TFTC: A Bitcoin Podcast - #456: The Path To Hyperinflation with EJ Antoni

Episode Date: October 24, 2023

Marty sits down with EJ Antoni to discuss the disastrous policies of the Federal Reserve. EJ on Twitter: https://twitter.com/RealEJAntoni 0:00 - Intro 5:48 - Explaining Fed losses 22:16 - Has the Fed lost control? 26:25 - What is the result of total failure? 32:38 - Can higher-for-longer solve the problem? 37:16 - Recession indicators 42:04 - Protecting yourself financially 50:48 - Weimar style hyperinflation 54:21 - Weaponization of the dollar 57:23 - Bitcoin 1:00:24 - Wrapping Shoutout to our sponsors: ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠Unchained⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠River⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠Bitcoin Talent Co⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ TFTC Merch is Available: ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠Shop Now⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ Join the TFTC Movement: Main ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠YT Channel⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ Clips ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠YT Channel⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠Website⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠Twitter⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠Instagram⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ Follow Marty Bent: ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠Twitter⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠Newsletter⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠Podcast⁠⁠⁠⁠

so freaks it's your boy marty here to introduce this rip of tftc i sat down with economist ej and tony to talk about the state of the federal reserve state of the federal government whether or not hyperinflation is on the horizon it just may be before we jump into this episode i got to read the top four boosts from rip 455 ai power tyranny with whitney webb at garth 20 000 sats boosting before i listen whitney we are all fucked webb winky emoji good episode go listen to it at dirt mud 12 000 sats heart i heart you dirt bud at wise hodl 10 000 and one sats palindrome boost whitney is the best thank you great rip peace sign thank you wise hodl and that dirt mud coming in number four and number two five

thousand sats double boost thank you for the double boost dirt mud is dirt mud redundant is that redundant logan it's muddy is mud dirt that is wet yes okay so maybe not too redundant Unless it's a bunch of clay, maybe. It's still dirt. Yeah. Great episode with EJ. I said it at the end. I'll say it again at the beginning.

Probably the most dense in terms of information learned per minute episode that we've ever had on this podcast. This dude is an encyclopedia when it comes to what the Kansians have done to our economy. highly recommend you watch the whole thing listen to the whole thing a lot of signal here this was brought to you by good friends at river river is here

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In the world of fiat currencies, Bitcoin is the victor. I mean, that's part of the bull case for Bitcoin. If you're not paying attention, you probably should be. And we're live. Welcome back to TFTC. EJ, thank you for joining us today. My pleasure. Thank you for having me. I think this is the first guest we've had with a beautiful warship behind them.

The Bismarck? The Bismarck, yep. In all his glory. Yeah. It's a beautiful ship. At the bottom of the sea right now, though? It is. It is at the bottom of the sea.

Yep. Along with the hood that it sank just days before. Yeah. uh it's uh well i don't want to get too dark here to start out the show but it'll be interesting to see uh if any any ships join the bismarck in the coming weeks here obviously things are very uh tense at the moment globally u.s moving warships uh to the middle east and it's pretty insane time in the world and it's interesting that uh you have the culmination of the macroeconomic landscape the geopolitical landscape and the sort of technological

innovations that are happening all at this particular point in time the fed seems to be losing control of what it's doing despite uh what it would have you believe via its public posturing and uh the government seems to be losing control of its fiscal situation interest expense on the debt is getting astronomical uh it seems like the economy here in the u.s is slowing down if you look at the manufacturing data um but yeah i'd like to start with the fed and one thing that you've been covering and part of the reason i reached out to you is the fed's unrealized and realized losses on its balance sheet would seem to be ballooning the chart is one of those thousand days in the life of a turkey chart where it sort of oscillates and then falls off a cliff

and it's fallen off a cliff and the unrealized losses you were just telling me are over a trillion realized losses at 110 billion currently or most recently. So how does the Fed make or lose money and how is it losing so much money right now? Well, those are great, great questions. So let's pull aside the curtain for a moment of the temple and take a step inside and take a look at what's actually going on here. There's really not a whole lot of mystery. It appears that way at first, but if we just understand the basic mechanics of the Fed, I think it becomes pretty clear. So the Fed has a magical checking account. I don't say that to be facetious. It's not a pejorative. It's literally just magical. It is an account with a perpetual zero balance. And so

when they write a check out of that account, what happens? Well, the money is simply just created. It springs into being at the moment the Fed buys something. But at the same time, when the Fed sells something, in other words, when money goes back into that account, it vanishes, it evaporates, it's gone, it ceases to exist. And so that's how the Fed literally creates and extinguishes money. So when the Fed goes and buys an asset, it does so again with money that previously did not exist. The money springs into being at the time of the Fed's purchase. The Fed now has an asset on its books. And so that is going to earn an income for the Fed, essentially. So imagine where they buy a treasury bond. That treasury bond is paying coupon payments

to the Federal Reserve, which the Fed now has essentially as income. But when it comes time to pay the bond, the principal of the bond at maturity, that money goes right back into that account at the Fed. And so the money is now extinguished. So the money was created at the time the bond was purchased and the money is extinguished at the time the bond is repaid. So now what about those coupon payments? Well, those coupon payments essentially go to pay for the operations at the Fed. So all of its employees and other expenses. And then what happens? Well, anything left over is turned over to the Treasury as part of the Fed's charter. So the Fed does not actually get to keep its profits. So it is technically a private bank, but it is basically

there just, let's be honest, for the service of the Treasury, both to create money for the government to spend and then also to earn a little bit of income. But the primary reason is just to create money for the government to spend. So those profits, those remittances are ordinarily turned over to the treasury. And that just happens constantly. But when the Fed suffers a loss, in other words, when its recurring income from its assets is not enough to cover its operating expenses, that goes on its balance sheet as what's called a deferred asset. You got to love the Fed. They're the only private institution in the world that gets to set their own accounting standards. And so a loss is considered an asset. Why on earth would a loss be an asset? Because it can be used to offset future earnings that must be sent to the treasury. In other words, if I take a loss of $100 billion, well, in the future, when I earn $100 billion, I now don't have to send that to the treasury because the treasury technically owes me $100 billion.

So the $100 billion I owe to the Treasury is offset by the $100 billion that the Treasury owes me. Voila, the books are balanced. Nobody owes anyone anything. What's really crazy is that any asset on the Fed's balance sheet can be lent against. And so the more losses the Fed takes, that technically increases the degree to which the Fed can create leverage. But I digress.

To date, the Federal Reserve has lost over $110 billion. dollars. That's currently the size of the deferred asset. Now, how on earth did we get to this just completely unprecedented situation? Well, the Fed essentially did exactly what so many regional banks did. And we saw that come to a head, I think, for the first time in March with the banking crisis when several banks collapsed, perhaps most noticeably Silicon Valley Bank or SVB. So what the Fed did was it lent out a tremendous amount of money at incredibly low interest rates. That was the asset side of the ledger. What about the liability side of the ledger?

Well, the Federal Reserve has been paying interest through a couple of different mechanisms. One, the reverse repurchase agreement operations, but also through its interest on reserve policy. Note, I did not say interest on excess reserves, which used to be the policy. It's now interest on any reserves because in March of 2020, when all of the other chaos around the world was happening, the Fed actually removed the interest, excuse me, removed the reserve requirement for banks. Banks don't actually have to keep any money on reserve anymore. In other words, a bank could technically lend out 100% of your deposits and of all deposits. That's particularly scary because for those who understand how the reserve requirement equation works for the money multiplier, that means that as that denominator goes to zero, the limit is infinity. That's a very fancy way of saying that a single dollar on deposit can now theoretically create an infinite number of dollars through fractional reserve banking. Again, a bit of a digression, but it just, I think, speaks to how insane the current situation is that the Fed has created.

So what the Fed does today is any money that is placed on reserve receives interest payments by the Fed. But likewise, the Fed also borrows money from the market through reverse repurchase agreements. Now, that immediately raises the question of why on earth is the Fed borrowing money? The Fed is an institution that can create money at will. There's no reason why the Fed would need to borrow money. There's not in terms of the Fed needing cash, but there is in terms of the Fed needing to suck liquidity out of the system.

So the way reverse repurchase agreements and also just regular repurchase agreements work is they are essentially short time or a short duration loans either made to the Fed or made from the Fed to banks and other financial institutions. You can include all kinds of large financial institutions that would have considerable cash balances, so not simply just banks. Essentially, what happens is you loan money to the Fed, and the Fed posts a treasury bond or some other kind of treasury bill or a note as collateral. And this is essentially just going to reverse in typically 24 hours.

In other words, the money in the treasury will go back to their original holders. The purpose of this, though, is that it allows the Fed to either inject liquidity or soak up liquidity very, very quickly, because these things are literally done overnight, as opposed to open market operations, which can take time on a very large scale to completely clear the system. But what they're able to do with either repurchase agreements or reverse repurchase agreements is literally dump trillions of dollars or soak up trillions of dollars of liquidity, again, literally overnight here. So these things can offer a tremendous amount of flexibility on a short-term basis, but they're just supposed to be short-term. These facilities were never designed to operate continuously day after day. Again, this was supposed to be something that happens until open market operations can catch up and can either increase or decrease the size of the Fed's balance sheet in order to match the interest rate level being set by the Fed and also match current market conditions of the supply and demand for loanable funds. Okay. So with all of that out of the way, what the Fed started doing in early 2021 is it observed that it was having essentially an inflation problem, that things were getting out of hand. And this speaks, by the way, to the fact that the Fed knew very, very early on that the inflation is transitory line was complete nonsense. That was a lie from the beginning. So what the Fed did is it observed there was literally trillions of dollars in excess

liquidity in the marketplace, and it needed to remove that. Otherwise, interest rates would have started to turn negative, and inflation would have grown even faster. The logical solution would have been to simply start selling US treasuries to bring down the balance sheet and reduce the supply of loanable funds. But the negative consequence of that from the Fed's perspective would have been to cause the interest rate on treasuries to explode, exactly what's happening today. And so how on earth do we square that circle? Well, the Fed said we can use reverse repurchase agreements and our interest on reserve policy to essentially create money for the Treasury to spend, but then bring that money right back into our coffers and what we call sterilize that money so it can't get into the banking system and multiply.

What that does is it minimizes the inflationary impact of creating money for the treasury to spend. Excuse me. It minimizes the inflationary impact while creating money for the treasury to spend. So that was the bargain, the deal with the devil, if you will, that the Fed created beginning in 2021. That was fine as long as interest rates were low and the amount of money that needed to be handled by these two facilities was relatively small. But as time went on, as the Fed continued to print money throughout 2021 and into 2022, and as all of a sudden inflation started to get out of hand and they needed to ramp up interest rates, what happened? The amount of money to be sterilized and the interest rate needed to sterilize it

both went through the roof. And that caused the Fed to literally spend hundreds of millions of daily in order to keep this money sterilized. Going back to what we said earlier, we have the asset portion. What about the liability portion? The asset portion were bonds, whether that's a treasury bond or an MBS at incredibly low interest rates. The liability portion are these reverse repurchase agreements and the interest on reserve policy at interest rates that continually ratcheted up higher even as the balances handled by those two facilities also grew dramatically. And so the liabilities end of the equation exploded. Banks found themselves in a very, very similar situation where they had all of these loans that they had made, that's the asset side of the

equation, at very, very low interest rates, especially mortgages, things that are going to be set for 30 years and no one's going to touch, at interest rates between 2% and 3%. percent. Meanwhile, the interest rate they have to pay on deposits to keep enough deposits in their coffers so that they don't bump up against their reserve constraint, that interest rate gradually ramped up as the Fed began a tighter monetary policy. And so regional banks had the exact same problem where their liability side of the equation continued to grow even as their asset side of the equation stayed completely stagnant. Now, how on earth do you get out of this trade as the Fed? Well, as the Fed, you don't care because any losses you suffer, again,

are just a deferred asset. Even realized losses, which again are $110 billion, are not in a meaningful sense realized by the Fed, but they are for the banks. And so you had banks literally collapse and you have many regional banks on incredibly shaky territory that are propped up right now by about $109 billion of emergency lending from the Federal Reserve. But those loans start coming due in March. And so it's completely unclear at this point how on earth the banks are going to get out of being on the wrong side of this interest rate trade. On the one hand, they need to attract more deposits, which means that they need to offer higher and higher interest rates to depositors because they're competing with the Fed and they're

also competing with the Treasury, who is borrowing at just breakneck speeds. We're going to borrow $500 billion just in the month of October alone, the current month. I mean, that's just mind boggling. Forget $2 trillion deficits. We're headed to a much larger deficit than that for fiscal year 2024. But it means that banks are having to continuously increase the interest rate that they're offering on deposits in order to attract more deposits. So now that's increasing their liability. They need to increase the asset side. How on earth are they going to do that? They can't sell the assets they have to free up capital to create additional loans because doing so would mean selling those at a tremendous loss. Again, they've sold about 109 billion to the Fed's

emergency lending facility, which has allowed them to post those as collateral at par. But that's only, again, a one-year loan. It's completely unclear how these banks are going to get out from underneath the wrong side of this interest rate trade. So every time the banks can now, they need to make loans at very, very high interest rates, which is what's driving mortgage rates up to 8% or higher. They need to offset the low interest rate assets on their balance sheet. And the only way they can do that is by making loans at very, very high interest rates. So the Fed has just, I know this is a bit of a roundabout way of answering your question, but the Fed has just completely disrupted the interest rate market and has created these just

insane mark to market losses and realized losses, both on its own balance sheet and throughout the banking system as a whole. And it's completely unclear how on earth we're going to resolve any of this without tremendous losses. Yeah. I mean, when you lay it out like that, it's very clear. The way you explain this problem is very clear. And then, too, it just makes me think that the Fed, particularly over the last 15 years, going all the way back to post-2008, has just created this Frankenstein where it's had to move from facility to facility, whether it's QE, Operation Twist, QE3, QE4Ever, BTFP. They had to step in to the repo markets in September of 2019,

completely destroy the reserve requirement. And it's all in the last two years to fix the problem that ZERP created in the 12 years, 13 years preceding that. And now they're trying to fix this inflation problem that arguably 13 years is there plus massive stimulus during the lockdowns sort of unleashed on the world and as you just described things are getting to a very precarious situation in terms of unrealized losses and realized losses throughout the banking system which is taking some banks down and the stated goal of this policy over the last two years specifically

is to bring down inflation and they haven't been able to do that effectively if you look at real inflation, but even within CPI, they haven't really gotten back down to their historical 2% target or even 3%, which may be the new target. And so that begs the question, has Frankenstein sort of been unleashed on the world? Can you actually put him back into the gurney and control him? Which I think that's the question a lot of people are asking. And I think going back to BTFP being a one-year facility, I think that will really be telling as if they extend that inflation still high. Is that a recognition in your mind that they've completely lost control? Oh, they certainly have.

And what I find astonishing is every time Powell and company get up to a microphone and they start talking about inflation expectations, Whose measurement of inflation expectations are they possibly citing? Every time I see, even if it's from one of the regional federal reserve banks, every time I see a survey about inflation expectations, in none of those instances, literally none, are long-term inflation expectations re-anchored to 2%, literally none. They have completely lost the fight for inflation expectations, which, according to their Keynesian mindset, is absolutely key. And so, no, the Frankenstein's monster is loose. There's no way to put this thing back on the gurney. The only thing you can do is to put it down. But that's going to be a very painful process. You can't unwind a Ponzi scheme, which is what they're trying to do.

There is no way to do this that's not going to be incredibly painful. They are constantly looking for ways to square the circle, but the laws of supply and demand will not be conned. You simply cannot get something for nothing. There is no free lunch, no matter how hard they try, no matter how hard they manipulate things. It is very reminiscent eerily of where we were 100 years ago in the 1920s, maybe not exactly 100 years ago, but at least in the late 1920s, when the Federal Reserve and the Bank of England coordinated to try to manipulate interest rates, manipulate exchange rates, and also manipulate the gold market. And that ended disastrously with a speculation binge in 1929 that came crashing down and helped

cause a true global financial crisis that today we know as the Great Depression. Frankly, I don't think the Federal Reserve, those at the helm have any idea the kinds of forces that they are messing with. They believe they are masters of not only their own destiny, but of nation's destinies, and nothing could be further from the truth no and i mean harking back to the great depression that's one thing that worries me as we sit here in 2023 i mean the global economy is much more interconnected intertwined the amount of debt that we're talking about risk that's been taking is order order is a magnitude larger than it was back then and so when you try to quantify the severity of the situation and the potential blowback that could come from the Fed not

executing on being able to taper a Ponzi, which as you mentioned is impossible. Where does everything fall when they ultimately fail? What is the signal that sends to the market that, oh, they have no control? And I think we're seeing some of them, whether it's the $110 billion in realized losses or going to the fiscal side, something you've been covering as well, looking at the growth rate of the federal debt or the interest expense on that debt it is ballooning at rates that are alarming the layman can look at the chart and say oh that doesn't look good certainly i mean if you look at gross interest we just got the the end of your statement from the treasury which was days late um just just a real quick side note so when when the uh the

monthly treasury statement did not come out as as scheduled on on the the day originally uh anticipated i reached out to the treasury and said hey is there any reason for the delay and you know when are we uh when are we anticipating this thing they got back to me at 7 30 p.m eastern time on a sunday evening what government worker is on the job is answering emails at that time of day but but I digress. And they said, look, it's going to be, you know, the Friday just passed the October 20th. Well, what we got in that report is gross interest of over $800 billion for the last fiscal year. To put that in perspective, that's more than all of the military spending in the defense budget from that same time. In fact, it is larger than all but two line items in the entire fiscal

service annual report. And that would be the, if I can remember them, the Social Security Administration and the Department of Health and Human Services. So I think it really speaks to just how out of hand the interest on the debt has already become, and that it's going to get much worse. In fact, CBO's projections, forget about it, they're completely wrong. They already missed last year. And now all subsequent years after that are obviously going to be under gross underestimations as well. You know, we are going to hit over $2 trillion in interest on the debt by 2030. And that's assuming that things just continue as they are, that they don't actually get any worse, which is pretty unlikely because these things tend to grow in a non-linear fashion.

You know, just as one example of that, the treasury doesn't pay off any debt, right? Anytime debt comes due, what do we do? We simply just roll it over. It's like when a family racks up a bunch of credit card debt. And instead of actually paying off that debt, what do you do? You just take out a new card and you roll over the balance from the old card to the new. Well, now you are paying interest charges on not just the balance, but also on the unpaid interest charges from before. And that continues to spiral out of control. And so that would be the case even if we weren't adding any additional debt. But because we have such a massive deficit, we're also growing the debt. So you have that at play. But on top of that, there's no reason to believe that interest

rates are coming down. I mean, why would they? The Treasury is crowding out so much private sector activity. We are creating such an increase in the demand for loanable funds that the price is going to go up. It has to. If it doesn't, we're going to have massive inflation. And so what is the price of loanable funds? Well, it's the interest rate. So interest rates are going to have to stay higher for longer, to coin a phrase, which means, again, the problem is going to be much worse than CBO anticipated. So all of this is combining for just a complete terrible fiscal mess, where we are eventually going to get to a point that the interest on the debt crowds out many what are often considered essential government services, things like Social Security, things like Medicare,

Medicaid, things like defense. I mean, we're not talking about discretionary spending here. We're talking about things that are, again, considered essential, but we're literally just not going to have the money for them because all of government spending is eventually going to have to be allocated just to paying interest, over $800 billion in a single year. I mean, it's mind boggling. And just one other point, if I may, on why the situation is going to continue to get worse. So much of the debt that has already been issued was issued at low interest rates. But again, because we don't actually pay off any of the debt and we simply roll it over, that debt is going to have to be refinanced at higher rates. Again, going back to the example

of a family with a credit card, imagine you got that credit card with a wonderful introductory APR of 0%. And now that period is over and you're rolling it over to a new card that has an interest rate at today's rates are 20%, 25%, 30%. You are now going to go from no or little interest charges to massive interest charges. And so as you roll over in the next year, almost $8 trillion worth of debt, almost all of which was at low interest rates of somewhere around 2% or less, you are rolling that over at 5% or more. Some of this debt is literally going up by 450 basis points, the interest rate is that, you know, on that debt. And so, even though you, again, haven't actually increased the amount of debt, the cost of servicing that debt is going to go through the

roof yeah and that's to exacerbate that problem too if we are going into a recession or god forbid something worse like a new depression tax receipts are going to plummet as well and so that renders your ability to pay back that interest uh even more moot and i guess that's the big question higher for longer is the big meme in the market right now and the question is can higher for longer actually solve the inflation problem that the Fed's attempting to fix? Or does a elevated cost of capital really bork the supply side of things, which makes it so you don't get as many goods to market? So inflation actually gets exacerbated by this high interest rate environment. It's a great, great question. And the thing that we have to remember here

is that there's a big distinction between inflation versus prices rising. And you can even have instances where prices across the economy are rising, but that's not inflationary, at least in the academic sense. Now, to a certain extent, the distinction that I'm about to make here, the average American is going to shrug his shoulders and say, I don't care, my cost of living is going up either way. But the reason is that it's important is that it has policy implications. And so just because costs are rising across the economy, we see this with energy, by the way, when the price of oil goes up and the cost of everything is affected by energy. And so prices everywhere rise. But that's not inflationary. When when oil prices go up, you don't want the Fed to start constricting the supply of dollars to in order to bring down prices.

Now you're going to have a double whammy on the economy. You're going to see supply be drawn down because oil prices and costs have gone up, and then you're also going to see supply drawn down because of the Fed's tighter monetary policy. That would be absolutely disastrous, and we've literally seen that happen more than once in the United States' history. In fact, actually going back to the Greenspan era in the late 1990s, you essentially knew as an investor what markets were going to do on a given day simply by watching oil. Because as the price of oil went up, everyone knew that that was a sign that Greenspan, you know, because he closely watched the price of oil erroneously. But everyone knew that as oil went up, Greenspan was more likely to hike rates and to reel in the supply of dollars. And when oil went down, the opposite happened and the market would rally. So it wasn't simply a matter of investors saying, oh, lower energy prices are good for profits. It was also the Fed's monetary moves that were being so closely watched at that time. And so what we want to keep in mind is that the Fed needs to or the Fed should be targeting a stable price level. And instead, what they are doing is, again, trying to square that circle of creating money for the government to spend, but siphoning money out of the private economy.

And so when the Fed created trillions of dollars for the government to spend and it caused inflation, the logical thing to do would be to simply take that money back from the private sector in order to reel in the same inflation that it caused. Instead, what it is doing is it's coming to the American people for its pound of flesh, and it is trying to take it from us. It is trying to reel in capital going to the private economy, which, as you said, is creating that double whammy where the private market is dealing not only with these higher prices, but not only from inflation, but now also higher prices from a higher cost of capital. What the Fed should be doing is essentially selling off its assets, especially government securities, at a breakneck pace in order to bring that reverse repurchase facility down to essentially zero, which means selling off trillions of dollars in government debt. And what is that going to do to the yields on treasuries? It's going to make them stratospheric. It's going to send them through the roof. But that's what's necessary in order to force the Treasury's hand and force Congress and the White House to get the nation's financial house in order.

But the Fed's not doing that. Instead, again, it is limiting the private market's access to capital and transferring that to the public sector. And it's having disastrous consequences. It's what's giving us, in large part, the anemic economic growth that we're seeing today and we have seen over the last couple of years. Yeah. And what are some of the indicators out there in the real economy that are making you believe that we're in the middle of a slowdown or potentially, I mean, there's many people out there think we've been in a recession. What indicators are you looking at that signal that all is not well in the U.S. economy? Oh, goodness. How much time do we have?

That's a very long list. I think it's a shorter list, frankly, to say what indicators are positive. You know, in terms of indicators that are negative, look, at the end of the day, investment is and always has been the big driver of economic growth. And the investment numbers have been terrible essentially since the end of 2020. And investment today in real terms, especially when you look at fixed private investment, it's roughly where it was almost three years ago. And so you can't continue to have economic growth while your investment base stagnates. And again, this is gross investment, not net. So you throw in depreciation in there, and we've had plenty of quarters where not only is gross flat, but net is negative.

It's below zero. So you have that working against us. Manufacturing tends to be a leading indicator for the service sector, which is the bulk of the economy. and we've seen manufacturing perform very, very poorly, especially recently. All of the regional federal reserve banks who do manufacturing surveys all indicate that manufacturing is in contraction and has been for a while. The New York Fed, their survey is highly volatile. And so that has been bouncing above and below the expansion threshold, the growth threshold. But if you look at it over

time and you average it out, especially if you do a three month moving average, it's very clear that that is in contraction territory as well. So that's pointing to recession. The growth in consumer spending has been fueled almost exclusively, especially in recent months, by a decline in savings and the consumer going into debt. We have over a trillion dollars in credit card debt, even as the interest rate on that debt is at a record high. And so that can't last forever. The consumer can only deplete his or her savings until those savings are gone. And debt is only going to last them so long until the interest on that debt starts eating in to their consumption as well. So personal consumption, which makes up about 70%

of GDP is also going to be taking a hit. I mean, really the only thing that seems to be growing is government, but that's not sustainable because it takes the private sector to support the public sector. And so again, I just don't know where all of the positive indicators that the White House and other sycophants for the administration are talking about. I don't know where these positive indicators are. Everything I see tells us that we're moving in the wrong direction. The yield curve, by the way, which is essentially a perfect indicator of recession. A lot of people say, oh, the yield curve is negative. That means a recession coming in. And that's certainly true. but a lot of people miss the timing around the yield curve in that the yield curve almost always

bottoms out and begins to normalize. In other words, approaching that one-to-one ratio between long-term and short-term interest rates, that normalization has begun and has been going on for several months. March really threw us off because that completely changed the yield curve and essentially reset the yield curve. So that's making the timing thing a little difficult here. But what I'm trying to get at is the yield curve has already begun normalizing. It's approaching parity. It's approaching that one-to-one ratio,

which is what typically happens right before the contraction actually hits, at least according to the National Bureau of Economic Research, which, I mean, they never even declared the recession last year as a recession. So who knows what the heck's going on in that regard. But again, we are probably only months away here from an economic downturn. Now, we'll continue to watch the data as it evolves day by day and month by month. But that's what the latest numbers are telling us, that probably very early in 2024, we're going to be in the throes of an economic downturn. And the longer that we kick the can down the road, the more the Fed tries to pull a rabbit out of the hat and create one of these, you know, emergency lending facilities, or the Treasury decides to spend more money, the more we're kicking the can down the road, but the worse the eventual recession is going to be. yeah it's uh it seems like they've completely lost control um when you look at all the metrics and you again another signal of a government or entity like the federal reserve losing control is when

they tell you not to believe your lying eyes whether it comes in the form of no inflation is not that high we've got it under control or the economy is doing great all the metrics are pumping. And then you're looking out there, you're filling up your gas tank, you're going to the grocery store, and you're getting calls from friends who are looking for jobs. You're like, I'm not sure if what they're saying is actually true. So it does seem like on the social side of things, like the projection that the government particularly is putting out there is trying to make people think that everything's all well when it's not. Which begs the question, it seems like for the longest time americans particularly i would put forth have been in somewhat of a state

of complacency like the fed and the government they've got it figured out they'll they'll fix they'll fix the thing but it's becoming clear that they're not going to be able to fix it and so with that in mind what are some assets or some ways in which people can sort of diversify away from government debt, particularly, and find themselves at the will of the Federal Reserve's policy or the Treasury's policy? It's a very, very good question. It's funny, though, I immediately thought when you were asking that, that we've had this, you know, complacency about the Treasury, about the Federal Reserve, I immediately thought of when I was pitching the idea for my dissertation, my doctoral dissertation, one of the chapters was on the global supply of loanable funds and how

that affects interest rates here in the United States, as well as inflation. And honest to goodness, the chairman of my committee, who was, this is by no means a disparaging remark towards him, but he had said to me, look, EJ, I don't know if you really want to devote a whole chapter to inflation because, I mean, it has literally been decades since major central banks around the world, we're able to really get a hold of inflation. And it hasn't been a problem since then. And it may never be a problem again. And I just don't want you to write a chapter in your dissertation that no one will ever read and will never do you any good. And thank goodness I was insistent that no, no, no, we by no means, you know, have this monster behind us. Everything

that's old is eventually new again. So there's that. But in terms of how does the investor protect himself today. The advice that I give, and I've asked counsel about this, and so I can disclose this. I don't own a single bond. I don't care if it's a treasury bond or commercial paper. I literally have not a single bond in my entire portfolio. That's not a recommendation that others do the same. That's just simply what I have today. Last year, I had over a 30% return on my entire portfolio. Not everything did that well, but that was on average. The best advice I can give right now is that you need to let history be your guide. That means going back and looking at periods of history where you had excessive government spending,

you had crowding out of the private sector, you had persistent or what we might call sticky inflation, despite higher interest rates, where you had, you know, again, borrowing by the Treasury, but also interest on the Treasury exploding, where you had anemic economic growth. One period that checks most, if not all of those boxes would be the late 70s and early 80s. And so you can go back in that during that time, and you can see, oh, wow, you know, US Treasuries performed abysmally, they were one of the worst sectors during that time. And so maybe that's something I want to shy away from. Again, that's not financial advice, but obviously everyone needs to make their own decisions, need to check with their own financial professionals, et cetera. But you, I think,

can let history be your guide in terms of figuring out what did well under those economic conditions and then how are those economic conditions similar to today and how can that best inform my optimal portfolio strategy going forward. I think that's really how you have to protect yourself as an investor, as an individual. I was recently looking, I'm trying to remember, I think it ran in the New York Post, but I was looking at how market performance, whether it's bonds, stocks, the last couple of years under President Biden, how those have performed, inflation, how all of these things have come together to impact people who are looking to retire. And these would-be retirees essentially have taken such tremendous losses on their

portfolios that they are going to have to work between seven and 10 more years. They're going to have to push off retirement for that long in order to be able to live comfortably at the standard of living with which they were anticipating. You know, that's come about from a variety of reasons, not the least of which is inflation, right? So imagine you wanted to retire with, let's say, a million dollars. You now need an extra $170,000 in your savings and investment to have the same actual value as you were originally anticipating. So how long is it going to take the typical retiree to get that kind of money. On top of that, the areas of your portfolio that are not doing very well, like fixed income, for example, which is growing slower than

inflation, so you're losing value there. What are you going to do? You can't turn around and sell those things. You're going to sell them at a loss. You're essentially stuck with them now. People who bought government bonds during 2020, many of those bonds have lost 50% if you try to sell them today. I mean, you're just stuck, unfortunately. So obviously the young have a lot more time and can be much more risk tolerant, you could say, in terms of their investment, which is one of the things that unfortunately inflation forces you to do. It forces you to take on more risk in order to try to beat the losses from inflation that you would not have during a time of stable prices. So unfortunately, it's not that you have no good options,

but you probably, or you definitely, I should say, have fewer good options during these times of slow growth and economic, excuse me, during periods of high inflation and economic stagnation. That being said, bears make money, bulls make money, pigs get slaughtered. There are always opportunities uh to to make money in any kind of of financial environment yeah and when you're mentioning the retirement situation i think that is one of the biggest signals of complacency over the last 40 years particularly retirees who put their money in target date funds and just had the rotation from their 60 40 stock bond portfolio into 80 20 bond stocks because that's the safest bet and you have all these retirees who thought they were going to go enjoy the end of their

lives and now their bonds are significantly underwater and that's where a large portion of their portfolio is which is really disheartening and really scary um particularly for somebody who has loved ones who are trying to retire and they're getting there after decades of work and being like holy crap it's right but but it you know it it helps explain why literally only a few weeks after I wrote that piece delving into these numbers on would-be retirees, only a few weeks later, the Beige Book, we found some members of the Fed saying that they are observing people in that older age brackets who are essentially on the cusp of retirement, choosing not to retire, but staying in the workforce longer. They are trying to recoup their losses.

yeah and it's even more nefarious because the government will use that to their advantage to pump unemployment numbers in their favor which is oh absolutely i mean why why are when you look at the um some of those uh labor force participation numbers that the biden administration keeps touting why are some of those numbers elevated for for older americans it's because they have suffered so many losses that they can't retire as they thought they could. Yeah, it's pretty, again, disheartening. To wrap it up here, one last question, a bit controversial. Nobody likes this word, but do you believe the potential for a Weimar Republic-like hyperinflationary event is before us? Oh, certainly. I mean, the potential is absolutely there, especially when you combine

it with the fact that no one wants our treasuries anymore. Russia already sold them all off. And, you know, China is doing the same thing. They are getting rid of treasuries at a breakneck pace right now, which, by the way, I am very worried about from the standpoint of when you have another country that you owe a lot of money to, you know, they essentially are just as much as you owe them. You know, they are also in a certain sense in hock to you. If China is is counting on literally billions upon billions of dollars of coupon payments from the U.S. Treasury. And then China does something the U.S. doesn't like. The Treasury can turn around and say, oh, no, no, no, we're selectively defaulting on the debt that we owe you. So now no more coupon

payments for you. And also, we're just not even going to pay back the principal. We're considering that debt null and void. And so that risk of selective default, if China were to, say, invade Taiwan, that risk goes away if China has gotten rid of its entire holdings of United States dollars, just like what happened with Russia. Russia got rid of all of their holdings of U.S. treasuries. Now, they started doing that a while before anything happened in the Ukraine. So I'm not saying that necessarily it is always the case that a country is getting rid of their U.S. treasuries so that they can invade a neighbor. But the point is that it is eliminating a risk that China currently has by getting rid of their U.S. treasuries. But they're also looking at it

from the standpoint of these treasuries aren't worth anything anymore. They're losing money on them because the value of the dollar is decreasing faster than the coupon payments are coming in because the inflation rate is higher than the yield on those treasuries. Japan is doing the same thing in order to free up cash to buy Japanese government treasuries. They are getting rid of United States treasuries. They're making that swap. Countries around the world are dumping our debt at the same time that the Federal Reserve is selling off debt and the treasury is issuing, again, it's going to be like $500 billion just in the month of October alone. I mean, these are eye-watering numbers and everything is moving in the wrong direction from the treasury's

perspective. Yields have nowhere to go but up. I mean, it's a very, very dangerous situation. And countries are also dumping the dollar in terms of international trade and also the currency that they choose to hold in reserve. You're seeing BRICS nations, for example, move against the dollar. There's an increasing push to back foreign currencies with gold and to not use the dollar at all because people are just sick of the stability issues that surround the United States dollar. Again, losing over 17 percent in less than three years. That's appalling. So what happens when literally 70 years of deficits all come pouring home because no one wants to use United States dollars anymore? That is a hyperinflation scenario. And that's not hyperbole. On top of that, another added complexity here. And I know you said that the word hyperinflation is a bit controversial. Well, this take is probably even more controversial. So sorry in advance. But one of the biggest mistakes monetarily of the current administration was confiscating dollars owned by the Russian people in the Russian Central Bank after Russia invaded the Ukraine.

That's not justifying what Putin did. That's not defending it, et cetera. All I'm saying is that it made it clear to the rest of the world that the United States dollar is no longer apolitical. And the United States dollar can and will be wielded as a weapon whenever a foreign actor does something that this White House doesn't like. For example, the Biden administration is already talking about doing the exact same thing to nations around the world, maybe not on as large a scale, but at least giving haircuts around the world for countries like, In Africa, countries that have anti-sodomy laws, in countries in Europe, especially Eastern Europe, that have very strict anti-abortion laws, countries around the world that do not comply with the Biden administration's ESG agenda.

And so at the end of the day, when you see the dollar as a risk, not only from the standpoint of it loses a tremendous amount of value over time and at unpredictable rates, but also the fact that my United States dollar holdings can at any time be confiscated if I run afoul of a rogue White House, why on earth would you hold dollars? Again, you are looking at decades upon decades of deficits coming home to the United States to compete with dollars that are already here. Absolutely, that is a hyperinflation scenario, and it is absolutely possible in the years ahead. Yeah. And one headline that went relatively unnoticed by the mainstream that really signals that even the White House and the Treasury specifically understands this is the fact that they're going to open up the buyback window for Treasuries next year, which they haven't done since 2001. Absolutely. And at the same time, you are also seeing Janet Yellen, who previously said, oh, there's no chance of de-dollarization. That's just silly. All of a sudden, what is she saying

now? Oh, don't worry. De-dollarization is a natural process and we should expect it. Excuse me? You went from it's not happening, it's impossible to, oh, it's perfectly natural. How did the impossible become natural and why should we not be concerned? And why on earth are you at the helm when you have no idea what's going on she she likes the trips to china to eat the mushrooms you know it's uh it's a good uh did she bring some of them home and has she incorporated that as as to now being a staple of her diet i mean it's just it's insane the the inmates are running the monetary asylum yeah it feels like it's uh you never want to call the top or the the end but it does feel like this is the end the end game if you will that's why i'm not sure if

you're aware but this is a bitcoin podcast or we typically focus on bitcoin that's part of the reason why we do that is a recognition that the dollar has been weaponized and politicized and obviously hyper inflated printed ad nauseum and to me personally i think bitcoin is a good solution to that problem, a political distributed monetary network with hard cap supply. Yeah. You know, a lot of people, when they ask me about Bitcoin and, you know, crypto is for a lot of people, it's just very, very difficult to understand. And one of the ways I like to explain Bitcoin in a broader context, of course, but this one point that I really try to make is that Bitcoin is a symptom. I'm not saying it's not a solution. That's not what I'm saying, but I'm

saying Bitcoin is a symptom in the same way that I think Donald Trump was a symptom of a failure of the political ruling class on both sides of the aisle, right? That's how you get a Donald Trump. There is no other way you get an Atlantic City casino owner to become president unless people have completely given up on both Republican and Democrat establishments. And so Bitcoin is a symptom in that it represents people's understanding that the monetary powers around the world have completely failed, utterly failed, and that the gold standard, at least for now, is dead. And as a result of that, people are trying to throw off the shackles of fiat currency. When I taught my money and banking course, I would ask the students, what does fiat mean?

And almost universally, they would say, oh, it means backed by the full faith and credit of the United States government? And I'd say, no, no, nothing could be further from the truth. That is not what the word means at all. It means by decree. It means legal tender laws. It means this piece of paper or these ones and zeros are absolutely worthless, but you will use them or you will go to jail. And so that is the only reason that we use these things, these Federal Reserve notes that we call dollars, which is a misnomer. Dollar is a weight. It's a unit of measurement that tells you how much gold this piece of paper can be traded for, which today obviously isn't the case. So again, the failure of our monetary authorities to keep our money stable,

to actually have a true commodity currency, a gold-backed currency like we originally had, that complete and utter failure is how you get Bitcoin. Chancellor, on the brink of second bailout for the banks. embedded in the genesis block i agree it definitely was a symptom reaction to the inability of these people to actually maintain and that's yeah it's when you have an incentive structure where levers can be pulled there's nothing to stop you from pulling them they will be pulled um because it's politically palatable ej this has been fascinating this is i think the most dense economics episode we've ever done i think we learned more in this last hour uh

per minute than we have in any episode up to this point 454 episodes in so i want to thank you for that it was a master class and how the fed the treasury uh and monetary economics in today's day world actually works so thank you for that well my my pleasure i hope it wasn't too dense no it's i like i like the density and i think the way in which you explain it is very um, easy to grok at the end of the day. Where, um, can anybody who's listening to this find out more about you, your writings, what you're working on? Well, the best place to find me is going to be on Twitter or X or whatever we're calling it these days. Uh, but the handle there is at real EJ and Tony. And I post, uh, in addition to, you know, all the, the writings

that I do, op-eds, uh, papers, et cetera. I'll also post things like congressional testimony and all of the daily data releases that I review and summarize so that you don't actually have to read these things as penance for your sins like I do. You can just get the you can just get the top line summary, which I promise will be more informative than the news headlines, which so often get these things wrong. Well, I co-sign that message. If you're looking for a high signal, follow on Twitter. We're just going to keep calling it Twitter. Go follow EJ, follow his writings his tweets ej thank you so much no thank you for having me all right that's what we got today freaks peace and love