TFTC: A Bitcoin Podcast - #606: The Ratio That Signals Every Crash with Michael Howell

Episode Date: April 14, 2025

Marty sits down with Michael Howell to discuss the incoming liquidity crisis. Crossborder Capital on Twitter: https://x.com/crossbordercap Capital Wars Substack: https://capitalwars.substack.com/ 0:00 - Intro 0:36 - Is liquidity crunch incoming 6:13 - Explaining the crisis 16:12 - Fold & Coinkite 17:49 - The Fed’s ineffective measures 20:39 - Powell/Trump standoff and China selling 28:13 - Unchained Evernt 29:37 - Digging out with better assets 34:44 - Bessent's reset & BitBonds 39:56 - Weimar & gold 45:21 - Cutting red tape 49:53 - Clear skies beyond the storm Shoutout to our sponsors: Fold https://tftc.io/fold Coinkite https://coinkite.com Unchained https://unchained.com/tftc/ Join the TFTC Movement: Main YT Channel https://www.youtube.com/c/TFTC21/videos Clips YT Channel https://www.youtube.com/channel/UCUQcW3jxfQfEUS8kqR5pJtQ Website https://tftc.io/ Twitter https://twitter.com/tftc21 Instagram https://www.instagram.com/tftc.io/ Nostr https://primal.net/tftc Follow Marty Bent: Twitter https://twitter.com/martybent Nostr https://primal.net/martybent Newsletter https://tftc.io/martys-bent/ Podcast https://www.tftc.io/tag/podcasts/

You've had a dynamic where money's become freer than free. When you talk about a Fed just gone nuts, all the central banks going nuts. So it's all acting like safe haven. I believe that in a world where central bankers are tripping over themselves to devalue their currency, Bitcoin wins. 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. Michael Howell, welcome to the show.

Hi, Monty. Good to be here. Lots going on, I think. Lots going on. And like I was mentioning before we hit record, I think the timing is perfect. I've reached out to you after watching your interview with Jack Farley on the Monetary Matters podcast exactly a month ago. And at the time, you two were discussing liquidity challenges in the market that you were foreseeing that began in Q4 of last year. And obviously, a lot has happened since then, most particularly in the last eight days with the Liberation Day Rose Garden speech with tariffs. We've seen disruptions in the bond market with bond yields screaming Tuesday night. Many people wondering if that was people engaged in a basis trade getting offside. And I think that's the big question right now is, are we on the precipice of a big liquidity crunch that is going to force the hands of these governments and central banks?

I think the short answer is in the in the very short term, no. But I think in the longer term, there are clearly big issues that we've got to face. And the essence of the whole issue is that if you look at the evolution of the global financial system since the GFC back in 2008, 2009, effectively, the market is very dependent now on collateral. And something like 77% of all lending globally is now collateral-based. And what that means is that, obviously, there's the clear example of mortgage lending against your real estate. But actually, more pertinently, most of the transactions in financial markets

now involve some security on the other side. In other words, people are probably depositing or posting treasury bonds, and they're borrowing against that. They're repoing those or using the repo market to do that. And this is a big deal. And if you get disruptions in the repo market, you're going to get disruptions in the whole of global liquidity, the world of global liquidity, and hence in financial markets, because this means the funding disappears, and you can't have that situation arise. Now, the reason that this is, again, a big, big deal is that what we've got to understand here is that financial markets have changed their whole complexion, really, in the last

couple of decades. I mean, no longer is the market, is the capital market, Wall Street or whatever, really used to finance new capital spending. Those days have long gone. That's the textbook model where a business came to the market, interest rates were the cost of capital, and effectively capital raising in the market fueled the business cycle. That world is gone. We're not in that world. We're in a world that's dominated by debt, and in particular, debt refinancing.

Something like three-quarters of all transactions that go through financial markets today involve a debt refinancing transaction in some form. So if you're refinancing debt, in other words, rolling over debt, what you need is balance sheet capacity to do that. And balance sheet capacity is what we think of as liquidity or given the fact that liquidity has an international dimension, global liquidity. So that's why it really matters. If there's no global liquidity, you get a refinancing crisis. And I would venture that every financial crisis we've experienced in the last 30 years has ultimately been a refinancing crisis. It's been the inability to roll over debt in some form. There's been a lack of liquidity.

So central banks have come back after the event, poured in liquidity, rewrited the trucks, and away we go again. But inevitably, these crises keep reappearing. And it's all because of this whole burden of debt in the world economy is just getting bigger and bigger and bigger. And we need liquidity to balance that. And the liquidity is not always forthcoming. Yeah, this reminds me of many conversations I've had with my good friend Parker Lewis on the show. He wrote a paper in 2017 called Ender's Game that basically went back and dissected the Fed minutes that were made public years after meetings that were happening from 2005 all the way through 2012. he basically pinpointed that this is this is the problem with the fed specifically is that they have these prognostications and these models and these predictions that they make and they

inevitably never come true and we just live in a system where there's too much debt not enough dollars you can go to zerp do qe try to unwind that but ultimately once you unwind it enough that that liquidity crunch comes in and i think that's the big question on everybody's mind particularly here in the united states is how how close are we to that potential liquidity crisis with qt sort of um having been been uh engaged by the fed for the last two years uh you can look at the the over indexing on the front end of the yield curve is not qe qe but it seems like repos are getting drained and that's a big topic of conversation right now everybody's saying Trump and Besant are maniacally focused on bringing down the 10 year yield so that they

can roll over this trillion dollars in debt that we have at the treasury at more reasonable rates to bring down the interest expense. And then on top of that, there's discussions that aren't as loud happening about the corporate debt situation and a lot of refinancing that needs to happen there. So you said you don't think we're on the precipice we're getting. What you can hopefully see here is a slide that is looking at. It's entitled Advanced Economies Debt as a percentage of the domestic liquidity stock worldwide. And what this basically says is that the thing to look at is not debt to GDP, which is what all economists are telling us that we need to be monitoring, but actually the debt to liquidity ratio, which is what you see here for the world.

Now, that statistic, that ratio, over time kind of flatlines, but it cycles. And there's a dotted line that you can see drawn to the middle of that chart at about circa 200%. And what that's saying is the volume of debt to the volume of liquidity is about 2 to 1. If it gets seriously above 2 to 1, and we annotate on the chart where that's happened, you typically get a financial crisis. And as that chart says with the annotation, that's when you get refinancing tensions in the world.

So if there's too much debt relative to liquidity, bang, you get a crisis. If you go the other way, so there's a lot of liquidity relative to your debt, what typically happens is you get an asset bubble. There's just too much cash around. That cash has to find its vent somewhere, so it goes into asset prices. So things like the Japanese bubble in the late 1980s, the Y2K bubble, the US housing bubble in the early 2000s the cryptocurrency boom that we're now seeing all these things have come about because there's been too much liquidity in the system now if you look at the projection that

we've made which goes into the end of uh 25 into the end of 26 what that's saying is that that ratio between debt and liquidity looks like it starts to move appreciably higher it gets back it mean reverts back to its level. Now, the reason for that is that number one, we believe that the pool of liquidity that's out there is not growing fast enough. So that's one factor. But the other thing is that the amount of debt that needs refinancing is starting to escalate because of something called the debt maturity wall. Now, the debt maturity wall basically is all about the debt that was turned out during the COVID crisis coming back into the system. And that debt that was termed out in 2020, 2021 at nearly zero interest rates is now coming back to be refinanced in 25,

26, 2027 at much higher interest rates. And that's going to be a big burden on financial markets. Essentially, issuers need liquidity, and that liquidity will be taken out of the market. And so there's less liquidity around to drive other asset prices up like Bitcoin or the S&P or whatever it may be. And that's where the problem is. The fact that we've had abundant liquidity through this period of the last decade is really courtesy of the fact that after the GFC, central banks threw liquidity at the system to revive it. And then during COVID, there was another big dose of liquidity. So all these factors, COVID, GFC, have distorted the debt liquidity ratio appreciably. But now it's coming back to bite us. And that really is one of the

questions. Now, if you kind of hold that thought, and let me just show you another chart. This chart here is looking at the world financial system, a schematic diagram that we've put together. Now, that looks a little bit complicated, but let me just distill that a little bit by saying that global liquidity, what we're really talking about is this key metric is at the bottom of that chart in the middle. And global liquidity rests on a collateral base or a collateral pool. And as I said, something like 77% of all lending in the world economy now is collateral based. And you can see around that collateral pool actually intermediating between collateral and liquidity is the repo market. So we need to understand the repo market

critically. It's a major, major point to watch. Now, the problem the system has got just to understand this is that stability is if we lean more to the left-hand side. And that is that collateral is really resting more on safe assets like public debt. Now, there may be a question in that going forward. But let's say for the moment, let's accept the fact that treasuries are pretty much pristine collateral. What I've shown there is that the system also has a right-hand wing, which we've called private debt instruments. You can see that bubble on the top right. And there's an arrow going from the public debt instruments to the private debt called regulatory arbitrage. And that is because the banking system has been so super regulated

in the wake of the GFC that actually to do business, to lend or to make money, you've got to go outside of your balance sheet if you're a bank and you've got to start operating a shadow bank. And the shadow banks are operating, obviously, in the shadows, the murky shadows of the financial system. They're not regulated that tightly. And what's more, they tend to focus on two aspects. One is private debt instruments, things like collateralized loan obligations, which clearly have a big credit risk in them. And secondly, there's a lot of leverage going on because hedge funds are sort of squeezing all the juice out of the treasury market through these basis trades, which may be up to 100 times leveraged or whatever you may get. So effectively,

the system is leaning more and more onto this shadow bank type environment. And what that means, it's a lot more unstable. And hence, you need central banks to come in and effectively corral the system or manage the system much, much more actively. Now, this is an issue mainly because of this chart here which which we cite this is looking at the repo market and it's looking at collateral shortages so-called in other words it's looking at the tension in the repo market where there's an inability of borrowers to post appropriate levels of collateral to borrow in other words the system is breaking down this chart is is monitoring the spread between sofa rates which is the system overnight financing rate, and Fed funds.

And what this is saying is when you start to get spikes, such as we're seeing on the right-hand side of the chart, what that's telling us is that there are liquidity problems, tensions, financing tensions in the repo market. Right at the heart of the system, it's beginning to shudder. And this is a big problem. Now, if you look at that graph, what you can say convincingly or compellingly is that 90% of, since the end of 2023, 90% of those spikes in the repo system have occurred

since last July. More worryingly, of those 90%, 90% of those have occurred since December. So what you can see here is a trend. And that trend is a worrying trend because it's basically telling us that there's a lack of liquidity emerging in the system. Now, the Federal Reserve is confident it can deal with this. They said they do not want to experience, obviously, another 2019-like repo crisis. And now they're on the case. They may well be, but this is what bothers us. And this is the prospective growth of Fed liquidity through the back end of the year. Now, Fed liquidity is effectively the active part of the Fed's balance sheet, the liquidity creating parts of the balance sheet and essentially it comes down to let's say three major ones that

we can we can think of one of those is what is uh called the soma account which is basically um the treasury and agency holdings that the federal reserve has the government securities that it buys or sells uh that is either operates under a qt quantitative tightening regime or a qe quantitative easing when they're buying treasuries. When they're selling treasuries into the market, you're into QT. That's what they're doing right now. So they're shrinking their liquidity injections through that conduit. The other two are the treasury general account, which tends to be cyclical. But at the moment, it's in drawdown because of the debt ceiling. So there's been a lot of liquidity drawn out of the treasury general account to pay for government spending that's gone

into the money markets. And that's clearly been a positive. And the other is the reverse repo facility was a bit of a wonkish thing. But it's another big pool of liquidity that the Fed has basically drawn down from over $2 trillion to about $100 billion in the course of the last 18 months. That drawdown of the reverse repo facility has been a major plank behind the bull market. It's put a lot of liquidity into the money markets. So what you're seeing going forward is, number one they're still doing qt number two the tga the treasury general account's been drawn down but it's going to be rebuilt by definition once the debt ceiling is solved so that will suck money back out of the system and then thirdly what you've got uh is the reverse repo facility has

already been spent so bottom line is if you look at that graph the projection uh going to the end of the year you see a lot of volatility but the trend is downwards because that reflects largely the TGA rebuild, plus some seasonality. And those ups and downs that you see are connected with the tax season, the taxpaying season from April 15, et cetera. So you've got volatility. There's maybe more liquidity coming in the short term as the TGA gets drawn down maybe a bit more. But it ain't good news looking forward. And that's really the issue that we've got to face so that that's the issue in a nutshell and um um you know over to you what's up freaks do you have a credit card are you getting cash back or airline points

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the cold card queue it's a beautiful thing you mentioned that the fed is hyper cognizant of what happened in september uh september 2019 with repo markets and wants to make sure that doesn't happen again if i recall correctly uh the reaction to that overnight rate spasm uh back in the fall of 2019 was to create new facilities that essentially give primary dealers access to the fed window correct is it your intention or is your belief that that's what they think is going prevent a spasm from re-emerging in the repo market or are they going to have to create new facilities that are specific to this particular point in time it it's a bit like say look the the system is not is not a stable system it's a fragile system i think we all accept

that and it's a fragile system largely because uh just simply because the regulators are uh over-regulating, in inverted commas, the banks, there's a lot of shadow banking activity and nobody really knows what goes on there. I mean, you can do a lot of research, but at the end of the day, in practice, one just prays that the system holds together. And if you're shaking the tree enough, and clearly we've had a lot of shakes in the last few weeks, and Mr. Trump is shaking the system furiously as we speak right now, we don't really know how it's going to hold up. Now, we hope that the system works, but effectively, a lot of these measures that the Fed is announcing or has announced a kind of sticking plaster on the cracks. And we just hope

it works, but it's not necessarily guaranteed. It didn't work, for example, in the case of SVB. That managed to default, even though these things still existed. So although you could say in theory SVB had complete access to the discount window, they didn't use it. So accidents happen. And what you really need is a system which acknowledges the fact that in a debt driven world, you need liquidity. You know, all this thing about the sort of hair shirt philosophy that the Fed has to say, well, OK, look, the balance sheet's so bloated now. We've got to go back to what it was in, I don't know, 19, you know, not 19, 20, sorry, 2007. Or we've got to go back to what it was, you know, five years ago. Or we've got to do it relative to GDP. It's madness.

I mean, let's just accept the fact that we're in a debt-driven world. Debt is a bad thing, we know. But we've got to accept we're here. You've got to have liquidity sufficient to roll the debt over. And that liquidity provision is really in the gift of the Fed. And there's no way around that. They've got to go back to some QT arrangement. Now, I know that they won't call it QE.

They'll think of some. They'll be the acronym department of the Fed would be working overnight to think of something else like qs or quantitative support or whatever they call it but it's got to come balance sheet's got to expand again yeah yeah i think we could return the monetary base to 2007 levels which i believe were around 800 billion it's insane it's insane and i guess that begs the question what do you think jerome powell is thinking right now because it seems like he's in somewhat of a standoff with president trump president trump i believe earlier this morning tried to send something up the supreme court to figure out if he could officially fire jerome powell it seems

very obvious that president trump would like chairman powell to uh cut rates as soon as possible and i think jerome powell is in a position where for years he's been trying to really um bring back the the belief that the fed is apolitical and it's going to do what it needs to do despite what any administration wants them to do and it seems like he's trying to hold a hard line there to to put out to the public that the fed is apolitical we're a private institution we're going to do what we believe is right and not be pressured by any particular administration but then you also have something like tuesday night where i mean there was like you said this it's a shadow banking system but zero hedge wrote a piece pointing at the multi

strat funds and how levered they are in this basis trade and we don't know for sure but many people were speculating that the citadel's 0.72s millenniums were getting off sides and that's what led to that spike in the 10 and 30 year yield curves on tuesday night um and so the meme that zero hedge had is jerome powell over the two buttons do i uh do i let the hedge funds fail or do I, um, come in and, and, and save the situation. But it seems like I'm, I'm appeasing president Trump politically. Yeah. Well, I think the, I mean, at the end of the day, look, first of all, it's a, it's a, it's a, it's a noble thought to say, look, we, we want an independent fed. I mean, clearly that that's, that's, that's essential. Uh, but on the other hand, one's got

to be realistic here. And realism tells you that the balance sheet of the fed has to expand during these times of crisis. If you starve the markets of liquidity, you have a big problem. And this is the issue that we're really facing now. Now, I don't think this thing is going to crack in the next few days. I don't think it's a problem that short a term. But I think as you go through the year, more and more, these tensions build. And there's likely more and more of a problem, particularly if our data or our projections about what the Fed is intending to do work out. um this is this is an issue and uh it's an issue not just for the u.s but it's an issue for the global economy as well well curious to get your thoughts on like and i i think the the

recently introduced variable of the unpredictability of president trump and his economic policies has to pull that that liquidity crisis forward just just just the embedded uncertainty that that has been introduced with how trump is going about these tariff negotiations is one example, has to, again, create uncertainty that forces people to think about their allocations to treasuries specifically and act accordingly, which could pull that liquidity crisis forward. Yeah, I think there's clearly a big issue here. What you've got is a situation in the treasury market where what we know is that Scott Besant has been put in a very difficult position because he has 30% of the outstanding stock of treasuries

to refinance this year. Now, that's a challenge for anyone in normal times. But in a difficult market environment, clearly, it's a much, much bigger challenge. And he's got to face that. So I think given the funding problems that he's inherited, what one has to say is that Trump, too, is much, much more about focusing on the bond market than the stock market. If Trump, one was about stocks. Trump, too, has got to be about bonds and trying to draw a line in the sand about how high the yield goes. And I think we kind of saw a little bit maybe last night that there is a line in the sand and they don't like yields pushing up much above four and a half percent. And then maybe there is a there is a change of tack. But, you know, that could tell

us something. But effectively, what they like would like is a yield to come down. The problem you've got there is that, you know, the enemy number one enemy is China. That's clear, right? The Chinese Ministry of Finance has a big sign in their headquarters, which says $9 trillion, which is the amount that Besson has to refinance this year. China is holding the ace cards in many cases because they're sitting on their holdings of, what is it, 750 odd billion of US treasuries. And if they start to sell those at an inopportune moment, they could spoil the auctions for Besson upcoming. And this is clearly an issue. This is a challenge.

And what you don't want is a disruptive market or failed auctions. And we saw a little bit of a hint of that in the last 24 hours. This is dangerous stuff. Now, the other problem that you've got, which is why a lot of pressure is going to be heaped on Jay Powell over the next few weeks is that if you look at the structure of the bond market now without getting caught in the weeds here bonds really comprise two moving parts one is an interest rate expectation element in other words what you think the Fed is going to do in terms of policy rates and the other bit is something called a term premium which is definitely wonkish

now a term premium is really the extra bit that investors demand to hold a bond to cover interest rate risk in the future. And if you look worldwide, term premier in bond markets are rising. Why are they rising? Because number one, Germany has taken off the debt break. OK, so what we know is that the world is going to be awash with bonds in the future or European debt. Number two, Japan has an inflation problem that's emerging. They're starting to make JGBs look less attractive. And we know that China, visually announced overnight, but we know it's coming anyway, is going to engage in a major fiscal spending program. So effectively, the long end of bond markets, in other words, the 10-year benchmark bonds globally, are being elevated, yields are being elevated by these

fiscal spending demands. Now, that ain't a great environment for Scott Besson to start raising money or trying to refinance US debt, because there's this upward pressure coming internationally. Now, the point is that if you go back five or 10 years, the US was largely a price maker in international bond markets. In other words, global bonds followed the US treasury market. Increasingly, it's the other way around. The US is more and more a price taker. And that is because you cannot guarantee the international bid for treasuries anymore, because the Japanese are sitting on their hands, the Chinese are more likely sellers and buyers, and all the other buyers, as you rightly say, Marty, are hedge funds, which we know are basically short term.

So there is a problem, which means that the only way you're going to get funding costs down is to put an awful lot of pressure on J-PAL to start cutting front end rates. And I think that's going to come. But I think he should be doing it anyway, because the economy is going to skid badly as we speak. The new administration is pushing hard for government efficiency. But can Elon Musk and Doge fix the dollar? On April 16th, PhD economist Peter St. Onge explains why Bitcoin is the most important tool for government efficiency and how the principles underlying the global shift towards sound money can help you protect and grow your generational wealth. Register now at unchained.com slash RHR. That's unchained.com slash RHR. These conversations often get frustrating

because it feels like we have to have them too often, particularly post 2008. And I think to touch on the core of the problem which is the collateral in the system being these these bonds how sustainable is that in the long term particularly taking into consideration the the nature of the geopolitical landscape right now in this push towards a multi-polar world like are we entering an era where markets more broadly begin to recognize that this isn't the ideal form of collateral for a financial system yes absolutely let me give you let me evidence that since year 2000 the stock of u.s treasuries has increased by 9.6 times almost 10 times so in 25 years the stock of u.s debt has almost grown by 10 times i mean that is an eye-watering amount

but the u.s is not unique here other countries are in exactly the same situation the gold price has gone up over that same period by 9.65 times so gold has absolutely matched the increase in treasury supply now what that's telling us is that effectively the increase in debt is part of a monetary inflation process and gold throughout history has been the best hedge against monetary inflation now if you're going to tell me that debt here doesn't grow anymore okay Please may it be, but it's not going to be the case because there's so much mandatory spending that we know is out there. Trump has said he's not going to stop Social Security, Medicare payments or anything like that. They're going to keep running. So ultimately, what you've got is a big

and growing debt burden. So what you know is that the gold price is going to match over the long term that increase in debt. Debt is growing at least 8% per annum. So that's going to give you some indication of what the trend in gold is likely to be. Now, can you sell that debt at stable yields? Well, I think that's extremely difficult. And therefore, they're going to have to start moving more and more towards monetization, which is exactly what Janet Yellen did, because she basically skewed treasury issuance, something like two thirds towards bills and short dated bonds. Now, that's left Scott Besson with a big problem, but he can't really get out it now. He's kind of he's been painted into a corner. So he'd probably like to issue more

coupon debt, but can't. So they're going to have to lean more and more back on short dated issuance or even bills. And what that means is monetization, which is devaluing ultimately paper monies and the gold market is going up. So this is the reality that you've got. What investors need to think about is hedging or getting monetary inflation hedges in their portfolio. Things like gold or in the long term, Bitcoin, you know, Bitcoin's volatile for sure. But in the long term, it's likely to outperform and it's going to match or at least match what's happening to the gold market. Now, if you're not if you're not satisfied with that explanation for the US, think China. OK, the problem that China's got, China has got a whopping debt burden. Right now,

if America is relatively stable here and I'm saying relatively, China is relatively unstable because the debt liquidity ratio in China is completely out of line because they've taken on so much debt. And in many of the last few years, they haven't created liquidity because they've been absolutely focused on maintaining the stability of the yuan, the currency, the renminbi against the US dollar, which means they had to tighten monetary policy. So that's why China is in a debt deflation. But the answer is they're digging their way out. And one of the things that we said a couple of years ago is that the way that China has to get out of its debt deflation is to massively increase liquidity and devalue the yuan currency. Now, they're devaluing the currency, but they're not devaluing the currency against the U.S. dollar.

The U.S. dollar, I mean, the yuan is weakened against the U.S. dollar for sure, but not dramatically. What it's weakened against, it's a gold price. two and a half years ago the yuan gold price was 11 000 yuan per ounce of gold what is it today as we speak is 22 500 it's doubled right now our view back then was they had to get up to over 26 000 yuan to actually dig themselves out of their debt crisis and why does that matter because ultimately uh what you want to do to get out of debt is to devalue your paper money but to devalue against real assets and gold is a real asset okay so if you start to think about this if china is driving the gold price and you know why shouldn't that be the case i mean we've

been grown up to think that it's the london gold market that is really the is the call on gold but actually it's no longer the case the shanghai gold exchange is really driving things uh there's a premium on shanghai gold a persistent premium uh because they're bidding for it there's an asian bid going on. China is printing money, and what's more, the People's Bank of China is buying bullion in the open market. They bought again in March. So they're lifting the gold price.

So if you start to think about how this works, if you're taking a 26,000 yuan per ounce target, at least, and you take a 735 yuan US dollar cross rate, you triangulate back at $3,500, $3,600 an ounce for gold. And that's where we've been moving. I mean, that's probably minimum target. So you can see how the whole world is starting to evolve. And China is in a much stronger position, certainly financially or in terms of financial markets than it is probably in the in the trade arena uh and that's what we got to remember it's

it's going to be difficult for the u.s to fund itself at low interest rates going forward yeah and with all this with all this in mind you mentioned scott percent he's been painted into a corner but it seems like he specifically asked to be placed in this corner uh he was on a press tour leading up to the election last year i mean famously the clip's been going around the last couple weeks of his conversation at the manhattan institute last june where he expressed that he believes there's going to be a monetary restructuring on on uh on par with bretton woods or the plaza accords and that's a pretty big discussion right now is that the this mar-a-lago accords that may be on the horizon and based off of everything you just described our problem here

in the United States, what China may be trying to do by fixing the yuan to gold. Do you think there is a potential for something like a Mar-a-Lago Accords or something of another name where everybody recognizes this is untenable, it's getting out of control? We need to meet at the table and negotiate how we settle this debt situation. Well, I think in an ideal world, sure, Marty, that would be great if they did something like that. I mean, good luck with that with that progress on that, because I think we, you know, there's a lot of traveling before we get there. And it'll be wonderful to get a deal on that, you know, obviously, you know, President Trump would like to oversee such a deal, I'm sure, and so would Scott Besson. But, you know, that

deal, if it comes, will have to involve gold in some form, because gold is fast becoming the sort of pristine asset or pristine collateral worldwide. Because effectively, you know, if you look at Western financials, or more particularly Western fiscal systems, they're effectively bust, aren't they? I mean, the commitments that have been made in an environment of aging societies are just untenable. I mean, how can we afford, how can younger generations afford this? It really is, it's crazy. So you've either got to renege somehow on those promises, or you've got to somehow devalue paper money, which means ultimately reorganizing the whole international financial system um and that's what we got to do but it's a big big ask and it's not not going to happen

overnight but i think gold has to play a much bigger role in that somewhere around the line yeah agreed and it's funny i was at a lecture last night where the birth rate crisis came up and it's like we're dealing with these problems now um with this debt issue but there is many more issues down the line with this global uh birth rate uh birth rate crisis that it's probably advantageous to get ahead of it whether that's resettling around a sound money standard or introducing pristine collateral but i think that's one thing that's being floated here and so my beats and my uh my passion is bitcoin and um taking the the situation that scott percent has found himself in needing to roll over all this debt curious to get your thoughts on we live in

insane times and it may demand creative uh bold thinking and one idea that has been floated in recent months the bitcoin policy institute wrote a paper about this concept of bit bonds where the treasury could issue 10 year 10 year bonds and take 10 of the proceeds from a portion of the offering by bitcoin have it sit in the bond over the duration of 10 years and essentially provide the market with a dual collateralized sort of bond product that is offered at a lower rate but has more potential upside on the back end when that bond comes to term? Is this something that you think is possible?

Is it something that would be appeasing to bond investors? Could it actually work in your mind? RAOUL PAL Well, I think there's, you know, there's scope for all this sort of financial engineering, for sure. Innovation is really the name of the game in the financial sector, so I wouldn't rule that out. But I don't think necessarily that's going to be the panacea. That's not going to solve the problem. I mean, ultimately, what we've got to do, I mean, the only way to solve the problem, ultimately, is not necessarily finding new financing instruments. It's basically to devalue the debt that we've got. So we can find innovative ways of actually selling debt,

for sure. But ultimately, it's better to actually devalue that debt en masse through printing liquidity. And that's, I think, the path of least resistance that the politicians and the central bankers will ultimately come to. Because hey, isn't that what they've always done? Look at the value of the dollar in 1900 versus where it is now, the purchasing power. I mean, this is the fact. Paper money is paper money. Ultimately, the value is destroyed. What you need to do is to hold your wealth in other forms of collateral, something that holds its value. And that's why I think it's very interesting that the younger generations basically go into things like Bitcoin, because they can realize that this monetary inflation process

is a real, real risk. And I think it's a very interesting analogy, and one ought not to push this too far for obvious reasons. But if you go back to Weimar Germany in the 1920s, and you look at the hyperinflation there. One of the things that the hyperinflation did is it basically caused a massive redistribution of wealth from the older generations to the younger generations. And that was because the older generations basically were wedded to fixed income and they had all their wealth held in German government bonds. So when you got the hyperinflation, they kind of lost everything.

The younger generations basically went into the stock market because they could see that the stock market was a monetary inflation hedge now all their parents and their peers were saying you are crazy what are you buying these stocks for are you going to lose your shirt these are speculations okay now they're the ones that actually got out of the 1920s 1930s with a big wealth transfer okay now the consequences of that and their particular political aspirations clearly didn't work out very well to put it mildly but effectively there was that generational shift if you look at what's happening now maybe the same thing is going on with bitcoin is that the younger generations are realizing that actually these are the instruments that are going to hold

their worth in the long term their parents okay our older generations are saying you must be crazy uh bitcoin is is completely you know is is there's nothing in it okay um you know keep your money in in stocks or bonds or whatever keep the 60 40 portfolio the younger generation is saying no we think that this is the this is the way forward maybe they're right but there's an interesting historical parallel there now they're really i'm i can't stop thinking of when money dies the um some of the stories that are told in there yeah walking great book and the paper boy is talking about his stock picks and the parallels are uncanny um in terms of the speculative fervor that's going on i mean and there's there's layer layers of the spectrum um in terms of like

where people find themselves on on the risk curve i think bitcoin um within this uh within the spectrum of risk assets the younger people are playing is actually like one of the least risky but we're seeing manifestation of meme stocks meme coins cryptocurrencies outside of bitcoin And you just see a bunch of people reaching out further on the risk curve to get an attempt to get yield so that they can sustain their lives. And that's one thing I worry about with the route, which I think we both agree is going to be taken and probably needs to be taken, which is just you debase the currency to solve the debt problem. And I just wonder how you manage that politically, considering where public sentiment is and how stressed, financially stressed the middle and lower classes are around the world. Well, I think that, yeah, I think you raise a very good point. But I think the issue is that what one has to do is, you know, let's say you continue as is because that's what politicians have always done.

And the way that they do it is they basically decry gold. So they always say, you know, it's a barbarous relic, all these things we've heard before. You know, gold has no meaning, no intrinsic value, nothing like this. You know, don't hold gold. You read it in the media, the Financial Times, the Wall Street Journal. All these media outlets are telling us that gold is, you know, a spoof asset. But they've been doing that for decades after all. You know, that's the story.

And they get everyone to focus on paper money units. Now, if everyone devalues at the same pace, in other words, if the British pound, the US dollar, the euro, the yen, etc., the Chinese yuan all devalue at the same pace, the paper money cross rates don't change particularly, but everybody inflates against gold. And, you know, the other way to think about it is that actually gold is not moving, although everyone says the gold price goes up. Actually, gold is like the pole star in the sky that navigators use to actually get their bearing. Gold doesn't really move, actually. it's everything else falls against it. And what you want to do is to fall at a lesser rate. What's happening with paper money devaluation is everyone is devaluing dramatically against gold. And you see that in the example I give with US Treasury debt outstanding.

If US Treasury debt is growing at 8% per annum, that means it doubles every 10 years, right? So the stock of Treasuries is going to double in the next 10 years just by looking at the growth rate we currently got. That means the gold price should double. There are not going to be many investments you could think of off the top of your hat that will do that. I mean, Bitcoin may do exactly the same, at least. So these are the sort of monetary inflation hedges we need, in my view. But the way that you restore the system is to get everybody to do the same thing. Everybody devalues. and the you know the issue in the 1930s or 1920s for Germany was it was only Germany in 1922-23 that was in that boat and they chose to print money to get out of their reparations problem

but that was a that was a skew now the whole world is indebted so there's more chance of everybody doing it together and that maybe is ultimately why Scott Besanty is correct to say we need to reform the global monetary system but they'll reform it after they've devalued that's definitely for sure yeah and it has been encouraging um in the last 24 hours to see i think trump recognizes this problem that exists and you mentioned the red tape that regulatory um burdens have have created for the banking system but i i think you've got it's got to be a multi-angle affront on on this problem and i think regulation is a big one so trump basically defanging the department of energy the epa and others last night i think it's very clear

that energy if we're going to get out of this like we need to bolster up the energy sector and make sure that we have robust and reliable and relatively cheap energy and so i think that's at least here in the united states something a positive that's happened uh recently that that could help create conditions where you can sort of manage the debasement of the currency because you don't have the regulatory compliance burdens on top of you. And so you're able to save costs as a business passed on that savings in the form of wages to your workers and let them succeed as this debasement is going on. Yeah. I mean, this is the issue. If you look at periods where monetary inflation has been rife, I mean, good example is in the last decade or so in the wake

of the GFC, you disenfranchise most of the non-asset owners in the economy. Because monetary inflation is not high street inflation. Monetary inflation means your asset values go up significantly. And you get a tremendous wealth divide opening up. And that's what we've been seeing. But the problem is that that comes with increasing debt burden. So the more and more debt that's taken on. And this was the errant policy that most policymakers fell into, is cutting interest rates to low levels. Low interest rates incentivize the take up of debt. And that was the madness that has taken place in the last 20 years. And that increase in debt has been funded by monetary inflation. And that monetary inflation has disenfranchised most of the workforces of

the western world yeah and so we've had a heavy focus on the fed and the government's solving this problem how do you think actors in the private sector can can move to solve their own problems and so with that in mind i get one example i've said this many times in recent months but my mind stuck on it like we're beginning to see um in the bitcoin world um people recognize that it is this pristine form of collateral it's very divisible uh trades 24 7 you can send it anywhere it doesn't come with maintenance costs whatever that so you're beginning to see bitcoin introduced in private credit products as part of the collateral package and so in my mind i look at something like this beginning to develop and i think

if you're somebody who doesn't want to be holding to the whims of any individual government or central bank or the collection of them all globally we need to figure out ways to get creative in the private sector and something like this really piques my interest because it gives you agency and the ability to move and begin solving the problems without needing to worry about what the Fed or the Treasury is doing. Yeah, I quite agree. I think that Bitcoin is going to be a major corner of the world financial markets. I think stablecoin as well. I think those are instruments which are going to be essential in the modern world. So I think the private sector is there already. I think there's

a lot of innovation. One's seen in the last few decades that financial innovation actually has been immense. And the problem is that financial innovation moves a lot faster than the regulators do. And that's part of the issue when it comes to financial crises. The regulators are just too slow in understanding how the system is evolved. But private sector is there. And I think it's coming up with these initiatives. And if you start to extrapolate into the future and you say, well, OK, how are we going to afford these burdens of mandatory spending, higher defense, higher social security uh higher medicare um you know without tax either taxing people more heavily or printing money uh and both of those both of those solutions if you like taxation and printing

money come back to saying well okay i'd rather be holding bitcoin and some of these uh crypto units because a it's more difficult for governments to actually get hold of me and secondly are they going to hold their value in a monetary inflation anyway yeah and so i can't tell are you off like is this a good thing that all this is coming bare i mean obviously there's going to be a lot of money it's a good thing in the long term i think the short term we've got to get through uh you know the current storm um and i think that you know i'm optimistic we will because we always do uh is there going to be volatility markets for sure but you know um it's like the old warren Buffett adage, isn't it? When people are fearful, start to be greedy. And when people are greedy,

start to be cautious. And I think if you look at where investors are positioned right now, particularly US investors and what we see, they've become, they've turned remarkably cautious, remarkably pessimistic in a very, very short time. And if we look at, we do a lot of monitoring of investor portfolios. And in fact, I can show you a chart if you let me stick another one up. So what you see in front of you is a chart of investor exposure. This chart basically comes from this time series, and this time series is looking at what we call the world risk cycle. Now, this is showing how investors globally and in the US, so the world investors are

shown in red, US investors in orange, change their asset allocation over time. This is beginning in the late 70s, and the cycle is basically a 9 to 10 year cycle as it happens. But it shows their shifts into risk assets, things like equities, corporate debt, cryptocurrencies, et cetera, versus their movements into safe assets. So the zero line is the long term average. If you're below the zero line, basically, it's telling you that investors are moving more and more defensive. And what you can see is that that line has gone right down. Now, it's not at the lows yet, but it's actually getting down quite low. And if you look at this following chart, what we've shown is a distribution of that data since 1978. And what it illustrates

is effectively the ranges of risk on and risk off. So most of the time, people on average are bunched around the middle, as you'd expect. But you do see extremes. Extremes on the right, where investors are really heavily risk on. And you can see right out there on the far right, there was June 2007 before the GFC, where investors were very bullish. And then if you go right to the other side, March the 9th, 2009, where you can see that was where US markets bottomed. And that was when investors were up there most pessimistic in their asset allocations. So this is actual asset allocations of investors. Look at the evolution of what's happened since November 6th, 2024, just after the election. So U.S. investors were bullish. They had investment

on that right side of the bar chart then. By the end of February, they'd moved to neutral. And the latest reading is that sort of minus 40 area, which is telling us that there's only 3% of occasions, 3.5% in reality, of occasions since 1978 where investor portfolios have actually be more defensively, only more defensively aligned or allocated than they are today. So there's a big, big risk-off move going on in the US, which basically says that there should be a bounce in markets. I think that's likely. But I think one's got to be realistic here that there are clearly other risks out there

with liquidity. And I'm not for sure saying that liquidity is going to rebound heavily in the next six to 12 months. hope it does but that really is in the gift of the federal reserve they need to but let's see yeah we'll see the yeah to me interesting to see if i think the supreme court's going to come back and say donald uh the fed is an independent entity you cannot fire the federal reserve chairman but it seems like that's right yeah it seems that's what is very interesting particularly right now that trump is posturing this way considering the liquidity conditions that you've you've laid out

over the course of the last hour it's like why not just you you should understand that powell probably understands this liquidity issue is just waiting for the right time for him i would imagine because well i hope that's right because the only thing i'd say is that history shows that the federal reserve is always behind the curve when it comes to these things that's true and And that's what makes me sort of somewhat nervous. Yeah. But adding the, to think that you would just try to replace him, get a new Fed chair in, and then have him act immediately,

that seems far-fetched to me. It seems like you're, I guess what I'm trying to say is like, your wagon's sort of been hitched to this. You've got to figure out a way to. I think international markets would be very, very skeptical if, you know, I mean, the obvious candidate is Kevin Walsh. to come in. But I think, you know,

even though he has extremely good credentials, I think international markets would be very wary about accepting that given the fact they would see it as a direct Trump appointee.

Yeah. Fascinating times. Are you having fun? Yeah, lots of fun. It's always good when you get volatility markets, but it's, you know, you can see

it's turned my hair white. I'm only 35 years old and look at this is what happened. Ah, we graduated high school around the same time. um michael thank you for for doing this this is incredible i i really appreciate uh your work and coming to uh explain everything that's going on to our audience it's uh it's very important i think

understanding the the plumbing behind the scenes and how all these things interface with each other is very important because i think it's obvious we live in chaotic times volatilities on the rise and it's important as somebody listening out there to realize that this is just a natural consequence of a debt-based system. It's all about liquidity and this too shall pass. And I think being equipped with the knowledge that you just provided us is very important. So thank you. That's a great pleasure. If you want to know more about what we do, Capital Walls Substack is where we write. We'll link to that in the show notes. I hope you enjoy your nights and hopefully we can do this

again at some point yeah i'll afford it man enjoyed it enormously thanks so much thank you peace and love freaks