We Study Billionaires - The Investor’s Podcast Network - BTC093: The Debt Spiral Defined w/ James Lavish (Bitcoin Podcast)

Starting point is 00:00:00 You're listening to TIP. Hey, everyone. Welcome to this Wednesday's release of the podcast where we're talking about Bitcoin. Back by popular demand is the one and only Mr. James Lavish. James is an expert in macroeconomics with a CFA, Yale alumni, two decades of institutional investing experience and risk management. During our chat, James gets into the details why Western countries are starting to enter into a debt spiral. We talk about how central banks are likely to make adjustments to the supplementary

Starting point is 00:00:28 leverage ratio or SLR, why it's important and what it means for risk assets, bonds, and Bitcoin. We continue a discussion we had about Japan from a few quarters ago, what's in store for credit markets, and much more. This is a chat that you will not want to miss, so get ready. Here's my conversation with James. You're listening to Bitcoin Fundamentals by the Investors Podcast Network. Now for your host, Preston Pish. Hey everyone, welcome to the show.

Starting point is 00:01:11 Like I said in the introduction, I'm here with James Lavish. James, welcome back to the show. I think this is the third time we've chatted. Awesome to have you. Yeah, thank you for having me again. I love coming on your show. I'm a huge fan and always like talking to you, Preston. Well, you got to see a little behind the scenes where I had a technical nightmare tonight,

Starting point is 00:01:32 working with my new computer. Oh, my Lord. We got through it though. As my wife likes to say, yeah, as my wife likes to say, is tech happens. It's been brutal for me lately trying to get this new computer up and working. But that aside, let's jump right into this. You wrote an awesome write-up about this debt spiral that's currently taking place here. And you're just talking about the U.S.

Starting point is 00:02:00 You're not even talking about some of the other places in the world. All the numbers you were thrown out there was the U.S. numbers. walk us through the layout of all of this. Really break it down for us so it's so I don't understand. Yeah, so absolutely. I got, I have to give kudos to Greg Foss because he and I were talking about it. And, you know, he's like, man, you've got to, you've got to write about this.

Starting point is 00:02:21 This is just, it's a major problem. I said, yeah, I think you're right. And so I dug in. And, you know, the thing is we talk about debt to GDP all the time, right? And you look at all the countries who have debt to GDP. that are over 100%. We've got that chart in there in some of my recent posts, and it's got that awesome chart that shows all of the, that kind of spiral of all of the economies that are running over their debt, over their GDP. And that's a good, that's a kind of a good baseline measure

Starting point is 00:02:54 for you to get an idea of if there's a problem. I mean, you know, we've talked about Japan. We'll talk about that later. But people usually think, well, the U.S. is fine. The U.S. is, yeah, they're running their debt to GDP is over 100%. And now if you look at it, it's 137%. And but they've always, you know, we've been running deficits for a long time. It's not that big of a deal. Then when you stop and you think about it and you actually do the math like it was a company, like it's a company that's operating and borrowing as it's operating, right?

Starting point is 00:03:27 I mean, it's no different than if you were Microsoft or you were Apple. And, you know, but you're running your operation and you've got your expenses and you'll borrow money in cheap rates in order to put leverage on your balance sheet to grow faster, grow quicker, you know, larger. And so we can do that and we've been doing it successfully for a long time. But the problem is now we're running deficits that are so large that when you just pull out the big pieces, right? So we kind of, you kind of condense it down and isolate out the big pieces. You've got your entitlement spending. You've got your interest on your debt. And those should be less than your tax revenues, right? Your revenue coming in are the taxes off of your gross domestic product. And those are broken down into all of the categories. You know, you've got your,

Starting point is 00:04:19 you've got your corporate tax, your capital gains, you've got, you know what all the taxes are. We won't go into all of the nuances there. But the bottom line is, you know, you're going to, is right now, where we stand in the United States, I was going through the Congressional Budget Committee and what they're coming up with on all of their estimates for the year, 2022, right? And right now, they're estimating $4.8 trillion of taxes. Well, when you take out $3.7 trillion of entitlements, now those are in legislation. Those are not flexible. Like, that's got to be paid, right? Yeah. And you estimate $800 billion for defense spending, well, you're left over with $300 billion for interest expense, but we're currently

Starting point is 00:05:04 running interest expense at $400 billion. So it doesn't take a math genius to figure out that we're running in a deficit, right? So that's, first of all, that's a problem. So how do you cover that? Well, you can either raise taxes, which actually negatively impacts your GDP in the long run, right? So your productivity goes down if you raise taxes, it's just natural, right? You can cut entitlements.

Starting point is 00:05:27 not popular, especially in election year. So no politician likes to cut entitlements. No politician likes to cut spending. We've seen on both sides of the aisle. It doesn't matter. And the other thing you could do is you could borrow. You could just issue more debt, which is exactly what we're doing, right? So you issue more debt to cover that deficit, but you know and I know that we've been talking about this for a long time is the problem is that you're issuing more debt into in a rising interest rate environment. And so as you're borrowing, you're borrowing money that's more expensive. You're putting more debt on your balance sheet that you have to pay off with a higher interest rate. So, I mean, if you think about it, it's kind of like if you take out a balance

Starting point is 00:06:10 on a credit card, right, and you run up that credit card balance. For people who, like, this is kind of hard to get your head around, but to simplify it to the essence of it, you take out debt on the credit card, you run it all the way up. Well, the monthly payments that you have to pay after paying for mandatory things like mortgage, car loans, food, you know, you can't meet that because your interest rate payments on your credit card, your minimum payments are too high. So you take out another credit card to cover some of the expenses, whether it's the food or the other interest expense of your credit card, then you're taking out more debt. But the thing is, when you do that, your interest rate is going to go up because you're

Starting point is 00:06:51 Your credit is going down. Worse. Yeah. Yeah, your credit is getting worse, so it's more expensive for you to borrow, right? So as you do that, then you get into a situation where, okay, now you've maxed out another credit card. You're still not meeting your obligations. And now when you go out to take out another credit card, the interest rate is even higher. So you get into this trap.

Starting point is 00:07:13 You're just, you're trapped. You can't get out of it. The interest rates are going up on your credit, on your credit card borrowing, your monthly earnings are not meeting that. They're not keeping up, right? And so that's, in essence, for an individual, that would be a debt spiral. And we see it happen all the time in the United States. You know, we're a completely indebted country. So, but it's exactly what's happening in the U.S. So at a government level, yeah, at a government level. So exactly. Thank you. So if you look at where we are now and then you tack on the fact that interest rates are going

Starting point is 00:07:50 up. Let's just say, and you can look across the yield curve right now, and everything's right about 3%. Right? So if the government's going to issue debt, it's going to be at about 3%. Let's just say it's at 3.2% to make the numbers kind of round here. And if you use 3.2% on the 30 trillion dollars of debt that we have currently, and we have to replace that over the next number of years, That's a trillion dollars of interest expense. That's $600 trillion more than we currently have at $400 billion, $600 billion more than we have at our current rate of $400 billion. Yeah, it's the number goes up so aggressively with just even the slightest change in interest rate. Exactly.

Starting point is 00:08:37 That I just don't think people understand that we're not dealing with a linear type situation right now. We're not, yeah, exactly. And that's the problem. So we're watching the Fed kind of squirm. And they know that they can't raise rates too high. So what they've been trying to do is raise them quickly without breaking the markets. That's just one part of it. But as our markets go lower, their tax revenues are going lower, right?

Starting point is 00:09:08 The government's tax revenues are going lower. So you have lower capital gains taxes, right? As the interest rates go up, it squeezes margins for companies. So their corporate tax rates are going down. Individual tax rates are going down as we enter a recession. And so now you've got a situation that your interest payments are going up and your tax revenues are going down. And it's just a spiral. There's no way out of it.

Starting point is 00:09:36 So I want to quantify. I don't think that we're in a situation, Preston, we're. the world is ending for the United States through the U.S. dollar tomorrow. That's not what I'm saying, but I'm saying that if you look out, there's just no way out of this trap. There's no way that they can fix the problem. So what are their solutions, right? And by the way, this is before investors around the world demanding higher rates for the increased default risk, right? And I don't know when that happens. But we're in a situation now where the demand for U.S. treasuries is lower, right?

Starting point is 00:10:21 The global energy crisis is causing, it's causing countries to sell U.S. treasuries to raise dollars to pay for more oil, right? Because they don't want to, the last thing they want to do is have their currency being sold. And we can go right into Japan off of this. But the issue is, how do they bring all those U.S. treasuries to the market in order to pay for this deficit? And so the piece that you had said, you know, you and I were talking about earlier about Luke Gromond's newsletter. And he's a brilliant observation.

Starting point is 00:10:56 And that is that the debt markets are, they're kind of mirroring where we were in 2019. And how the U.S. Treasury, right, so exactly what we're talking about. here, right? We know that they have to, they have to sell more treasuries. It's, it's everything minus the rising interest rate environment, right? And it was bad back then. And now it's like insane. Yeah. Go ahead. I'm sorry I kind of stepped in. No, it's exactly right. So, you know, back in 2019 when they were, they raised. Okay. So right now, we've just gotten word that the treasury is is raising the third quarter borrowing estimates by $262 billion. Remember what I just said, right?

Starting point is 00:11:44 So they're raising it by $262 billion. Why? Because a drop-off in tax receipts and expectation that tax receipts are going lower. Of course, we just discussed that. And increased spending. More entitlements. I don't know what, you know, we've got a lot of spending. It's a gargantuan engine up there in D.C.

Starting point is 00:12:06 God help, anybody can figure out where all the money is scaling. So now you're talking about the new estimate is $444 billion of treasury issuance versus $182 billion. Well, who's going to buy those? And that's the problem is it mirrors the 2019 situation where they did the same thing and they raised it by about the same amount. And their total was $433 billion. And what happened?

Starting point is 00:12:34 The repo market locked up. Interest rates went, the repo rate went through the roof. And so the Fed had to step in and save the market, right? So what do they do? So this time, the Fed's trying to decrease its balance sheet at the same time. So they're trying to sell treasuries themselves on top of this through quantitative tightening, right? You and I have talked about, we've posted back and forth on Twitter a number of times, hey, look at how fast the balance sheet is coming down.

Starting point is 00:13:04 Ha ha. It's not moving. Yeah. Why? They know. They can't send more treasuries into the market, knowing that they're in this situation where tax receipts are going down, entitlement costs are going up, and there's no buyers. Yeah. Right? You know, we've had countries around the world, China and Russia scrammling to get all their treasuries off their balance sheet. So what can they do?

Starting point is 00:13:29 This was a quote from Luke's article just so people can hear real. simply the way Luke described it in his write-up. He said, the Fed is attempting to shrink its balance sheet into a toxic combination of a sharp rise in the third quarter U.S. Treasury issuance, insufficient foreign U.S. demand and a weakening global economy, but this time with a kicker of an existential global energy crisis to boot. And some of the numbers that you were quoting there, James, on 1 August, the U.S. Treasury increased its quarterly borrowing estimates by a whopping 143 percent to $444 billion from $182 billion, which is what they were expecting. And then this was an interesting quote he also had in there. He said, Jamie Diamond in the fourth,

Starting point is 00:14:21 I'm sorry, August 14th said that he estimates a 90 percent chance the U.S. economy goes into a recession or worse. And the or worse part made me laugh because it reminded me of when I was a kid watching the old Batman TV show when Robin said the Batman. He said, Batman, we could have been killed or worse. Or Hermione. Yeah, we could have been killed or worse. Or worse, expelled.

Starting point is 00:14:53 Exactly. Yeah. So, I mean, it's just. Yeah. Yeah. I mean, we're like, you know, we're sitting here laughing about it and it's not funny. What else can you do? It's nuts. It's so, it's ridiculous that we're in this situation, right? Okay. So what can they do? Well, we know that, you know, we've, again, we've been laughing about the Fed going up to Jackson Hole this week to have their, you know, their annual meeting. I mean, the awareness there, the

Starting point is 00:15:22 social awareness there is just that, I mean, rock bottom, right? To go to, I love Jackson Hole. It's beautiful. I don't know. Is the government? Oh, yeah. Yeah. It's crazy. While we're like we're in this major problem. And anyway, so the world's on fire. Everything's fine.

Starting point is 00:15:37 But so we're talking about what can what can Powell do? You know, we've watched the markets kind of fluctuate pretty dramatically around his comments and the other Fed governor's comments. And so he's walking this really thin line, right? So he doesn't want to break the markets, but he's got to get inflation down. But he knows that he can't raise. rates too high because he could break the bond market. And he knows that the Treasury is over there on the other side. And they're supposed to be separate, right? So I wrote a piece about this in another

Starting point is 00:16:11 newsletter about the Fed and how it's supposed to be separate. Of course, it's super political. I mean, it's obvious. But they're supposed to operate separately. Well, the Treasury's over here, and they have a a balance sheet issue in that, or they have a revenue and expense issue that the Fed is now going to exacerbate by raising interest rates. So they know that. So what can they do? Well, they can let inflation run hot. And so we've been talking about this. And Greg and I've been talking about for a while is about Greg Foss, sorry, is, you know, they're going to quietly, I think, they're going to quietly raise the inflation target from 2% to like 3 or maybe even 4. And they're just going to let it run a little bit hotter and allows them then to, you know,

Starting point is 00:17:02 monetize the debt. They allows them to pay down the debt with cheaper dollars, you know, in the future. And so that's one thing they can do. I don't know how long can do. Because we said it again, as soon as they pivot, and we're talking about QE infinity, right? So I don't think they're going to pivot before the economy kind of breaks. I don't think that, and this is my personal opinion. I don't agree with you.

Starting point is 00:17:31 But I don't think that Powell is going to pivot until it's absolutely abundantly clear that inflation is coming down. Well, you know, the indicators are there, but employment's still high, CPI is still high. And so, you know, as long as the employment is, they've got the dual mandate. As long as we're kind of at full employment, they've got to get inflation down. Well, he's going to continue raising rates until the employment number moves, right? So unfortunately, as we've seen and we've seen evidence of, employment often is the last indication of a recession.

Starting point is 00:18:10 The employment number comes down after the recession already hits, right? So that's an issue. So what else can they do? They can let it run hot, but we get into the same problem. CPI goes through the roof. Asset prices just soar, and whoever's closest to the spigot gets benefit of the dollar printing, the Cantillon effect, and then you're back to where we were in February, in January, right? But even worse.

Starting point is 00:18:40 So there's another thing they can do, which I haven't seen many people talk about yet. I've heard Lynn say something about it before Lynn Alden say something about it. SLR. I can't remember when. Yeah. Exactly. Yeah. So and if they change the reserve requirements or they just let.

Starting point is 00:19:01 Tell people. The SLR is the supplementary leverage ratio. And this is how much treasuries the. the bank is allowed to hold on their books, right? Like that amount for how much they have land out. Yeah. And they're, and exactly. It can't, it comes out of the, you know, it comes out of the financial, great financial

Starting point is 00:19:23 crisis and the new leverage ratio laws and what banks can hold. But what they could do is just, and that's exactly right. So you, perfect. Keep it simple. And so, but what they could do is they could either change that ratio or just say, well, you don't need to have a ratio at all in this environment. because it's so important as the repo market starts to break, we're going to need you to come in and buy these treasuries. Okay. So, I mean, we know there's a $2 trillion plus of cash out there

Starting point is 00:19:53 that we've got reverse repoed, you know, constantly. Well, that cash could go buy those treasuries. The treasuries go on the bank's balance sheets. And what is that? That's essentially a form, a sneaky form of additional QE, right? Yeah. I mean, Right? So, I mean, it's money that that was printed in the last two years that they're using to buy the debt, to monetize the debt. I mean, it's kind of, then where do we go from there? If they do that, are the yields going to start getting suppressed from reality? Like the reality of going higher? Are we, are we, yeah, we're able to hold the rates down? Yeah, it's a form of yield curve control. Absolutely. It's a form of yield curve control. Absolutely. It's a full. It's a form of yield curve control. So let's talk about that.

Starting point is 00:20:43 So we've seen, I mean, look, I don't know when this happens, but I do know that there's decreased, you can see it. There's decreased demand for U.S. treasuries. And at some point, you're going to hear about the overnight, the repo market breaking. And just like it was in 2019, I think I think that Luke is 100% correct. And he thinks it happens soon. Like in his nude letter. He thinks it's imminent.

Starting point is 00:21:12 Yeah. Yeah. Like weeks. Yeah. I mean, he's right that the Fed should be pausing at least by now, but I don't think they're going to. They're going to raise rates again, 50 basis points in September. And then I think they're going to raise them again.

Starting point is 00:21:26 Unless something happens, something changes. They'll raise them again in November and December and then pause. So this was something that was tweeted out tonight. I know it's by zero hedge, but this is this is what they said. Cashkari, who's the Fed official, says very clear Fed needs to tighten monetary policy. And then this is their snarky reply to his comment. It said, translation. Very clear.

Starting point is 00:21:53 Only way to fix collapse in commodity supply is with millions of unemployed workers. And so I find their reply to be very, I know they're joking, but they're serious at the same time is like, hey, so we keep tightening. We already have severe disruptions in commodity supply chains. And so now we're going to get a whole bunch of people laid off to only make that worse and only make these desirable goods and services continue to go through the roof because people are now getting laid off. At what point does the playbook from the last 40 years, are we at the point now where that playbook is you got to literally throw it out?

Starting point is 00:22:34 Scrap it. Yeah. I mean, remember the leverage where we have. are in right now. I mean, we've never gone through a recession like this where we have debt to GDP far above. I mean, we're above 100%. We're at 137%. Is that? We're not making, we're not making enough money to pay for it. Like, we're just, we're just, we're trapped. We're trapped. And it's just a question of how long we can play the charade. I think that Russia is kind of calling us out on it. Oh, yeah, I think their whole move was that, wasn't it?

Starting point is 00:23:07 Yeah, they're just like, look, it's fake money. It's monopoly money. Everybody wake up. It's a monopoly money. And then when we pulled, we pulled them off a swift and we seized treasuries. Like, that's just, I think it's insane. I think it was a, it was a fumble, you know, and oops. And everybody's looking around saying, you know, India, China, like, they're looking around

Starting point is 00:23:32 saying, well, they're, you know, we can't trust that these, that. that the treasuries we own are they're going to make good on them. That's insane. If we want treasures to be the reserve asset of the world, we should honor them, right? So, I mean, it's, yeah. James, I would say, I mean, I'm getting, forget about ethics of war or anything like that. Yeah, yeah, yeah. Just, I mean, you know, the math.

Starting point is 00:23:57 The math. Just the math. Yeah. Let's take a quick break and hear from today's sponsors. All right. I want you guys to imagine spending three days in Oslo at the height of the summer. You've got long days of daylight, incredible food, floating saunas on the Oslo Fjord, and every conversation you have is with people who are actually shaping the future.

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Starting point is 00:28:10 No, I got you. When I'm looking at like how bad, and what we were describing was all U.S. based math. When I look at the European situation. 11th grade, 11th grade. 11th grade math. Yeah, thank you. When I look at the European situation.

Starting point is 00:28:28 situation, it seems way more dire, way more insane, way more difficult from just like, what is the incentive structure? Who is a net exporter? Is there any even any left in Europe? Because it used to be Germany and now they're not even net exports. Germany was it, right? Yeah. And so.

Starting point is 00:28:52 I mean, then in they're like in a real like make or break energy crisis. I mean, look at it. They're in a real, they're in a major problem, right? So you just saw the the French energy cost that I sent out that I re-posted a chart about the French energy prices that are up. I mean, the amount that the prices are up in everywhere. It's everywhere in Europe. They're just soaring.

Starting point is 00:29:20 Well, they don't have capacity, right? So they don't have capacity. So how do they get capacity online? Well, they just took, they took three nuclear generators off. line in Germany, right? And they were supposed to decommission six. Well, they've decided that, okay, we won't decommission the last three. I mean, okay. Oh, I thought they were going to do that after December. Yeah. They're going to keep it through December, at least to, you know, to get their people through the winter, although to me, I think winter goes through March, ish, right? I don't know.

Starting point is 00:29:55 I don't know who's in charge up there. But, you know, and then you've got, just talking about the money situation out there, though. I mean, they've had free money for 11 years. In fact, they're paying you to take the money, right? Not really because you can't get negative interest rates from a bank. But they had a negative, they had a negative key target rate, right? The key interest rate, the ECB held it below zero for 11 years. They finally raised rates in July.

Starting point is 00:30:25 just a few weeks ago, finally, after they've had record inflation for months, and it's now at 0%. So talk about a union that has no, they have no room. They have no room, none. So as soon as they started talking about raising the rates, you and I talked about how Italy, the Italian bond market started to break. And so the, you know, Lagarde came out and said, oh, wait, wait, wait, don't worry. We're going to be there. We've got this antifrasy. fragmentation tool. It's yield curve control, but it's deliberate yield curve control that picks out specific country bonds, specific maturity and specific denominations. So you've got, like they may pick out the two years. They're saying the 10 year, we're going to defend the 10

Starting point is 00:31:15 year. Don't worry about. And the 10 year came down. I don't know. I mean, if I'm an institutional investor, I don't, I don't particularly want to own those bonds because the market, the free market is telling you that they should be trading at a certain price. But now the ECB is coming in and essentially using the stronger country's balance sheets to monetize their debt, to monetize Italy's debt and Greece's debt, right? So now you've got Germany who's taking on the debt of these nations that are not operating at an efficient level, they should be, by all means, they should be defaulting on their debt at, you know, at some rate here. And so how long can that last? I mean, you've studied, you tell me, how long do you think it could last?

Starting point is 00:32:09 Well, I would have told you it couldn't have lasted this long, you know, so I'm obviously, I guess when I'm looking at the whole situation, like, where the hell was academia for the last decade in this situation where you were running negative rates? And instead of them speaking up and, you know, sounding the alarms and being the canaries in the coal mine, they were literally out writing books about MMT and how this is normal and how it needs to be more negative. And so it's just like, what's their incentive structure? Right? And then you pull back and they're being funded to write this crap, right?

Starting point is 00:32:49 By the same people that are causing it all. Right. So, I mean, you could make the argument that we couldn't have made the productivity gains that we have without running deficits in debt. I mean, you could make that argument. No, I totally agree with that. Yeah. You know, but now we're addicted. I mean, there's no way off that we're, there's no way off of that, that addiction.

Starting point is 00:33:14 Like you, you, everybody needs debt. Everybody's borrowing, you know. Everything, everything has turned into a zombie. From the individuals to the companies to the government. And now, and here's the problem, right? So you had individuals and companies that were zombies that back in the great financial crisis. Yeah. Well, we kicked, we kicked the individual problems up to, up to the banks.

Starting point is 00:33:38 straight up to the government, well, where are we going to kick it now? So, you know, there's nowhere to, there's nowhere to kick the problem any further. That's it. We're kind of at the end of the line. So the question isn't whether sovereigns start to fail. The question is which ones start failing first? First. And, you know, emerging markets, their balance sheets are not as strong and they're going to,

Starting point is 00:34:05 their currencies are not as strong. They don't, you know, we're seeing the U.S. dollars soar here because people are, they're taking risk off and they're looking for safety, right? So you're going to have smaller nations that fail. The currencies are going to fail. They're going to go into hyperinflation. And, you know, they're going to have to reset. And the question is, which G20 goes first? Is it Italy? Do you think we see that in the country? coming 12 months that we see a G20 go in the coming 12 months? Well, I mean, I could get to a place where the EU has no choice but to talk about breaking

Starting point is 00:34:50 up. Within 12 months. I mean, it's possible. I mean, this energy crisis, if it worsens, it's possible. Yeah. I don't predict that. I can get there, you know, but no, I don't think that I, do we see emerging markets fail Oh, in next four months, it's very possible.

Starting point is 00:35:09 A G20, I don't know. These things take so long. These, right? Once they start unraveling, they happen, I think, faster than everybody thinks it could happen. I agree. Just like any type of liquidation event. Like everyone, the thing people all say is, it happens so fast. It happened like in the blink of an eye.

Starting point is 00:35:28 And I think this situation that's brewing, I don't think people have an appreciation for how insanely fast this could. like ripple throughout every country because everything's intertwined right and the u.s. dollar will soar yeah the u.s. dollar will swallow everything the milkshake theory right and i can see countries collapsing within you know absolutely in the next three to five years i can see that happening well how does that happen well because we go through the one more cycle like this right and it seems like the cycles are getting shorter shorter, tighter, and more pronounced, yeah. Shorter, tighter, more pronounced, right?

Starting point is 00:36:11 And so I could see that happening where we go through this QE, like we have our recession, hopefully not a depression, but we have a recession. And then we have our pivot. We start, we go through QE again, you know, stop the QT, put bonds on balance sheets, whether it's the Fed or we change the reserve requirements. And then we start giving out entitlements. We subsidize and we send out more checks. And that really causes inflation.

Starting point is 00:36:44 And then the inflation runs so hot again that you've got to tighten again. But you raise those interest rates. You put more debt on the balance sheet. We're in the debt spiral, right? We're already in it. You put more debt on the bank's balance sheets. You borrow more as a U.S. government. Your tax receipts are going down again as you raise rates.

Starting point is 00:37:01 Yet your interest expense is going up. and it goes, it just goes in the stairs step, and I could see it in the next maybe two cycles where it breaks a number of G20. I don't know how you could possibly get. When I look at the streets of Philadelphia, San Francisco, New York, you name it, right? Name your city, right? How in the world could we possibly go another two cycles at this point without? out there just being an absolute riot.

Starting point is 00:37:37 There you go. And that's the problem. The problem is that the separation of wealth is just being more and more pronounced. It's getting more pronounced with every single cycle. You know, and that's the issue. So when you've got Fed governors out there saying, why don't see, I don't see a recession. I don't feel anything. Well, when you make, you know, $8,000 a week, whatever is, you know.

Starting point is 00:38:03 Yeah. Between their speaking engagements or whatever. I mean, of course you're not going to feel it. Come on. Give me a break. You're going to Jackson Hole to talk about all the problems. The Gulfstream was delayed. We're not leaving until 10.

Starting point is 00:38:21 Couldn't get gas. So we couldn't get jet fuel. So, yeah, I mean. Yeah, it's, it's insane. Let's pivot to Bitcoin. So Eddie, I don't know if you know Eddie, but he posts some awesome questions online. He had a question for you. What is the most important change institutional investors are waiting for before changing

Starting point is 00:38:44 mandates to include the direct BTC exposure? I think they want clarity around regulations, you know. They want regulatory clarity. How is it going to be treated? You saw Gary's write up this week, right? I haven't seen it yet. No. You didn't see this right up in the Wall Street Journal.

Starting point is 00:39:03 He's basically like, hey, you know, all these borrowing and lending platforms were doing legal things. And this article was proof that they were because we just said that they were. So have at it. That's basically the. Did you lump in Bitcoin with it? That was my 10 second Summers. Just any, any basically said that, yeah, it doesn't matter whether it's Bitcoin or any other token, like because these borrowing and lending platform, are out there doing these things, these security-like things, that there should have been disclosures

Starting point is 00:39:37 by them to the public. And so the public has damages. Regulation. They want to oversight, oversight, oversight, oversight. Yeah. And so I think there's a line there, though, how much oversight versus the strength of Bitcoin, you know, being hard money. When institutional investors get both clarity around regulation,

Starting point is 00:40:01 and their knowledge base rises and they understand Bitcoin as a completely separate asset than an Ethereum, than a Cardano or Solano or whatever. When they can see how it's unique, and this has to do with educating the, you know, all of the investment managers that are going to be making these decisions, I can tell you right now, Preston, there's a lot of ignorant managers out there who have no idea the difference between Bitcoin and Ethereum. None. Yeah.

Starting point is 00:40:39 And it's not that they're dumb. They're not. I know very smart people who have no idea what the difference is and why they should be buying Bitcoin and treating as a separate asset class. And part of the reason is, well, they don't need to know. They've done very well in this current system that they're, that they've been thriving in for decades. They don't need to know what hard money is. They have manipulated money and that's treated them very well. The Fiat system has treated them very well. So that's number one. And then just

Starting point is 00:41:13 the institutional money managers themselves have a lot of hurdles to get through. And we've talked about this before. And it doesn't get on their balance sheets quickly. It takes a long time. So you've got to get enough of them to get comfort around regulation and whether or not it's going to be, number one, and if it's not going to be the comfort around that, understanding it, and then get through all of their processes in operational and legal settlement, you know, custody processes that they have to iron out at each of those institutions in order to own it as a separate asset class. And that's going to take time. But having... Do you think pain is the instructor for them to try to understand it? And when I say pain, I mean all

Starting point is 00:42:00 these supply chains are breaking down, our prices are blowing out. Like, how does this possibly solve itself? When I look at the Fed, they're going to keep printing more. They're doing QE. Does that, does all of that force them to try to understand what this is? It could, but you've got all of this noise out there around proof of work versus, you know, proof of stake, right? So, and the amount of energy that Bitcoin uses to, you know, be mined. And that's, and there's going to be, I think there's going to be a lot of noise about that over the next year or two. And that's just, unfortunately, that's been a headwind and it's going to increase. And I have no idea what's going to happen with Ethereum in a few weeks. I have no clue if it's going to work or not going to work or

Starting point is 00:42:47 what's going to happen. Sounds like you know the same as the developers. Right. Did you hear that? conversation? Insane. Crazy. Insane. Yeah, I think you said that to me. It's insane.

Starting point is 00:43:00 Let me ask you this and James on the energy side. So, you know, I was talking with Parker and Will Cole last week. And they're telling, I mean, they were down in Houston. And I asked them, is it inevitable that you're going to see this merging of infrastructure between the miners and large cap energy companies? And they both looked at me and they're like, yeah, like that's happening. No brainer. It's a no brain.

Starting point is 00:43:24 no-brainer. So do the apples of the world who are not in that particular space that might be looking at this and saying, well, I don't know which one of these things are going to win. I just know that we've got issues and they're not getting resolved. When they look over at an ExxonMobil or a Shell, I think is Shell sponsoring the Bitcoin 23 event? Is it really? I think one of the, it's either ExxonMobil or Shell or like one of these large cap energy companies is sponsoring the the next Bitcoin conference down in Miami. And that's a big deal. It's a huge deal.

Starting point is 00:43:59 And so I think you're going to all these narratives around energy and how corrosive proof of work is to energy. I think these energy companies are like, cool story, bro, but we just, you know, doubled our bottom line or whatever. And we're actually having a favorable environmental impact by actually storing all this energy that we'd be just, you know, pissing over the dam or, you know, not capturing to exactly. Just like, yeah, just you're just flaring gas. I mean, it's just, yeah, it's crazy. It's a massive amount of waste, right? So, you know, it's funny you bring that up because I was

Starting point is 00:44:39 thinking about that in the Bitcoin conference this year and how much fun, I mean, and that was my first conference. I had never, I'd never been to the Bitcoin conference before in Miami. I thought how much fun it was to be around all these people who are super passionate about this emerging technology, but it's really, you know, it's really a global money saving discovery, right? Yeah. And the energy around there is just incredible. I was looking around, I was thinking, what's it going to be like when you've got Goldman

Starting point is 00:45:09 Sacks here and Credit Swiss? Or maybe not Credit Suisse anymore, but, you know, JP Morgan. And like you said, Exxon and Shell and all these major companies and Apple and everybody's there and you know, Apple's in there talking about lightning and, you know, Exxon's talking about mining. It's going to be time for us to find a different venue. Right? And it's going to be boring, right?

Starting point is 00:45:35 It's going to be boring. But I can tell you this, that's where it's going because once it gets institutionally adopted, they're going to be all over that space. And that's when you know it's just the momentum is just too great. And I think that we're already at, so to answer your question succinctly, I truly believe Preston that we, that momentum is just too great to stop. The problems are just too great to solve. And that that merging is what absolutely makes Bitcoin win.

Starting point is 00:46:11 And it's not, it's not even that we're going to have a fight and we've got to make sure that we clarify it. But I think that that is just about. the length of time it takes to get there versus the weather or not it does. Yeah, yeah, I totally agree with that. Let's take a quick break and hear from today's sponsors. No, it's not your imagination. Risk and regulation are ramping up,

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Starting point is 00:49:22 The fund's total return in 2025 was 8%, and the average annual total return since inception is 7.8%. Past performance does not guarantee future results, current distribution rate as of 1231, 2025. Carefully consider the investment material before investing, including objectives, risks, charges, and expenses. This and other information can be found in the income fund's prospectus at fundrise.com slash income. This is a paid advertisement. All right, back to the show. Yeah, does it happen quickly because people come to their senses and realize, oh, the solution is literally smacking me in the face? Or do they battle it and fight it and, you know, end up losing anyway in the long run? Yeah. Yeah. Yeah, it's coming. I just think that the momentum's already there.

Starting point is 00:50:09 We've seen Fidelity, Black Rock, you know, J.P. Morgan, Jamie Diamond, talking about it. You know they have experts on their desks that are that are working on this and creating the ability for their high net worth portfolios to own it. I mean, the momentum is there. It's not going away. So, yeah, they're working on the merch. Got it. Hey. Hey, a couple of cheap shots here. So I think we already covered this earlier when we were talking about the debt spiral, but I just want to highlight this question because this is something that I think a lot of people have this question online. And Lynn has done an outstanding job explaining why we haven't seen inflation actually materialize after 2008 when we were doing QE.

Starting point is 00:51:02 And in her article, and a couple different article is that she's highlighted, she's saying, hey, it really needs to be the Fed and the Treasury acting together, monetizing the debt and doing QE simultaneously for to actually start spilling over into what, you know, everybody would see when they're checking out at the grocery store to see inflation actually making its way to the consumer. And so this is the question that the person posed. They said, what changed in 2020 that wasn't happening from 2008 to 2020 that got the Treasury also working with the Fed to cause this debasement and these inflationary prints to start

Starting point is 00:51:39 manifesting themselves? I think the simplest thing is we just sent checks directly to consumers, right? That's the, I mean, we sent trillions of dollars into people's bank accounts. So it immediately caused a demand for goods, number one. Number two, our supply chains were broken. We were in lockdowns everywhere. You know, things weren't being made. They weren't being shipped.

Starting point is 00:52:04 You couldn't find certain things. You know, I mean, the used car market, like, you would have done better if you had used car than, you know, if, then I think if you had bought silver at that point, you know, I mean, like, so they're just worked there, I think that just that, just that combination has that, that has been a major driver where you just saw it immediately. And then it just got exacerbated with the energy crisis, you know? The fact that we don't have enough refineries to keep up with demand here in America. I mean, we can be energy independent without, you know, a blank, obviously.

Starting point is 00:52:45 But right now, we don't, the refineries get to capacity pretty quickly. So we're just, we're draining our emergency reserves, right? Our special reserves. So there are a lot of different. So I just think that exacerbated the issue. So let me ask this, because it kind of. piggybacks on that. And so is your opinion that a lot of this disruption and a lot of this inflation is hanging around because of those factors, but moving from time now forward, because

Starting point is 00:53:19 we're now in this debt spiral and they have to monetize the debt because you're in this spiral type situation that the interest expense is now exceeding what we can actually handle. Absolutely. It's pure math, right? It's pure math. And so inflation, what people have to understand And I was talking to my wife bought it. And she's like, well, when do you think the prices will come down for some of these goods that we've seen just rise so exponentially? I'm like, they're not. That's when you gave her just going to. You gave her the Anakin Skywalker, you know, smirk to Natalie Portman, right?

Starting point is 00:53:52 Right. Like, she's super smart. They're not. You know? But people, it's really hard to get your head around the prices of things now. Like, just anything. Name anything. Yeah.

Starting point is 00:54:05 It's really hard to get your head around the prices. And so people are like, well, when are we going to see these prices come down? It's like, we're not. You know, you're just going to see them go up a little bit slower, you know? So, yeah, I think it's sticky and it's because of all the underlying issues that you laid out. No question. Yeah. Because we didn't have this dead spiral scenario prior to 2020.

Starting point is 00:54:27 Like it was getting bad. You could see it moving in that direction. But now it's when it got out of control. Yeah. That was kind of the tip off. Yeah. But now it's just pure 11th grade math, as Greg would say. That's right.

Starting point is 00:54:42 What's caused the Japanese credit markets to kind of calm down a little bit from the last time we talked? Because I remember we threw up a chart and we were looking at the volatility across the whole duration of their curve. And it was looking like somebody was trying to blow through the yield curve control. And it looks like whoever that was or whatever was causing that has kind of calm. Yeah, has backed off. Yeah. Those are a huge hedge fund trades, right? Where they were selling JGBs.

Starting point is 00:55:11 And, you know, so what they're trying to do is take the opposite position, right? So they were like short swap positions by hedge funds as they go the short JGBs and long yen, right? Which is a counterforce to, you know, what Japan is trying to do, right? the Bank of Japan. Well, then when it looked like the Fed was already becoming doveish and they're going to pivot, this is one of the, I believe that Japan is they're playing a game of chicken with the Fed, right? They're hoping that the Fed blinks before they do and they pause, right?

Starting point is 00:55:59 So it's just, it's a simple search for yield is a major driver. of currencies, right? So when you own a 10-year treasury in Japan, and to catch your listeners up for those who hadn't heard this before, the Bank of Japan has instituted what they call it yield curve control where they are buying every single 10-year treasury to keep the interest rate at 25 basis points, 0.25%. So they'll buy endless treasuries to do that. Well, they've proven that as now the Bank of Japan owns more than 50% of all outstanding Japanese government debt, which is just insane. But this is what they're doing. And that reverse trade of the hedge funds were betting that they wouldn't be able to, they wouldn't be able to hold on, right?

Starting point is 00:56:52 My guess, and I don't, I haven't done scientific work on this, but it just points to this is is that the traders, the same traders saw, they saw Powell come out a few weeks ago and sound kind of dovish that meeting. And they thought the Fed's going to blink first. And so they unwound a lot of those trades and the pressure came off. But you saw in the last few days, you saw the yen spike lower again to just under 140. And so, you know, we talked about the fact that For your listeners, if investors want to sell Japanese bonds and there's yield curve control there, so they sell the bonds to the government, the government standing there in the open market buying them, right? So then they get yen for those bonds. Well, they're in search of yield.

Starting point is 00:57:49 And the best yield in the world right now for the major countries and the major currencies is the US dollar, is the US Treasury. We're at 3%. So they can, instead of getting 0.25% for the Japanese yield, they can take those yen, sell them, and buy US dollars to get the 10-year Treasury at 3% instead of getting 0.25%. Now, if they want to hedge out the currency, they're going to have to make a currency bet or they'll hedge out the currency. And that's actually been a driver, negative driver for U.S. Treasuries recently, but the long and short of it is, that's kind of the pressure. So, James, after you hedge out that currency risk, you have to make up the 3.5%, which I think is what makes that so hard to do and why you're not necessarily seeing it happen. Yeah. Okay.

Starting point is 00:58:41 Exactly. Exactly. So there's got to be a release valve somewhere. So that's what's happening. And it's gone, it's back to where it was a few weeks ago, where, you know, there's pressure on the yen. And there's pressure on those treasuries. And if the Bank of Japan stands and buys the treasuries, well, the release valve is the yen, period. It's simple as that. This was an interesting question, and this relates to what we're talking about there. Dr. Anton, help explain why advanced economies can't get away, and he used in that, in quotations, get away, with doing what Japan does, at least for a few more years, with low inflation, yield curve control,

Starting point is 00:59:23 and big debt to GDP ratio. How are they able to do what they're doing over there, but no one else can get away with it? Yeah, that's a good question. And, you know, I think it has to do with the fact that Japan, you know, they run, they're actually a net exporter. Yeah. And the U.S. is a net importer, you know. I mean, most economies are, right? Yeah.

Starting point is 00:59:49 And so most of the major ones. So the question is, like, we can't get away with it because we don't have the same, we don't have that same surplus. Trade balance surplus in order to do, you know. And so it just, it just won't work. And they've had, they've had low interest rates for so long. And, you know, their current account surplus is what I'm trying to say. I'm kind of fumbling around with my word here because we took so long to get up and running here. Preston, sorry.

Starting point is 01:00:19 I look at it almost like a. company with like retained earnings? Is the company making money or is it not making money from like a country kind of level, right? Yeah. I mean, so they've got yeah, yeah, yeah. And and, you know, the international investments in there, it's a net positive. And they've got low wealth concentration. You know, actually, these are points that, that, that Lynn made, you know, she, she actually, I read something from a long time ago. It feels like a long time ago. It might have been last week.

Starting point is 01:00:54 But, you know, she basically said, U.S. is in the exact opposite. Lynn Alden, for your listeners, sorry, the U.S. is in the exact opposite position. You know, they've got a current account deficit. They have. That's getting wider. Yeah, their international investment position is negative and it's far more negative. And we have a super high, you know, concentration of wealth in this country. And then the other thing is that Japan was doing it during a period that we were having,

Starting point is 01:01:26 you know, global deflation up until now. So I don't know what's going to happen with them now. I think they're in it. They have a problem. But that's why the U.S. can't get away with it. It just doesn't work. It's just not going to work. So last question I got for you, James.

Starting point is 01:01:41 You have a awesome thread where you lay out 25 years in finance, what you learned, your top five things. They were, and I'm going to read these off quickly. Don't be the smartest guy in the room. Fortunes are made in fear. Don't get killed. Eat what you kill. And banks work for us. Talk to us about your favorite one of those five.

Starting point is 01:02:01 And maybe give us a story or something to kind of leave folks with. That's a good question. You know, let's see. That thread, that's funny. I wrote that, you know, I think that's one of the, that's the first thread I ever wrote. Oh, no way. I love it.

Starting point is 01:02:18 It's an awesome thread. Thank you. you. I think the one that I come back to, I keep coming back to, especially with Bitcoin, is you eat what you kill, but really the underlying thing with that one is your conviction in a long-term investment. As an investor, you know, all the other things that are in there kind of like risk measures and, you know, or using the leverage for your balance sheet intelligently, but having a conviction, some people, they get tied up with the emotion of something. And people are really emotional about Bitcoin. I've seen this in some pretty amazing and pretty

Starting point is 01:02:59 negative ways. Sometimes they get so confident that they'll take leverage, take out leverage on it and use Bitcoin as a collateral. It's a volatile asset, taking out leverage on a volatile asset to margin their trade, and then they just get wiped out. You see that. Okay, so having conviction really, for me, has to do with a long-term investment. Like, you know, you look at it and you've got probability analysis on it. And you're looking for the low-risk, high reward versus a super-high conviction in your analysis of an investment that you want to take a long-term position in. And that's where you'll hear, you know, you'll hear Warren Buffett or Charlie Munger as much as they don't understand Bitcoin. You'll hear them talk about these, taking these opportunities where there's a misprice opportunity in the market.

Starting point is 01:03:57 Because they have such high conviction in it, they have no problem with buying it all the way down and just sitting on it for years. They know what they own. And so, and yeah, that's the one that honestly I keep coming back to. over and over again. Yeah, I love that. And that's what has, that's what's driven me in Bitcoin. And so I don't care that it's down at $20,000. I know that there are extraneous forces on it, you know, that there's a lot of noise

Starting point is 01:04:28 around this as an emerging asset class and an emerging money, hard money. And it's, and so for me, having the conviction and understanding it, and understanding why it's different from the Fiat currency we have now, how it's decentralized, how it's scarce, how it's trustless, you know. These are things that not having counterparty risk in something that I own is incredible. I mean, you would say it's no different than having gold in a vault in your house. Except if I want to, if I'm in the Ukraine or if I'm in Venezuela and I need to flee my country because it's dissolving. It's imaginary vault.

Starting point is 01:05:16 You saw the woman who was stopped at the border trying to get across the border with suitcases full of money. Well, she just had 12 words in her head. She could have gotten across the border with all her money. You know? And so that's just something that, and I just have. There's such a high conviction in it, that that's the one I just keep it coming back to you. Yeah. Love it.

Starting point is 01:05:41 James, thank you so much for having this discussion. I just want to tell folks, so your newsletter, phenomenal, it's so easy to sign up for, I'll have a link in the show notes to the newsletter and also your Twitter feed. But for people, just go to James's Twitter feed, and there's a button right there under his name, And you just click subscribe and you'll start getting his newsletter. And I mean, he is putting out phenomenal, like high value ad, just like, you know, what you heard today. His comments are just so valuable.

Starting point is 01:06:13 So I would highly encourage people to check that out. I know I'm a subscriber to it and just really look forward to anything that you put out. It's free. And it's completely free. He's not selling. I mean, I tried, yeah, I try to do is what I do is every single week, I sit down on a Saturday morning. I put on Premier League soccer and I start and I just write. I write about one financial concept that I can simplify for people.

Starting point is 01:06:41 And I got tired of, you know, Preston, I got tired of people saying, you know, your, your business is so opaque, Wall Street is so opaque. They're trying to hide things from us. And I think that they're just not incentivized to tell people what's going on. Well, I'm going to tell you what's going on. I'm going to give it to you in layman's terms so you can understand it. It's not that difficult. These concepts are not that difficult.

Starting point is 01:07:01 The terms may sound crazy, yield curve control, credit default swap, you know, I mean, the repo and reverse repo. I mean, it's not that difficult. And so I appreciate it. I appreciate you sharing that. It's a no brainer, man. It's something that I have a passion for. Yeah. Thank you.

Starting point is 01:07:20 Yeah. So we'll have a link to that in the show notes. We'll have a link to your Twitter. Is there anything else that you wanted to highlight for folks? No, this is awesome. I appreciate it. I always appreciate having a nice. And an evening chat with Preston about macro.

Starting point is 01:07:31 We need to have some bourbon next time we do this. Yeah, definitely. Yeah. That's a deal. All right. All right. Thank you so much for your time. Always a blast.

Starting point is 01:07:43 And thanks for coming on. Yeah. Thank you, Preston. If you guys enjoyed this conversation, be sure to follow the show on whatever podcast application you use. Just search for We Study Billionaires. The Bitcoin specific shows come out every Wednesday. and I'd love to have you as a regular listener.

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We Study Billionaires - The Investor’s Podcast Network - BTC093: The Debt Spiral Defined w/ James Lavish (Bitcoin Podcast)

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