Transcription
We are gradually hollowing out our industrial base to maintain our kind of global dollar empire. Nothing stops his train. I I refer to basically Walter White from Breaking Bad, where you know his allies are trying to get him to stop his like drug empire, and he's like, no, nothing stops his train; you know, we're going to keep going, and we're just we're just getting started. And I think the US physical deficits are the same.
If there are people in the administration even talking about this, it is a shifting of the Overton window. That's more of a break the glass type of decision. And I think the more elegant approach is to let that shift happen and make sure that we're kind of benefiting from that shift rather than fighting it.
So would you say that, given you know, debt-to-GDPs of the US at 120, Japan, what are they at? 240? I mean, so huge debt-to-GDP ratios, uh, giant deficit spending percentages and dollar amounts on that as well. Any recession that we would have in the future would almost be a policy decision. Um, so we're sitting here in what I think is maybe a historical moment. Maybe books a 100 years from now will be talking about this; dates like 1913 or 33 or 71 are maybe framing this up. Maybe give us the historical context of what you see going on right now.
Yeah, it's a good question. I think that um, historically we go through certain monetary changes. Um, there are a couple of different cycles that kind of overlap. Both of them could be considered the long-term debt cycle. So debt builds up in the private sector, then generally gets transferred more toward the sovereign level and then gets uh, basically debased or inflated away. That's kind of one big cycle that developed economies go through um in modern history on something like an 80-year cadence, but you know, it can vary. Um, and then just more broadly, there's this kind of imbalances that build up in any sort of complex system, uh, the way that these are currently constructed. And so even between those say 80-year periods, there's usually like a midpoint where things change. So, for example, the midpoint between um the the past kind of long-term debt cycle, which was the 30s and 40s, and the current one was the early 1970s. Um, that was a different type of default, a different type of monetary change. Um, and so, uh, I agree with you that this is kind of a historic moment. I don't know if there's a specific date that's going to stand out to quite the same way. Maybe maybe liberation day, maybe another um time will be picked, maybe uh the moment that Russia invaded Ukraine, and then there all these sanctions triggered that, you know, maybe it's maybe it's just the pandemic itself that was kind of um uh kind of a catalyst for a lot of things as well, fiscally speaking. Um, so I don't know exactly what date or period will be highlighted as like B points, but I do think that this era will be looked back upon uh much like the 70s, much like the 30s and 40s as a time of change in the way that the global uh monetary systems constructed uh and the way that a lot of domestic finances work.
So looking at more of a period as opposed to a specific date. Um, some of those dates I think when you're talking about like the midpoint, so you think like 1944, Bretton Woods agreement, and that's a date because everybody sort of came together and agreed on something at that time. 71 again was a date from Richard Nixon, but maybe like 1985 was like a midpoint when maybe the world sort of came back together at the Plaza Accord and sort of agreed to sort of repeg and devalue at the same time. Um, it seemed like maybe, you know, the the big catalyst here to your point, liberation day, tariffs being the big thing that you know, Moran's talking about these Mara Lago accords and seemingly to maybe have, I guess in reference to the Plaza Accords, maybe a chance for the US or the the other currencies of the world sort of repeg back to the dollar and allow the dollar to devalue. I mean, maybe there could be some sort of coordinated agreement coming around that.
Yeah, I think that's one of the aims of the of the administration. Um, I generally put something like the Plaza Accord on a smaller level than than these the bigger things I mentioned. Uh, because that was more of like a pivot point within a current structure. So, that wasn't really like um the foundation shifting. That was more like a bunch of entities agreeing to kind of keep that system going, cuz otherwise that, you know, the system that we've been in since the '70s could have broken earlier had certain things become totally unbounded. And that was one of the kind of events that kind of kept it going, kept it kind of sustainable, for lack of a better word, at least longer, longer sustained. Um, and I do think that the the something like a Mara Lago accord uh could absolutely uh occur here.
If you look back to the early 1970s when this this current kind of floating exchange rate system really began, um, there's really only been three dollar cycles. Uh, so so major periods of dollar strengthening compared to other currencies and then weakening compared to other currencies. um, these have had uh very big investing implications each time. Generally speaking, when you have this kind of weaker dollar periods, you're looking at more inflationary periods, you're looking at more value stock outperformance periods. You're looking at more international stock outperformance periods. Whereas when you're looking at the stronger dollar periods, you're generally looking at more disinflation. You're looking at more um growth stock outperformance. You're looking at more US stock outperformance. Um, and so uh you know, we are we have been in a strong dollar environment for quite a while now, since about 2014. So we're something like 11 years in what is a a fairly strong dollar environment. And should we get another leg lower in the dollar, either just due to policy flow shifts kind of like say the early 2000s dollar bear cycle or a more intentional dollar bear cycle like 1985 uh the Plaza Accord. We could have a Mara Lago accord. Um that has a variety of major investing implications. uh, but it's not necessarily a structural change in how the system works. Um, so I do think that we we we could certainly be geared towards something more than just that. Uh, because some of the things have been building up for a lot longer than just say a dollar cycle. Um, but that is kind of a one key thing to watch for any of us that are involved in markets or you know, follow the the prices of assets we own. So that is that is a certain a key thing to watch. Uh, something bigger geared up to happen.
And I'm definitely going to ask you about that, but I want to go back just to the dollar for a sec a second because you're talking about these different cycles. And I'm curious, you mentioned since 2014. When I look at maybe a longer chart, I mean, the dollar seems to be very strong. Obviously, not as high as it was in 1985, but from a historical basis, it seems to be pretty overvalued. Um, would you say that? And then does it look like it if if it retraced back to its historical mean, maybe it drops 20 or 30% from here?
Uh, so I do. I mean, if you look at the the three dollar cycles of of modern history, uh each one is kind of a lower high than the prior one uh thus far. Um, so even though, like you said, it's not as high as 1985, it's a different world than it was back then. Uh, and so the system starts to kind of break at a lower high than it used to. Um, back in the 1980s, there's both in the US and elsewhere, there's a lot less debt in the system. Um, and so it could go a lot further before it would run into problems. uh, whereas now the feedback loop is a lot tighter, and so it it runs into issues sooner. So yeah, ever since ever since, uh, 2014 roughly coincided with the end of QE3, uh, quantitative easing three, the third round after the global financial crisis when that ended, uh, we had a pretty strong dollar surge, and it although it's fluctuated, you know, it go it goes up to say at 100 on the dollar index. Um, it, you know, it's gotten as high as like 114, it's gotten down, uh, so it goes through these kind of these kind of waves in this period, but during that 11-year stretch, it's all been pretty elevated. And we look at on a on a trade balance basis, it's very strong. Um, when you look at its effects on, you know, what type of assets are doing well, what types of economies are booming or not booming, um it's all characteristic of a stronger dollar environment. Generally, when you get a truly weaker dollar move, um you'll get something like an emerging markets boom for maybe 3 to 5 years. Um you'll get probably a round of inflation, you'll probably get a round of kind of value stock outperformance. We've not really seen any of that at scale. Sometimes you have individual years of that happening. For example, 2017 was a good kind of rotation year for those types of assets. Um, uh, this year so far has been somewhat of a rotation year. But these are kind of smaller moves compared to what you can get when you have a true say 20, 30% uh, uh, currency shift involving the dollar. And then when you see these big shifts happen in the dollar going back into a weaker dollar, then that tends to correlate with like global M2 increasing. So the money supply starts increasing when that goes down, and that's also part of what pushes these other markets back up. Uh, yes, indirectly because uh many cases uh global M2 will be measured in dollars because global M2 has a bunch of different units, all all the different units of the major currencies, and so when you're kind of reporting what is the value of this figure, it's normally reported in dollar equivalents um because uh that's the the major that's the global reserve currency, and the reason it's really relevant is because out of all the major currencies the dollar is by far the most important cross-border funding currency. So there's something like $18 trillion worth of uh dollar-denominated loans and bonds that are cross-border in the world. Um, and so uh it's the unit of account for liabilities, which is really important. So when the dollar is weakening, it means various entities around the world, their liabilities are weakening, which is good for them. Whereas when the dollar is strengthening, their liabilities are hardening. It's like if you took if you took out a mortgage in Swiss Francs um but say you're renting it out and all the cash flows are in dollars. Uh, you're in a world of pain if if the Swiss Franc doubles compared to the dollar, uh, whereas you're doing great if the Swiss Franc gets cut in half relative to the dollar. Um, and so that that's what happens kind of the whole world. And so whenever um you do get that weaker dollar environment, yeah, you get a surge in global M2, but it's mainly because the denominator is going down. And but then also what that does, that allows emerging market central banks around the world to kind of loosen a little bit. Um, because during strong dollar environments, even if they encounter a recession, they often have to be pretty tight with their monetary policy to avoid currency crisis. Um, and so when they do get that weaker dollar period, they're able to kind of actually stimulate for a change. And that's when we tend to get that little bit of a rotation.
Yeah. Uh, I know that all too well. The last couple of years I was building a house down in Mexico and trying to deal with multiple currencies at the same time has been extremely difficult. The the peso has moved quite a bit uh quite a bit against the dollar over the last couple of years, and um we're ordering supplies. Some are coming from Europe, some are coming from Mexico, some are coming from the US, and my vendors couldn't give me any quotes. Like it's all because we don't know what the price will be at those different times. And then certainly you see these big moves, and all of a sudden things get a lot more expensive for me. So, uh, I can only imagine that uh on a much bigger scale, and and it living through that, you know, I haven't built a house in another country before, and then you just start thinking, man, how inevitable is something like Bitcoin because like how can the world work like this? Like it's it's madness that people have to deal with that all the time.
Yeah, we built a we built a home in Egypt. We went through similar uh issues uh over the past uh two years. Um, and it's also been even when you're just in a country with high inflation, for example, in Egypt, uh, they're dealing with, uh, something like 25% uh, annual money supply growth in that country. Um, and so imagine all contracts in that country, whether it's wage contracts, whether it's supplier contracts, um, all those things have to kind of adjust on a regular basis, or someone's getting really messed up. Uh, and it just it it adds a overhead problem to every every entity trying to do business uh in the country and every worker.
Yeah. And I didn't really think about at this level, but what it also does is it makes all of those vendors become speculators because they're all now trying to speculate on what the price changes will be in those currencies. So like I didn't really understand why at the gas stations there's like one price for Mexican pesos and one price for dollars. And it's like, well, because they can't go exchange those dollars maybe till the end of the week, and then we don't know what the exchange rates are going to be. So, they have to like make up for that. And uh, yeah, you just realize like how uh how broken the money is. Uh, to your book, right?
Um, before we get into something bigger that I really want to get into, um, the other thing sort of around this shift or seems to be maybe the catalyst for the shift per Trump is is tariffs and resetting um trade imbalances. And I think it's bigger than just trade imbalances, but I'm curious in in regards to that. Um, seems like that's like a pretty big deal, shifting that back. So, one, I mean, is it really about trade? Because I've seen you talking about this as well. And it seems like in our society, like we don't want to bring t-shirts and sneakers back from Vietnam. 100 years ago in the US, we did that. We did textiles, but we've moved on to higher things. And so, like, bringing t-shirts and sneakers back doesn't seem to be the highest and best use case, fixing those trade imbalances. So, I'm curious your take on that.
Yeah, I think what they want more is like higher capital goods. Um, even when we when we look at China, for example, that's the trade boogeyman at the current time. They've moved up the capital stack. So, we, you know, we used to think of China as the biggest producer of like plastic goods, for example, uh, and textiles. A lot of that has rotated toward less expensive manufacturing places than China. Whereas, they've moved up the capital stack. China's now the biggest exporter of vehicles in the world; they they've passed South Korea, Germany, and Japan as the biggest uh exporter. And it's not just, you know, like electric vehicles. It's actually mostly ICE vehicles. Like when I go bring up Egypt again, uh the streets just have tons of Chinese cars on them. Uh, and that's true for a lot of developing countries in the world. You don't see them in the US, but you see them in a lot of other places. Um, and I think, you know, several entities in the US kind of want that for the US. They want to be a a semiconductor manufacturing area. We want to be leaders in robotics. We want to be a leader in in all sorts of kind of higher-end capital goods uh rather than kind of having give that industry up to Europe and and East Asia and places like that. Um, and I do think it's bigger than just trade because a point that I've been making a lot um is that the the current issues with US trade specifically are heavily tied to the global monetary system as it as it's structured. Um, so going back to my point that that you know, every several decades these things tend to change pretty substantially, this is potentially more than just a trade cycle. Um, part of why there's so many entities even talking about a monetary change or a change in structure is because it's it's so tied to trade. And a point that I've made is that basically the other side of of being the global reserve currency is something in your in your economy is generally getting hollowed out. There's some sort of imbalance that's kind of embedded into the system, and you're kind of paying this cost to maintain the privilege of being the global reserve currency. So back in the Bretton Woods era, the cost was that we were draining our gold reserves. Uh, we had pegged the dollar to gold. All a bunch of other currencies pegged themselves to the dollar, and then the dollar was the primary uh global funding currency. So the combination of fractional reserve banks and deficit spending made it so that the number of dollars kept increasing dramatically, but our gold reserves were not. And so over time, as you get more foreign redemptions, our gold reserves fell from 20,000 tons to, you know, 9,000 tons, and then they quickly um defaulted on the ability to to redeem dollars for gold. And ever since then, when we shifted more toward the Eurodollar system, petrodollar system, uh, instead kind of the cost that we're paying is is de-industrialization. We are gradually hollowing out our industrial base uh to maintain our kind of global dollar empire. Um, but this has cumulative imbalances. We're basically we're constantly taking away from Michigan and Ohio and Pennsylvania and the rust belt and making it get the name rust belt. Uh, it's going then international and then they're reinvesting their proceeds in US stocks, US bonds, private equities. So that's going back into New York, back into Silicon Valley. And so kind of the net result is we're taking out of the the Midwest and we're sticking it the value into the coasts. And so you get both both domestic political issues and then you get these kind of global big imbalances where China has all these massive surpluses, the US has all these massive deficits, and other countries kind of sit somewhere in the middle. Um, and that's kind of an artifact of the system that we've structured. And the challenge is that if you want to bring back uh some degree of manufacturing and industrial vibrancy, it generally comes with the cost of giving up some degree of of the currency power that they have.
Why? Why does it I mean that's obviously Triffin's dilemma, which is the problem that we sort of get ourselves into and so having to supply the world with dollars in exchange for giving those dollars for the goods that they bring in. I'm guessing that's what you're saying, but I mean, is that why the world needs the dollars? I mean, doesn't the Eurodollar system just create their own dollars now? Can't we just provide dollars another way? Um, and then also maybe a a better question maybe that I'd like to ask specifically is like sort of in a capitalist system like the goal is to move to higher levels and sort of take care of those base needs and give those to another emerging market. So like 100 years ago we did do textiles here. Now Vietnam does, but we now make digital products. If we make Facebook and social media platforms and financial products and those get exported to the world and the world imports those and that doesn't show up in trade balance, does it?
Uh, so yeah, so two questions: one is actually it does. So there is a services component to to trade balance. Um, and our our trade balance has reported includes services. We actually have a services surplus to your point. Uh, and services can also include things like tourism. You know, if a place doesn't really export things, but everybody wants to go there to travel and they bring currency with them and they spend in that economy, they're basically exporting tourism services is a way to think about it. So, the US is exporting financial services, software services, um tourism services, uh things like that. And that is that is taking away from some of our goods deficit, but we still have a net deficit even after that's considered. Um, and it's pretty big. And to your you know, to your point like there specialization matters like the the trade is is a net good because it allows different areas to focus. Uh, it only becomes an issue when it's not necessarily happening naturally. It's happening because of an artifact of basically an intentional system as designed. And two, there's
Usually, realpolitik at some point that hits. There's national security interests that hit. And so, for example, when a pandemic hits and they're like, wait a second, we can't make ventilators. Why can't we make ventilators or, um, semiconductors—super important? Why are all the semiconductors, uh, being made in like Taiwan and South Korea, for example? Uh, that becomes an issue. So, uh, people usually don't lose sleep over where shirts are made, but they do lose sleep over where, um, complex machinery is made, especially if it's a handful of kinds of places in the world.
So, uh, and then there's weird things you don't think about, like pharmaceutical components, medical dyes that are needed in like imaging, um, just little little widgets here and there that, um, our industry is just heavily relying on. And if so, if you do have some sort of trade embargo, um, you can have a national security issue and kind of, um, shortages and things like that, as we saw in 2020, to your point. And I'm I'm bullish on tariffs for the most part, and I agree with you. They're strategic. They're not blanket. We're not trying to grow coconuts in the US, right? We want to import those types of things. And also, uh, tariffs also work for protecting certain industries, especially allowing industries to grow. So, for example, bringing back some of these competitive things like microchips, for example, and doing some tariffs might make it more cost-beneficial here. Also, in the US, we've sort of shot ourselves in the foot by doing a lot of uh environmental regulations against rare earth elements and certain minerals that we might need here and bringing those things back just by loosening some of those political—I guess if you'll call them—those political regulations against that.
Um, so I guess those are all important pieces, and I think if I looked at sort of the plan, it doesn't look like the goal was to bring sneakers and t-shirts back. I that's like a media headline. And I shouldn't probably repeat that, but I think maybe getting back to 15% manufacturing in the US, you know, um, and then putting some of these tariffs would allow us to sort of develop some of these automation technologies that we need. Um, seems like a seems like a pretty good plan. At least that's what I was seeing. Yeah.
But potentially, I think that the problem is that so if you look at, for example, that Steven paper, so Steven Myron is Trump's uh chair of the council of economic advisers to the president, uh, and he kind of outlined that the trade imbalance is directly tied to the currency issue, uh, and that there is somewhat of a trade-off there. Um, one of the challenges that I I think the administration as they're approaching it is not really talking about that other side of it. They want to retain every single benefit of the dollar as the global reserve currency, but then they also want to fix the trade element, even though they're kind of tied at the hip. And I think that's that's where they potentially run into frictions because it's more like you're treating a series of symptoms rather than talking about the elephant in the room, which is kind of the root cause because it's it's very wonky to talk about. You know, it's not something like all the stuff I just said is terrible at a political rally. It's it's not—no one's going to clap. It's not fun. It's it's not energizing. There's no enemy. It's like it's it's it's cumulative decisions that us and others have made collaboratively for decades.
Um, and so that's the challenge, and and there's no there's no, um, kind of narrative political gain from saying we're actually being harmed by being the sole reserve currency now that the downsides of it are kind of equal or exceeding the benefits of being it. Um, and it it's it's it's a whole wonky subject to talk about. It's more about kind of a we're in a more multipolar world now, and there are realities associated with that. But yeah, none of that carries political capital to bring up. Um, and so it's a lot of the focus is on the tariff side, the trade side, but the challenge being that's only one side of the coin. Yeah.
And does that lead to something bigger that you see kind of being geared up is maybe to change that structure of the monetary system? We have seen that in elements of the administration. So going back to Steven Meyer, for example, uh, you he in his paper he literally talked about the potential of putting a fee on investing in US assets by a foreign sector. Now, you wouldn't really think a politician or or an adviser to a politician would think, hey, we want the world to invest less in our assets. Um, but that's that's one side of the coin that's happening. The other side of basically a current account deficit is what we have is a capital account surplus. Um, and by all these entities around the world owning US assets, it overvalues the dollar and therefore makes it harder for us to compete on manufactured goods. And so to the extent that that's, you know, become very extreme, um, uh, there are elements in the administration that want to push back on that and say, well, how can we kind of maybe balance this out a little bit? Um, but then that sort of focus on some of those bigger things doesn't necessarily make it up to things that Trump will say out loud, for example.
Um, so I I think like any administration, there are kind of different factions within the administration. We saw this, for example, there there was more of a free trade contingent with the administration and more of a protectionist and tariff uh contingent, and then similarly you have a somewhat more academic bent within the administration—you the Stevens—and then you have, um, you the other factions. So I think that's that's one of the challenges—kind of seeing which which side's winning at any given time. There was a similar dynamic in in his prior term, but that was more of an establishment versus, um, anti-establishment contingent, uh, whereas this this term he put together this administration's more, um, it's more fully anti-establishment, but then there's still different factions within that. Yeah.
I guess what I was asking about is maybe some fundamental transformation of the system, uh, getting away from the dollar being that reserve currency that's always forced to then export it to the manufacturing sector. So there's been hints—I mean, Luke Groman talks about quite often—but hints about, you know, revaluing gold, for example. Obviously, there's a a strategic Bitcoin reserve bill put forth, and so maybe doing something to sort of get away from that pure fiat, you know, US Treasury dollar system and going back to something like a gold or Bitcoin. Is that what you're talking about?
Well, yeah, that's what I mean by faction. So, for example, in Steven Meyer's paper, he talked about how, um, if what he's saying is basically ends up happening, it'd be beneficial for gold and cryptocurrencies, uh, which would primarily be Bitcoin. He he used the phrase cryptocurrencies, but basically gold and bitcoin, um, would benefit from this more neutral reserve asset type of system and a more multipolar system. Uh, then there's a you see a little bit of pushback from within the same administration because, for example, Trump would say that if there's an attempt to make a BRICS currency, he would stop it, uh, or try to, you know, he would sanction it and things like that, even though that would actually kind of play into the playbook, uh, to say, okay, let some of that, you know, foreign trade happen in a different currency. You know, I think for separate reasons a BRICS currency doesn't make sense. Um, but basically one of the potential paths for reshoring some of the higher-end US manufacturing is to say, look, I mean, if you want to do if if China wants to do trade, they're already the biggest trading partner with most countries. They could do more of it in their own currency. They can do more cross-border funding in their own currency, not have it always be the dollar. And that actually allows some of the imbalances to shift a little bit. So instead of the dollar being, you know, 90% of, um, you know, currency exchange—by far the biggest cross-border funding currency, bigger than all the others combined—you could have a potentially more multipolar world where the dollar remains central in certain parts of the world and other parts of the world it becomes, you know, the Chinese currency and and that the biggest reserve assets become, you know, the neutral ones—ones that are not issued by any one country. So it's not as though another—there's no world where really another country becomes the global reserve currency issuer in the way that the United States has been. That's not that's not really in the cards for anyone. It's more like how quickly are we going to shift toward a more multipolar system and one built around neutral reserve assets, or to what extent are we going to fight that shift? Uh, and I think the the more elegant approach is to let that shift happen and make sure that we're kind of benefiting from that shift rather than fighting it. It's kind of like if you're if you realize you've you're the Roman Empire, you've maybe spread your spread your borders too thin. Uh, so you're kind of too wide, and now you find yourself doing tons of border skirmishes and realizing that you're facing issues from such a big empire. The question is, do you keep fighting every every inch of the way to keep your borders, which is probably not the best approach, or do you kind of strategically assess, okay, which borders don't make sense anymore? How can we come out of this really strong from a position of strength? And I think you can do that with currencies.
And do you think—I mean, was it a couple years ago—uh, Jerome Powell had said something about potentially having more than one uh reserve currency global currency, and it seems like, you know, obviously with the Trump administration there's been a lot of talk about it. I think Biden has maybe tried to squash that a little bit about revaluing gold, but I mean we've seen—I think to your point—uh, Steve Myron talking about it. Um, I mean, do you think that's something that they're talking about potentially sort of letting that happen, I mean within this term or is that much longer further out?
The short answer is I don't know. But I will say that uh this would have like been a non-starter in the prior administration, for example. So the fact that like there are people in the administration even talking about this, uh, is a shifting of the Overton window. So so like this is, you know, that's more of a break the glass type of decision, um, uh kind of an intentional major shift in the global system, uh much like how companies rarely disrupt themselves, they usually get disrupted by external, uh, uh startups. Um, but every once in a while a big company will disrupt itself, and then therefore, you know, kind of pivot from a position of strength. It's certainly possible the US could do it. Um, and the fact that those discussions are even happening is interesting.
How does the sort of stablecoin, the Genesis bill that they're trying to get through, and Trump's executive orders around that come into play? Because it on one hand it looks like the US is sort of trying to exert the US dollar dominance as a currency at least, um, throughout the world. So you have all these currencies hyperinflating or or double-digit inflation. The people want dollars, can't really get them. The US wants people to buy treasuries, and that stablecoin sort of seems to be like that perfect middleman. Is that a way that continues to keep the dollar dominance going or not in the same regard because it's not a reserve? It's more of just a currency.
Uh, so that is a way to keep dollar dominance going. But then it goes to the prior point. Do you even want dollar dominance to keep going? And that's where you could have different factions because you could have—there's there's literally the the Myron faction potentially talking about adding a fee to owning US assets and another faction saying how can we get more entities outside of the US to own US assets via stablecoins. Right. Right. So there's a little bit of a potential conflict there. Also, um, one of the things that Myron proposed was trying to get foreign uh holders to term out their debt. So basically to say hold fewer T-bills and two-year T-notes and things like that and how to get them to buy potentially newly issued 50-year bonds or century bonds, for example. Whereas stablecoins need the opposite. They generally need pretty short-term collateral, or you're potentially risking a a pretty big mismatch of assets versus liabilities. Um, and so if anything, I mean, that that increases the appetite for T-bills, uh, and maybe potentially other other fairly short-term treasuries. uh, it's not functionally that much different than reserve holdings. Um, uh, you know, it's kind of the the money of the people rather than money of the central banks. We do see kind of a gradual top-down slight dollarization whereas you don't see that on the bottom up. Uh, generally at, you know, when you go to the black market in Cairo looking for money, um, it's the dollar. It's not the it's less so the euro, less so the Chinese yuan. Uh, even though China is the biggest trading partner with Egypt compared to the US, uh, it's still dollars that that are desired. Um, and so there is a lot of bottom-up demand for stablecoins, by extension T-bills. Uh, and but that's it doesn't really conform with Myron's plan of either getting the foreign sector to invest less or to the extent that they're going to invest to term out their liabilities to potentially reduce long-term interest rates for the US. Because what you're saying is one is central bank demand which has been going down, but then you have retail demand picking up from the stablecoins, but then the stablecoin companies turn around and buy the treasury debt. So, it's basically the same thing one way or another, but but the demand from the stablecoin companies would be more in the short term on the bills versus at least if central banks were buying it, they'd term it out a little bit further, I guess. Yeah, they central banks generally hold a mix of both uh for different purposes where stablecoins primarily need that shorter term.
Now, um, at the time of us recording this here, uh, May 21st, we're seeing the Japanese, uh, long bond market seemingly blowing out, which is looking very extreme when you look at it on a chart. When I look at the 30 years of the other developed world, the US and Germany and UK, they're also making new all-time highs. What's going on with that? I mean, is is Japan screaming something different than what the rest of these developed world, you know, long bonds are showing?
So Japan's on somewhat of a different cycle. U I think for Europe a somewhat of a shift there is that they're, you know, they they've historically been reticent to do fiscal stimulus of various types. Uh, Japan's kind of in a constant state of fiscal dominance. The US runs pretty heavy fiscal spending uh deficits on a regular basis. Uh, Europe's generally been more constrained, uh, primarily because of Germany. Um, but because of their um defense situation and other factors, they've been increasingly uh over the past several months inclining toward, you know, looking at more fiscal in the future, and the market's kind of front-running that, um, which potentially means, you know, hotter—not nominal—GDP growth and uh longer, higher long-term interest rates. Uh, in Japan's case, I mean, they basically have such high public debt to GDP. Um, that their bond market is not really a free market. Uh, and when they try to do things like quantitative tightening, uh, they try to get out of things like yield curve control, um, they face pretty significant issues, um, uh, and basically because there's there's no end in sight to their ongoing deficits, uh, and there's no realistic fix for their um public debt to GDP other than inflating part of it away and letting it kind of run hot and trying to keep nominal GDP growing in line uh with that debt. Um, you know, I'm less of a bear on Japan than some of the the doomsayers would be because Japan has, you know, for for a lot of the problems they have with their public debt. The other side of it is they they've run decades of trade surpluses and current account surpluses. So, they have a huge stockpile of sovereign assets and private assets. Um, and so as we saw, for example, you know, a couple years ago when their currency was weakening sharply, uh, they can sell treasuries or they can sell dollars to backstop their currency, uh, potentially break short attempts. Um, so they have a they have a lot of ammo uh to really draw this out, um, and potentially have, for example, make the Fed go back to QE because of potential dislocations in the Treasury market before they would run into a true crisis. Uh, we we've even seen some comparison between Japan and Greece that came up in the news lately that Japan's debt to GDP is now higher than Greece's was at the at the at the high point. But a key difference is one Japan is incredibly productive compared to Greece. Uh, they have a much more diverse productive economy. Uh, and two, that the debt is in their own currency whereas Greece was subject to a currency that they didn't fully or even have have substantial control over whereas Japan does. And so they they have a lot of different levers that they can pull to keep the wheels on the track uh for a lot longer I think than people expect.
So you said it's sort of on a different cycle. So like it's saying like it's it's showing the same thing. It's the same fundamental thing as as most of these developed countries, but it's further ahead. A lot of times people would say that Japan is 20 years ahead of us. So it's like we'll get there. Maybe maybe the UK or Australia or Canada get there eventually, but just Japan's a little bit further along. But then also maybe like other compared to other countries, it is more productive and has much more surplus. So it could also sort of kind of hold it together longer.
Yeah, I think there's there's two ways of of meaning that. So one I I kind of meant in the more tactical sense—they're on a different cycle—which is like, for example, when the rest of the world was was raising interest rates, Japan wasn't; they were like the only doves in the room, basically. Uh, and that's that's why the yen was weakening so much relative to the dollar because you had this really big interest rate differential opening up. But then as the rest of the world got into like, okay, we maybe peaked, and interest rates were going down a little bit. Japan was still gradually increasing, uh, so they were actually the kind of the hawks in the room on a on a on a on a relative basis—like, you know, they were still lower interest rates—but the the direction they were going in was kind of the the outlier. Um, but yeah, then in the longer-term sense, like you said, they are kind of 10 to 20 years ahead of many other uh developed countries in terms of demographics and and the debt situation. Um, and uh, they do have a lot of strengths though, like they they're highly productive. And a a statistic I like to point out is that they spend way less per capita on health care than the US and many other countries despite having way longer longevity and on average being something like 10 years older. Um, and so and also they spend a lot less on defense. So things that are generally viewed as uh inefficient types of spending. You know, if you build a warship and then you never have a war, it's kind of wasted spending. Now, obviously, you need a certain amount of defense, but it's like it's it's generally better to reinvest in your economy when you can. So, the fact that they've been been kind of under the US security uh umbrella uh and the fact that they they're very efficient with health care spending and other habits that contribute to longevity and good health. Um, they've been able to kind of get around a lot of their shortcomings, um, by leaning into their strengths. Okay, so maybe it's not as dire as a lot of the doomsayers uh want to say.
And uh, as someone who makes a ton of content, uh, man, why does everybody want the doom so bad? It's like it's like the only thing that gets like views online anymore, you know, it's like you say anything positive, nobody wants to hear it. Um, but in regards to that, you know, something that you talk a lot about is the nothing stops this train meme. You've got that one going pretty well. And I think when you're referring to the nothing stops this train, it's basically what? Fiscal spending, government spending, debt, debt creation?
Right? They're just going to keep printing.
Um, when I think about that, like we saw, like the Trump administration come in, uh, fired up, ready to change the world. Uh, we we had had Howard Letic talking about getting getting back onto a balanced budget. Elon Musk fired up with Doge. He's going to, you know, find all this waste. And now that seems to just like all have fizzled out. Scott Bas on the news, I think a week ago saying, "Well, I think we're just going to try to outgrow this thing." Is that all the nothing stops?
Yeah, I think there's a few months of people thinking they might slow down the train, and they're realizing that they're not going to. Uh, and now we're kind of back on all all steam ahead. Um, you know, nothing stops his train. I I referred to basically Walter White from Breaking Bad, uh, where, you know, his allies are trying to get him to stop his like drug empire, and he's like, "No, nothing stops his train. Uh, you know, we're going to keep going. Uh, and we're just we're just getting started." Uh, and I think the US physical deficits are the same. There there's is it's extremely low probability that any time in the next five to 10 years that they're going to meaningfully make reductions in the US fiscal deficit. There's a bunch of reasons for that. Uh, and that has all sorts of geopolitical implications, investing implications, uh, economic implications, and um, you know, sometimes people will phrase that as a a doomsay thing to your prior point, doom sells. Uh, but that's actually not really how that's meant because, for example, if it was doomy, then the train would stop. Uh, and so part of the nothing stops his train thesis is it's kind of a balance between um, you know, it's bas I'm saying on one hand it's pessimistic because I'm saying they're not going to meaningfully fix the deficit anytime soon. Uh, it it's very mathematically implausible that anyone's going to be successful in that, and as we've seen, has been pretty abrupt pivots and even even the people that said they would now kind of backtracking. Uh, the other hand it means that uh, they're going to keep the wheels on enough uh, and I mean I think that's true for the US. I think that's true for Japan. Um, where it's also not going to spiral into some crisis in the next year, two, three years and stop in that way either. I think it's basically going to run hot for uh any sort of investing time horizon. You when we're looking out two decades, that's a whole different world, right? And I'm not trying to make two decade predictions, but I'm trying to look 5 10 years ahead and basically that in that time frame, there's there's relatively low scenario probabilities for how we're going to do anything other than run hot for that period.
So would you say that given, you know, debt to GDPs of the US 120, Japan, what are they at 240? I mean, so huge debt to GDP ratios, uh, giant deficit spending percentages and dollar amounts on that as well. And to your point um about them be able to keep the train on the track then almost like any recession that we would have in the future would almost be a policy decision in a way.
Yes. Um, when when another way of putting it is that emerging market recessions and developed market recessions look different. Um, so for example, um, in an emerging market you you often won't get an unemployment spike. I mean, it depends on the type of recession they're having, but often what happens is said is there basically a currency crisis. There's kind of like this inflation wave. Um, and so everybody kind of feels poorer. Um, and yet there's there's not really this big like labor cycle change. It's more just like imports more expensive. Um, they're getting less per hour worked. The there's a economic malaise that is happening, but the the units are being treated differently. Um, if you look at a lot of numbers in many ways 2022 was a recession in the US. For example, if you look at the misery index, which is uh unemployment plus inflation. Um, that was basically a you know a recession level misery index. Uh, but it was more from the inflation side than the labor side. Uh, when you look at for example bank lending um so how many you know what percentage of banks are tightening credit availability versus loosening credit availability uh that that 2022 year was like the only time in modern history where we hit something like 40% of banks tightening at once uh and without a recession on the record and again because that was kind of a I would say that was basically a recession like most people were worse off that year than 6 months or 12 months prior um but it didn't show up in a big labor cycle change instead showed up in this kind of inflation wave where everybody's kind of a little worse off than they were at the sugar high of the stimulus um because that delayed inflation hit and their wages weren't going up at the same rate and so everybody's kind of taking this kind of shared pain. So in a typical developed market disinflationary recession, most people don't lose their jobs, but those that do are greatly impacted. Whereas in a more inflationary emerging market style recession, fewer people lose their jobs, but the the pain is kind of spread through inflation. And so it's a different type of pain. And I do think that basically recessions going forward in the developed world are more likely to have some of those characteristics where some of the pain is felt more in monetary dis debasement uh rather than these kind of typical cycles we've been through. And part of that is because bank lending is less important or less like a lower magnitude relative to fiscal deficits than it used to be. For for most of the past call it 50 years in any given period of time. Net bank lending is a bigger dollar amount in a given year than fiscal deficits. Uh, with with generally the only exceptions were like you maybe you'll see a 12-month period during recession where briefly fiscal deficits are bigger and lending has contracted. But now in this kind of period of fiscal dominance even when um you know we're not in a recession um fiscal deficits are usually bigger than bank lending. And so this is kind of this more background running hot. Uh, and so it's actually pretty hard to have the type of recession we've come to expect. But that doesn't mean you can't have periods of economic weakness or people kind of correctly feeling off feeling that they're worse off than they were the year before.
Yeah. And so I guess what you're saying is since we typically see uh money supply go down, banks aren't lending as much. So the money supply is not as expanding through debt creation. Uh, but now that fiscal dominance, government spending has eclipsed that. Um, whatever the banks are doing from tightening and loosening their lending regulations doesn't affect it as much as it did because now we have this fiscal dominance.
Yeah. It still affects part of the economy like affects small businesses that are either getting or not getting that that credit and on what terms. But for example, the fact that um social security checks are still going out and Medicare spending is still happening and huge defense spending is still happening and interest expense is still happening. Those are different vehicles where this money is pouring into the economy. And so generally consumption stays pretty strong uh you know for example and so the net result is that the the thing runs hot compared to what you normally expect uh in that type of environment. And then when so and then it seems like you said yes sort of like a policy decision. And so when you look back from previous crashes in the 70s or '9s or 2000 like they it seemed like they policy decision was to allow the sort of bubble to delever and maybe in 2008 they also tried to let it delever and then it got too big and too systemic. They launched QE levered this thing back up and now today the decision is there's no appetite for that at all. Um, in 2022 um it kind of was a recession. The Biden administration had to come out and say technically it wasn't. Um, but that also seemed to be a policy decision because that was right after the Fed started QT and tightening things back down. So, it sort of was a a decision. Um, looking back historically, it was a pretty minor correction overall. That was a decision by the Fed to try to tighten things. I'm curious what your view is on these like more like four or five-year global liquidity cycles like Michael Howell talks about which seems to sort of maybe be in the macro driver's seat right so you look at like 2008 um response to the global financial crisis interest rates were dropped to zero which sort of synced up the term on all the debt and now every about four to five years we have these cycles which happens to coincide with a four-year Bitcoin having cycle happens to coincide with a four-year presidential election cycle and and that hit right in 2022. What do you think about those cycles?
Um, so I think those cycles are intact. I wouldn't say what I think the specific time frame is going to be. Um, on average I think it's it's somewhat of like three-year cycles, but it varies. Um, and you know, I do think they they tried a pretty pretty aggressive tightening cycle in 2022. Basically, they decided that the they kind of observed that the inflation pain was worse than anything else. So, they had to get that under control. It was tried to. So, they tightened policy. They slowed down bank lending. Um, there weren't any major new fiscal bursts going on in 2022 compared to what we saw in in the prior two years and so that was across the board a pretty contractionary year. Um, but then the pain became so much that the entity started to bend around it. So for example, um, UK guilt crisis in 2022 was an issue. Um, at the same time the US treasury market didn't break the way that the UK's did but ours became wobbly like we had like record high move index like meaning treasury volatility. Um, and uh that over over that year and then the next year the Treasury Department shifted toward kind of an unprecedented issuance of T bills as a ratio of their debt uh which they normally only do in crises and recessions. Um, but despite the fact that there was no official crisis or recession, they were shifting more and more toward T bills um rather than issue as much as they generally should have been doing on the longer end. Um, and so that was that was kind of a softening of the uh you know the Treasury kind of offsetting some of the Fed tightening. Um, and then in early 2003 when the when the banks ran into issues uh they blinked um and so they you know they gave um liquidity provisions and soon after they slow down and then stopped uh interest rate increases. Um, so they kind of ran into the guard rails that they could do. Um, and so some of these background forces like the big ongoing fiscal deficits slowly kind of overpowered some of those tightening attempts. So in 2023 and 2024, we got this we got this like other kind of kind of unintentional loosening of a lot of things. Um, and 2025 is obviously been a shaky year because all this tariff uncertainty, uh currency volatility and things like that. Um, but I still I still think we're in a sustained period of of um, you know, money supply running hot, nominal GDP running hot. Um, attempts at tightening are more about narratives and jawbon rather than anybody meaningfully cutting the deficit. uh doing anything that can really hurt banks. Um, and so the the the kind of the error correction is normally toward when in doubt, liquidity is okay and things tend to run hot rather than run into disinflationary collapse.
Yeah. And now all that uh you know we did have a rough first quarter like you said all the tariff stuff you know the new administration etc. Seems like we're on the other side of that. Like I said maybe percent sort of threw in the towel, Elon threw in the towel on that. Uh, Bitcoin's off to the races. Hit a new all-time high 109,000. The thing that I have been completely absorbed by and I'm guessing you have as well is the new Bitcoin treasury strategy companies that are popping up and it seems like we sort of have like this new financial asset creating these new financial uh products and maybe creating a new financial system in front of us and there's all these new metrics like Bitcoin per share and MNAV and things like that. I'm curious your take on this uh Bitcoin treasury strategy play.
Um, is this building a new financial system with a new financial asset or is it sort of running the old playbook on a new asset?
I think there there are two things happening simultaneously. I think one uh it just makes sense for for balance sheets to have the best money. Um, and so I think that's that's a more structural shift that basically uh if you're a business uh instead of holding melting ice cubes, you know, fiat currency or instead of uh decapitalizing yourself, basically giving all your money back to shareholders as as share buybacks or dividends and purpose taking on debt you don't need like Coca-Cola has like 40 to 50 billion in debt despite being profitable every year for like a century. And the reason they do that is because why would you not take why would you not issue 30-year bonds at 2% if you can? It's basically financial arbitrage, right? Uh, and so that's been the name of the game. Uh, these these big successful blue chip companies, they take out debt they don't need because they can and is cheap and they they you know they they basically shortening the currency for 30 years at 2% which is great. Yeah. Uh, they're buying back shares, they're paying dividends. So Bitcoin introduces another thing you can do which is hold a scarce asset on your balance sheet. So you're protecting yourself from debasement, but you're also not, you know, turning your your whole balance sheet into liabilities and basically decoupizing yourself as much as possible when capital is not, you know, kind of respected. All these companies said, well, we we don't want capital then. Um, and so this is a new tool to actually have capital. Um, the other strategy I think on top of that is arbitrage, which is if this currency is going to keep weakening, we're then going to try to issue debt in that currency and buy this way better currency. You see this to some extent whenever you have like an emerging market currency crisis. There are companies there that say, "Well, we could take out bank loans in our failing domestic currency and buy dollars with it." Um, that seems like a good trade. And then sometimes you'll say, for example, like this is happening in Turkey where they would then come in and say, well, if you're a business that holds dollars, you can't you can't take out a loan in the local currency because we don't want you, you know, attack basically doing a speculative attack on our currency to buy dollars. That's kind of what's happening with these leverage Bitcoin entities. They're kind of doing speculative attack on the dollar buying Bitcoin. Um, but of course the dollar can absorb a lot bigger attack than than a developing market currency. Um, and so there are I think arbitragees that are happening and rightly so. Um, because when when you know when the opportunity is there, their entities are going to take it. Uh, and those that do it earlier get disproportionate gains. And then the question is what percentage of them or which ones will nail nail the turn like when this eventually gets overdone excessive and dangerous which ones will have the best risk mitigation in play to get through a bare market without having to liquidate at an inopportune time uh and otherwise just you know knock it over their skis.
Right. So it's almost like um like you said it gives gives these public companies a new option as opposed to just leveraging up with debt. So, it's almost like maybe buying Bitcoin is like the new buy back your shares sort of strategy.
Yeah, it's it's a it's a new tool in the toolbox and it's not necessar um but it's certainly a new variable. All the all the other choices basically involve decapization and this is the first one where where you know you can retain value without decapization and I think that up to a point that makes a ton of sense. When I look at like a company like Micro Strategy, you know, uh at the Bitcoin opportunity fund, we're looking at a lot of these deals. as I'm sure you guys are over at Ego Death as well. And we're looking at these deals and it's always like, well, how do we value this thing? And it's like we have these these new strategies, these new companies are building and and and a lot of it defaults to this old narrative is like what's the underlying business model? When I look at like Micro Strategy, it's like, well, they used to be software, but now they're sort of just like financial products. So, MSTR, STRK, STRF, they're sort of like financial products that they're bringing to market. Um, almost like maybe like an ETF. And then I think of it like, well, I mean, I guess the market could bear thousands of financial products. So maybe it's not as bubble-esque as some people think it is right now. Or do you think it's sort of hitting that level?
I don't think it's too bubbleishious yet. I think there I mean it goes to periods of microbubbles. I I tend to, you know, when bit when micro strategy is hitting like over three times NAV and every single person on Twitter is talking about it, that's when it tends to get temporarily overdone and then it goes through a period of consolidation. The market digests that move and then potentially sets up a new round higher uh in the coming months. Um, there is somewhat of a network effect here. So uh liquidity really matters. Uh, and having a liquid option market really matters. So Micro Strategy is kind of in a unique position where um their equity is very liquid. Uh their options market is very liquid and so that is a pretty you know self-sustaining network. It's hard for like another entity to become Micro Strategy and have you know hundred different Micro Strategies on the market. But I do think that the overall market size can absorb quite a bit of this. I mean you know that the fiat system is hundreds of trillions of dollars globally and Bitcoin is a $2 trillion asset. Um, and so and then you know these leverage Bitcoin entities are still in the hundreds of billions. Uh most of which being Micro Strategy but even the long tail lot of others is still not that big. Um, so I think that that over time the market can absorb more of it and even micro strategy uh you know there was a pause during the bare market they weren't really you know it was like the cycle was temporarily over um and but then it it came back once Bitcoin um entered another bull market. So it can absolutely get overdone for periods of time. It's like how much can the market absorb at once. Um, but then when the dust settles and anyone who did it improperly maybe gets washed out, um, a new base builds and then potentially there's another round of arbitrage and this this can get pretty big because the the mismatch in size between the Bitcoin ecosystem, the fit ecosystem is is huge.
Yeah, that's what I was thinking. It's like as long as they can continue to arb that, right? As long as the rate to borrow is well below the rate of appreciation, which seems like it's going to be that way for a very long time. But I guess then you have to decide how much liquidity will there be available for the um, for the debt. But I think to your point, you know, if you have a long enough time frame and you believe in Bitcoin, then seems directionally correct. But yeah, who knows who's going to get caught, uh, upside down when the tide goes out, as Warren Buffett would say.
Exactly. Yeah. All right. Well, uh, and that and that and that was the Birkshar playbook on a lesser scale. I mean, part of why they're so successful is that basically what what Buffett and Mer did was they bought a bunch of blue chip equities uh, basically with debt uh, and they just they managed it so they never blew up. So the the reason they basically bought insurance companies and operators as a big insurance company is that's a really cheap source of leverage that entire insurance float is basically their liabilities. Um, and so there you know in addition to issuing debt which which Birkshshire would do um they would also just their insurance float is a type of leverage. Uh, and so they basically own a bunch of blue st blue blue chip stuff at moderate leverage, make sure they don't blow up during recessions, and therefore compound at a at a good rate.
And so that if the best leverage Bitcoin entities do essentially the same thing with Bitcoin, um, they can have similar long-term success, and just the key is never getting over your skis.
Yeah. Which is always hard to do. Human human nature always wants to push it too far. I saw this quote from Elon. Uh, he's talking about with Doge, and he said something like, um, if you don't have to add back in, you didn't cut enough, then it's kind of like the opposite. It's like if you if you don't have a couple uh, collapse, and you didn't push far enough, I guess would be the opposite of that.
Um, man, I think that's a good place to stop, Lynn. Uh, what a wealth of information. I appreciate it. Um, like I said earlier, man, you're so in demand that obviously, uh, it's because of this wealth of information you have. I subscribe to your newsletter, lynalden.com. We'll link to that down below. Obviously, your book, Broken Money. I have a copy of that as well. It's amazing.
Anything else you want to point people to? Uh, no. This is two big things. Check out lynald.com and the book, and and thanks for having me. Yeah, we'll link that down below.