Transcription
And it does sound that the entire framework that you just described very much resembles a Ponzi scheme, doesn't it?
Well, yes. A Ponzi scheme has to be kept going because you need new entrance into the Ponzi scheme. Uh, there's not, there's no real there there. Uh, there's nothing. It, uh, but you have a pretense, a claim that it's going to make money, but in you pay out very high dividends, uh, to and capital gains to the investors, uh, as if you're somehow making a lot of money. Well, where do you get this money to pay the investors if there's really no generation of profits? Well, you keep hyping up the Ponzi scheme, and you hope that new investors—there's a sucker born every minute, as P.T. Barnum said. You hope to get more and more suckers coming in, and you use their contributions to pay the high dividends to the early investors in the Ponzi scheme, and it keeps going, but ultimately, uh, the, uh, the nominal debts to the, uh, depositors or the participants in the scheme get so high that, uh, there's, uh, no more money being provided by new investors, and the whole scheme fails.
Well, the economy is like that today. The real estate sector, the banking sector, uh, the stock companies have all borrowed to pay the interest rates that are falling due, and as they, they've borrowed money to buy real estate or stocks. Uh, and how are they going to, um, be able to pay, uh, the banks as, uh, the stock prices go down and the dividends, uh, and rent, uh, rents are squeezed by the higher costs of real estate? Not only mortgage costs, but the rising insurance cost. Well, the banks, uh, can't afford to let them default. So, the bank said, "We'll lend you the money to pay, and we'll lend you the money to pay, and, uh, we'll keep lending more and more money, and you'll bid up the prices of the real estate and, uh, stocks, and we'll say, 'Well, our collateral is worth it. We're lending solid, uh, loan against real estate's already there and against, uh, stocks, and look, everything's going up.'" So, uh, we have, uh, we're not in negative equity at all, but all of this rise in equity values that backs their liabilities is, is, uh, all financed by debt. And if there's, uh, no way that, uh, borrowers can go to the bank and say, "Well, lend me more money to pay you, uh, the, uh, the interest and the debt service we owe," well, then what's going to happen is they default. Uh, the bank said, "We can't afford to loan you money because, uh, uh, you don't have any prospects for paying." Well, that's a situation that we're in today. Right now, with interest rates, uh, 30-year mortgages, as I said, they're over 5%. If the Treasury securities are over 5%, so mortgage rates are up near 7%. Well, it's almost impossible at, uh, interest rates what they are today, mortgage rates, for, uh, new buyers or new sellers to be able to sell their homes. Suppose you have to move. Suppose you can't afford the home anymore. We'll let you put the home on the market so that you can pay the bank what you owe it and hopefully come out with a capital gain. But all of a sudden, the homeowners, uh, and you could say the same for the stockholders, uh, are realizing, "Well, there's no market for, uh, real estate at the prices that I paid just a few years ago because I borrowed, and the carrying charge for my house is pretty low because I had a low interest mortgage." But now that, uh, new buyers are going to have to take out a higher yielding mortgage, uh, the cost of carrying, uh, this mortgage month after month is beyond their ability because wages aren't going up. The economy is not expanding. The economy is shrinking. Bad weather is coming. Uh, the risks are up. Our home insurance costs, uh, are rising, and our local taxes are rising. So, uh, the high interest rates are threatening another crash in the real estate market. This time, it's not from bank fraud. It's just from the fact that, uh, the economy is debt-strapped.
You mentioned the Treasury Department having to borrow more. Well, recently, the Treasury Department announced that it would need to borrow more money than previously expected. And in turn, that statement sort of reinforces fears that Washington's fiscal position is deteriorating rapidly. It really is. And I think it's out out in the open for everybody to see now. But the risk of lending to a government that's already running massive deficits from one year to the next with rising interest expenses means that investors around the world are going to demand higher and higher returns. They're going to want higher yields. So, how significant is the growing U.S. national debt in pushing borrowing costs higher across the U.S. economy?
Well, that fear that the government cannot pay because it's running a budget deficit is total junk economics. That's the, uh, the fallacy that thinking that the government balance sheet is like a private household. The government's not a private household. If all of a sudden you, uh, have to spend more money than you're earning, you can't go to the grocery store and, uh, buy groceries and tell the, uh, cash out person, "Well, I don't have enough money to pay. Let me write you an IOU, and, uh, you can just, uh, maybe pay your, uh, whoever is supplying your vegetables with the IOU's money." That's just crazy. The government can always print the money. And when I say the government can print the money, that means the central bank can do it. The Federal Reserve, uh, can simply create, uh, electronic money on its balance sheet, and the government, uh, essentially, uh, runs a deficit. The Federal Reserve gives it an electronic credit on its balance sheet, and the Federal Reserve ends up holding, uh, more and more, uh, a increasingly large portion of the federal debt that's running, uh, run up. So, the government just owes it to itself. It doesn't have to borrow the money from the market because the Federal Reserve can create it freely just for the cost of electricity running its, uh, its computers. So, there's this pretense that somehow, uh, finance is part of the real economy just like a household budget. That's part of the junk economics that pe that economists are taught in school. And that's why economists are not the people who are running most of these, uh, investment funds and the stock market funds. There are people who, uh, have, uh, been free of an economic education, and they, they can go to business schools, and they learn how to debt leverage and, uh, how to, uh, save on taxes and how to, how to make themselves tax exempt. But, uh, that it's, it, it's just silly.
So, the Federal Reserve's response, uh, to 2008, not only did they, uh, they funded the, uh, government debt by, uh, printing the electronic money, but, uh, they lent, as I said, to the banks all the way down to 0.1%, but they paid the banks something like 2%—I forget the actual rate—on deposits. So, the banks could borrow at less than 1%, uh, just take the money they borrow, leave it on deposit at the Federal Reserve, and get free money. This was a special law that the Obama administration administered. He said, "We, I've got to reward my campaign contributors, uh, with, uh, a free lunch, uh, and, uh, a way to make billions of dollars easily. This is what we'll do: uh, give them free money to borrow, let them invest it at the Fed, just leave it on deposit, and they'll make enough money to earn their way out of the financial fraud, and then if they don't go under, we won't have to prosecute any of the crooks, uh, that ran these, uh, the mortgage fraud." I mean, this was, uh, the travesty of, uh, the Obama administration. And so, rather than letting, uh, the, uh, banks and their depositors lose money, uh, he, uh, essentially said, "Well, we can load the whole economy down with debt to, um, to make hundreds of make trillions of dollars for the stock and bond holders. Uh, sacrifice the economy." "But after all, who do I represent? Who does the Democratic Party represent? My campaign contributors, of course." So, that's what he did.
So, the result was, as I said, was an enormous, uh, bond market boom, but a K-shaped economy. The financial and real estate sectors, uh, and the wealth of the one to 10% of the population went way up. The rest of the economy was squeezed increasingly because it had to pay, uh, debt service on more and more of the debt that it was running up. Mortgage debt, credit card debt, student loan debt, uh, auto debt, uh, all of this, uh, debt service, uh, was squeezing its ability. And the result is that the consumer market in the United States really hasn't been expanding. And one result is that last year, in 2025, half of all of the increase in consumer spending in the United States was by the wealthiest 10% of the population. In other words, the billionaires were buying, uh, luxury, uh, handbags. Again, a lot of Italian fashions, just like in the 18th century. Uh, they're buying, uh, Botox facelifts; that's, uh, very popular. The luxury spending was way up, but not spending on basic needs: uh, groceries and, uh, transportation and gas and oil. So, uh, this K-shaped economy is a result of running the economy in order to, uh, pre increase the wealth of the finance, insurance, and real estate sector—the FIRE sector—at the expense of the economy, uh, at large. And this is what's called financial engineering, uh, not industrial engineering. And that, uh, that was what had, uh, sort of engineered the whole post-2008 recovery, and, uh, it's left the economy very debt leveraging debt leveraged, and, uh, this means that it has hardly any room to begin raising interest rates again, especially to distress levels, and especially if the break in, uh, the international oil trade causes is companies to have to stop production because they can't get oil to, uh, fuel, uh, their, uh, their production process.
The farmers, uh, are reported now in the Wall Street Journal to have been cutting back their, uh, their planting, uh, in this season because they can't afford the high fertilizer that's made out of natural gas, uh, which has gone way up in price because America's, uh, exporting it all to replace Russian gas to Europe, uh, and to Asia. Uh, they can't afford, uh, the gasoline to power the tractors. They can't buy the tractors. The tractor prices are way up because the big tractor companies are, uh, American companies have moved a lot of production facilities into Europe. And what do you make tractors out of? You make them out of steel and aluminum. And, uh, Trump has imposed, uh, high 50% tariffs on the steel and aluminum in these imported tractors, uh, for that farmers need. The tractor prices are way up. So, the price of used tractors has gone way up as farmers try to avoid having to pay the new high prices. Trump's tariffs have also played a big role in bankrupting the U.S. economy. All because he said, "If we can raise money by tariffs and make, uh, the wage earners pay, falling on, and farmers pay, and industry pay, then I can cut, uh, then I can cut, uh, taxes for the wealthiest, uh, 1%—my constituency of billionaires." So, uh, Trump has created, he's tied the economy in an even tighter knot than Obama did. That's the problem that we're, uh, having today. And, uh, pla companies are not even getting the oil to make plastics that need NAFTA. Uh, they're worried about who's going to get the plastic bags, uh, that you need to, uh, put so many things in and to wrap the food at the supermarkets. You know, who's, who's going to, uh, construction is going to be failed back. You have, uh, fluid, all sorts of, uh, oil fluids, oil for the, uh, that you need for the cars, for the lubricants are being cut back. You're going to have a break in the chain of payments, and that means companies are going to have to cut back their production, and that means cutting back employment, and that means unemployment, which is going to increase the, uh, the deficits here and in other countries, and, uh, cause an even more lopsided, uh, economy where, uh, that is being crushed under the debt burden because when you're unemployed or when you have to pay higher cost of living, how are you going to meet the debts that you have? Not only if you're an individual, but if you're a company, how, if you're a company cutting production, h how are you going to pay the debts falling due? If you're a real estate company, cost of heating, uh, houses, cost of electricity is going way up. H how how are you going, uh, to pay it? There's a total mess in the making.
And yet, the stock market in is going up. And before we turn to the stock market, because I know our viewers have many questions about the stock market doing well while the rest of the economy is weakening. But we before we turn to that, I would love to briefly focus on the bond market because I know that's, that's, that's been a focal point for the past several weeks. There's been a selloff, and, um, bond yields have increased, as you mentioned in the beginning of the interview. How do today's bond market conditions actually compare with past periods, such as, maybe, the 1970s inflation crisis or the early 1980s or even the post-2008 financial system? If you had to compare them and sort of, uh, point out the differences and similarities and how this one is different now, what would stand out to you the most?
Well, good question. As I pointed out, the 1970s inflation crisis was the guns and the Vietnam War caused it. The guns and butter economy. The econ, uh, America's foreign military spending accounted for the entire balance of payments deficit, uh, of the country. It, it absorbed, uh, an enormous amount of capital investment, uh, and, uh, employment. So, employment was up. The Vietnam War in the 1970s were the golden age for American labor. That's when its, uh, wages and its living standards went up. And Volcker said, "I represent the banking class." "Labor is our enemy, as it's always been the enemy of bankers. In the 19th century, in the early 19th century, uh, we believe that the lower the wages are, the more money can be squeezed out as profits to pay dividends and by stock buyback programs. And my constituency, uh, is essentially, uh, the bankers, uh, and the enemy's labor. So, I'm going to bring about a depression that'll teach labor to try, that'll break the unionization movement. Uh, it, it means that there won't be jobs, and, uh, companies are, labor is going to be desperate for getting work, and workers are going to, uh, work for lower wages, and that's what we want. Lower wages mean higher profits. Higher profits mean more investment in bank loans for my constituency." So, but today, we don't have a an over what he called an overheating economy of too high employment. We're having unemployment going up. We're having underemployment, uh, happening. We're not having a wage inflation. We're having wages being squeezed tighter and tighter. And that is what is forcing wage earners to, uh, run into credit card debt and defaulting on credit card debt. They're being squeezed by, uh, the they now have to pay, uh, the enormous, uh, student loan debt that they've taken under every form of debt: mortgage debt, credit card debt, student loan debt, uh, auto debt. They're, they're all rising in default rates. Uh, so, it's a completely different situation from the 1970s. And yet, the rhetoric and the s sort of junk economics that the stock and bond market and media promote is the same. Not realizing that we're now in a tighter corner than, uh, we were in the 1970s when, uh, the government was able to say, "All right, we're going to cut back our military spending." "We're going to rebalance the budget." "Uh, we're going to cut taxes and do all that." Uh, is not possible to cut taxes anymore, uh, than Trump has already done without there being a political revolution here.