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What If the U.S. Paid Off All Its Debt Overnight? · The Infographics Show Podcast

• 0:10
  Speaker 1: Have you ever like it, actually looked closely at an
• 0:17
  Speaker 1: X ray, like really held one up to the light.
• 0:20
  Speaker 2: Uh yeah, unfortunately a few times. Usually for something broken
• 0:23
  Speaker 2: right exactly.
• 0:24
  Speaker 1: Usually when you're trying to figure out what's wrong, say
• 0:26
  Speaker 1: you have this terrible pain in your arm, you go
• 0:27
  Speaker 1: to the doctor, they take the image, and there's this
• 0:30
  Speaker 1: expectation of well, absolute precision.
• 0:33
  Speaker 2: Oh for sure, it's almost like engineering. At that point exactly.
• 0:37
  Speaker 1: You look at the dark film and there is that
• 0:39
  Speaker 1: jagged white line right across the bone, and the doctor
• 0:43
  Speaker 1: points to it and says, yep, broken. It is a
• 0:46
  Speaker 1: completely binary reality. It's either broken or it's not right.
• 0:51
  Speaker 2: It's a physical fact. You don't have to like believe
• 0:54
  Speaker 2: in the broken bone for it to be broken.
• 0:56
  Speaker 1: It just is exactly. But if you step into the
• 0:58
  Speaker 1: world of global finance and you try to look for
• 1:01
  Speaker 1: that same kind of foundational X ray, you know, the
• 1:03
  Speaker 1: bedrock that holds the entire.
• 1:05
  Speaker 2: System up, You're not going to find a clean line.
• 1:07
  Speaker 1: No, you don't find a clean hard line at all.
• 1:10
  Speaker 1: You don't find a physical fact. You find a psychological construct.
• 1:14
  Speaker 1: And looking over the state of the markets recently, staring
• 1:17
  Speaker 1: down the barrel of some incredibly sobering economic data. I
• 1:21
  Speaker 1: had this striking realization, which is, well, I think we
• 1:24
  Speaker 1: all sort of vaguely know this, but when you really
• 1:26
  Speaker 1: internalize it, it's honestly chilling. The entire global financial system.
• 1:31
  Speaker 1: I mean, your mortgage, your retiring account, international trade, even
• 1:35
  Speaker 1: the price of the food on your table. Everything is
• 1:38
  Speaker 1: built on a single assumption, the.
• 1:39
  Speaker 2: Assumption that US government debt is a risk free asset.
• 1:43
  Speaker 1: Yes, that is the assumption. Welcome to beyond infographics. By
• 1:46
  Speaker 1: the way, I'm so glad you're sitting here with us
• 1:47
  Speaker 1: today because we are embarking on a truly comprehensive exploration
• 1:52
  Speaker 1: of global finance's most vital element, the concept of safe money.
• 1:57
  Speaker 2: It really is the concrete foundation that every other financial
• 2:01
  Speaker 2: calculation on Earth is built on it. And when you
• 2:03
  Speaker 2: actually start poking at that concrete, you realize how incredibly
• 2:07
  Speaker 2: muddy the waters really are.
• 2:08
  Speaker 1: Right now, so muddy. We're going to be talking about
• 2:11
  Speaker 1: the US treasury, the national debt, and the sheer dominance
• 2:14
  Speaker 1: of the dollar. We've brought together a massive amount of
• 2:17
  Speaker 1: historical data, economic theory, and recent market actions just to
• 2:20
  Speaker 1: figure out where we actually stand today.
• 2:22
  Speaker 2: Because we are going to look at the somewhat terrifying
• 2:26
  Speaker 2: reality of where we are right now, and also the
• 2:30
  Speaker 2: incredibly bizarre, almost science fiction alternate reality of where we
• 2:36
  Speaker 2: almost ended.
• 2:36
  Speaker 1: Up right the zero debt universe, which we will definitely
• 2:39
  Speaker 1: get to. But first, what happens when that foundational asset
• 2:43
  Speaker 1: tops thirty six point eight trillion dollars That is roughly
• 2:47
  Speaker 1: one hundred and twenty three percent of the entire gross
• 2:49
  Speaker 1: domestic product of the United.
• 2:51
  Speaker 2: States, which means we owe significantly more than we produce
• 2:54
  Speaker 2: in an entire year.
• 2:55
  Speaker 1: It's staggering. And if you are enjoying this kind of analysis,
• 2:57
  Speaker 1: we'd love it if you could take a quick second
• 2:59
  Speaker 1: to rate be on Infographics five stars on whatever app
• 3:02
  Speaker 1: you're using right now. It really helps other people find the.
• 3:04
  Speaker 2: Show, it really does. So to even begin to grasp
• 3:07
  Speaker 2: the national debt, we have to start with the water
• 3:11
  Speaker 2: we're swimming in right the current exactly the currency that
• 3:14
  Speaker 2: debt is denominated in the US dollar, because the psychological
• 3:19
  Speaker 2: weight it holds globally is just it's staggering. It's hard
• 3:23
  Speaker 2: to overstate it really is.
• 3:25
  Speaker 1: Like the sheer scale of the dollar's dominance is unlike
• 3:28
  Speaker 1: anything else in modern history. If you look at international finance.
• 3:31
  Speaker 1: The US dollar is used in eighty nine percent of
• 3:34
  Speaker 1: all foreign exchange transactions.
• 3:35
  Speaker 2: Eighty nine percent. You have to kind of wrap your
• 3:37
  Speaker 2: head around that number.
• 3:38
  Speaker 1: Let's put that in perspective for a second. If you
• 3:40
  Speaker 1: have a company in Brazil, right, and they are buying
• 3:43
  Speaker 1: heavy machinery from a company in South Korea, they aren't
• 3:46
  Speaker 1: using the Brazilian real, right, and they aren't using the
• 3:49
  Speaker 1: South Korean one. They are transacting in US dollars. That
• 3:53
  Speaker 1: is effectively a global monopoly on trade.
• 3:55
  Speaker 2: It is. And to understand the mechanics of how we
• 3:58
  Speaker 2: got here, we really have to look back to thenineteen
• 4:00
  Speaker 2: forty four Breton Woods system.
• 4:01
  Speaker 1: Oh, Breton Woods, the famous hotel meeting.
• 4:04
  Speaker 2: Yeah, exactly. You have to picture the world at the
• 4:06
  Speaker 2: end of World War Two. Europe is totally devastated. Asia
• 4:10
  Speaker 2: is devastated. The United States emerges not just as a
• 4:13
  Speaker 2: military victor, but as literally the only functioning industrial powerhouse
• 4:19
  Speaker 2: left on.
• 4:19
  Speaker 1: The planet because our factories didn't get bombed.
• 4:22
  Speaker 2: Exactly at that moment in time, the US was producing
• 4:26
  Speaker 2: roughly forty percent of the entire world's economic output. We
• 4:30
  Speaker 2: held the vast majority of the world's physical gold reserves too, right,
• 4:33
  Speaker 2: So when the Allied nations met at that hotel in
• 4:36
  Speaker 2: Breton Woods, New Hampshire to design the post war financial system,
• 4:40
  Speaker 2: they quite literally hard coded the global architecture to the dollar.
• 4:44
  Speaker 1: Because they had no other choice really, so the mechanics
• 4:46
  Speaker 1: of that, just to be clear. Other countries pegged their
• 4:49
  Speaker 1: currencies directly to the.
• 4:50
  Speaker 2: US dollar yep a direct peg.
• 4:52
  Speaker 1: And the US in turn obligated itself to fix the
• 4:54
  Speaker 1: price of the dollar to physical gold at thirty five
• 4:56
  Speaker 1: dollars an ounce.
• 4:57
  Speaker 2: That was the anchor. If you held dollar, the US
• 5:01
  Speaker 2: Treasury promised you could trade them in for gold. But
• 5:05
  Speaker 2: this created an immediate operational necessity for foreign countries well.
• 5:09
  Speaker 2: To defend their own exchange rate pegs, they had to
• 5:12
  Speaker 2: make sure their currency didn't wildly fluctuate against the dollar,
• 5:15
  Speaker 2: which would totally ruin their export markets. So they had
• 5:18
  Speaker 2: to accumulate massive amounts of liquid US dollar assets to
• 5:23
  Speaker 2: hold as reserves.
• 5:23
  Speaker 1: Oh I see, so if their currency started to drop
• 5:26
  Speaker 1: in value, their central bank would take those dollar reserves,
• 5:30
  Speaker 1: buy up their own currency on the open market, and
• 5:32
  Speaker 1: stabilize the price.
• 5:33
  Speaker 2: Precisely, they needed a massive bottomless rainy day fund.
• 5:37
  Speaker 1: But fast forward to today. The gold peg died in
• 5:39
  Speaker 1: nineteen seventy one when Richard Nixon took us off the
• 5:42
  Speaker 1: gold standard, So the anchor is gone, long gone, but
• 5:45
  Speaker 1: the legacy behavior is still there. Like, currently US dollar
• 5:49
  Speaker 1: denominated securities make up about fifty seven percent of global
• 5:52
  Speaker 1: foreign exchange reserves. That is roughly seven point four trillion
• 5:56
  Speaker 1: dollars just parked in American debt.
• 5:58
  Speaker 2: And who do you think is holding all that paper?
• 6:00
  Speaker 1: Well, it's mostly foreign central banks, right, Like, who are
• 6:02
  Speaker 1: the top holders?
• 6:03
  Speaker 2: The top holders globally right now are China holding about
• 6:05
  Speaker 2: twenty six percent of all foreign exchange reserves, in Japan
• 6:09
  Speaker 2: holding about nine percent.
• 6:10
  Speaker 1: Okay, So why do they do that? Why do foreign
• 6:13
  Speaker 1: governments and central banks park trillions of dollars in US
• 6:17
  Speaker 1: treasuries today? It cannot just be historical inertia from some
• 6:21
  Speaker 1: agreements signed in a hotel in nineteen forty four. There
• 6:24
  Speaker 1: has to be an active, daily reason to keep buying
• 6:28
  Speaker 1: this debt.
• 6:28
  Speaker 2: Yeah, a lot of people casually assume it's just because
• 6:31
  Speaker 2: of US military might mm hmm. You know the idea
• 6:34
  Speaker 2: that the dollar is backed by aircraft carriers.
• 6:36
  Speaker 1: Right, the petro dollar argument and all that exactly.
• 6:38
  Speaker 2: But if you look at the actual mechanics of global
• 6:40
  Speaker 2: reserve management, the backing is entirely institutional. The US offers
• 6:45
  Speaker 2: a combination of factors that historically no one else could match.
• 6:50
  Speaker 2: Like what well we have solid, deeply ingrained legal and
• 6:54
  Speaker 2: economic institutions. We have a well regulated, completely open financial system.
• 6:59
  Speaker 2: If you are a four or an investor, you know
• 7:01
  Speaker 2: that property rights in the US are fiercely protected by
• 7:03
  Speaker 2: an independent judiciary.
• 7:05
  Speaker 1: So the government can't just arbitrarily seize your bombs because
• 7:08
  Speaker 1: they don't like your country's politics that week.
• 7:10
  Speaker 2: Right, at least, that has been the historical operating assumption
• 7:13
  Speaker 2: for decades. So for a foreign reserve manager in Tokyo
• 7:16
  Speaker 2: or Beijing, US treasuries are the ultimate insurance policy.
• 7:21
  Speaker 1: They use them to ensure against a sudden economic shock exactly.
• 7:25
  Speaker 2: Say a massive earthquake hits Japan. Yeah, or there's a
• 7:28
  Speaker 2: massive supply chain disruption and suddenly capital inflows just halt.
• 7:33
  Speaker 2: They need to be able to pay for imported food
• 7:34
  Speaker 2: and energy immediately.
• 7:35
  Speaker 1: They can't wait around.
• 7:37
  Speaker 2: No, they need assets that are both incredibly safe meaning
• 7:41
  Speaker 2: the issuer won't default, and incredibly liquid.
• 7:44
  Speaker 1: And liquidity is the keyword there.
• 7:46
  Speaker 2: It's everything. Liquidity means you can sell billions of dollars
• 7:50
  Speaker 2: at this asset on a Tuesday morning in ten minutes,
• 7:53
  Speaker 2: and the market is so deep that your massive sale
• 7:55
  Speaker 2: doesn't tank the price.
• 7:57
  Speaker 1: Right. You can't do that with real estate. You can't
• 7:59
  Speaker 1: do that with corporate stuff. If you dump a billion
• 8:01
  Speaker 1: dollars of Apple stock, the price moves. You can only
• 8:03
  Speaker 1: do that with US treasuries. But you know, I've been
• 8:07
  Speaker 1: wrestling with this idea of safety lately. Is it actually safe?
• 8:12
  Speaker 1: Because when you look at what everyday people are feeling
• 8:14
  Speaker 1: right now, watching their grocery bills go up, watching their
• 8:18
  Speaker 1: purchasing power evaporate, you really start to question the fundamental.
• 8:22
  Speaker 2: Premise you're talking about, the inflation risk.
• 8:24
  Speaker 1: Yeah, is the idea of a risk free rate actually
• 8:28
  Speaker 1: just a dangerous myth?
• 8:30
  Speaker 2: Well, that depends entirely on how you define risk.
• 8:33
  Speaker 1: Okay, let's look at the guarantee. The government guarantee is
• 8:36
  Speaker 1: nominal returns. If I buy a ten year Treasury bond
• 8:40
  Speaker 1: for one thousand dollars, the US government will absolutely one
• 8:44
  Speaker 1: hundred percent pay me that thousand dollars back plus the
• 8:46
  Speaker 1: agreed interest.
• 8:47
  Speaker 2: Right, there is zero default risk in nominal terms because
• 8:50
  Speaker 2: they literally own the printing press exactly.
• 8:52
  Speaker 1: If they don't have the tax revenue, they will just
• 8:54
  Speaker 1: print the thousand dollars in hand it to me. But
• 8:56
  Speaker 1: real returns, you know, returns adjusted for the actual cost
• 8:59
  Speaker 1: of those are absolutely not guaranteed, not even close. Look
• 9:03
  Speaker 1: at what happens during inflationary spikes like we saw recently.
• 9:07
  Speaker 1: Real draw downs on bonds can hit thirty percent to
• 9:09
  Speaker 1: fifty percent. Retail investors call it an inflation tax. The
• 9:13
  Speaker 1: purchasing power just vaporizes.
• 9:16
  Speaker 2: You are hitting on the critical distinction here between nominal
• 9:19
  Speaker 2: safety and real safety. A treasury bond guarantees you the
• 9:22
  Speaker 2: return of your currency, sure, but it makes absolutely zero
• 9:26
  Speaker 2: promises about what that currency will actually be able to buy.
• 9:30
  Speaker 1: So think of it like this. Tell me if this
• 9:31
  Speaker 1: analogy works. If I buy a house and the inspector
• 9:35
  Speaker 1: tells me the house is built on a flawless, impenetrable
• 9:38
  Speaker 1: concrete foundation. Okay, I assume the house is safe. I
• 9:41
  Speaker 1: assume it won't sink into the earth. But if inflation
• 9:44
  Speaker 1: erodes my purchasing power by forty percent over a decade,
• 9:47
  Speaker 1: isn't calling treasuries risk free? Kind of like saying my
• 9:50
  Speaker 1: house is perfectly safe from sinking, right as a massive
• 9:53
  Speaker 1: flood washes through the valley and puts the entire neighborhood
• 9:56
  Speaker 1: under ten feet of water.
• 9:57
  Speaker 2: That's a great way to put it right, because so.
• 10:00
  Speaker 1: The foundation didn't crack, the house didn't sink, but I
• 10:03
  Speaker 1: am still underwater. I still lost everything.
• 10:05
  Speaker 2: It is a devastatingly accurate analogy. Honestly, Yeah, you preserve
• 10:09
  Speaker 2: the structure, but you totally lost the utility. And this
• 10:13
  Speaker 2: tension between nominal guarantees and real world purchasing power raises
• 10:18
  Speaker 2: a question that economists have been fighting over for well
• 10:21
  Speaker 2: more than a century, which is what what should the
• 10:24
  Speaker 2: bedrock rate of return actually be? If a government bond
• 10:28
  Speaker 2: is just a nominal promise that is entirely subject to
• 10:31
  Speaker 2: the whims of inflation and central bank money printing, is
• 10:34
  Speaker 2: there a better, more honest measure of risk free.
• 10:36
  Speaker 1: Return, Because right now the entire world uses whatever yield
• 10:40
  Speaker 1: the US Treasury happens to be auctioning off this week
• 10:44
  Speaker 1: as the baseline for literally all human economic endeavor.
• 10:47
  Speaker 2: Exactly, if you are building a factory, you calculate your
• 10:50
  Speaker 2: expected profit against what you could have made just sitting
• 10:52
  Speaker 2: in treasuries.
• 10:53
  Speaker 1: Right, But there are alternative ways to think about this, right.
• 10:56
  Speaker 2: Yeah. Early twentieth century economist Irving Fisher had a wildly
• 10:59
  Speaker 2: different way of looking at this. He cautioned against confusing
• 11:02
  Speaker 2: interest rates with fundamental economic growth. He used an analogy
• 11:06
  Speaker 2: about bushels of wheat to explain the difference between money
• 11:09
  Speaker 2: and actual wealth.
• 11:10
  Speaker 1: Oh I like this, break down the wheat analogy.
• 11:13
  Speaker 2: Okay, So if you have a piece of land, and
• 11:16
  Speaker 2: through better farming techniques, the physical yield of that land
• 11:20
  Speaker 2: suddenly multiplies. You are literally growing more bushels of wheat,
• 11:25
  Speaker 2: the income potential increases, and the intrinsic value of the
• 11:29
  Speaker 2: land increases. That is real economic growth.
• 11:32
  Speaker 1: Okay, that makes sense. More wheat equals more wealth.
• 11:35
  Speaker 2: Right, But Fisher argued that interest rates the cost of
• 11:39
  Speaker 2: money are more about our intertemporal choices.
• 11:41
  Speaker 1: Intertemporal choices meaning how we choose between consuming something today
• 11:47
  Speaker 1: versus consuming it tomorrow.
• 11:49
  Speaker 2: Yes, how much do I need to be paid to
• 11:51
  Speaker 2: delay my gratification to give up a bushel of wheat
• 11:53
  Speaker 2: today so I can have more tomorrow? But modern financial
• 11:57
  Speaker 2: theorists have actually taken this idea even further, pose that
• 12:00
  Speaker 2: the true bedrock of the global economy shouldn't be a
• 12:02
  Speaker 2: government interest rate, which obviously can be manipulated, but rather
• 12:06
  Speaker 2: something called multi factor productivity growth.
• 12:08
  Speaker 1: Okay, I want to make sure we really understand the
• 12:10
  Speaker 1: mechanics of this, because it's fascinating. What exactly is multi
• 12:14
  Speaker 1: factor productivity growth?
• 12:15
  Speaker 2: Think of it as a measurement of pure human innovation.
• 12:19
  Speaker 2: In any economy, you have inputs, right, labor meaning human
• 12:23
  Speaker 2: hours worked, and capital meaning the machines, computers, and factories
• 12:28
  Speaker 2: those humans use.
• 12:29
  Speaker 1: Okay, labor and capital, got it.
• 12:31
  Speaker 2: Multi factor productivity measures the efficiency with which those two
• 12:35
  Speaker 2: inputs are combined. If you have the exact same number
• 12:38
  Speaker 2: of workers and the exact same machines, but they suddenly
• 12:41
  Speaker 2: produce five percent more output, that is multi factor productivity.
• 12:46
  Speaker 1: Oh, because they're being smarter about it exactly.
• 12:48
  Speaker 2: I mean, someone invented a better process, someone wrote better software,
• 12:52
  Speaker 2: someone figured out a smarter way to organize the factory
• 12:55
  Speaker 2: floor so people aren't bumping into each other.
• 12:56
  Speaker 1: So it's essentially the mathmatal measurement of human.
• 12:59
  Speaker 2: Progress really is, And over various ten year rolling periods,
• 13:03
  Speaker 2: this number has averaged about one point one percent for
• 13:06
  Speaker 2: the non farm private business sector in the United States.
• 13:09
  Speaker 1: One point one percent. So the argument from these theorists
• 13:12
  Speaker 1: is that capturing the fruits of that human innovation that
• 13:14
  Speaker 1: one point one percent is the true essence of investing.
• 13:18
  Speaker 2: Yes, the argument is that if you strip away all
• 13:20
  Speaker 2: the noise, you know, the central bank interventions, the inflation,
• 13:24
  Speaker 2: the geopolitical maneuvering, the wars, the ultimate reason you invest
• 13:28
  Speaker 2: a dollar today instead of spending it is to capture
• 13:31
  Speaker 2: the value of future human progress. Wow, that one point
• 13:34
  Speaker 2: one percent productivity growth represents the actual physical advancement of
• 13:39
  Speaker 2: our civilization's ability to provide for itself. Some economists argue
• 13:43
  Speaker 2: that this should be our mental baseline. This should be
• 13:46
  Speaker 2: our true risk free hurdle rate. Rather than a government bond.
• 13:50
  Speaker 1: That completely flips the paradigm of how we view money.
• 13:53
  Speaker 1: It changes the benchmark from what the government promises to
• 13:56
  Speaker 1: print to what humanity actually invents and produces. It roots
• 13:59
  Speaker 1: finance and reality instead of a printing press.
• 14:02
  Speaker 2: It roots it in the physical world. But as intellectually
• 14:05
  Speaker 2: elegant as that theory is, the global financial system doesn't
• 14:08
  Speaker 2: run on philosophical theories of human ingenuity.
• 14:10
  Speaker 1: No, it definitely doesn't.
• 14:12
  Speaker 2: It runs on cold, hard US Treasury.
• 14:14
  Speaker 1: Bonds, and right now those bonds are under immense historic pressure,
• 14:19
  Speaker 1: which means we need to look at a crucial economic
• 14:22
  Speaker 1: mechanism that explains why investors have historically accepted this risk
• 14:26
  Speaker 1: free premise despite the massive inflation risks we just.
• 14:29
  Speaker 2: Talked about, right the convenience yield.
• 14:31
  Speaker 1: Yes, we need to talk about the convenience yield.
• 14:33
  Speaker 2: The convenience yield is absolutely vital to understanding the psychology
• 14:37
  Speaker 2: of global finance. In simple mechanical terms, a positive convenience
• 14:42
  Speaker 2: yield means that investors are actively willing to accept lower
• 14:46
  Speaker 2: financial returns on US treasuries compared to other investments that
• 14:50
  Speaker 2: have identical cash flows.
• 14:52
  Speaker 1: I want to pause on that because to a regular
• 14:54
  Speaker 1: person that sounds totally irrational. Investors are intentionally choosing to
• 14:59
  Speaker 1: make less money. Why would a rational actor do that.
• 15:02
  Speaker 2: Let's bring it down to a personal level. Imagine you
• 15:05
  Speaker 2: have a checking account that pays zero percent interest and
• 15:08
  Speaker 2: a certificate deposit at the same bank that pays five percent. Okay,
• 15:11
  Speaker 2: you still keep a few thousand dollars in the checking account, right.
• 15:14
  Speaker 1: Of course, to pay rent, buy groceries exactly, But why
• 15:19
  Speaker 1: you are intentionally losing out on that five percent yield.
• 15:23
  Speaker 2: You do it for the convenience. You do it because
• 15:25
  Speaker 2: you can write a check against it instantly. You can
• 15:28
  Speaker 2: hit an ATM, you can pay a sudden emergency bill.
• 15:30
  Speaker 2: You drive a non financial benefit from the liquidity.
• 15:34
  Speaker 1: Oh okay, so scale that up to the global economy.
• 15:38
  Speaker 2: Exactly. Global investors and central banks accept a lower yield
• 15:42
  Speaker 2: on treasuries because of the massive additional benefits they derive
• 15:45
  Speaker 2: from holding these specific assets. The unparalleled liquidity, the safety
• 15:50
  Speaker 2: from default, and crucially, the ability to use treasuries as
• 15:54
  Speaker 2: collateral in almost any financial transaction on Earth.
• 15:57
  Speaker 1: Wait explain the collateral part.
• 15:58
  Speaker 2: If a major bank wants to borrow overnight funds to
• 16:01
  Speaker 2: meet regulatory requirements, they pledge treasuries as collateral. It is
• 16:05
  Speaker 2: literally the grease that keeps the gears of global finance turning.
• 16:09
  Speaker 2: The convenience yield is essentially the market's perception of the
• 16:12
  Speaker 2: bond's value beyond just the financial returns.
• 16:14
  Speaker 1: It is the premium you pay for a good night's.
• 16:16
  Speaker 2: Sleep, exactly. It's the sleep well at night premium.
• 16:19
  Speaker 1: But the data is showing a massive behavioral shift right now.
• 16:22
  Speaker 1: The market's willingness to accept this lower yield to pay
• 16:26
  Speaker 1: for that good night's sleep is rapidly trending downward. We
• 16:29
  Speaker 1: are seeing a continuing collapse in this convenience yield, and.
• 16:33
  Speaker 2: That downward trend is a glaring red warning light on
• 16:37
  Speaker 2: the dashboard of the global economy.
• 16:39
  Speaker 1: It really is.
• 16:40
  Speaker 2: It suggests that the premium investors place on the safety
• 16:42
  Speaker 2: and liquidity of US debt is evaporating. They are demanding
• 16:46
  Speaker 2: higher and higher returns just to compensate for what they
• 16:50
  Speaker 2: perceive as rising risk, and recent developments have only thrown
• 16:53
  Speaker 2: fuel on that fire.
• 16:55
  Speaker 1: Like what happened in May twenty twenty five, Moody's officially
• 16:58
  Speaker 1: downgraded the US sovereign credit rating to AA one. Now
• 17:03
  Speaker 1: a lot of people hear credit ratings and their eyes
• 17:05
  Speaker 1: just glaze over. AA one sounds like you went from
• 17:07
  Speaker 1: an A plus to an A in high school. It
• 17:09
  Speaker 1: doesn't sound catastrophic.
• 17:10
  Speaker 2: It doesn't sound catastrophic to a layperson, but the mechanics
• 17:13
  Speaker 2: of what it represents are profound. AA means the rating
• 17:17
  Speaker 2: agencies models calculate the probability of the United States defaulting
• 17:21
  Speaker 2: on its debt as effectively zero.
• 17:23
  Speaker 1: The pinnacle of safety right.
• 17:25
  Speaker 2: A one means the models are now acknowledging a non
• 17:28
  Speaker 2: zero mathematical probability of default, and their reasoning for the
• 17:32
  Speaker 2: downgrade was brutal and straightforward. They pointed directly at the
• 17:36
  Speaker 2: nation's growing debt burden, which, as we mentioned earlier, hit
• 17:39
  Speaker 2: thirty six point eight trillion dollars, or roughly one hundred
• 17:43
  Speaker 2: and twenty three percent of GDP.
• 17:45
  Speaker 1: It's not just a symbolic slap on the wrist either
• 17:48
  Speaker 1: when a rating agency does that. Certain massive institutional funds,
• 17:52
  Speaker 1: like pension funds, that manage trillions of dollars, they have
• 17:56
  Speaker 1: strict mandates, very strict. Some are legally required to only
• 17:59
  Speaker 1: hold erraated assets. A downgrade forces mechanical selling. They don't
• 18:03
  Speaker 1: even have a choice, they just have to sell.
• 18:04
  Speaker 2: YEP. It reflects mounting skepticism among global investors about the
• 18:09
  Speaker 2: actual fiscal trajectory of the United States, and you can
• 18:11
  Speaker 2: see the results of this skepticism in the data where
• 18:14
  Speaker 2: see it. If you look at the Treasury International Capital
• 18:17
  Speaker 2: System or at teach ACT data, which tracks cross border
• 18:20
  Speaker 2: portfolio flows, you see a measurable ongoing decline in foreign
• 18:23
  Speaker 2: official holdings of US debt.
• 18:25
  Speaker 1: Meaning those global reserve managers we talked about earlier. The
• 18:29
  Speaker 1: central banks in Asia and Europe, they are quietly but
• 18:32
  Speaker 1: steadily diversifying away from the dollar.
• 18:35
  Speaker 2: They are, and this forces us to reconsider how we
• 18:38
  Speaker 2: interpret basic market signals. Historically, if you saw rising yields
• 18:43
  Speaker 2: on US treasuries, meaning if the interest rate the government
• 18:47
  Speaker 2: had to pay to borrow money went up, that was
• 18:49
  Speaker 2: actually interpreted as a positive economic signal.
• 18:52
  Speaker 1: Wait, really, why was higher borrowing costs of positive signal?
• 18:56
  Speaker 2: Because it meant the US economy was booming, growth was accelerating.
• 19:00
  Speaker 2: The private sector was generating so much profit that investors
• 19:03
  Speaker 2: demanded higher yields from the government just to bother holding
• 19:06
  Speaker 2: their bonds because they had such lucrative alternatives in the
• 19:09
  Speaker 2: private market.
• 19:10
  Speaker 1: Oh, I see, the government had to compete for capital exactly.
• 19:13
  Speaker 2: The US was an engine of growth, attracting massive capital inflows,
• 19:16
  Speaker 2: so yields naturally rose to compete.
• 19:18
  Speaker 1: But today that entire paradigm has.
• 19:20
  Speaker 2: Inverted, completely inverted. Today, when you see yield spiking, it
• 19:25
  Speaker 2: is increasingly perceived not as a sign of underlying economic strength,
• 19:29
  Speaker 2: but as a reflection of heightened risk. Risk of what exactly, Well,
• 19:32
  Speaker 2: it's driven by fiscal concerns, it's driven by policy uncertainty
• 19:36
  Speaker 2: in Washington. It's driven by the evolving dynamics of the
• 19:39
  Speaker 2: Federal Reserve's own balance sheet. Investors aren't demanding higher yields
• 19:43
  Speaker 2: because they have better private sector options.
• 19:46
  Speaker 1: They are demanding higher yields simply to compensate for the
• 19:48
  Speaker 1: growing anxiety that the US fiscal house is fundamentally broken.
• 19:52
  Speaker 2: Exactly.
• 19:53
  Speaker 1: So, if treasuries have always been the VIP section of
• 19:56
  Speaker 1: the global financial club, you know, the place everyone wants
• 19:59
  Speaker 1: to be when things get scary, it feels like we
• 20:02
  Speaker 1: are suddenly seeing the bouncers quietly letting people out the
• 20:05
  Speaker 1: back door.
• 20:06
  Speaker 2: Yeah, they're looking for the exits.
• 20:07
  Speaker 1: What happens if the VIPs start preferring other assets? What
• 20:12
  Speaker 1: happens if the convenience yield vanishes entirely?
• 20:15
  Speaker 2: That is literally the multi trillion dollar question. Yeah, and
• 20:18
  Speaker 2: we are seeing whispers of exactly that kind of shift
• 20:22
  Speaker 2: in the regulatory space. If you want to see where
• 20:24
  Speaker 2: the anxiety really is, look at the intense focus over
• 20:28
  Speaker 2: the past couple of years on the Basil third endgame.
• 20:30
  Speaker 1: Okay, let's break down Basil the third because it sounds
• 20:33
  Speaker 1: like an incredibly dry banking regulation, but the implications are
• 20:36
  Speaker 1: actually massive Basil.
• 20:37
  Speaker 2: The third is an international regulatory framework designed to prevent
• 20:41
  Speaker 2: another two thousand and eight banking collapse, which we definitely
• 20:44
  Speaker 2: don't want to repeat, right.
• 20:46
  Speaker 1: It dictates how much capital banks must hold to protect
• 20:49
  Speaker 1: themselves against risk. Under these rules, banks are required to
• 20:52
  Speaker 1: hold a certain amount of high quality liquid assets or HQLA, and.
• 20:56
  Speaker 2: An HQLA is an asset that a bank can sell
• 20:59
  Speaker 2: immediately in a time of severe market stress without taking
• 21:03
  Speaker 2: a massive loss. It's their emergency lifeboat, exactly.
• 21:07
  Speaker 1: And the ultimate Tier one HQLA, the asset with a
• 21:10
  Speaker 1: zero percent riskway, meaning regulators treated as completely fail proof,
• 21:14
  Speaker 1: has historically been the US Treasury bond, obviously, but recently
• 21:18
  Speaker 1: there were rampant rumors circulating through global financial circles that
• 21:21
  Speaker 1: gold might be broadly reclassified as a Tier one HQLA
• 21:25
  Speaker 1: alongside treasuries.
• 21:26
  Speaker 2: Gold literally a shiny rock, the oldest money in the world.
• 21:30
  Speaker 1: Right now, we have to be clear here, the regulatory
• 21:32
  Speaker 1: mechanics of Basel the third are highly complex, and some
• 21:36
  Speaker 1: of those specific rumors regarding immediate global reclassification were exaggerated
• 21:41
  Speaker 1: or inaccurate.
• 21:41
  Speaker 2: So it wasn't a done deal, no, But the rumor
• 21:44
  Speaker 2: itself isn't the story. The story is the psychology. The
• 21:49
  Speaker 2: very fact that the global financial world became hyper focus
• 21:52
  Speaker 2: on gold's regulatory treatment underscores a deep pervasive anxiety surrounding
• 21:58
  Speaker 2: traditional FIAT safety.
• 21:59
  Speaker 1: Nets, because when trust in paper wanes, the market instinctively
• 22:03
  Speaker 1: looks backward. It looks to physical assets that carry no
• 22:06
  Speaker 1: counterparty risk. Exactly, counterparty risk is everything, right, because if
• 22:10
  Speaker 1: I hold a Treasury bond, I am relying on a
• 22:13
  Speaker 1: counter party, the US government to fulfill a promise. If
• 22:17
  Speaker 1: I hold a bar of gold and a vault, I
• 22:18
  Speaker 1: am relying on no one. It is just an element
• 22:21
  Speaker 1: on the periodic table.
• 22:22
  Speaker 2: It is incredible how fast that psychology can shift. When
• 22:26
  Speaker 2: the bedrock starts to look like sand, capital seeks out
• 22:29
  Speaker 2: new bedrock.
• 22:29
  Speaker 1: And I just want to pause for a second here.
• 22:31
  Speaker 1: If you're sitting with us right now listening to this,
• 22:33
  Speaker 1: and you value this kind of deep personal analysis into
• 22:36
  Speaker 1: these massive macroeconomic forces, please consider giving Beyond Dempographics a
• 22:40
  Speaker 1: five star rating. It's a small thing, but it allows
• 22:43
  Speaker 1: us to keep bringing these insights to you.
• 22:45
  Speaker 2: It really is a huge help.
• 22:47
  Speaker 1: It's just unnerving to realize that the stability of your
• 22:50
  Speaker 1: local bank might hinge on rumors about gold classifications and
• 22:53
  Speaker 1: the shifting psychology of foreign reserve managers in other countries.
• 22:57
  Speaker 2: It's all connected.
• 22:58
  Speaker 1: But to truly understand the end anxiety over this thirty
• 23:01
  Speaker 1: six point eight trillion dollar debt burden today, we have
• 23:04
  Speaker 1: to look at a fascinating historical anomaly. We have to
• 23:07
  Speaker 1: look at the bizarre alternate universe of what happens when
• 23:11
  Speaker 1: there is no debt at all.
• 23:12
  Speaker 2: Oh, this is my favorite part of the history. It
• 23:15
  Speaker 2: sounds completely absurd today given the numbers we just discussed,
• 23:18
  Speaker 2: But if we travel back to the late nineteen nineties,
• 23:20
  Speaker 2: in the early two thousands, the US was not only
• 23:23
  Speaker 2: running unified budget surpluses, it was actively on track to
• 23:27
  Speaker 2: eliminate its public debt entirely zero debt.
• 23:30
  Speaker 1: I remember reading the projections from two thousand and one
• 23:32
  Speaker 1: both the Congressional Budget Office and the Office of Management
• 23:35
  Speaker 1: and Budget suggested that the publicly held national debt could
• 23:38
  Speaker 1: be completely extinguished by two thousand and six.
• 23:41
  Speaker 2: By two thousand and six, the historical context is important here.
• 23:45
  Speaker 2: We are coming off the peace dividend following the end
• 23:47
  Speaker 2: of the Cold War, meaning defense spending had fallen significantly
• 23:50
  Speaker 2: as a percentage of GDP.
• 23:51
  Speaker 1: Right, we weren't studying as much on the military, and.
• 23:53
  Speaker 2: We're in the middle of the massive dot com economic boom,
• 23:58
  Speaker 2: which generated record tax revenue use. The result was that
• 24:02
  Speaker 2: the government was taking in far more money than it
• 24:04
  Speaker 2: was spending.
• 24:05
  Speaker 1: Now, when you have a massive surplus, it obviously sparks
• 24:08
  Speaker 1: fierce debates. And I want to be really explicit here
• 24:11
  Speaker 1: because this touches on politics, as we discussed the debates
• 24:14
  Speaker 1: of the nineties and early two thousands. This show takes
• 24:16
  Speaker 1: no political side whatsoever.
• 24:18
  Speaker 2: And at all.
• 24:19
  Speaker 1: Our goal is strictly to impartially convey the economic theories
• 24:23
  Speaker 1: behind both left leaning and right leaning fiscal policies, just
• 24:26
  Speaker 1: to explain the mechanics. So from a supply side perspective,
• 24:30
  Speaker 1: the argument was that surpluses meant the government was overtaxing
• 24:33
  Speaker 1: its citizens and that money should be returned via tax
• 24:36
  Speaker 1: cuts to stimulate private business.
• 24:39
  Speaker 2: Right. And if you talk to proponents of public investment
• 24:41
  Speaker 2: and debt reduction, their argument was that paying down the
• 24:44
  Speaker 2: debt was a once in a generation opportunity to structurally
• 24:47
  Speaker 2: strengthen the American economy.
• 24:49
  Speaker 1: And mathematically speaking, the economic arguments for paying down the
• 24:54
  Speaker 1: debt were incredibly substantial. It starts with the concept of
• 24:57
  Speaker 1: the national saving rate.
• 24:58
  Speaker 2: Let's walk through the mechanics that because it's crucial.
• 25:01
  Speaker 1: Yeah, how does government debt impact national savings?
• 25:05
  Speaker 2: Think of the total amount of available investment capital in
• 25:08
  Speaker 2: the economy as a massive pool of water. When the
• 25:11
  Speaker 2: government runs a deficit, it has to issue bonds to
• 25:14
  Speaker 2: borrow money to cover the shortfall. It basically dips a
• 25:18
  Speaker 2: massive bucket into that pool and takes water out.
• 25:20
  Speaker 1: Which leaves less water less capital for private businesses to borrow.
• 25:25
  Speaker 2: Right, But when the government runs a surplus and uses
• 25:28
  Speaker 2: it to retire past debt, it is effectively pouring water
• 25:32
  Speaker 2: back into the pool. It increases the national saving rate,
• 25:35
  Speaker 2: and when.
• 25:35
  Speaker 1: There is a greater supply of available funds in the
• 25:37
  Speaker 1: private loan market, the cost of borrowing that money goes down.
• 25:41
  Speaker 1: It pushes down real interest.
• 25:43
  Speaker 2: Rate exactly, and lower interest rates create a phenomenon economists
• 25:47
  Speaker 2: call a crowding in effect.
• 25:48
  Speaker 1: Crowding in meaning private investment rushes into the space the
• 25:51
  Speaker 1: government vacated.
• 25:53
  Speaker 2: Yes, imagine a company wants to build a new semiconductor factory.
• 25:57
  Speaker 2: They rude the math and they realize the project only
• 26:01
  Speaker 2: generates a six percent return. Okay, if interest rates are
• 26:04
  Speaker 2: at seven percent, the project is unprofitable. It costs more
• 26:08
  Speaker 2: to borrow the money than the factory makes, so they
• 26:11
  Speaker 2: don't build it.
• 26:12
  Speaker 1: That makes sense.
• 26:13
  Speaker 2: But if the government pays down the national debt, flooding
• 26:16
  Speaker 2: the market with capital and interest rates dropped to five percent,
• 26:20
  Speaker 2: suddenly that factory is highly profitable. They build it, they
• 26:24
  Speaker 2: hire workers, they research new technology.
• 26:31
  Speaker 1: This expands the productive capacity of the entire economy and
• 26:34
  Speaker 1: theoretically leads to a permanently higher standard of living for everyone.
• 26:38
  Speaker 2: That's the theory.
• 26:39
  Speaker 1: Yet that makes perfect sense, But it also changes our
• 26:41
  Speaker 1: relationship with the rest of the world, doesn't it. What
• 26:43
  Speaker 1: happens to international capital flows when we stop issuing debt.
• 26:47
  Speaker 2: It fundamentally alters the current account deficit. Now, this is
• 26:51
  Speaker 2: a concept that sounds academic, but it directly impacts the
• 26:55
  Speaker 2: ownership of the American economy. When US interest rates fall
• 26:59
  Speaker 2: due to the debt being paid off, US financial asset
• 27:02
  Speaker 2: becomes slightly less attractive to foreign investors who are purely
• 27:06
  Speaker 2: seeking a high yield.
• 27:07
  Speaker 1: Because they can get better interest rates elsewhere.
• 27:11
  Speaker 2: So you have less foreign capital flowing into the United States. Now, Historically,
• 27:15
  Speaker 2: the US imports far more goods than it exports. We
• 27:18
  Speaker 2: buy flat screen TVs and cars from abroad, and we
• 27:21
  Speaker 2: send dollars overseas. Okay, Following those foreign companies trade the
• 27:26
  Speaker 2: dollars to their central banks, who then use those dollars
• 27:29
  Speaker 2: to buy US treasuries. They are essentially lending us the
• 27:32
  Speaker 2: money to buy their goods.
• 27:33
  Speaker 1: It's basically a vendor financing arrangement on a geopolitical scale exactly.
• 27:37
  Speaker 2: But if the US Treasury stops issuing bonds because the
• 27:41
  Speaker 2: debt is paid off, those foreign entities can't park their
• 27:44
  Speaker 2: dollars in government debt anymore. The capital dynamic shifts.
• 27:48
  Speaker 1: So what happens to the money.
• 27:49
  Speaker 2: Well, if foreign investment slows down, the current account deficit shrinks.
• 27:54
  Speaker 2: This means the ownership of the nation's capital stock, the factories,
• 27:57
  Speaker 2: the real estate, the corporations. It's slowly transitions back to Americans.
• 28:02
  Speaker 1: Wow, So the dividends and interest generated by the American
• 28:05
  Speaker 1: economy augment domestic income rather than flowing overseas as interest
• 28:09
  Speaker 1: payments to foreign bondholders.
• 28:11
  Speaker 2: Exactly.
• 28:11
  Speaker 1: So, on paper, paying off the national debt sounds like
• 28:14
  Speaker 1: a utopian economic dream. Lower interest rates, massive private investment,
• 28:19
  Speaker 1: Americans owning more of America. It sounds perfect.
• 28:22
  Speaker 2: It really does.
• 28:23
  Speaker 1: But when you look closely at the actual financial mechanics,
• 28:27
  Speaker 1: if you run the simulation all the way to zero debt,
• 28:30
  Speaker 1: eliminating the debt actually creates incredibly bizarre, massive negative consequences.
• 28:36
  Speaker 1: It threatens to break the system entirely.
• 28:38
  Speaker 2: It does because, as we established at the very beginning
• 28:40
  Speaker 2: of this conversation, treasuries act as the bedrock benchmark for
• 28:44
  Speaker 2: pricing almost all of their financial assets on Earth. Every
• 28:47
  Speaker 2: corporate bond, every mortgage, every complex derivative uses the risk
• 28:52
  Speaker 2: free rate of the treasury as its baseline. If treasuries vanished,
• 28:56
  Speaker 2: pricing risk becomes incredibly difficult. A reliable benchmark, lenders demand
• 29:02
  Speaker 2: a massive premium for uncertainty. It leads to profound inefficiency
• 29:06
  Speaker 2: in financial markets.
• 29:07
  Speaker 1: Wait, so, the global financial ecosystem is essentially like a
• 29:10
  Speaker 1: biological organism that actually evolved to depend on the parasite
• 29:14
  Speaker 1: of government debt to survive. And if we cure the
• 29:16
  Speaker 1: patient and kill the parasite, the host organism collapses.
• 29:21
  Speaker 2: That is a dark but remarkably accurate way to look
• 29:24
  Speaker 2: at the mechanics of it. Think about how markets behave
• 29:27
  Speaker 2: during times of acute crisis. Take the nineteen ninety eight
• 29:29
  Speaker 2: Russian debt default for example.
• 29:31
  Speaker 1: Oh, that was when long term capital management, that massive
• 29:34
  Speaker 1: hedge fund, almost took down the global financial system.
• 29:36
  Speaker 2: Right, Russia defaulted on its domestic debt, which shocked the world.
• 29:40
  Speaker 2: Global investors completely panicked. They experienced some massive, violent flight
• 29:44
  Speaker 2: to quality. They blindly sold off risky assets, emerging market debt,
• 29:48
  Speaker 2: corporate bonds, equities, and poured trillions of dollars into the
• 29:51
  Speaker 2: ultimate safe haven, US treasuries.
• 29:53
  Speaker 1: They just wanted safety at any price.
• 29:55
  Speaker 2: Yes, and the risk premium, the gap between the yield
• 29:58
  Speaker 2: on safe treasuries and risky corporate bonds skyrocketed.
• 30:02
  Speaker 1: It exploded.
• 30:03
  Speaker 2: Now, imagine if US treasuries didn't exist in nineteen ninety
• 30:07
  Speaker 2: eight because we had paid off the debt, where would
• 30:09
  Speaker 2: all that terrified global capital have gone.
• 30:11
  Speaker 1: There is nowhere else for it to go.
• 30:13
  Speaker 2: Exactly, there was no other asset large enough, deep enough,
• 30:17
  Speaker 2: or safe enough to absorb that massive influx of panic
• 30:21
  Speaker 2: driven money. Without the shock absorber of the treasury market,
• 30:25
  Speaker 2: the panic would have metastasized. The structural collapse of the
• 30:28
  Speaker 2: global banking system could have been exponentially worse.
• 30:31
  Speaker 1: And it's not just panicked investors who rely on this debt.
• 30:34
  Speaker 1: The Federal Reserve itself literally uses the national debt to
• 30:38
  Speaker 1: steer the American economy every single day.
• 30:40
  Speaker 2: This is perhaps the biggest operational hurdle of a zero
• 30:43
  Speaker 2: debt universe. The Federal Reserve relies entirely on treasuries to
• 30:47
  Speaker 2: conduct open market operations.
• 30:49
  Speaker 1: Let's walk through how open market operations actually work, because
• 30:53
  Speaker 1: it's the core engine of monetary policy.
• 30:55
  Speaker 2: Okay, when the Fed wants to increase the money supply
• 30:59
  Speaker 2: and lower interest to stimulate the economy, they don't just
• 31:02
  Speaker 2: print cash and drop it from helicopters.
• 31:04
  Speaker 1: Right, They don't literally head out bills.
• 31:07
  Speaker 2: No, they go to the open market and they buy
• 31:09
  Speaker 2: short term US treasuries from large banks. They take the
• 31:13
  Speaker 2: bonds onto their balance sheet, and they credit the bank's
• 31:16
  Speaker 2: reserve accounts with newly created digital dollars.
• 31:19
  Speaker 1: They essentially swap the bank's paper debt for liquid cash.
• 31:24
  Speaker 2: Yes, the bank suddenly has more cash reserves, which means
• 31:28
  Speaker 2: it can lend more money to consumers and businesses, which
• 31:31
  Speaker 2: stimulates economic activity.
• 31:33
  Speaker 1: And what about when they want to cool things down?
• 31:35
  Speaker 2: When the Fed wants to cool inflation, they do the
• 31:37
  Speaker 2: exact reverse. They sell treasuries to the banks, sucking cash
• 31:41
  Speaker 2: out of the banking system and replacing it with bonds,
• 31:43
  Speaker 2: which makes money scarcer and drives up interest rates.
• 31:46
  Speaker 1: And they can only do this because the treasury market
• 31:48
  Speaker 1: is so impossibly large.
• 31:50
  Speaker 2: That is the key. The market is so broad, deep,
• 31:53
  Speaker 2: and resilient that the FED can move tens of billions
• 31:57
  Speaker 2: of dollars in a single afternoon without fundamentally distorting the
• 32:01
  Speaker 2: private market.
• 32:02
  Speaker 1: Because think about the alternative. If the FED had to
• 32:05
  Speaker 1: conduct monetary policy without treasuries, if they wanted to inject
• 32:09
  Speaker 1: money into the system, they would have to buy private assets.
• 32:12
  Speaker 1: They would have to buy corporate bonds exactly.
• 32:14
  Speaker 2: And the moment the Central Bank of the United States
• 32:16
  Speaker 2: starts buying corporate bonds, they are effectively picking winners and
• 32:20
  Speaker 2: losers in the private market.
• 32:22
  Speaker 1: Wow. Yeah. If they buy bonds from Ford, they are
• 32:25
  Speaker 1: subsidizing Ford's borrowing costs, giving them an unfair advantage over
• 32:29
  Speaker 1: general motors.
• 32:29
  Speaker 2: They would inadvertently allocate credit to specific companies or industries
• 32:34
  Speaker 2: based on whatever internal metric they chose.
• 32:36
  Speaker 1: It would fundamentally alter the central bank's role. It would
• 32:39
  Speaker 1: turn a monetary institution into a political juggernaut allocating capital
• 32:43
  Speaker 1: and deciding which corporations survive and which fail.
• 32:46
  Speaker 2: It is an operational lightmare. So whether we are talking
• 32:49
  Speaker 2: about the theoretical elimination of debt back in two thousand
• 32:52
  Speaker 2: and one or what we are facing today, the modern
• 32:55
  Speaker 2: day degradation of treasury safety due to massive debt loads
• 32:58
  Speaker 2: and credit downgrades, both scenarios leave a vacuum.
• 33:02
  Speaker 1: And financial markets are poor a vacuum.
• 33:04
  Speaker 2: Yes, they do.
• 33:05
  Speaker 1: If treasuries vanish or if they just become too fundamentally
• 33:09
  Speaker 1: risky to serve as the global bedrock. What replaces them?
• 33:12
  Speaker 1: If the concrete foundation crumbles, capital will desperately search for
• 33:16
  Speaker 1: something else to stand on.
• 33:17
  Speaker 2: And this was a massive area of research when people
• 33:20
  Speaker 2: thought the debt was going away, and looking at the
• 33:23
  Speaker 2: alternatives they came up with is really illuminating because none
• 33:26
  Speaker 2: of them seem to work.
• 33:28
  Speaker 1: Finding a replacement benchmark is incredibly difficult. Let's look at
• 33:31
  Speaker 1: the primary alternatives that were proposed. The first alternative was
• 33:35
  Speaker 1: using derivative markets, specifically interest rate swaps. Right, let's demystify
• 33:40
  Speaker 1: what an interest rate swap actually is, because derivatives sounds
• 33:44
  Speaker 1: like wall street voodoo to most people.
• 33:46
  Speaker 2: At its core, an interest rate swap is just a
• 33:48
  Speaker 2: financial contract between two parties who agree to exchange cash flows.
• 33:53
  Speaker 1: So imagine I have a mortgage with a variable interest rate.
• 33:56
  Speaker 1: Every time the Central Bank raises rates, my monthly payment
• 33:59
  Speaker 1: goes up, and it is keeping me awake at night.
• 34:02
  Speaker 2: Right, you hate the uncertainty.
• 34:03
  Speaker 1: My neighbor has a fixed rate mortgage. They pay the
• 34:06
  Speaker 1: exact same amount every month, but maybe they want the
• 34:09
  Speaker 1: flexibility of a variable rate because they think rates are
• 34:12
  Speaker 1: going to drop. We could conceptually write a contract where
• 34:16
  Speaker 1: we agree to effectively pay each other's interest bills. We
• 34:19
  Speaker 1: swap the cash flows. I get the peace of mind
• 34:21
  Speaker 1: of the fixed rate and they get the potential upside
• 34:24
  Speaker 1: of the variable rate.
• 34:25
  Speaker 2: That is a perfect analogy. You are hedging against interest
• 34:29
  Speaker 2: rate changes on a corporate scale. Banks and multinational corporations
• 34:33
  Speaker 2: do this to the tune of trillions of dollars. Because
• 34:35
  Speaker 2: the swaps market is massive and highly liquid, some economists
• 34:39
  Speaker 2: theorize it could serve as a new benchmark if Treasury
• 34:41
  Speaker 2: has disappeared.
• 34:42
  Speaker 1: That there are massive fatal flaws with this idea, severe drawbacks.
• 34:46
  Speaker 2: First, swaps have inherent counterparty default risk.
• 34:50
  Speaker 1: Yeah.
• 34:50
  Speaker 2: Unlike a treasury where the government can print the money.
• 34:52
  Speaker 2: In a swap, you are trusting another private entity like
• 34:55
  Speaker 2: an investment bank, to honor the contract.
• 34:57
  Speaker 1: And if your neighbor loses his job and goes bank,
• 35:00
  Speaker 1: your swab agreement is worthless.
• 35:02
  Speaker 2: Exactly two thousand and eight proved that counterparty risk is very,
• 35:06
  Speaker 2: very real. Bleeman Brothers failed.
• 35:08
  Speaker 1: Yeah, that was a wake up call, it was.
• 35:11
  Speaker 2: Second, swaps are incredibly complex derivatives, not simple, easily understandable bonds.
• 35:18
  Speaker 2: And Third, their informational value is tied to external rates
• 35:21
  Speaker 2: like live or the London Interbank Offered Rate or SOF
• 35:25
  Speaker 2: the secured overnight financing rate, which carry their own embedded
• 35:29
  Speaker 2: credit risks.
• 35:30
  Speaker 1: So in a time of severe panic, the pricing of
• 35:32
  Speaker 1: derivatives just freezes.
• 35:33
  Speaker 2: You cannot build a stable financial system on a foundation
• 35:37
  Speaker 2: of complex private contracts that might evaporate in a crisis.
• 35:40
  Speaker 1: Okay, so private derivatives are too risky. What about the
• 35:42
  Speaker 1: second alternative GSE securities government sponsored enterprises? We are talking
• 35:47
  Speaker 1: about the massive mortgage aggregators. Fanny May and Freddie mac.
• 35:51
  Speaker 2: Yes, back in the late nineties and early two thousands,
• 35:53
  Speaker 2: when they saw the supply of treasury shrinking, Fanny and
• 35:56
  Speaker 2: Freddie aggressively marketed themselves as the natural heirs to the
• 36:00
  Speaker 2: risk free asset throne. They began issuing massive, regular batches
• 36:03
  Speaker 2: of debt that they literally branded as benchmark notes.
• 36:06
  Speaker 1: The marketing appeal is pretty obvious. They are quasi governmental entities.
• 36:11
  Speaker 1: They were created by Congress to provide liquidity to the
• 36:14
  Speaker 1: housing market. So investers look at them and think, well,
• 36:17
  Speaker 1: it's not technically government debt, but it basically is.
• 36:20
  Speaker 2: And that implicit assumption is exactly the problem. It presents
• 36:24
  Speaker 2: a massive economic concept called moral hazard.
• 36:28
  Speaker 1: Moral hazard is when you take risks because you know
• 36:31
  Speaker 1: someone else will bear the cost if it goes wrong,
• 36:34
  Speaker 1: like driving recklessly because you have great car insurance.
• 36:37
  Speaker 2: Precisely, investors assumed, and they were proven entirely correct during
• 36:41
  Speaker 2: the two thousand and eight financial crisis, that the federal
• 36:43
  Speaker 2: government would never let Fanny May and Freddiemack fail. Because
• 36:48
  Speaker 2: of this implicit guarantee, GSEs can borrow money at incredibly
• 36:52
  Speaker 2: low rates, almost as low as the treasury itself.
• 36:54
  Speaker 1: So what's the hazard.
• 36:55
  Speaker 2: The moral hazard is that the gsees might be tempted
• 36:58
  Speaker 2: to take on excessive reckless us in search of profit,
• 37:01
  Speaker 2: secure in the knowledge that the task payer is the
• 37:03
  Speaker 2: ultimate backstop.
• 37:04
  Speaker 1: But there's an even bigger problem with using housing debt
• 37:07
  Speaker 1: as the global benchmark, isn't there It distorts the entire economy.
• 37:11
  Speaker 1: If we replace general government bonds with housing backed GSE notes,
• 37:16
  Speaker 1: aren't we just swapping out a generalized government spending problem
• 37:20
  Speaker 1: for a highly localized, hyperinflated housing market bubble.
• 37:24
  Speaker 2: You are hitting on the fundamental flaw right there. A
• 37:27
  Speaker 2: true benchmark asset should reflect only the broad risks inherent
• 37:31
  Speaker 2: to the overall macroeconomic environment general economic growth, inflation, demographic trends.
• 37:38
  Speaker 2: GSE debt reflects the specific, highly localized, idiosyncratic risks of
• 37:43
  Speaker 2: the real estate sector.
• 37:44
  Speaker 1: You cannot build the foundation of global finance on the
• 37:47
  Speaker 1: health of the American suburban housing market. It is way
• 37:50
  Speaker 1: too narrow. It forces the entire world to bet on
• 37:52
  Speaker 1: whether Americans keep paying their mortgages.
• 37:54
  Speaker 2: Exactly. It sucks disproportionate amounts of capital into housing at
• 37:57
  Speaker 2: the expense of industrial investment, research, infrastructure. It structurally misallocates
• 38:02
  Speaker 2: global capital.
• 38:03
  Speaker 1: So if swaps fail because of counterparty risk and gss
• 38:06
  Speaker 1: fail because they are just a housing bubble in disguise.
• 38:08
  Speaker 1: What is left.
• 38:09
  Speaker 2: Well, there was a third, highly speculative alternative discussed by economists.
• 38:15
  Speaker 2: It is fascinating but also terrifying.
• 38:18
  Speaker 1: Let's hear it.
• 38:19
  Speaker 2: What if the government continued to issue massive amounts of
• 38:22
  Speaker 2: debt solely to serve as a risk free benchmark for
• 38:25
  Speaker 2: the markets. The government doesn't actually need the money to
• 38:28
  Speaker 2: fund its operations because it's running a surplus, So it
• 38:32
  Speaker 2: takes the trillions of dollars in proceeds from selling those
• 38:35
  Speaker 2: bonds and it invests them in private securities.
• 38:39
  Speaker 1: Wait, the United States government issuing treasury bonds and then
• 38:43
  Speaker 1: turning around and using that cash to buy stocks and
• 38:45
  Speaker 1: corporate bonds on the open market.
• 38:47
  Speaker 2: Yes, it would effectively turn the federal government into the
• 38:50
  Speaker 2: world's largest, most dominant hedge fund.
• 38:52
  Speaker 1: That sounds like an absolute political nightmare.
• 38:55
  Speaker 2: It is an unparalleled political mindfield. If the government is
• 38:58
  Speaker 2: buying private assets, it'suddenly holds immense controlling ownership positions in
• 39:03
  Speaker 2: the private economy. It essentially nationalizes a huge portion of
• 39:07
  Speaker 2: private enterprise through the back door.
• 39:09
  Speaker 1: And how do you even decide what to buy? Imagine
• 39:11
  Speaker 1: the congressional hearings on that.
• 39:13
  Speaker 2: Exactly what is the government's investment goal. Should it act
• 39:17
  Speaker 2: like a purely rational investor and try to maximize profit,
• 39:21
  Speaker 2: which means aggressively investing in whatever is most lucrative, regardless
• 39:26
  Speaker 2: of social impact.
• 39:27
  Speaker 1: Or should it use its massive financial power to promote
• 39:29
  Speaker 1: specific public policies right.
• 39:32
  Speaker 2: Should it only buy bonds from green energy companies. Should
• 39:35
  Speaker 2: it refuse to invest in companies that don't use unionized labor.
• 39:39
  Speaker 2: Should it prop up sailing industries in depressed regions just
• 39:42
  Speaker 2: to save jobs.
• 39:44
  Speaker 1: The pressure from lobbyists to have the government allocate credit
• 39:47
  Speaker 1: toward their specific industry would be completely irresistible. It would
• 39:51
  Speaker 1: corrupt the entire concept of a free market.
• 39:53
  Speaker 2: It would fundamentally alter the relationship between the state and
• 39:56
  Speaker 2: the private sector forever. So every alternative we look at swaps,
• 39:59
  Speaker 2: how usk dead government hedge funds, has a fatal flaw.
• 40:02
  Speaker 1: We are seemingly stuck with treasuries as the indispensable bedrock.
• 40:06
  Speaker 2: Unfortunately, yes, but the theoretical debates of two thousand and
• 40:09
  Speaker 2: one about what to do with surpluses are long gone.
• 40:12
  Speaker 2: We no longer have to worry about the absence of debt.
• 40:14
  Speaker 1: No, we really don't. We now face a reality mapped
• 40:17
  Speaker 1: out by the Congressional Budget Offices twenty twenty five to
• 40:20
  Speaker 1: twenty fifty five long Term Budget Outlook. We have pivoted
• 40:24
  Speaker 1: from the absence of debt to the exponential explosion of.
• 40:27
  Speaker 2: It, and the numbers in that outlook are sobering. The
• 40:30
  Speaker 2: structural disconnect between federal spending and revenues is worsening rapidly,
• 40:34
  Speaker 2: and it's not just a matter of political squabbling over
• 40:36
  Speaker 2: tax rates or discretionary spending either.
• 40:38
  Speaker 1: What's driving it.
• 40:39
  Speaker 2: It is driven primarily by an unstoppable force demographic shifts,
• 40:44
  Speaker 2: specifically the retirement of the baby boomer generation. It is
• 40:48
  Speaker 2: just math. For decades, the American social safety net programs
• 40:52
  Speaker 2: like Social Security and Medicare were highly.
• 40:54
  Speaker 1: Affordable because the ratio of workers to retirees was incredibly favorable.
• 40:58
  Speaker 1: In the nineteen fifties, you had more than a dozen
• 41:00
  Speaker 1: active workers paying taxes into the system for every one
• 41:03
  Speaker 1: retiree drawing benefits out.
• 41:05
  Speaker 2: Exactly, the system was flush with cash. But birth rates
• 41:09
  Speaker 2: are shifted downward, and medical technology means we are living
• 41:13
  Speaker 2: significantly longer. That ratio of workers to retirees is plummeting.
• 41:17
  Speaker 2: According to historical data points tracking these deficits. Over the
• 41:20
  Speaker 2: long term, the trust funds from Medicare and Social Security
• 41:24
  Speaker 2: face looming exhaustion.
• 41:26
  Speaker 1: Let's explain what trust fund exhaustion actually means. Because people
• 41:30
  Speaker 1: hear that and think Social Security is going to zero,
• 41:33
  Speaker 1: that checks will bounce. That's not what it means.
• 41:35
  Speaker 2: Well, the checks won't bounce for years. When those programs
• 41:38
  Speaker 2: took in more tax revenue than they paid out, they
• 41:41
  Speaker 2: parked the surplus in special treasury bonds that is the trust.
• 41:45
  Speaker 1: Fund, So it's basically a stack of IOUs from the
• 41:48
  Speaker 1: government to itself.
• 41:49
  Speaker 2: Right, exhaustion means they have cashed in all those bonds.
• 41:52
  Speaker 2: The surplus is gone. Once the trust funds are depleted,
• 41:55
  Speaker 2: the programs are running purely on current tax revenues, which
• 41:58
  Speaker 2: are no longer enough to cover the prompt benefits. And
• 42:01
  Speaker 2: what happens then at that point the Treasury is legally
• 42:04
  Speaker 2: obligated to provide general revenues to honor those commitments. It
• 42:09
  Speaker 2: forces those massive programmatic shortfalls directly into the broader unified
• 42:14
  Speaker 2: budget deficit. The government has to borrow the difference.
• 42:17
  Speaker 1: And as the government borrows more and more to cover
• 42:20
  Speaker 1: this demographic title wave, the debt balloons, and as the
• 42:23
  Speaker 1: debt balloons, the interest payments required to service that debt
• 42:27
  Speaker 1: balloon as well.
• 42:28
  Speaker 2: This creates a vicious cycle that leads to a phenomenon
• 42:31
  Speaker 2: economists call crowding out. Rising interest costs on the national
• 42:35
  Speaker 2: debt are increasingly consuming a larger and larger percentage of
• 42:38
  Speaker 2: the federal budget.
• 42:39
  Speaker 1: When massive amounts of tax revenue are diverted just to
• 42:42
  Speaker 1: paying interest to bondholders for money borrowed in the past,
• 42:45
  Speaker 1: it stifles future economic opportunity.
• 42:47
  Speaker 2: It crowds out the future. It leaves less and less
• 42:50
  Speaker 2: money available for actual investments, things like basic scientific research, education,
• 42:55
  Speaker 2: modernizing infrastructure, or national defense.
• 42:58
  Speaker 1: And this brings us to a really powerful concept uctual
• 43:00
  Speaker 1: framework called generational accounting. It's a way of measuring the
• 43:03
  Speaker 1: fiscal burden we are leaving behind.
• 43:05
  Speaker 2: Normally, a generation is expected to largely pay for its
• 43:08
  Speaker 2: own consumption, but by accumulating massive structural debt to fund
• 43:13
  Speaker 2: current consumption and immediate benefits, current taxpayers are essentially enjoying
• 43:18
  Speaker 2: a higher standard of living at the direct expense of
• 43:21
  Speaker 2: future generation's productive capacity.
• 43:23
  Speaker 1: We are transferring wealth backward and time. We are legally
• 43:28
  Speaker 1: mandating that a worker thirty years from now, who maybe
• 43:31
  Speaker 1: isn't even born yet, has to surrender a portion of
• 43:34
  Speaker 1: their future labor to pay the interest on a bond
• 43:37
  Speaker 1: that funded a tax cut or a healthcare benefit that
• 43:40
  Speaker 1: we consume today.
• 43:41
  Speaker 2: That is exactly what is happening. We are consuming the future.
• 43:44
  Speaker 1: But wait, let me jump in here. Are all debts
• 43:46
  Speaker 1: created equal? Some economists argue that if we use the
• 43:50
  Speaker 1: debt to fund massive infrastructure projects like high speed rail,
• 43:53
  Speaker 1: modernized power grids, new ports, it fundamentally pays for itself
• 43:58
  Speaker 1: by expanding the economy.
• 43:59
  Speaker 2: That's a very compt argument.
• 44:00
  Speaker 1: If we are leaving our grandchildren a massive restaurant tab,
• 44:04
  Speaker 1: aren't we also leaving them the restaurant. Does the infrastructure
• 44:06
  Speaker 1: we build offset the interest burden we leave behind?
• 44:09
  Speaker 2: That is one of the most crucial debates in modern economics.
• 44:13
  Speaker 2: We absolutely must distinguish between different types of government spending.
• 44:17
  Speaker 2: If the government borrows a trillion dollars to fund immediate consumption,
• 44:21
  Speaker 2: say sending direct stimulus checks to citizens or funding a
• 44:25
  Speaker 2: temporary tax holiday, that money hits the economy instantly.
• 44:29
  Speaker 1: It chases the existing supply of goods, which is highly inflationary.
• 44:33
  Speaker 2: And at least behind no durable asset.
• 44:35
  Speaker 1: You ate, the meal left the tab and there is
• 44:37
  Speaker 1: nothing to show for it.
• 44:38
  Speaker 2: Right, But infrastructure investment behaves mechanically differently. There is fascinating research,
• 44:44
  Speaker 2: such as the work distinguishing between consumption and investment goods
• 44:48
  Speaker 2: by economists like Boehm, showing that investment goods things like
• 44:51
  Speaker 2: structural steel, industrial concrete, heavy machinery used for infrastructure are highly.
• 44:56
  Speaker 1: Elastic elastic, meaning they're very sensitive to price changes.
• 45:00
  Speaker 2: Exactly when the government decides to build a massive new
• 45:03
  Speaker 2: highway system, the demand for concrete and steel rises, But
• 45:07
  Speaker 2: because these goods are elastic, prices only have to increase
• 45:11
  Speaker 2: a tiny bit to convince private sector consumers to delay
• 45:14
  Speaker 2: their own construction projects.
• 45:16
  Speaker 1: So the private sector steps back slightly, which frees up
• 45:19
  Speaker 1: the available output to be purchased by the government.
• 45:22
  Speaker 2: Because of this elasticity, massive government infrastructure spending might not
• 45:27
  Speaker 2: be nearly as inflationary as other types of rapid fiscal stimulus.
• 45:31
  Speaker 1: It doesn't trigger the same kind of immediate consumer price spiral.
• 45:34
  Speaker 2: It doesn't and eventually that new highway lowers transportation costs
• 45:39
  Speaker 2: for everyone, making the entire economy more productive, so that
• 45:43
  Speaker 2: type of debt matters immensely.
• 45:45
  Speaker 1: But regardless of whether the debt is spent on a
• 45:46
  Speaker 1: highly productive new port or a highly inflationary stimulus check.
• 45:51
  Speaker 1: The sheer aggregating volume of the debt thirty six point
• 45:55
  Speaker 1: eight trillion in climbing, puts the Federal reserve in an
• 45:58
  Speaker 1: incredibly precarious position, doesn't it.
• 46:00
  Speaker 2: It puts them in an almost impossible bind. The Central
• 46:03
  Speaker 2: Bank is tasked with managing a delicate balance. They have
• 46:07
  Speaker 2: to stimulate economic growth, they have to manage inflation to
• 46:09
  Speaker 2: keep purchasing power stable, and they have to ensure that
• 46:12
  Speaker 2: these massive, unprecedented debt loads can actually be serviced by
• 46:16
  Speaker 2: the Treasury.
• 46:16
  Speaker 1: And they do this using specific mechanical tools. Let's break
• 46:20
  Speaker 1: those tools down, because I think a lot of people
• 46:22
  Speaker 1: hear the news, say the Fed raise rates today, and
• 46:26
  Speaker 1: they know their credit card bill is going to go up,
• 46:28
  Speaker 1: but they don't actually know the plumbing of how that happens.
• 46:31
  Speaker 2: The two primary interest rates you need to understand are
• 46:33
  Speaker 2: the federal funds rate and the discount rate. Let's start
• 46:36
  Speaker 2: with the federal funds rate. This is the interest rate
• 46:38
  Speaker 2: on overnight inter bank loans.
• 46:41
  Speaker 1: Why do banks lend each other money overnight.
• 46:44
  Speaker 2: Because of reserve requirements at the end of every business day,
• 46:48
  Speaker 2: a bank is legally required to hold a certain percentage
• 46:51
  Speaker 2: of its deposits in cash at the Federal Reserve. It
• 46:55
  Speaker 2: ensures they are solvent right But throughout the day money
• 46:58
  Speaker 2: is moving constantly. Checks are clearing, wires are sending. Some
• 47:01
  Speaker 2: banks end the day with too much cash, and some
• 47:04
  Speaker 2: end the day slightly short of their requirement. So the
• 47:07
  Speaker 2: banks with excess cash lended overnight to the banks that
• 47:09
  Speaker 2: are short, so everyone meets the regulatory requirement by morning, and.
• 47:13
  Speaker 1: The Federal Funds rate is the interest charged on those
• 47:15
  Speaker 1: overnight loans.
• 47:17
  Speaker 2: Yes, now the Fed doesn't just declare what this rate
• 47:20
  Speaker 2: is by fiat. They target it through the open market
• 47:23
  Speaker 2: operations we discussed earlier, buying and selling treasuries. If the
• 47:27
  Speaker 2: Fed wants to cool down a booming inflationary economy, they
• 47:32
  Speaker 2: sell treasuries to the banks.
• 47:33
  Speaker 1: This pulls cash out of the banking system.
• 47:36
  Speaker 2: With less cash sloshing around, it becomes harder for the
• 47:39
  Speaker 2: banks that are short to sign loans. The money becomes scarcer.
• 47:42
  Speaker 1: And when a commodity is scarce, its price goes up.
• 47:45
  Speaker 1: The price of money is the interest rate, so the
• 47:47
  Speaker 1: Federal Funds rate goes up precisely.
• 47:50
  Speaker 2: The second tool is the discount rate. This is the
• 47:53
  Speaker 2: interest rate charged by the central Bank directly on the
• 47:56
  Speaker 2: loans that it gives to commercial banks. When would a
• 47:58
  Speaker 2: bank use that If a bank is shortened reserves and
• 48:01
  Speaker 2: absolutely cannot find another private bank to lend to them,
• 48:04
  Speaker 2: which usually implies a severe lack of trust in the market,
• 48:07
  Speaker 2: it has to go to the Fed's discount window to
• 48:09
  Speaker 2: borrow the money directly.
• 48:11
  Speaker 1: It's the lender of last resort.
• 48:12
  Speaker 2: Yes, the FED sets this rate directly. They will raise
• 48:16
  Speaker 2: the discount rate when the economy is overheating and they
• 48:18
  Speaker 2: want to tighten credit conditions across the board.
• 48:20
  Speaker 1: And here is the brutal feedback loop. We find ourselves in.
• 48:24
  Speaker 1: High government debt and massive deficit spending cause inflation. Fears
• 48:29
  Speaker 1: to fight the inflation and cool the economy down, the
• 48:32
  Speaker 1: FED uses these tools to raise interest rates, but when
• 48:36
  Speaker 1: they raise rates, it cascades through the entire economy. Mortgages
• 48:41
  Speaker 1: get more expensive, corporate borrowing gets more expensive, but crucially,
• 48:45
  Speaker 1: the interest payments on the national debt for the government
• 48:47
  Speaker 1: itself get drastically more expensive because.
• 48:50
  Speaker 2: The Treasury constantly has to issue new bonds to pay
• 48:53
  Speaker 2: off the old bonds that are maturing, and when they
• 48:56
  Speaker 2: issue new bonds in a high rate environment, they have
• 48:58
  Speaker 2: to offer those higher.
• 48:59
  Speaker 1: Yields, which means the government's interest expense explodes, which drives
• 49:03
  Speaker 1: the deficit even higher, which requires even more debt issuance
• 49:07
  Speaker 1: to cover the gap, which fuels more inflation fears. It
• 49:10
  Speaker 1: is a dizzying structural doom loop.
• 49:12
  Speaker 2: It is a profound structural challenge. We are testing the
• 49:15
  Speaker 2: limits of Fiat currency mechanics on a scale that human
• 49:19
  Speaker 2: civilization has never attempted before.
• 49:21
  Speaker 1: We have covered a massive amount of ground today on
• 49:23
  Speaker 1: beyond infographics. We started by exploring how the US dollar
• 49:27
  Speaker 1: and US treasuries became the undisputed bedrock of global finance,
• 49:31
  Speaker 1: tracing the history all the way back to the Bretton
• 49:34
  Speaker 1: Woods Agreement in nineteen forty four.
• 49:36
  Speaker 2: We looked at the deep institutional trust in the American
• 49:39
  Speaker 2: legal system that makes the convenience yield.
• 49:42
  Speaker 1: Possible, and then we analyze the recent trouble and cracks
• 49:45
  Speaker 1: in that foundation. We looked at the implications of Moody's
• 49:48
  Speaker 1: downgrading the sovereign credit reading to AA one, the shifting
• 49:52
  Speaker 1: psychology around the convenience yield, and the reality of global
• 49:55
  Speaker 1: reserve managers quietly diversifying their portfolios away from the in
• 50:00
  Speaker 1: favor of other assets or even physical gold.
• 50:03
  Speaker 2: We dig a fascinating detour into the alternate reality of
• 50:06
  Speaker 2: the early two thousands, realizing that the utopian dream of
• 50:09
  Speaker 2: actually paying off the national debt would have ironically created
• 50:11
  Speaker 2: chaos because the entire global financial ecosystem has evolved to
• 50:15
  Speaker 2: completely rely on the existence of treasuries.
• 50:18
  Speaker 1: And finally, we confronted the actual mathematical reality of our
• 50:22
  Speaker 1: thirty six point eight trillion dollar debt quote, a reality
• 50:25
  Speaker 1: driven by unstoppable demographic shifts, the exhaustion of social trust funds,
• 50:30
  Speaker 1: and the very real threat of crowding out future economic investments,
• 50:33
  Speaker 1: leaving a massive burden on generations yet to come. Understanding
• 50:37
  Speaker 1: these macroeconomic forces isn't just an academic exercise. It is
• 50:41
  Speaker 1: absolutely essential for you, the listener, to make sense of
• 50:45
  Speaker 1: your daily life. When you hear a news headline about inflation,
• 50:49
  Speaker 1: when you see the interest rate move on your prospective
• 50:51
  Speaker 1: mortgage or your credit cards, when you feel a subtle
• 50:54
  Speaker 1: shift in your personal purchasing power at the grocery store.
• 50:57
  Speaker 1: This is the invisible machinery driving all of it. It
• 51:00
  Speaker 1: is the reality of the X ray we talked about
• 51:02
  Speaker 1: at the very beginning of our conversation.
• 51:04
  Speaker 2: But if we look really, really closely at that X ray,
• 51:07
  Speaker 2: we see something fundamentally unsettling that we haven't explicitly stated yet.
• 51:11
  Speaker 2: What's that The definition of a safe asset today is
• 51:14
  Speaker 2: entirely psychological.
• 51:16
  Speaker 1: Explain what you mean by that.
• 51:17
  Speaker 2: Our financial bedrock isn't backed by physical gold anymore. It
• 51:21
  Speaker 2: isn't backed by a finite resource. It is based purely
• 51:24
  Speaker 2: on a collective agreement. It relies entirely on the trust
• 51:27
  Speaker 2: that tomorrow will function roughly like today, and that the
• 51:30
  Speaker 2: US government will always have the political will and the
• 51:32
  Speaker 2: economic capacity to tax its citizens enough to service its debts.
• 51:37
  Speaker 2: But mass psychology is a fragile thing.
• 51:39
  Speaker 1: And that raises a terrifying but entirely necessary speculation.
• 51:43
  Speaker 2: What if that collective agreement fractures. Could a rapid viral
• 51:47
  Speaker 2: shift in global psychology cause the risk free rate to
• 51:50
  Speaker 2: completely vanish overnight? If the world wakes up tomorrow and
• 51:53
  Speaker 2: collectively decide the Emperor has no clothes that thirty six
• 51:56
  Speaker 2: point eight trillion dollars is simply unpayable without resort acording
• 52:00
  Speaker 2: to massive currency destroying hyperinflation. Does a math global finance
• 52:04
  Speaker 2: simply stop working If.
• 52:05
  Speaker 1: The entire world decides simultaneously that the paper isn't worth holding,
• 52:09
  Speaker 1: the illusion breaks. That is the ultimate question. If the
• 52:13
  Speaker 1: diagnostic X ray machine breaks and the concrete foundation of
• 52:17
  Speaker 1: the global economy turns out to be nothing more than
• 52:19
  Speaker 1: tightly packed sand, what happens to the house we all
• 52:22
  Speaker 1: live in? We want you to ponder that question. Let
• 52:25
  Speaker 1: it sit with you the next time you read a
• 52:26
  Speaker 1: headline about the debt ceiling or watch bond yields tick
• 52:30
  Speaker 1: upward on a screen. Thank you for joining us at
• 52:32
  Speaker 1: the table to explore these monumental ideas, and again, if
• 52:35
  Speaker 1: you found value in this, please lead beyond infographics of
• 52:38
  Speaker 1: five star review until next time