The Breakdown - Let Them Eat Equities! The Economic Chickens Come Home to Roost, Feat. Luke Gromen

Episode Date: September 3, 2020

Today on the Brief: Debt will exceed U.S. GDP for the first time since 1946 SPACs in action! Decentralized exchange volume flippens centralized exchanges  Our main conversation is with Luke Gromen, founder of the Forest for the Trees consulting firm.  In this conversation, we discuss:  Chairman Powell’s speech and whether this is a true policy departure The evolving relationship between the Federal Reserve and Treasury Department What it would mean to get China to start “footing the bill”  The gold narrative Why stock price gains are unlikely to keep U.S. citizens satisfied with the economy for long Find our guest online:Website: fftt-llc.comTwitter: @LukeGromen

To me, the punchline is that if you look back over the last 100, 120 years, any time you get sovereign debt levels as high as they are now in the U.S. and more broadly across the developed world, there's four outcomes 100% of the time. It's restructuring slash default. It's inflation. It's financial repression or it's hyperinflation. That's it. Those are your choices.

And so if we can assume that the United States is not going to restructure or default as treasuries, which I think is pretty safe, we can set that one aside. Historically, and this ties into the political current size and lack thereof, if we were going to reform entitlements in the United States, the time to have done so was prior to 2008, because post-2008, after you bailed out the banking system, you made it politically impossible for all intents and purposes to reform entitlements, because you can't cut payments to retirees after you've bailed out Wall Street. Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world.

The breakdown is sponsored by crypto.com, BitStamp, and nexo.io, and produced and distributed by CoinDes. What's going on, guys? It is Wednesday, September 2nd, and today I am so excited to bring you another conversation with Luke Gromyn. Luke is one of the most interesting and thoughtful guys out in the macro scene, and I know you'll love this conversation. First up, however, let's do the brief. First up on the brief today, debt will exceed 100% of GDP this year for the first time since World War II. So basically, in the context of the massive response to COVID-19, the U.S. debt level will exceed economic output for the first time in 70 years since 1946. In many ways, the real question about this, because come on, let's be serious, there's not many people who are surprised at this, the real question becomes how do we get ourselves out of it? And as the Wall Street Journal put it,

after World War II, federal debt levels remained relatively stable for years, and a booming 1950s economy helped cut the debt-to-GDP ratio in half to 54% by the end of the decade. That isn't expected to happen this time. This is one of those stats this year that sort of does two things. On the one hand, it puts a pin in the fact of just how extraordinary times have gotten, and just how much our expectations of normal have changed. But at the same time, it also shows just how comfortable with that change we seem to be, at least on a high level. Ultimately, how this will matter and play out, at least in the short and medium term, is really in terms of what it's does for faith in investor response. What I mean by that is do investors start to lose faith in this larger system? Do they start to hedge against crises that arise from this debt? How far ultimately the game of musical chairs can continue is predicated at least in part on not just this data, not just this debt to GDP ratio, but how investors and how people in the economy interpret it. It is a game of reality and narrative all at once.

Next up on the brief, and speaking of narrative, let's talk about SPACs in action. Mobile gaming company's skills with a Z will go public via a merger run by Flying Eagle Acquisition Corp, which is one of those special purpose acquisition companies that we've talked about before. These are companies that are created, sometimes known as blank check companies, explicitly with the purpose of taking a different company, usually specified to a particular industry, public via merger.

Flying Eagle or Feke as it trades is a group of Hollywood execs who previously brought Draft Kings to market, so they've got some tailwinds going with this sale. Skills will be valued at $4.3 billion after the deal. Speaking of Draft Kings, that company just recruited Michael Jordan as a special advisor, which sent shares up 6%. I continue to keep an eye on Spax because I think they're an emerging and important tool of the narrative-driven markets. Spacks effectively ask investors to make a bet on people and a story and an industry, which is very kind of pure-play narrative stuff,

rather than the specifics of an individual company and the fundamentals that go along with that company. If you look at it like that, it makes perfect sense in the context of a larger stock market which is so narrative-driven right now. Last up on the brief today, let's turn our attention to the crypto market specifically decentralized exchanges. Defi has been on an absolute tear this year. The total value locked in Defi has grown 13x this year, up to 9.11 billion currently. And the majority of that 13x growth has happened in just the last couple months,

as there was only 2 billion locked in Defi as of July 1st. Now, crypto loves its flippening narratives, where one thing overtakes another thing, and there was an interesting one just this week where Uniswap, which is one of the leading decentralized exchanges, their trading volume on Tuesday was $953.59 million. This itself is a tenfold gain over the last month, and the 24-hour trading volume is now 50% higher than that on Coinbase Pro, which is the U.S.'s biggest exchange by volume. The crazy thing is that part of this was driven by a fork of Uniswap called Sushi Swap, which is basically adding in a

a reward to liquidity providers. Sushi Swap, just five or six days after launching, already has a trading volume of 151 million, which is higher than Binance U.S., Gemini, and Poloniacs. These rapidly increasing numbers show the extent to which money is just pouring into this space, and obviously in crypto, anytime you see that, you have to be at least a little bit eyebrow-raising. I think, as I've said before, that this is an area that is somewhat more prevented from the excesses of the ICU boom based on the high barriers to entry. But when you have protocols that are five days old with unaudited contracts that have 151 million and 24-hour training volume, you have to keep an eye on that. With that, let's turn our attention to our main discussion with

Luke Gromond. Luke is the founder of Forest for the Trees, which is a massive. macroeconomic research firm. And frankly, as you'll know if you've listened to my previous episode with Luke, he's just one of the most thoughtful, well-spoken guys in this space. Our conversation today focuses a lot on Powell's speech last week and more specifically whether this really is the transition point between one era to another, whether this new approach to inflation actually is as big a deal as it seems like the Fed wants us to think it is. We also talk about the Fed and the Treasury's relationship, the state of the U.S. dollar, and we talk a lot about this idea of the U.S. switching to game the U.S. system for our advantage, whereas it's been gameed for the rest of the world's advantage for some time. Without any further ado, let's dive into the conversation. All right, welcome back to the show, Luke. How are you doing?

I'm doing great, Nathaniel. Thanks for having me out. How about yourself? How are you doing? Things are good. Lots going on. We were. just talking about the transition to fall and transitions are actually why I wanted to have you come back. So we're in this moment, obviously, in 2020 as a whole, that feels very transitional to a lot of folks in terms of the economy and kind of how it's shifting underneath our feet. But we had a moment last week that some are trying to paint as a dramatic break and others are painting as sort of more just kind of what's to be expected. But you tweeted out after Jerome Powell's speech about inflation targeting and basically said that really there's two options defaulting or inflating away

the debt. And this was an indication of option two. So what did you think of Powell's speech? What's your take on how actually transformative or different it actually is? I think it has the potential to be transformative. And I think it depends. depends in part, in no small part, on what the fiscal side does. In other words, what does Congress do? What does the White House do in terms of spending going forward? And what I mean by that is if you go back to a year ago in August of 2019, there was a Fed or excuse me, a Black Rock Investment Institute White Paper that was co-authored by three different former senior global central bank. bankers, most important of whom was former Fed Vice Chair Stan Fisher, who, as Harold Malmgram called him,

is the ultimate behind the scenes actor. A good friend of mine called him the godfather of central bankers. He was both Bernanke and Draghi studied under his tutelage. At any rate, so he is one of the co-authors of this white paper. The former president of the Swiss National Bank is another a gentleman named Philip Hildebrand, and then a former governor of the Bank of Canada named John Bovind. And the punchline of this report, to me it was an absolutely seminal paper. You can find it online. And what they said in August of 2019, the week before Jackson Hole, was that in the next

crisis, global central banks would likely have to go direct, which effectively meant their version of MMT, basically central bank financing of government deficits, and that they would probably also have to cap yields, bond market yields, to avoid an offsetting increase in interest rates, driven by what you would expect to occur when central bank says we're going to effectively monetize deficits and engage in MMT. And very few people noticed the paper at the time. We wrote about it pretty extensively last fall. It ended up being a very prescient roadmap for what we've seen year to date. We had seen a number of other central bankers talk about yield curve control, but when it comes from someone with the gravitas of Stan Fisher and when it's laid out as

explicitly as it was in terms of a roadmap in this white paper, it really caught our attention. And so bringing it back to Powell's speech, the reason I say it has the potential to be transformative is it depends on what the fiscal side does. And I tweeted something else out last week where I said, look, if we wanted inflate, I could have CPI inflation by Halloween, easy. I could just say, look, we're going to spend a trillion dollar. We're going to run a trillion dollar deficit next month, executive order. You know, my caveat here, I should probably start with the caveat. I don't fully know all the political loopholes that. I would or would not be violating. So with that caveat, in theory, the way you can get inflation is

just have the government run trillion dollar deficits every single month on whatever you want to spend in the real economy. Hey, we want to bring semiconductor manufacturing back here. Great. Give Intel $200 billion to build 20 fabs in the next 12 months. We want to improve infrastructure. Great. Here's another trillion dollars every month to improve our roads and bridges. And you can do this and then have the Fed come out say when the long end of the curve starts backing up, have the Fed say the 10 years not going to be allowed to go beyond 60 basis points. And so this is exactly what the United States did during World War II when we were motivated by an external threat and the Fed and Treasury basically cooperated. And inflation was high. It was contained back then by rationing of consumer goods.

And so my point is that when I say it's conditional is that it depends on what the Congress, what the White House does in terms of spending into the real economy. To me, the reason why it's potentially transformative is because I understood Powell to say, we stand ready to do what you want us to do. And we're not going to raise rates to stop it. So the interesting part, there's a lot of interesting parts of that analysis, but one of the parts that I think is really important is it's a take on why, you know, everyone picked up on Powell kind of saying, look, you know, it's time for, there's only so much the Fed can do.

I mean, he didn't, he would never say it like that. But it made it very clear that there's, there's this other side of the coin that needs to come in. And different people interpreted that differently, but I think it comes down to exactly what you said, which is like that there's only so far that these sort of instruments that the Fed has available. can take them. And that was very interesting to see people pick up on this from kind of the pure MMT side and people who are very kind of opposed to those policies is like the Fed seems to be angling to get the actual sort of Congress and the U.S. government more involved here. Yeah, and they can be as angry as they want. The reality is that the time for political courage

has passed. Now we sit down to a banquet of consequences, as they say. If we didn't want this to be the outcome, there needed to be political courage about entitlements or about bad foreign policy and spending a lot of money on wars we didn't need to have. Or there needed to be political courage about a whole slew of things over the last two decades, three decades, five decades, whatever you want to do. But there wasn't for a number of reasons. And I'm not blaming anyone per se. This is human nature. And we've seen this pattern repeat over and over and over throughout. throughout modern history. To me, the punchline is that if you look back over the last 100, 120 years,

any time you get sovereign debt levels as high as they are now in the U.S. and more broadly across the developed world, there's four outcomes 100% of the time. It's restructuring slash default. It's inflation. It's financial repression or it's hyperinflation. That's it. Those are your choices. And so if we can assume that the United States is not going to restructure or default as treasuries, which I think is pretty safe, we can set that one aside. Historically, and this ties into the political reform side, or excuse me, political current size and lack thereof, if we were going to reform entitlements in the United States, the time to have done so was prior to 2008. because post-2008, after you bailed out the banking system, you made it politically impossible for all intents and purposes to reform entitlements because you can't cut payments to retirees after you've bailed out Wall Street. And even if that was maybe theoretically possible up until now with what we're seeing happen across cities in the United States, this year, I think the ability to restructure those, that portion of our obligation. is gone. So now you're left with inflation, financial repression, which is I would lump in with

inflation. It's just another form of it or hyperinflation. And so when I sort of break it down that way, or it's different this time. This will be the first time in 120 to 200 years that you've got a massive amount of sovereign debt and it somehow doesn't result in one of those four. I suppose that is possible. There are ways it is possible, but I think it's a very minimal chance. And so that ties back into the tweet that you're referring to where I think we're in a transitional period. I think Powell's speech represents, I guess, if we think about it as trying to swing from

one trapeze to the next, I think this speech was maybe either preparing to let go of one trapeze or actually letting go of one trapeze and trying to grab the next one. And hopefully he doesn't miss it. Yeah, it's interesting. Speaking of another tweet to bookend that conversation, one that I saw just before we had this conversation, actually, you tweeted out, it seems that a lot of the debate on FinTwit at the moment ultimately comes down to one question. Do you think the U.S. will be the first sovereign with a purely fiat currency to default on its sovereign debt and or obligations for lack of printed currency. That's really it. I'm seeing a lot of people on Twitter say, well, if the fiscal authorities don't do what they need to do, and it's 100% right. I agree with it. And to me,

they're going to do what they're going to need to do, is my view. The question, I think, is how long do they need to, A, do they need to let markets and or the populace sort of twist in the wind? Or do they or can they get this stimulus done without it? But I think with each passing, this is how these things happen when you read the history books. It's okay, well, we're just going to do this temporary emergency. Well, it's still kind of an emergency. Well, we need what? And it's you know, it really is. It's like Guns and Roses Mr. Brownstone, right? I used to do a little, but the little wouldn't do it. So the little got more and more. And we've sort of crossed the Rubicon on that front. So for me, it's going to be interesting to see how much, if any pain

or how much pain is needed to get this done. But I'm really not worried that they're not going to do what they need to do. You know, it's interesting. Part of what I wonder in this type of context is, well, one is do you see or do you think that the what the MMTers have going for them is sort of a, they're leaning into this in a much more aggressive way, right? And basically, they're kind of making a bet on our ability to kind of play this out for much longer in a much different ways than we've seen in the past. And I, you know, I wonder how much that political economic take is going to kind of just increase in popularity? I think it will continue to increase in popularity. And to me, I think that's one of the big

unwritten costs of the way 2008 was handled has been the inability to credibly cut or reform anything else after doing that. You can't come out and cut entitlements after what you did in 2008. You just can't. And you certainly can't now. So I think they are, I think we're headed in that direction. I think the world is moving toward them. And sort of an offshoot to that is that you have to restructure the dollar's reserve status as currently structured because you can't have treasury bonds be the world's primary reserve asset at the same time that you're running MMT around treasury bonds. It doesn't make sense, right? That they were basically, you're buying those or monetizing treasury bonds with printed money effectively, but then also asking the world to hold

treasury bonds as their finite reserve asset that they store the wealth of their country in or adjust the value of their currency against the United States dollar in. That just, it just doesn't work. So that is one thing the MMTers tend to leave out of the discussion. But it, It's, to me, I think, interesting because you're seeing a lot of those changes already underway in terms of the structure of the dollars' deserves status over the last several years. Well, you have a lot of interest kind of contrary to that. I mean, this is one of the more interesting debates in the world because on the one hand, I think you pointed out today that China now pays for more Russian exports in euros than dollars, which is obviously, that's a conscientious

decision on both of the parts of those countries, obviously. But then you also have folks, I feel like almost on kind of many sides of the economic aisle, so to speak, who are questioning the USD's sort of world reserve status, whether it benefits us. And I guess this is another part of the Twitter thread that you had where you were talking about, look, I can get inflation. Here's how you do it. You basically said the world has long been gaming the USD system to its advantage. What I describe above would be the US gaming the US system for our advantage for a change. What did you mean by that and what would that look like? Yeah, so, I mean, it does tie into the MMT perspective.

The dollar system is structured post-71. You can look around and see who has won and who has lost on a relative basis within the United States. And so, and outside the United States, the more mercantilist nations, China in particular, some of the others have been, have come up. They've risen up out of poverty. And those are good things, all else equal. The question then is, is as their relative power increases politically, economically, politically, geopolitically, geopolitically, that then has, that's a problem if the interests of the more powerful nations as a result of that are not aligned with ours, as we're seeing in the case of China in a lot of cases. But in terms of the U.S., you can look from the time the Bretton Woods system broke down and Nixon closed the gold window, real median wages in the U.S. have barely moved for 50 years. And so living standards for the median household in the United States have barely moved for 50 years.

Now, the living standards for the top 10%, 5%, 1%, 0.1%, have all risen by varying degrees with the 0.1% rising the most and the 1% rising the second most and the 5% rising more than that and 10% in a declining way. So 0.1% rises the most, 1% a little less, 5% less, 10% less and the median barely at all. And so you can see the relative, just by that, the relative winners and losers. you can also see it by industry or by metropolitan areas. So when the Washington Post writes in 2012, that seven of the ten richest counties in the country surround Washington, D.C., you can see what was effectively a system where regions of the country that were in the quote unquote dollar export business or treasury export business, regions like Washington and New York City and financial centers, they outperform. performed the parts of the country that were in the business of producing stuff. And that was a political choice. And I'm not necessarily judging that one way or another. I'm just describing it. Ultimately, that system allowed us to win the Cold War, which was in 1971, still in a fair

bit of doubt in some circles. So it wasn't that it wasn't necessarily a bad thing. That was just the system we pursued. That was why we pursued it in part. And that system had, a very well-defined system of winners and losers. After the Soviet Union collapsed, we then decided as a unipolar power that we were going to engage in some of these free trade deals, NAFTA, China and the WTO. These two, very clear sets of winners and losers. And so basically when I talk about gaming the system, if it would be good for the U.S., when I say it would be good for the U.S. is if you, if you, can generate inflation by basically an MMT type programs, there's really now no limit to how much money you can spend. The limit is really inflation. And if you can suddenly spend a bunch of money

on rebuilding infrastructure, which would drive wage growth, or rebuilding the industrial capacity of the United States, which would rebuild, which would accelerate wage growth, that would be good for that real median wage over some period of time. Now, inflation would in theory pick up with it, but again, if the Fed is capping yields, for some period of time, when you look at what the biggest obligation or obligations of most U.S. household, it's their house, it's their student loan payments, it's their car payments. You could cap, the Fed could cap the interest rates on these payments.

simply by growing their balance sheet as much as needed. And you would basically engineer a debt jubilee for much of the United States by doing what I described. Again, there's winners and losers here. If you have too much of your net worth in debt, you're going to lose purchasing power on a real basis. It's basically a tax of debt-based wealth assets. It's likely going to skyrocket the stock market. And so that would still help certain holders of equities. It would require a variety of different policy choices where there'd be winners and losers.

But that's what I mean in terms of gaming it, where the world's short dollars and wants dollars, let's give them dollars and keep giving them dollars until they realize, wait a second, this is not the deal, right, until the bond market sniffs it out. And then the Fed would have to get involved. What's going on, guys? I'm excited to share that one of this month's breakdown sponsors is crypto.com. Crypto.com offers one of the most cost-efficient ways to purchase crypto out there, as they've just waived the 3.5% credit card fee for all crypto purchases.

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NXO also lets you earn up to 10% annually on your Fiat and digital assets. What's more, interest is paid out daily, and you can add or withdraw funds at any time. Get started at nexo.io. I've been following along, you have kind of an ongoing discussion, sometimes debate with Hugh Hendry on a lot of different things. But this is one where, you know, I kind of heard from both of you on this front. A lot of, you know, I had Hugh on the show a few weeks ago. And a lot of his point was to look towards this system.

Basically, you know, I felt like a lot of the undercurrent of what he was advocating for or thinking about was, trying to have some period of shift where, to use your words exactly, the U.S. starts gaming the USD for its advantage and says China, it's your turn to foot the bill a little bit. Yeah. I mean, he and I have talked a number of times, and the challenge is that China has no interest in doing that, because footing the bill, quote, unquote, as the United States has since 71, means sending all your factories somewhere else and going on a government and consumer debt-fueled spending binge for 50 years that leaves you in the position of the United States is in now,

which is dependent on foreigners for critical supply chains and basically an impoverishing of the working class on a real basis over some span of time. the Chinese, from what I can tell, have no interest in doing that. And so it speaks to the need. I think he and I are very much on the same page in terms of the U.S. moving away from sort of footing the bill on this. But because the Chinese don't want to, you know, heavy as the head that wears the crown, Chinese don't want it. The Europeans don't want it.

I don't think anybody else is in a position to take it. And so it speaks to the need to move towards some sort of neutral primary settlement asset, basically. Basically, when people say, well, what's going to take the place of the dollar? And the answer is nothing. The dollar is going to take the place of the dollar. What I think is going to happen in a transition we've already seen happening is instead of the world stockpiling treasury bonds as their primary reserve asset, they're going to stockpile gold or they'll stockpile SDRs or they'll stockpile some sort of, digital currency, Bitcoin, something like that, some neutral settlement asset. And that would basically reorder the whole economic system around balance of payments, again, for the first time in 50, 60 years.

And the U.S.'s balance of payments is not good. The dollar would be the dirtiest dirty shirt by a wide margin on that basis. So the dollar would fall a lot and all of a sudden we'd be really competitive again, and we'd inflate away the debt, and the Fed might need to help with that in terms of cap and rates. But that's all of that when you sort of think about it is why some of that Powell speech, that, hey, we're open to ideas that let inflation run hot, starts to peak my interest. It's interesting. One thing I can't help but think about when I have a lot of these conversations is there's a, the vacuum feels, at least in part, not just economic, but geostrategic and geopolitical, right? And this is something, you know, folks like Peter Zion would

argue this, that in the wake of the end of the Cold War, the U.S. didn't really commit to what it wanted the world to look like and what it wanted to be in the world. It just kind of did a bunch of new things. Now, the free trade pieces that you talked about are certainly the closest thing to at least a governing ideology that it had, but it never said, this is the world that we want to go design now. And because of that, a lot of these things are they were kind of assembled, cobbled together by virtue of just, you know, the world evolving with a few decisions that were kind of obviously very high implication, like bringing China into the WTO. And now we're kind of trying to unwind it in this strange piecemeal way as well. But again, without a real vision for what it looks like,

you know, on the other side and what we want, you know, the status of the USDA to be, what we want the American place in the global economy to be. Yeah, I think that's, I think that's in large part fair. I mean, I, to my eyes, I think policy in the aftermath of the Cold War shifted from economic policy where everything had to be at least vetted by the Pentagon because it was all framed, everything was framed in this lens of, we got to beat the Soviets, to, there was a vacuum for a little bit. And I think that vacuum was filled to some extent by American corporations, American multinationals, which was the ethos became making money is good, making money this quarter is good. We don't need strategy. We need to beat our earnings this quarter because if we do that, our stock options, we'd be worth a lot more and we'll be rich.

And so, you know, and we don't care what happens to, you know, what the implications five years from now, 10 years from now, 20 years from now of getting China in the WTO is all we know is we have these expensive American workers. and every now and then they strike, and I got to pay their health care, and I got this gosh darn EPA breathing down my neck about the factory. And if I put it all in China, I don't have to worry about the EPA. I don't have to worry about the unions. I don't have to pay for health care. And my margins go up, and I'm going to beat earnings, and my options are going to be worth a lot more money. And I'm going to be rich. And I think if you look at a lot of what transpired vis-a-vis these trade agreements, you just got to believe.

that when you look at the amount of lobbying dollars spent in Washington, this was probably had at least a fair bit to do with how policy evolved internationally with trade in particular. And it was, you know, this, you know, I'm going to get mine. And, you know, the old 2008, YBG, IBG, IBG, you'll be gone, I'll be gone. You know, by the time my options vest and I'm worth $100 million, you know, you'll will be gone and I'll be gone. And that was sort of true. But of course, the problem with it doesn't matter until the long run is that inevitably the long run shows up. And we're now sort of figuring out. And I think COVID in a lot of ways showed is making stark to even those that were defending

sort of the flaws in that system made it obvious to everybody. And so I think there's suddenly this, this, you know, like you said, I do think now we're moving back in the other way where it's, oh gosh, what do we do? We have to rush and we want to get this done fast. And it's going to be hard to get done fast, you know, when you're trying to unwind some suboptimal policy decisions that were made over 25 years span of time. I think I saw you call at one point or use a different phrase to describe this, let them eat equities policies. It, yeah, I mean, there was at some point along the way, and there's reasons I think this evolved, but you can clearly see that basically policy got to be the Fed making sure equity prices rise, because we've done the work, it shows that per IRS data, net capital gains plus taxable IRA distributions are about 200% of annual growth and personal consumption expenditures in the United States or PCE. and PCE is a $13 trillion line item.

So it's about two-thirds of GDP. So this is not saying people are taking money out of IRAs or selling their businesses and buying cars and boats and health care and all the wide span of stuff that's in PCE. But what it does say is that mathematically it's impossible for PCE to grow if stocks aren't rising. And if PCE's not growing, it's virtually impossible for GDP to grow because PCE's two-thirds of GDP. And if GDP's not growing when your debt's over 100% of GDP, that's a problem because now you're moving toward a sovereign debt crisis. So there's this linkage where you can sort of take a look at how big equities became. And some of that is a function of just the way the system worked in terms of recycling dollar deficits back into U.S. financial markets.

some of it as policy. When you look back to Bill Clinton who signed a policy limiting cash compensation of executives, this is either 1994-95 he signed this. Cash compensation over $1 million was not deductible by the corporation. And so it was an attempt to ease or or cut wealth inequality. But they made an exemption. They said incentive comp does not count. It doesn't count. So stock options,

incentive stock, et cetera, didn't count in the legislation. So post-95, guess what corporate America began doing? They began taking a whole lot of their comp and incentive comp. And so as stocks rise, instead of it reducing wealth inequality, this tax law change actually hypercharged it, supercharged it.

So there's just a number of different policies they put in place that made the stock market super important to the economy. And you can see whether it was 2011 when Ben Bernanke was asked for proof that QE worked, one of the first things out of his mouth was, well, stock prices went up. And then Janet Yellen talking about the possibility the Fed could eventually buy stocks in 2016. You can just see that it became the way for them to try to their transmission mechanism. to get money into the economy by making stock prices rise. It's really interesting. So Neil Keshgari, after Powell's speech, was on Oddlots, Joe Wisenthal and Tracy Allaway's podcast on Bloomberg.

And I actually haven't had a chance to listen to it yet, but I saw someone's commentary. And they basically said that their read on Keshkari's take on asset price inflation, which obviously he would, you know, it is not the party line to acknowledge that or accept that something that the Fed's policies have enabled or abetted in any way. But that the read that this person got from listening to him was that almost if that was a externality or a byproduct of getting to full unemployment, they wouldn't care, right? That the Fed was basically what they were trying to signal is that what mattered to them most was getting to full unemployment, not sort of just some natural rate of unemployment, and that if asset prices, you know,

inflated because of that or alongside that, you know, to so be it. And the interesting point that this person made was that it's Nick Carter for anyone who knows him in the kind of crew of my listeners. The interesting thought experiment that he did is like play that out to the extreme where you basically have every single person is guaranteed a job, you know, not necessarily a good job, but a job, right, with wages, but all the assets in the world are owned, you know, the genie coefficient basically goes to one. And it's entirely kind of owned by the very smallest tip. Would that be acceptable? And I thought it was interesting because it's, you know, as as ludicrous

as it seems, then the natural question then becomes like if that is, in fact, the case that employment or, you know, full employment becomes the goal, then where is that line in terms of the division of wealth and jobs in the country? It is. It's a difficult question. It's a political question because you start getting into guaranteed jobs and what have you. You start to talk and central planning the economy in that way. That's not a capitalist system.

That's really a socialist or communist system is what it is. and that's not me passing judgment on it or calling me. I'm just, that's, you look it up in the textbook. That's what it says. And there's no easy answers to that because there are levers they have that they can pull and there are levers that they're not allowed to touch, they being the Fed. And so as long as there are levers they can't touch, you're going to get these periods of time where things get really mismatched in terms of employment, the social situation,

debt levels, et cetera. And when you look at things they can't touch, they can't touch demographics, whether you're talking about the number of old people, they can't touch birth rates, they can't touch technology growth, they can't touch productivity, they can't touch education, They can't touch a number of the policy things that would make them and their policies much more efficient. Some of that's really good because it's a democracy and so that prevents anything bad happening. But when things are really moving fast and because of the world in which we live, technology is moving so fast, ideally the Fed would be most. efficient under some sort of benevolent dictatorship, right, where you can do the right thing for the people or the most people and structure things with this goal in mind of being here in

five years and somewhere else in 10 years. And that requires you to believe that the benevolent dictator was all knowing and that the benevolent dictator would remain benevolent. And, oh, by the way, this sounds an awful lot about an awful lot like Chinese, China's five-year plans and it assumes the dictator knows the best technology, et cetera, so on, so forth. So it's, I have empathy for what the Fed's, the Fed is, is, is, is, is, is trying to, you know, they're trying to fight Mike Tyson and, and, and they're, you know, all they can do is like flick with one hand. They're not allowed to punch. They're not allowed to kick. They, they, they can't use

the other hand, you know, and maybe sometimes they can spit at him, but it's hard. There's, there are some things they can do, but there's a lot of the, especially when you get to the sort of ends of these long cycles, you know, the debt cycles and rates get to zero and some of the stuff we're seeing around the world, there's not a whole lot they can do, you know, until they're really willing to work with the, with the policymakers and devalue the currency. Well, I mean, I think that that to me, I mean, really gets at it. And this is the thing that I always come back to is that If this is the institution we've chosen to really get the, you know, unemployment down, right? And to get to full employment, like the only tools that, but the only tools they have available to them are the same tools that they use for other things to use your Mike Tyson analogy.

It's like saying you got to beat him, but you can only poke. You know, so it's like, how much are you going to have to poke before you get there? You know, you're going to have to hire a bazillion people to poke all at the same time or whatever. You know, the analogy breaks down. But you get what I'm saying is that you can't. Ultimately, there's things that these set of tools can't do. And so they're clearly grasping for new sets of tools. But between here and there, there's just more of the same, which right now looks like asset

price inflation and a bunch of other things that aren't necessarily what they were going for. No, I think that's right. And it's a very difficult political question because you run this. system out to its logical conclusion and it's like you said it's it's it's neo feudalism it's it's you know everybody gets some check in the mail and we all send some big portion of the check to jeff bezos every month and you know basos drones drop the stuff off every and and right and so that that's very um uh dystopian there's a way that if it's done properly it can be very utopian where

you know, we're all doing what we love every day, whether that's writing or making music or, you know, helping kids or teaching something to somebody young or recording some historical experiences for posterity. And then we're also collecting UBI and we're buying at Amazon. And so there's sort of, there's a way where you could almost use technology to return America to being a nation of shopkeepers, quote unquote. And that could actually be more utopian, at least in that direction, that requires some big assumptions. So there's ways to get there. But again, it requires political foresight. It requires political courage. And those are two things that are in short supply these days, unfortunately.

Yeah, I couldn't agree more. Well, so, I mean, against this backdrop, obviously, it was a very interesting. month for gold. We saw it, you know, kind of punched through that $2,000, you know, dollar marker. We saw, you know, interesting machinations and things around pensions and institutional buyers. And we saw, obviously, Buffett make a bet on Barrick. What was your take on all of this? It was just kind of completely expected with the macro backdrop. The Buffett thing surprised me. The pensions things surprised me to a certain degree. I mean, I, We've been talking, you've been seeing hints of some other pensions looking at gold.

You know, they tended to be more libertarian-leaning states, I guess, if you will. You know, more, you know, the Alaska's of the world, the Wyoming's of the world, where there's a little bit more of a tradition of sort of self-reliance and libertarianism, if you will. So those things surprised me. you know, gold went vertical and then pulled back. And, you know, to me, I think we're likely going to continue to see more volatility like this around gold than we'd seen in the past. I mean, it's fascinating. We went through a period of time where gold volatility was de minimis.

And now it's moving in $50 and $80 swings all the time intraday. ultimately I think it's much healthier for it to sort of consolidate some of the gains it's senior to date rather than going vertical because those types of situations never last very long or resolved very favorably so I'm not too I'm not too worried about it I still feel very good about about gold and and and that really comes down to the dichotomy laid out in that tweet which is either either the debt's going to get defaulted on or the debt's going to get restructure inflated away. And either one of those things, gold ends up okay. It's one of the few asset classes that does well

under either one of those. There's virtually, I would say, gold and Bitcoin and probably silver, too, the assets that do well either way. It's a pretty short list in my view. Yeah, well, you know, when it comes to that volatility, you know what they say gold is physical Bitcoin. So get used to the ball. Yep. No, I just, you know, I keep buying, I keep buying Bitcoin too. And I, I, you know, I continue to really like, I really like Bitcoin as well. Well, listen, Luke, I really appreciate you hanging out today and spending some time.

For those of you who haven't heard it yet, please go back and listen to the last conversation that I had with Luke. I dragged him through basically like an hour and a half of economic history to get us to an understanding of the dollar system. But I wanted to close. You just published Mr. X interviews volume two. And I wanted to give a shout out to that and just let you have our listeners hear about what that's about where they can find it and just what you're kind of trying to accomplish with it. For sure.

So I just published my second book, the Mr. X interviews volume two, which follows volume one of that. And the genesis of these books, they're written in a Socratic method. So it's an interview, me interviewing a fictional sovereign creditor of the United States. And it started off with a client of mine asking me probably almost five years ago now to recommending that I conduct an interview or write something in the Socratic method, just so I could illuminate the thought process that we were discussing at the time. turned into a recurring series, and I began collecting them and publish them as books. And so we've gotten great feedback on them just in terms of the Socratic method really allows some speculation in terms of motives. They're all supported throughout the book with events.

And so they're chronological in order. The first book covers 2015 and into 2016, 2017, and then Volume 3,000. and then volume two picks it up in the third quarter of 2017 and goes forward into the first quarter of 2019. And so you can catch either one of those on Amazon, pick either one of those up on Amazon, both in electric form and hard copy. And for more information about our work on our research work,

you can check us out at fFTT-LC.com. And I'm also on Twitter at Luke Gromin, and with a pretty, as you said, pretty active Twitter feed. Well, Luke, I really appreciate you hanging out today. Always a pleasure to talk, and I'm sure I will drag you back for some more debate and discussion soon. Absolutely. Thanks for me on, Nathaniel. Always happy to, always happy to check in. This is the second interview I've had in the last few weeks where the idea of the USDA system and to whose advantage the USD system is has come up. The other one was

with Hugh Hendry, and in many ways, as I mentioned in that conversation with Luke, Hugh's point was that maybe it's time for China, who has been the biggest beneficiary of the system that we organized over the last 20 years, to start paying their share of the bill. That's Hughes' point. I think Luke's point is that maybe that's harder to actually do and implement from a geopolitical perspective, even if that was the policy that we want. That, to me, shows that part of the challenge that we face right now is not just a crisis of economics, but a crisis of global political leadership. And that's an issue that we haven't positioned ourselves well to deal with. I certainly think it means that if you care about these issues, you

have to be paying at least a little bit of attention to things like global economic policy, like the way that domestic politics interacts with global economic policy, because of course, as much as we'd like to pretend they're not, these things are all interconnected. did. Anyways, guys, I appreciate you listening. I hope you enjoyed that conversation. And until tomorrow, be safe and take care of each other. Peace.