that people couldn't, if you go back and look at old U.S. dollars, it would say that they're exchangeable for a certain amount of gold, right? But that's not on the dollar anymore. All you've got is that weird eyeball at the top of the pyramid, the all-knowing eyeball, and that's the U.S. government. But the problem is they took us off that standard, so now there's no check and balance there.
00:11:59
Speaker
Right. So you can just keep issuing debt and print more money. Right. So this is where the issue comes in is that the, the, the money is not really worth, it's, it's only worth what people believe it's worth. Okay. So it's a, it's a, it's this generally accepted note that people believe, whoa, well that's worth a hundred dollars. And if I take that and I go over here, it's going to be worth a hundred dollars to that guy. Well, the United States is in this wonderful position that
00:12:29
Speaker
We benefit from the fact that we have the global reserve asset in the US Treasuries and the global reserve currency in the US dollar, which means that US dollar is the one that people are using around the world more than any other currency. But here's the issue is that when we got off the gold standard, we started running massive deficits because there was no check and balance. There was no worry about do we have enough gold in our vaults to
00:12:58
Speaker
exchange for these notes that we're putting out there because now they're not exchangeable for gold. So well, they're just, well, they're just exchangeable for dollars. That's all they're exchangeable for, you know, so, or goods and services for whatever people believe those goods and services are, are, you know, the price of those are. But the issue is that we are running these deficits, which is, and in running deficits, it's just spending money we don't have. Okay. So it's your, we're borrowing money.
00:13:28
Speaker
in order to create productivity. Now, debt in and of itself is not a bad thing. It's not a terrible thing. If you use debt responsibly, you can own a house, you can start a business. I like to give this example. If you have $10,000, but you want to go start a restaurant, you've got this
00:13:51
Speaker
place that people are asking for food. There's a lot of office buildings around there and you know that you can have a great restaurant right there. And so you've got this opportunity, but you only have $10,000, but it's going to cost you $100,000 to open that restaurant, small restaurant. So what do you do? Well, maybe you're able to borrow the rest of that money and open that restaurant today, right? So meaning that you've borrowed that
00:14:21
Speaker
$90,000. Now you've got 100 and you can buy your ovens and your cookware and your dining ware and you can hire employees and you can buy all the food. And as soon as you're done with that in a few weeks, you can open your restaurant and start generating productivity.
Interest Rates, Inflation, and National Debt
00:14:43
Speaker
And so that's pulling productivity from the future into today because instead of having to
00:14:50
Speaker
work and work and work and work and save money and save money and save up that $10,000 to make it $100,000. Well, now you've pulled the productivity from the future into today and you're creating, right? So as long as you didn't borrow too much, as long as you probably would be a better example if you borrowed $30,000 against that 10. But the bottom line is as long as you're covering your expenses,
00:15:17
Speaker
You're covering the interest on that debt and all the other expenses you have and you're generating a profit continually that's large enough that you have the ability to ride the wave of economic cycles. Well, then you're okay. The problem is many people take on debt, they just take on too much. And we're in that situation now in the United States where we have taken on too much debt
00:15:45
Speaker
And we're in what we call a, we're, we're in a debt spiral. And I can, I can talk about that a little bit more, but I'll kind of pause there and, and, uh, let you, uh, let you ask questions or, or, or maybe, uh, reflect on it. Yeah. I'd like to, because we can, we can continue to go into like, what is the debt spiral? And, uh, yeah, what would be, what's that step look like? Let's, let's keep, let's keep going on that for a bit. Yeah. Pull that thread. Yeah.
00:16:14
Speaker
So on that thread, the problem with debt is sometimes you're taking on debt that has too high of an interest rate that you can't really pay back. So say you're a single parent, you've got a few kids, and you hold two, maybe even three jobs. And today's day, that's not
00:16:35
Speaker
abnormal, you know, many, many people have two jobs. The last employment report showed a rise in double employment of over a hundred thousand people in this just this last, this last week, you know, it's crazy.
National Debt Cycle Explained
00:16:50
Speaker
So people are taking on second jobs.
00:16:53
Speaker
because they're not keeping up, okay? They're not keeping up with inflation, but let's just walk through that. So you have mandatory expenses, right? You've got your house, your car payment, you've got gas to get back and forth to your job if you're not fortunate enough to be working remotely and you have to actually go to an office or a facility or, you know,
00:17:19
Speaker
And so, and you've got to pay for food. You've got to pay for your kid's food and your kid's clothing and, you know, they're growing. They need, they need new shoes, you know? So.
00:17:30
Speaker
Those are mandatory expenses. And so if your jobs are not covering those expenses, what do you do? Well, you're gonna take out a credit card. It's the easiest, fastest way to make sure that you're covering your expenses. But the problem is you're running up debt on that credit card. You're still not meeting those expenses and you're falling behind. Well, you're eventually gonna run up that credit card and it's gonna be full and you're gonna have to take out another credit card.
00:17:53
Speaker
And then eventually that's going to be full and you take out another credit card. Now you're paying on that third or fourth credit card. All you're using it for is to pay the interest on the last two or three credit cards. And you're not, you know, we're near making the margin, you know, you're not meeting the margin and you're going under, it's called the debt spiral. You can't get out of it.
00:18:18
Speaker
Well, let's look at the United States. So if you look at the United States in particular, and all fiats are in this position, all modern fiats are in this position, the US is not alone. It's just the US has the benefit of being, as I said, the global reserve asset and global reserve currency. So we're gonna be able to perpetuate this for a lot longer than I think people think.
00:18:42
Speaker
I believe people think. So if you look at the United States, and we were to say that the United States is a company on the New York Stock Exchange, you would call it a zombie company. Why? Well, a zombie company, as you know, Jim, is a company that is not generating enough income to cover its interest expense.
00:19:03
Speaker
So typically, a healthy company will be generating enough income annually to cover their annual interest expense by seven, eight, nine, 10 times. So it's not a problem at all. The United States is not only not covering it, it's at like a 0.5 coverage, which means it's not even covering the interest expense, which means that it's a zombie company.
00:19:31
Speaker
Well, the United States also has mandatory expenses, right?
00:19:39
Speaker
So you have Social Security, Medicare, Medicaid. You've got some internal expenses that are signed into legislation. These are all signed into legislation. You have to be paying these expenses every year. That's number one. That's a big chunk. Then you've got a next chunk, which is military expenses. So if you say that Medicare, Medicaid, and all that, it's kind of a moving target
00:20:09
Speaker
But, uh, if you look at last year, okay, so I, I kind of went through this last year and I wrote a thread on it back in August of last year. Okay. And these, these have all these expenses have gone up. Um, but if you look at it back in, in, uh, in terms of 2022, um, you know, you have,
00:20:37
Speaker
you have entitlement expenses that were upwards of $3.7 trillion. And then you add on your military expenses, which is about $800 billion. Now, those are not signed into legislation, but those are long-term military contracts with defense contractors that you have to be paying these, especially if we plan on going to war in every single country. It's another issue.
00:21:05
Speaker
So you've got about $800 billion of defense spending. So now you're at about $4.5 trillion, give or take. Now entitlements and all that have gone up as employment goes down, those go up and the need for unemployment, that's going to be rising here. But let's call it $4.5 trillion of expenses.
00:21:31
Speaker
Last year, we were running about $600 billion of expense on interest payments. So now, as a country, we're taking in, if you look at the debt clock, and I like this, and maybe we can share the screen, is that something we can do? I don't know. Let's see. I hadn't had a chance to figure that one out yet. I don't see that we can do that here.
00:22:01
Speaker
But for your listeners, you can just go to debtclock
US Debt Clock and Budget Analysis
00:22:06
Speaker
.com, or I think it's .org, usdebtclock.org. And it'll show you continuously where our expenses are, our debt, and all that. And of course, it's down right now, so I won't be able to tell you.
00:22:27
Speaker
These come in from the CBO, the Congressional Budget Office. Every single year they put out budgets and they tell you exactly what they expect. So they're expecting to take in about $4 trillion, $3.9 trillion of tax collections this year. These are a lot of numbers. We're going to go back. Start at the top. They're taking in about $3.9 trillion, which is 10% lower than last year.
00:22:57
Speaker
That's what they're taking in as tax revenue. And they're about to spend this year, they're going to spend about $5.5 trillion. So right there you can tell that that math doesn't work. And one of the biggest problems is the interest on our debt is growing so rapidly. Last year it was $600 billion. This year it's getting to be about $1 trillion.
00:23:27
Speaker
Okay, so we're just like that single parent who is issuing more and more debt. Okay, we're borrowing more and more money. Now we're borrowing at higher interest rates, just like on a credit card, the next credit card, you get to higher interest rate next, and that's what's happening to us, okay? Part of that has to do with just because the Fed has raised rates, but also it has to do with the market realizing that we have so much debt that's coming onto the market. They're demanding a higher interest rate for that.
00:23:56
Speaker
So now the treasury is issuing this debt and they're having to pay more and more interest on that. So when you pull out all of those numbers, you see that we've got this gap, okay? That's just growing and growing and growing. That deficit is growing. It's getting worse and worse and worse, okay? And so we are in what's called a debt spiral. So what is your choice?
00:24:21
Speaker
If you're the United States government and you ask me where we are, okay, this is where we are. Our deficits are growing. We issued $2 trillion of debt in just the last few months because we need to borrow money to pay for all these things. Part of that was because there was a log jam of, you know, there were a lot of things they had to pay for in June because we had that debt ceiling crisis and they were holding off a lot of expenses and they all came due.
00:24:50
Speaker
We, you know, we're, we're $3 trillion above where we were last year. That's the only number you need to know. Okay. Doesn't even matter what the, what the debt ceiling was. We have borrowed $3 trillion more this year. That's 10% more. Okay.
Inflation as Hidden Tax
00:25:06
Speaker
So we are, we are in the same spot as that, as that single parent, but because we're the United States government, we have a, we have a few other options. Okay.
00:25:18
Speaker
One thing we can do, we have basically three main options and then a fourth sneaky option. But the three main options are you can either be, you can, uh, institute some fiscal austerity, which means cut spending. Okay. Which is meaning that you're going to cut spending on, on certain entitlement programs. Cause we just heard that those are, that that's the big expense you have to cut entitlement spending in order to,
00:25:46
Speaker
bring this deficit down. Well, that's just political suicide. I'm not much of a fan of entitlement in a lot of things, but I think the term entitlement there is actually merited. That is social security, Medicare. Those are things you've literally paid in. It's not a handout from the government. I paid for that. Yeah, I paid. That is mine.
00:26:10
Speaker
I mean, I've been paying for my entire career and I get my, my, I get this little statement every year. It says what my social security payment will be if I retire at 62 or 65 or 70. It's just, it's pathetic, but I paid into it. You know, I paid all that money into it for, for decades. And I'm Gen X. I'm not expecting to get much from it, unfortunately, because of what we're talking about here. Okay. But let's walk through it.
00:26:40
Speaker
You can cut spending, but that's political suicide. Neither party will do that. They'll try to push the other party to do it, to be fiscally responsible, take the blame, and then not get elected on the next round, but neither party will do it. The second thing they can do is raise taxes. We know from many studies over many years and centuries that raising taxes winds up just disincentivizing
00:27:10
Speaker
productivity and it takes away the ability for thriving companies to reinvest money into good investments that will grow productivity over time, you know, research and development, new divisions, new products. You can't do that if you're being taxed and it's taken away and given to the government for, you know, just silly spending.
00:27:39
Speaker
So that's the second thing you can do. So you end up getting back to the same place. It doesn't help productivity and you wind up with the same tax dollars eventually. The third thing you can do is just issue more debt. So when a bond matures and we don't have money to pay for it, we just sell another bond, take that money, pay for that first bond and give people back their principle. They wind up buying that new bond with that principle and so it's just this circle, right?
00:28:09
Speaker
That's the third thing we do and we're issuing more and more debt, right? But that can only go on for so long before you get to a spot where people realize that they're dollars, they're bonds, they're not worth what they were before. Why? Because of the fourth sneaky option, which is allow for and hide perpetual high levels of inflation.
00:28:37
Speaker
And when you do that, you allow for inflation to create productivity in nominal terms, meaning we're producing the same goods, but those goods cost more because of inflation.
Global Implications of US Debt
00:28:51
Speaker
And so the tax dollars are higher because of inflation and it's really just fake productivity. And so they take that fake productivity that they tax
00:29:01
Speaker
And they use those cheaper tax dollars to pay down debt that they issued years and years and years ago. So it would be like, if I borrowed a hundred dollars from you today and 10 years later, I pay you back that a hundred dollars. Well, who had the benefit from that? Well, I, I got a hundred dollars when it was worth a hundred dollars. Now I give you the hundred dollars back and it's really worth about 50. That doesn't sound like a good deal for you.
00:29:30
Speaker
You're the one who's loaning me the money. In this situation, I'm the US government and you're the citizens. Not a good deal, especially if you're a European or an Asian country, you're China and you're lending me dollars, you're getting them back and you're looking and thinking, these are worth a fraction of what they were. So why do you think China is letting their US Treasuries just mature off their balance sheet and they're not re-upping?
00:29:57
Speaker
The same thing that Russia did. That was a tactical error for us to freeze their assets. So there was another reason for them to do it. But they don't want these dollars that are worth less and less every year. And they know that's what's going on.
00:30:12
Speaker
And you're seeing, that's why the BRICS nations have been trying to, you know, commingle and congregate and get a, not a competing currency, but an option against the Treasury because they don't want to be holding Treasuries anymore. They want to be able to buy oil and gas in their own currencies. So
Potential Economic Outcomes of Debt Policies
00:30:33
Speaker
that's kind of where we're at.
00:30:35
Speaker
We're at a spot here, Jim, where we're taking on so much debt so rapidly that the market is realizing it. They're forcing higher interest rates. And the Fed has lost a little bit of control at the long end of the curve here because it's the what we call the bond vigilantes. And I wrote all about this in my newsletter this last weekend. It's the bond vigilantes that are refusing to buy long-term treasuries
00:31:04
Speaker
4%. They want them higher, 4.5, 4.7, 4.8, approaching 5% now. So if you look at that 10-year treasury, it's going higher and higher. And that isn't because people think that the Fed's going to be raising rates here. People think the Fed is going to be lowering rates next year. If you look at the Fed, if you look at Fed funds futures, they believe the Fed's going to be lowering rates next year. So why is the 10-year going up? Well,
00:31:31
Speaker
because people realize that this high perpetual level of perpetual inflation is going to eat away at their dollars. And so they're not going to loan the money. They're not going to loan money to the US government at zero interest rate policy anymore. They want to be paid for that risk of high inflation, perpetual inflation,
00:31:52
Speaker
that the Fed quite honestly is working, and they're not working with the BLS, but they are not demanding the BLS make it look any better than it really is. Because again, the Fed's job is to restore confidence in the US dollar. And so the BLS, the Bureau of Labor Services that creates the different measures of CPI and the other inflation measures, they make it look as good as they possibly can.
00:32:21
Speaker
pulling out, you know, uh, very sensitive things like energy housing. Yeah. Like this week. Yeah. Energy housing, uh, used cars and food. Was it? It was a, you know, pretty basic stuff. Whatever they need to pull out. Yeah. The stuff that you kind of need, those are mandatory expenses for people, you know, heat their house, eat their food.
00:32:44
Speaker
drive their car to work. Those are kind of mandatory expenses. We'll pay for the house. Well, James, the secret is go buy a new big screen TV, and you just leveled out your inflationary hit because the TV's deflationary, and now you're breaking even. Things are good. That's right. That's right. So yeah, that's kind of where we're at. That's the debt spiral. I wrote all about it last year in my newsletter. You can find it's pinned on the thread of my
00:33:14
Speaker
on my profile on Twitter. But in our little Friday fireside chat here, it seems depressing. It seems very, very bleak. But I'm not depressed. I'm actually optimistic. And I'm optimistic because we found this wonderful, incredible thing called Bitcoin that I think can help us out of this mess. And so, yeah.
00:33:40
Speaker
There's a couple things. So one when I am a very simple minded guy, so I try to keep, I have to keep things pretty simple. And I, I guess when I tie this back, like we're talking about numbers like this, it's hard to lose touch with reality. Like my, I have four young kids, my oldest turned six this week. And he was saying yesterday, uh,
00:34:05
Speaker
that he can count to 100 million, billion, trillion, quintillion just started going off. And at that point it's like, it's just, you can make up words. Cause no one even knows like, I don't even know
00:34:17
Speaker
Is dodeca-dillion? Is that 12 whatever? I don't know. We lose touch with reality once we get to these numbers. If a small business or a large business or a household was managing money in the same way our government is, you'd be in big trouble.
00:34:37
Speaker
Now, the government is able to kick cans a lot farther down the road, but it's very sobering to think about this is our government. This impacts everybody. I would be very concerned if this was my house. I'd be looking at, man, baby, we've got a downsize. We're going to have to... We'll be living out of the car for a bit. I hope you like camping.
00:34:59
Speaker
I don't see how this goes for the for a government and you sit here it's like all right obviously you have a lot of smart people thinking through this and a lot smarter than me but if this was my personal household and the way this happens we roll the debt like it's hilarious a few months ago you know big politician came out and said hey we've we've never defaulted on our debt do we default on our debt
00:35:19
Speaker
regularly. It's a habit of ours. We just don't default in the same way that we come out and say like, Michael Scott, I declare bankruptcy. We're soft defaulting every single day by having inflation. Exactly. Yeah. The inflation number is just this number that they picked out of the air and they said, okay, why is it 2%? Well, why is it 2%? Because that's what they can get away with. 2% is like, okay, well, 2% of mine
00:35:46
Speaker
you know, of my income is kind of eaten away every single year. So in order to keep up with that, Jim, you've got to be getting, you know, you got to be getting a 10% raise at least every few years. Are you getting a 10% raise every few years? I know that most people are not. That's number one. So that winds up, that winds up,
00:36:09
Speaker
creating this system that the top earners, the 1%ers, the people who own companies, the people who own assets, they get wealthier and wealthier because those things inflate every
Strategies for Debt Management
00:36:22
Speaker
single year. Assets inflate, right? Wages don't inflate until you go in and demand them. That's what we have. We have over 100,000 people. Actually, I think it's over a quarter of a million people have entered or been on strike at some point
00:36:38
Speaker
since the beginning of the summer in the United States. And that's because they're demanding higher wages. Why are they demanding higher wages? Because they can't keep up. They're not able to keep up with the inflation. And so the 2% is OK because it's just low enough that people, they almost don't even notice it. It's a sneaky tax. And what is that doing?
00:37:06
Speaker
that's allowing for the government to continue this charade of debt, the debt charade now. Your question, and this is a really important thing. So people ask me all the time, they're like, well, why would S&P and Fitch downgrade the US debt? Do they think that there's really a chance that US would default? And the answer is no.
00:37:35
Speaker
So if, and you know, to quote Lynn Alden here, if you are a sovereign, if you are, if you have a, if you're a country that you issued debt in your own currency, you would never default. Why would you? You could just print money and look at Japan. Okay. The bank of Japan has been buying their own debt so much for so long that
00:38:04
Speaker
They now own, the Bank of Japan owns more JGBs, Japanese government bonds than anybody else in the world. They own over 50% of outstanding JGBs. I mean, this is just insanity.
00:38:17
Speaker
That's what happens when you do an emergency purchase regularly. Yeah, exactly. Well, let's see. So where where the government is, like, if this is my household, it's sort of mean, we're rolling over debt to new debt. That's what's happening. And that would be like, Oh, gosh, babe, the credit card bills do and I go check the mail and there's a new mastercard there. And it's like, Hey, you're approved.
00:38:41
Speaker
Here you go. Hey, let's roll it over. In the next month, hey, babe, we're not going to make it. All right. Hey, we just got this visa in the mail. Let's roll it over. And you keep doing that. And what's really putting the squeeze on is not just this growing amount of debt, but each time we get a new credit card in the mail, maybe initially our interest rate was 5%. But then we rolled it over to the visa, and it's 15. And we rolled over the massive card. Now it's 20. That's right right now. The Fed raises rates. We're putting that pressure on ourselves. So let's, if I
00:39:11
Speaker
If this was my household and I can control, all right, I'm about to get a Diners Club card in the mail and I can control the interest rate I have to pay. I would say, well, heck, let's make the interest rate zero. I'll be able to actually start paying this down. Any principal pay will go towards a steady zero and I can get myself out of this.
00:39:29
Speaker
So again, this is obviously not how it works, but why not? If the government can set the interest rates for the debt, the interest rate on the debt we're going to pay, why doesn't the government just come in and say, hey, new debt payments is zero. And then, yeah, we could just buy our own debt. No one else is going to like, actually, I don't want to say that. Could you explain to me why we don't do that as a country? Because I would do that if I was an individual can set my own interest rate.
00:39:51
Speaker
We did that a little bit, but the problem is that, you know, when you, when you run, um, zero entry policies, uh, you wind up, uh, it, it, it does become inflationary. Right. And so our issue here is that we're trying to, the fed is trying to, they're trying to bring down inflation by cramping demand. Right. So when you, when you crimp on demand to bring down
00:40:21
Speaker
spending. All right, so if you just think about it in terms of if you're a company, okay, and it costs you so think of big terms, I'm just individuals, big terms. If you if you if it costs you more money to borrow, then you're when you when you need capital, and a lot of companies have what's called a bank line of credit, well, that line of credit just gets more and more expensive. It's it's you know, a lot of those are variable rates. And so
00:40:50
Speaker
it becomes more, capital becomes more expensive. Okay. And when they go out to issue a bond, it's more expensive. And so that means their margins come down. That means their spending comes down. That means that they can't, they can't pay their workers as much. And that, so that, that pulls down their, their profits, right? And so they're less profitable, which means that,
00:41:14
Speaker
their multiples in the stock market will come down, which means that asset prices come down, which means that that's less money in the pocket of people who are selling stocks or borrowing against stocks to go and spend on things. And so it all brings productivity down and it brings eventually.
00:41:35
Speaker
often what happens is it pushes a number of large companies or institutions to break. And then, you know, you have what's called a credit event and you have a drop off a cliff, right? So what you'll often see here, Jim, is the Fed keeps rates high, they raise rates to keep them high, higher than longer, higher for longer than they should have. And then you see a sudden spike in unemployment and we're in a recession.
00:42:04
Speaker
And that's what's going to happen. I mean, it's likely, very likely what's going to happen in this, in this cycle again. So, but you can't keep interest rates that low because it's just going to, if you lowered interest rates now, people go borrow again and go spend again, that's going to just, it's going to perpetuate the inflationary issues, right? So you've got to keep inflation high enough that you, you can't, you, you don't want to go into a situation like in the eighties where we, you know, we, we were,
00:42:33
Speaker
on the edge of interest rates getting out of control. And then Volcker came in and raised rates to almost 20%. At one point, I think they touched 20%. And so
00:42:47
Speaker
We couldn't do that now. I mean, we would cripple the government with interest expenses. That would actually be laughable because back then we were running at about a 30% debt to GDP. And today we're running about 125%. So that would not work. So 120, 125. So what...
00:43:13
Speaker
So that's the point though. Go back to your statement of you take out another credit card and it's more, it's a higher interest rate. Okay, let's go back to it. So let's go back to Fitch and Standardism Pours. And why Moody's hasn't jumped on this yet, I have no idea. I cannot figure out what they're thinking. But what they tipped off to the market, Jim, is that not that there's a higher chance of the Fed, of the Treasury defaulting, but rather
00:43:42
Speaker
The higher chance that inflation goes unchecked and that if you're investing in those bonds, you're actually getting a negative real return. So inflation is higher than the, than the interest rate you're getting on that bond. And so they, they tipped off the market. I mean, the market already knew this and the, you know, the bond vigilantes already out there, but they said, yeah, we agree. There is a, there is a, there is a distinct probability that
00:44:11
Speaker
you're going to get a negative real return on those bonds. And so we're going to lower the bonds from the highest rating, triple A to double A plus. There's still, you know,
00:44:22
Speaker
They're a great place to keep your money. You're not gonna lose it all. But when you get paid back that principle, it may not be worth quite what you planned on it being worth because of high inflation. And so that's the issue and what you're talking about. And I 100% agree with you, we're defaulting every single day. And that's in the form of a soft default, which is called inflation.
00:44:46
Speaker
So there's a lot of the problems. So how does this work out? Here's where I see things right now. I talk with normal people daily about money. And obviously, I'm looking out my window right now to our town square. And there's people out and drinking coffee and on walks and stuff. And I think where things are right now, I don't think most people are aware of the gravity of the situation.
00:45:18
Speaker
But I think it's about to hit. Just a few weeks ago, student loan payments, federally owned student loans, you got to pay them again. It's been years. It's been what, three and a half years? Three and a half years ago, if you're a student loan payment was $400 a month.
00:45:35
Speaker
Okay, well, I have 400 bucks a month and I can go get coffee with some friends and my avocado toast once every once a week, once every two weeks. And then when the COVID shutdowns happened, and they canceled your student loan payments for a bit.
00:45:51
Speaker
you suddenly had $400 in excess and you were given some, you know, 1500 bucks and those COVID payments. So you had $400 in excess to go spend on avocado, toast and coffee, and you couldn't spend on anything right then. So then you saw savings
Bitcoin as a Solution to Financial Instability
00:46:04
Speaker
rates go through the roof, the best they've been in decades. And everyone just got 1500 bucks to go and sock away or most people did something in their yard or whatever. And that's when the coinciding of house projects with the, the, the, uh,
00:46:20
Speaker
lack of production of these assets. And stimulus checks that were deposited straight into people's accounts. Yeah, but that's a good point that these interest payments have kicked in again. That's number one. Number two, when you look at the demographics, Jim, the lower 80% are struggling. They're taking on more debt, and it's not because
00:46:46
Speaker
they think that they're, it's not because they're optimistic about the future, it's because they're struggling today. And so those credit card, the credit card debt in this country is just going
00:47:00
Speaker
you know, straight in a straight line, almost exponential number one, and you're seeing defaults start to tick up. You know, it looks it looks almost exactly inverse of what happened in March of 2020, March, April, May 2020, saving the rates were the best it's been in decades, accounts and everything was just it was it was impeccable. It was great. But
00:47:22
Speaker
Again, at that point, everyone had these people had $400 in excess, and they were skipping $1,500. And then we weren't facing the reality of the taxation of this inflation yet. So suddenly, like, cool, I can do this. And people are going out and doing things. And then after several months, inflation started to pick up, and people were realizing it. And suddenly, it was like, instead of going out and getting coffee daily, now I can do it every few days. Then it was once a week. And then we reached a point where, like, hey, I'm back where I was. I can go out and get coffee with my friends once a week.
00:47:52
Speaker
Oh crud, what happens is my $400 student loan payment comes up again. And that's where we are. We were back to a point where things were just about as tight, actually more tight than they were prior to COVID.
00:48:03
Speaker
without even having these debt payments. And suddenly, this is back. So I think there's a lot of people between the age of 25 to 45 who are about to be in a lot of pain. And who knows what's going to happen? But I would not be surprised if, in a few months, the consumer spending just falls off a map and used cars starting to get out there. When we look at, again, a few years back,
00:48:26
Speaker
average balance of savings accounts and savings rates were phenomenal. And it was just a spike. We've had this injection of capital. And then it's the inverse. It's not this gradual thing. It's just sort of falling off the map and the other side of the credit card, the average delinquency on credit cards, the average amount on credit cards are just abysmal.
00:48:52
Speaker
Yeah. Again, I think it's just going to get more dire. I'm curious to see how their government's going to respond to this, what the implications are going to be with homes. I mean, houses cost a fortune. I mean, the houses are the least affordable. They've been in several decades. What's going to happen? Let's say the Fed, well, if the Fed pivots and starts dropping rates, there's pent up demand for people to buy houses. There's a lot of people who want to own a house right now, but the interest rates
00:49:19
Speaker
Yeah. Yeah. The cost of the house has not gone down in tandem with the rise of interest rates. So the affordability is not evened out. It's just the interest rates have skyrocketed. That's because nobody's selling because what are they, they're not going to, they're not going to give up their, their two and a half, 3% mortgage. Why would they do that? They wouldn't. So until that happens here, they're,
00:49:46
Speaker
So what's going to happen? Well, I see it kind of in two different paths, right? So either we kind of plunk along here, and the Fed keeps rates too high for too long. And we do have that whoosh moment of a bunch of layoffs. We go into recession. You have a spike in unemployment. And we go into like this kind of hard landing, OK? Hard-ish landing. That's kind of the optimistic case.
00:50:15
Speaker
I like how that's the optimistic case. The pessimistic case is that we have a major systemic far-reaching default that has counterparty risk with contagion that produces an event, like we saw back in 2008, that we have a major credit event
00:50:45
Speaker
that or in 2019 where you saw the repo market lockup, we have a credit event that forces that all markets sell off. Every single thing you own sells off. It all correlates to one and it does it in face melting fashion where you just cannot even believe how quickly it happens.
00:51:14
Speaker
And it all happens like a 1987 Black Monday moment where everything sells off. Everything correlates to one. Why does it happen? Well, it happens because if you're a money manager and you walk into the office and you have a massive event like this, you don't know where your counterparty risks are. You don't know where your margin calls are going to come from. You don't know what assets are worth. What? You sell everything. And often you sell things that are more liquid.
00:51:40
Speaker
Things like Bitcoin, because they're liquid, they trade all day, every day, 24-7. You can be selling that on a Sunday if bad news comes on a Saturday night. But everything correlates to one, and you have just a drastic downturn of 10, 15, 20, 25%, maybe even more of assets. And it's extraordinarily painful. Now, the thing is,
00:52:09
Speaker
The Fed can't have that. The Treasury, sorry, can't have that. And really the Fed, by extension, they can't have that. Why? Because of the deficits we're running. Can you imagine if our tax receipts go down by another trillion dollars? I mean, it would be catastrophic for this country to try to weather a period, and it'd be catastrophic for the entire world. Because in reality, what we're talking about is
00:52:39
Speaker
the Treasury market locking up. And if that happens, then the entire financial system crumbles. So you've got to keep the Treasury market going. Well, how do you do that? You do it by turning on the money printer, the Treasury press a button on the Fed, and it dumps trillions and trillions of dollars onto the Fed's balance sheet. And the Fed, through the dealers, through the bank, major dealers, they go and buy up the US Treasuries.
00:53:08
Speaker
and keep that market going. And so that's what people are talking about when they say QE infinity, like that's the moment. So that would be very scary. In my mind, it would be a V recovery where you have this steep drawdown of a credit event and then the treasury market gets disorderly or locks up. The treasury steps in, the Fed steps in, they shore up the market, they dump a bunch of money on the market and here we go again.
00:53:38
Speaker
and the same thing. And so I would recommend, and this is what I do, is if you don't own any Bitcoin, own a little bit. I own Bitcoin and gold and silver because I believe that that type of event, in those types of events, there's going to be a flea to stores of value where you can hide money, not literally hide from the government, but hide it from
00:54:07
Speaker
the risks that are out there and these things, they hold their value.
00:54:13
Speaker
over long periods of time. And so it'll be interesting to see in this cycle what Bitcoin does and if it breaks away and really becomes that store value that everybody's talking about. But I think that's still a ways off. I still think it's considered a risk asset. However, because of its scarcity value, it is something that would absolutely own at least one or 2%. If you're not a believer, become a believer, do your work, figure it out.
00:54:40
Speaker
And and it may just save you because if the worst case scenario happens Which I don't believe would happen in this cycle, but it is out in the future it that the world just stops believing in the dollar and then you know, then you have to have something protect your wealth in and so because the entire financial system will Be reset so but the optimism
00:55:10
Speaker
The good news is that we do have Bitcoin and we do have a system that we can run in parallel that we can onboard to over the course of the next decade or two. And that's my hope is that we run this system in parallel and eventually that becomes what people use as a store of value as they spend their dollars. And that gives me hope because otherwise, you know,
00:55:39
Speaker
that we can't do this forever. And as the Treasury said themselves earlier this year, this isn't where we are on an unsustainable fiscal path. So do your homework and and and read up on it. But that's my and that's why but I have hope because thank God for Bitcoin period. Awesome. Well, James, thanks for going through and talking that out with me. That's that was really helpful from a
00:56:07
Speaker
Yeah, again, how do we get here? Where are we? And what's a, what do we think a way out of this is? So I appreciate your time. Yeah. Of course. I'm happy to be here. And it's great to spend a little time with you on a Friday gym, looking forward to the next time we get out to Colorado together. That'd be fun. So let's do it.
00:56:24
Speaker
Yeah, so thank you. Thank you for having me. And I appreciate it. Yes, sir. Thanks. Hey, thanks for listening to the Intentional Living podcast. Now today's show is simply entertainment and educational in nature. Do not take this as tax, legal or investment advice. If you are looking for tax, legal or investment advice, you should go talk with a tax, legal and or investment advisor.
00:56:51
Speaker
Again, this content is simply educational and entertainment purposes. Thanks again for listening. We look forward to you joining us on the next episode.