Transcription
The US empire and the US dollar: is it going to boom, or is it doomed? That is not only the question of the day, but it's the question of the year, and the question of the last 10 years, and in some ways, the question of the last 50 years. Despite the ever-ending narrative that it's about to die, it is still here. So the question is, what comes next? Because that's always the question. It's the argument I always get: "Just wait, you'll find out. It won't be long. Tick-tock." So that's what I thought we would talk about today.
I know many of you guys have heard me talk before about it. It's always important to understand both sides of the argument. So what I thought I would kind of do today is tell you a little bit of the story of how I even kind of came up with the whole milkshake theory in the first place. Because I think it helps understand why I am so ardent that there is only one way that this is going to end, and that's with a lot of pain when the dollar goes higher, rather than a lot of euphoria when the dollar goes lower.
As part of this, I'm also going to talk a little bit about a report that we recently wrote as part of our Macroalchemist research. So if you haven't already gone over and checked that out, you can go to macroalchemist.com. You can see some of the reports that we've written in the past; you can see some snippets of the reports that we've written recently. This is a report I think we wrote two months ago, and it was a two-part report. It was basically about the US debt, the US debt trajectory, and we titled it "When the Math Begins to Matter." Because a lot of people have put forth the argument that now that interest rates are rising, the math really matters, and that's why this time is different, and that at this time, it really is the end for the US, the US dollar, the US Treasury market, etc., etc.
But if we rewind a little bit, you know, coming out of the global financial crisis, I was very, very lucky in that right about a year before the global financial crisis, I kind of got introduced—I don't know if "introduced" is the right way to say it—but I kind of got introduced to the rabbit hole of the US debt. That's really the only way I can think of to say it. I had some friends of mine who were extremely successful—I've told this part of the story before—who were extremely successful. They'd sold their company for a lot of money, and they were trying to figure out where to invest it. They weren't investing it with me, and they weren't even really investing it; they were basically just sitting in cash trying to figure out what to do. But they were smart enough to know that they didn't know what was going on, and so they just met with a bunch of people and read as much as they could. And they gave me this book. It was probably 2006–2007. It must have been 2006 because it was in 2007 when I kind of started thinking about this stuff. So it was the end of 2006, I think it was for Christmas. I don't… They gave me this book called *Empire of Debt*, and it was written by a guy named Bill Bonner, who's kind of a legend in the newsletter space, and you know, very smart guy, successful guy, and it… you know… had… and he's one of my favorite writers. He's very, very funny, he's very smart, very sarcastic, and he's very irreverent. And so I really liked the book, and it kind of opened my ideas to some things, or my mind to some things. And I wasn't smart enough to put it all together that we were going to have a financial crisis and the banks were all going to fail, but the book helped start me on the path to kind of thinking a little bit differently and kind of doing my own research on some of this stuff.
And you know, I had this one fateful meeting with kind of the same people, and I came out of that meeting very disillusioned with how intelligent I—or how the lack of intelligence, I guess I should say—that my superiors had. And so I kind of started doing my own research. You know, this book, and then that meeting, and then these friends of mine were kind of a big part of that journey. And so I did the analysis on the United States rather than doing it on a company or an investment; I did it on the United States. And I came to the conclusion: this is just a disaster, right? And um, it's not that I was wrong. I think the… an… if I were to go back and if I were to give myself a grade on the analysis that I did, I think I did pretty good analysis on it, and I think I, you know, I put in a lot of work, and I… I think if I was going to go back and do it again, I would look at a lot of the same things, and I would probably come to the same conclusion.
What reminded me of this today and why I decided to talk about this today is somebody retweeted something of mine that I had retweeted, I don't know, two or three years ago, and it basically said: "If you analyze the United States in isolation, the only conclusion that you can logically come to is that this is just a disaster waiting to happen." And I kind of stand by that. But the problem is thinking that analyzing the United States in isolation is a worthwhile endeavor. And it's not that it isn't beneficial, because it's very beneficial to understand what is going on in the biggest market in the world and the type of challenges that the global superpower faces. So from that perspective, it's very good. But thinking that you can come to some conclusions as to what global markets are going to do just by looking at one factor or one country, even though it is the biggest and perhaps most important country, it's just fallacious. Because we don't live in just the United States; we live in a global world. We live… you know, it's a global market. Many of the listeners, many of my clients are not even in the US; they're outside the US. And so the idea that you can just look at one market and tell what's going to happen in the world—it's insane to think that.
Now, at the time, I didn't realize it. And so for years, I pounded the table that this was really bad. I was a doomer; that's probably the only way to say it, or the simplest way to say it. And I could, you know, look at a number of factors that could prove it, and I felt really strongly about it. And then for the next three or four years, and I… it was kind of proven right in 2008 and 2009. But then from 2010 to 2014, it didn't go the way I thought it would go. And I thought the dollar would go down; I thought the United States would go into a vague recession or depression, and you know, I couldn't understand why the dollar was not going down. And in fact, it went up a lot in late 2014. And I finally just got tired of being wrong, to be honest. And some of you people may have heard me talk about this before. And so I kind of went back to the basics, and I went back and I reanalyzed everything, and I kind of came… kind of came to the same conclusion. But there was one weekend—I would always… I always hated working from home—and so I would go to the office to work whenever I had something to do; I would go to the office. And there was one weekend where I went in, and it was a Sunday; I'll never forget it was a Sunday. And I went into the conference room, and I said, "Okay, I've done all this work on the United States, what am I missing?" And I put out on the big conference table, I put different pieces of paper, and I would label one the United States, and then on the other side of the table I'd put Europe, and on the other… you know, down on the other side of the table I'd put South America, and then China, and then I would put banks and insurance. I basically tried to create this big maze of the world essentially. And then I wouldn't just look at… I would go sit in the other person… I would go sit in the chair in front of that piece of paper, and I would try to look at it from that perspective. And I kept coming up with the same answer until it finally dawned on me. And when it dawned on me, I… I just felt really stupid; there's really no other way to say it. Like I literally had the light bulb above the head moment. Because even though I was sitting in those other chairs and looking at it from what I thought was the other country's point of view, I was still thinking like an American, and I was still thinking like Brent Johnson. But that's not… when you have… when you put somebody… but when you put yourself in somebody else's shoes, you not only have to look at it from their point of view, you have to think like they do in order to understand what moves they're going to make. And so when I was sitting there and I was kind of looking back at the US, you know, from China's perspective or Japan's perspective, I realized, well, I was analyzing the US, but I was analyzing it from a US perspective. And even if I was analyzing it from a Chinese perspective or Japanese perspective, it's not that I was coming up with the wrong conclusion; it's just that I never sat in the US chair and looked back at Japan or Europe or China and did the same level analysis on their economies and their banking system and their government bureaucracies to the same degree that I was to the United States market. So I was… I was doing a lot of work, but I was doing a lot of work on only one piece of the puzzle. And once I realized that I had only done a lot of work on one piece of the puzzle, I realized how stupid I had been, and… and how… it… looking back now, it's so obvious what I was doing and why I was missing everything. But at the time, I was so focused, laser-focused on the US rabbit hole that I couldn't see the rest of the world.
So this is a long way of saying that, you know, and you guys have heard me say this before, this is a relative game. And I was… I was kind of thinking of it like a golfer who's trying to beat par, and I was just focused on, man, you know, just focus on yourself, don't worry what the other… other players are doing, you just got to beat par. But that's not what the world is. The world is match play; you're playing against the other players; you're not playing against par. You don't have to be perfect; you just have to be better than the other players. So when I started looking at the other economies and the other parts of the world with the same laser focus and the same critical… you know… attitude that I was giving to the United States, I realized, holy cow, that's what I was missing. Not only was I… you know… what… not only was I not even analyzing the rest of the world, but I was only looking at it from my point of view, not other people's point of view. And when I started doing that, it changed everything. And so what I thought I'd do today is I'll just walk you through some of the reasons why the… the debt is starting to matter in the US, and then… al… and that side of the argument, and then when we look at the other side of the argument, what… what that looks like and why… why I ultimately come to the conclusion that I come to.
So the reason—going back to what I said at the beginning—the reason this is coming up again now, even though it seems that, in my opinion, it comes up every year for the last 50, 60 years, but the reason the whole, you know, thesis of the US is really in trouble this time, and why it's different this time, and why it's really going to happen this time, is based on four or five different factors. And the main factor is obviously debt, right? The whole world knows that the United States has $36 trillion in debt. Not only that, but the rest of the world is not buying our debt to the same degree they were 10 years ago. They've stopped buying treasuries to some extent, and when they mature, they're plowing it back into things like gold or other resources. And so there's a worry that the United States won't be able to finance its budget anymore because the rest of the world is no longer buying US treasuries. So that's part of it. The other part of it is that for a long time, interest rates were either very low or zero, and so we borrowed a lot of money when the interest cost didn't really matter. But now, over the last four or five years—six years, I guess—they started going up in… I guess they started going up in '18 or '19, but then they went down during COVID, and then, you know, in the last three or four years, they've gone up a lot. And now, rather than selling bonds at a 1% rate or a 2% rate, they're 4%, 4.5%, 5%, and perhaps it will go even higher than that. So that's another thing. So not only is the amount of debt now skyrocketed, and it's kind of going exponential at this point, but the interest rates associated with them are high—so high that now interest expense is the biggest single line item expense in the US budget; it's even bigger than the defense budget now. And if interest rates don't go down anytime soon, you know, and we have to keep borrowing at an… at an… at an increasing rate, it's just going to make the problem even worse. To make matters even worse than that, though, is there's another factor, and that's the maturity profile of a lot of the bonds that have been issued. There's a huge percentage of the debt—I think I don't have it right in front of me, but I think it's like 60 or 70% of the outstanding debt… No, I don't think it's that… maybe it's… No, it's not 60. I… I think it's like 25 or 30% of the debt outstanding comes due in the next year or two. And so not only do we have to service the debt that already exists, and the interest rates have gone up, but we have to refinance a huge portion of the debt sometime in the next, I don't know, year to two years, and we're going to have to refinance it at now higher interest rates. So it… it… the story just keeps getting worse, right? Um, and this… this is very much kind of the same conclusion I came to 15, 16 years ago, 17 years ago now. Um, but the problem is is it's even bigger, and on… even though I had all of the… um… characteristics, or the… or the… the main components identified way back then, all of those things have just gotten even worse now.
To complicate things even more, though, is that now we're in an environment where the world is not cooperating the way it used to. In fact, not only are they not cooperating, they're kind of at each other's throats, right? You guys have heard me characterize this as a game of thrones. You know, it's… every country has its challenges; nobody is longer cooperating; everybody wants to rise on the global stage; nobody wants to fall on the global stage. And so new deals are being made; alliances are being broken; other alliances are being forged. And it's kind of a whole new ballgame, and it's to a certain extent—even though there are still partnerships, even though they're all still alliances—it's kind of every man for himself in some ways. And so it's just a very uncertain world. And with an uncertain world, governments don't like to lose control, and one of the ways that they… kind of stay in control and try to… you know… keep things in their favor is they institute capital controls and other… um… economic… I don't know… priorities demanded by law and enforced by their… their own governments. And then they also… you know… one of the… the biggest… whenever a government gets in trouble, or a domestic economy is… is slowing down, or is… or is not performing well, one of the easiest and oldest strategies in the world is to blame the evil foreigner. And it does… listen, it doesn't matter if you're Chinese or Japanese or the… or American or European; I mean, every country does this. I mean, this is just standard… this is just standard textbook strategy. And so it's just a very uncertain world, and you know, in that environment, it makes it tougher to finance things if you are dependent on the international community to do that financing. So that's one of the big problems that the US is facing now. And then probably the final thing, and part of what's been speculated over the last couple of months, is that the Fed balance sheet is in trouble. You know, the Fed bought all of… No, that… so… so not only does the US have all this debt, and not only is the rest of the world not financing it the way it… it… it has been, but the Fed, the central bank of the United States, has had to go in and monetize some of that; they have had to buy a lot of those bonds. And so they have a lot of those bonds on their balance sheet. That in itself wouldn't be so bad; it's not great, but that in itself wouldn't be so bad except for they bought all those bonds when interest rates were zero, and now interest rates are over 4%. So what do you think the Fed balance sheet looks like, right? Uh, well, the Fed balance sheet has a huge hole in it. Um, you know, if it was a regular bank, then you could argue that it was insolvent or… or would be facing insolvency if people started to take the deposits out. So there's just a number of challenges and a number of very good arguments for why the US was in trouble and why this time it really is it, right? The problem is we've only talked about the United States. So now let's talk a little bit about the rest of the world.
So you know, when I very first time I ever talked about the dollar milkshake theory, literally… literally the very first sentence I think I said was: "This is not a story that ends well; this is a story that ends very, very badly." So I'm… I'm not of the opinion that this is never going to matter, and I'm not of the opinion that the US will never have a reckoning. In fact, I think… I think there will be one. But the problem is is when you start looking at the rest of the world, you realize they're going to have a reckoning too. And this is match play, right? We're not trying to beat par; we're trying to beat the other players. And so while everybody knows the United States owes $36 trillion, what they don't know or typically don't know is that the rest of the world not only owes all the debt in their own currencies, but they also owe $36 trillion. If you kind of add it all up, it's probably… you know, it's over 30 trillion. And if you start including off-balance sheet items, then all of a sudden it starts getting into the 60 or 70 trillion area. You throw in derivatives and all this stuff, and you're in the hundreds of trillions. And this is the Eurodollar market that you hear me talk about. You know, you've heard Raoul Pal talk about the Eurodollar market; you've heard Jeff Snyder talk about the Eurodollar market; George Gammon talk about the Eurodollar market. You know, there is kind of a handful of people who… who talk about this Eurodollar market because it really is the key to it all. And I didn't… back… you know, in 2006 and 7 when I was trying to figure out what was going… or sorry, 2012, 13 time period, 14 time period when I'm trying to figure everything out, I didn't even really understand what the Eurodollar market was. U… maybe I knew it existed, but I certainly didn't fully understand it; didn't realize how big it was; didn't realize how important it was. But it's really the key to it all. You know, if you… if… if you don't understand the Eurodollar market, then you're kind of missing the forest for the trees, for lack of a better way of saying it. And the rest of the world owes an incredible amount of money in their own currencies, but they also owe an incredible amount of money in dollars. And they don't owe it to the United States; they owe it to each other. And so if they were to default on that, then they would be defaulting on each other. Now, I don't know anybody who thinks that they can get defaulted on and that would be a good thing. So that's number one that you have to think about when you're thinking about the rest of the world: they owe just as much as the United States does, and they owe an incredible amount in a currency that they can't print, which means they are much more susceptible to default than the country that can print that money. Now, it doesn't mean that current fiat currencies, whether it's a euro or a dollar or yen, can't lose value; that can absolutely happen. But you're not going to default as quickly or as soon as the country that can't print that currency.
Now, the other thing… um… that the rest of the world doesn't have that the United States has is the history and the knee-jerk reaction of the flight to safety—the US dollar and the US Treasury. And perhaps this is changing a little bit, and you know, gold's at 3,000 bucks now, so it's not like they have to only buy dollars or have to only buy treasuries. But that is still the… the US does still have the reputation of being the port in the storm or the flight to safety. And part of the reason is because everybody does business with the United States because the United States is the biggest client or one of the two biggest clients for everybody in the world, and because everybody owes dollars and uses dollars. When things get uncertain, what do you grab on to? You grab on to the things that you need, not the things that you want. And you need dollars; they need dollars; the rest of the world needs dollars to service this US dollar debt that they have. And because the dollar typically rises in a crisis, and the… then when a crisis reps, people grab dollars quickly because they know they may disappear and not be as prevalent a few days or a few weeks or a few months later. So if for no other reason than a knee-jerk reaction, the dollar gets a bid when things get really, really crazy. So that's part of it. And because in a credit crisis or a credit contraction, there is no entity outside of the United States that can recapitalize the system with new base money. The only way to stem a credit contraction outside the United States would be to loan new money into existence, but loaning new money into existence is the exact opposite of a credit contraction. And so they're really stuck when we do get a global slowdown, and that is also part of the reason why you get a flight of safety to the dollar; it's just the structure of the monetary system. So that… so… so first of all, we've got the amount of debt, and then we've got the… for the rest of the world, we've got the flight to safety of the US dollar; we've got the fact that the rest of the world owes debt in a currency that they can't print, and they have to buy on the open market. But then what was the big catalyst that we were just talking about in the US was that interest rates have now risen, right? Well, I don't know if people have looked at interest rates outside the United States recently, but interest rates in Europe have been spiking. Part of the reason they've been spiking is because Donald Trump has told them they're going to have to spend more money to protect themselves, um, and to… to… to finance NATO and… and some of their own needs; the United States isn't just going to, you know, foot the bill for them anymore. And so what does that mean? They're going to have to print more euros, probably to do that, and as a result, they're going to have to… you know… you know… their… their… their budget deficits are going to grow, and as a result, the market wants more interest in order to buy those Treasury bonds. And guess who's still going to end up going to… who… guess who is going to have to buy those Treasury bonds that the European nations are… are… are going to be issuing in mass in order to fund these budget deficits? That's going to be the ECB. So when you start looking at the… in… listen, the same thing goes in Japan; the same thing goes in China. So when you start looking at the rest of the world, you realize all of those issues that you noticed in the United States, they also exist in the rest of the world. It's not like these are uniquely United States problems.
But here's where it really gets interesting, and that is because the United States has the global reserve currency, because the United States is the biggest consumer market in the world, and because the United States is either the first or second biggest customer for virtually every exporting nation in the world, they all not only use dollars for these transactions and for trade and for their invoices and for their suppliers and for their clients, they also hold on to dollars as reserves. That is what the majority… and we've talked about… yeah, are they starting to hold other things like gold? Absolutely. And will they continue to do that? I think they probably will. But it doesn't change the fact that currently the biggest reserves on their balance sheets are US dollars and US treasuries. So let's think about this now. So if we talked about how the… the Fed balance sheet was upside down, so let's look at the balance sheets of these other central banks. Well, they were buying… Japan was buying Japanese government bonds not only when they were zero, when they were negative, and now interest rates have started to rise in Japan. So do you think the Japanese central bank, the Bank of Japan's balance sheet might be upside down in the same way that the United States Fed is? Absolutely. When the ECB was buying bonds, they were either at zero or negative, and now that these interest rates are spiking in Europe, do you think the ECB balance sheet might be upside down? Absolutely. China's been buying… they… they've kind of been doing backdoor QE, so you know… and… and they're trying to fund… the interest rates in China are actually low… because it's not a very big international market, and Chinese banks are kind of mandated to buy them, and that's the only place that the Chinese financial institutions want to put money because if they put it in the stock market or the real estate market, they lose even more of it. So interest rates aren't a big problem in China, but… but financing themselves is. So again, when you start looking around the world, you… you see these same problems. But now let's… let's think about the reserves. Forget… forget the… the domestic treasuries that they have on their balance sheet; what else do these… not only the central banks around the world, but just commercial banks… what do they hold on their balance sheets in addition to the local treasuries? They hold US treasuries, and they hold US dollars. Okay, so now let's go into a scenario where US treasuries lose… lose a bid, can't get financed, interest rates blow out, and the price crashes. What does… now we know that that would…
Be bad for the US, but what does it do for the global central banks that hold those Treasury bonds? What does it do for the global commercial banks that hold those Treasury bonds? It breaks their balance sheets as well. So the point I'm making is there is no way that you can have a US Treasury crisis or a US dollar crisis that doesn't affect international banks and international central banks.
The idea that the dollar or the treasuries are going to go to zero and it's only going to hurt the United States is crazy, because US dollars and US treasuries are the most important reserves that the rest of the world has. And if anybody is saying, "Yeah, but these central banks and these other countries have gold," okay, fine, I give you that, but who owns more gold than anybody? The United States. And in the last few months, where has most of the gold in the world been flowing to? To the United States.
So again, if you're looking at everything equal, there's no way the US Treasury can go to zero or the US dollar can go to zero that doesn't impact these foreign central banks who hold it on their balance sheet. And the kicker is the United States doesn't hold anybody else's bonds on their balance sheet. The Fed does not go out and buy Japanese treasuries or JGBs or Italian bonds or French bonds. They don't hold a bunch of foreign currency on their balance sheet. They have a very, very, very small amount, but the US doesn't have to hold reserves because the US can just issue them.
So when you think about it, the US is the one that supplies all the money to the Monopoly game. And if you want to consider it a Monopoly game, I won't disagree with you. But there's no way that the issuer of the currency in a global system where everybody issues the same type of currency, and when that issuer has more gold than anybody else—so if the system ever changes, they have more gold than anybody else—and in the chaos of that system, they have the biggest military in the world, and in that chaos they have the biggest consumer market in the world, and in that chaos they grow more food than any place else in the world, and in that chaos they have more fresh water than anybody else in the world, and in that chaos they're surrounded by an ocean on three sides, uh, or or sorry, two if you want to consider Alaska the Arctic Ocean—um, but the point is, is when really bad things start to happen, then global—not just economy but, uh, you know, geopolitical things break down and you start getting into military action and all kinds of bad things break out—but the US is literally in the best location geographically. They print the global reserve currency; if they need to do it, they hold more gold than anybody else, and they don't hold any of the other countries' reserves or bonds on their balance sheet. But no matter where else you go in the world, they do hold treasuries, they do hold dollars, they do have debt in a currency that they can't print.
And so when you start to look at it from a really hardcore objective point of view of which of those countries you would want to bet on, and how could those other countries perform better than the United States if there is a US Treasury crisis or a US dollar crisis, it just doesn't add up. If somebody can explain to me how the US dollar crashes or US treasuries crash and the rest of the world's banks and central banks don't go into crisis as a result, I would absolutely love to understand that analysis.
So anyway, is the dollar doomed, or is the US empire and the US dollar going to boom? You know, I think—I don't think we're there yet. I know it's a very popular thing that this time really is it, and we're really in trouble this time. And listen, I'm not saying things are good; we there's there's a lot of challenges, but I just don't know who else I would bet on right now, um, if I if you had to do it.
So anyway, that's my explanation this week. I hope this was helpful. Um, if you want to read more about this type of stuff, this is the type of stuff that we write about on the Macro Alchemist. You can go to macroalchemist.com uh, to get information there. We also write about this stuff on our Substack. You can go there; it's santiago.substack.com, and uh, check it out. Hopefully you like it, and keep tuning in here, and I'll keep trying to give you guys uh, some updates and uh, just for market—the markets. You know, we talked last week how we were we had just broken support on a bunch of things. We got a little bit of a bounce this week; they kind of bounced back up, and we're testing the 200-day moving averages from below. I think we're going to see some more downside in the US risk markets and global risk markets. I don't know if it's going to happen right away; I don't know if we're going to go right down this week or next week, or maybe we kind of bounce a little bit for a couple of weeks and then go further down in April, but I do think it's going to continue to be very volatile. I don't think the worst is necessarily behind us in the short term. So anyway, stay safe, uh, keep your eyes open, and hope you guys have a great week. Bye.