We Study Billionaires - The Investor’s Podcast Network - TIP404: The Untold History of Money w/ Joe Brown

Starting point is 00:00:00 You're listening to TIP. On today's episode, we have a very fun guest, and that is Joe Brown of Heresy Financial. Joe is most known for his YouTube channel, providing entertaining videos on a wide range of financial topics. In this episode, we discussed the history of money and how we've arrived at the monetary landscape that we have today. The playbook the Fed might use in the event of a debt default, a deep dive on central bank digital currencies, the current labor shortage, the velocity of money, and how it's misunfutable. understood, real estate, jobs, farmland exposure, and much, much more. Joe is a wealth of knowledge and provides an amazing framework for thinking through the current economic landscape. I know you're going to get a lot out of this one, so without further ado, please enjoy this wide-ranging

Starting point is 00:00:44 discussion with Joe Brown. You are listening to The Investors Podcast, where we study the financial markets and read the books that influence self-made billionaires the most. We keep you informed and prepared for the unexpected. Welcome to the Investors Podcast. I'm your host, Trey Lockerbie, and today we have a very fun guest for you. And it is Mr. Joe Brown from Heresy Financial. Joe, first time on the show. Welcome.

Starting point is 00:01:22 Hey, thank you so much. I'm excited to be here, Trey. I'd love to explore a little bit about your background here at the top because I think a lot of our listeners might be able to relate to this. And if not, there might be a lot of learning to come from your journey. So you were a stockbroker at Charles Schwab. Talk to us about that experience and what ultimately led you to what you're doing today. I got into the industry because I was very curious about the way money works and how investing works.

Starting point is 00:01:53 And so that was really the only path that I saw in front of me to learn about these things was kind of going to the belly of the beast. And I'm just by nature a very curious person, especially when something doesn't make sense. And the more I dug in, the more licenses I stacked up, the more I realized, hey, a lot of this stuff isn't making sense. And I read a lot, like I read 100 books a year. And I started to notice the things I was learning from inside were not the same things that I was realizing were true from books that I was reading. And like a good example of that is bonds. If you go to your financial advisor, you say, hey, what's the safest investment I can buy? they'll tell you government treasuries. And the reason for that is because, well, their broker tells

Starting point is 00:02:38 them that they have to tell you that. The reason why they're required to say that is because of their licensing. Where do those licenses come from? The SEC and FINRA. So ultimately, from the top down, you've got the government, weaseling its way down to your financial advisor telling you that treasuries are the safest investment when it's the government that's directly benefiting off of that by them being the ones that are loaning you the money. And so after a while, I just realized the stuff that I was selling was so disaligned from what I believed to be true that I had to go out on my own and then trying to educate people about how the system works ever since.

Starting point is 00:03:15 Well, I've been a huge fan of your content. I'm really enjoying it, especially around the history of money itself. So I'd like to start there. Start as far back as you'd like and give us the overview of how we've gotten ourselves into this monetary mess that we seem to be in today? Even something is, what you would think is as simple as a history of money is generally misunderstood. We typically think of, you know, if you read your classic economics textbook, it starts off

Starting point is 00:03:40 with barter and says, hey, one person makes shoes, the other person, you know, has a lamb. You know, they start to trade with each other. Well, one person has to then go trade for apples in order to get their shoes. And it's just this whole mess. And when you study history, anthropological evidence shows that barter never. ever existed as a monetary system ever, any time, ever in history. There's a great book, Debt the First 5,000 Years by David Graber, and it talks about the earliest recorded monetary system that we had on Earth was a credit-based monetary system.

Starting point is 00:04:12 And that was basically, if you think about rural communities who owe each other favors and very hospitable environments that are separated from technology, they still operate under kind of like a credit-based monetary system. But it was complex. There were credit markets and they had innovative ways to keep track of things like tally sticks that were used as currency. And so that was the first monetary system. As a nation states emerged, governments wanted a way to pay for and keep standing militaries.

Starting point is 00:04:41 And gold and silver emerged as a great medium to be able to do that. And so gold and silver emerged as commodity money. Now, the reason why gold and silver specifically emerged is because they operated very well, as money, specifically because you can't just go out and make new gold or new silver without heavy intensive labor. You have to dig it out of the ground. You have to refine it. And so gold and silver emerged as good money because it preserved the pricing signal. Pricing is information. It's everything in an economy. And if the money supply stays relatively the same, that means all the price changes of everything are just pure information and you can make accurate decisions,

Starting point is 00:05:25 off of those. And so gold and silver allowed people to do that. The problem, though, that arose, and this is a very slow, like centuries-long problem, is one of deflation. Deflation is a natural force of history that always happens everywhere, consistently, persistently from the beginning of humanity until the end of humanity. Deflation is getting more for less. That's where things and stuff and wealth gets more abundant. Every time we figure it out a way to offload human labor to something like fire, when we offloaded human labor of gathering so many roots and nuts and veggies and berries to fire, to cook them, to get more nutrients out of them, that was a growth.

Starting point is 00:06:07 That was a leap forward in energy that we could then use our labor for other more productive purposes. Every single time we've been able to do that, that means wealth, real wealth gets more abundant, but the money supply stayed relatively the same. money supply of gold and silver throughout history kept pace with the growth of population at about 1 to 1.5% every single year. And so what you inevitably have happened, especially as things like the Industrial Revolution come in where you have technology and progress and growth expanding very rapidly, is that the money starts to get very valuable, almost too valuable.

Starting point is 00:06:42 And so whereas before a couple hundred years ago, you could slap a gold coin down on the counter for a beer, now you slap a gold coin down on the counter and that's going to pay for a horse or it's going to pay for your month's rent. It's worth a lot more because the money supply stayed the same, but the wealth in the world, the real stuff, the real goods and services have grown so much more. And so then you have this tendency towards centralization with gold moving from being the medium of exchange to more of a store of value and then for larger purchases. And people like, hey, I don't want a store to my house.

Starting point is 00:07:12 I can't use it for small purchases. So I'm just going to leave it with the goldsmith. These were the original bankers. And so they'd say goldsmith, here's my gold. I'm going to get a receipt from you and I can go give you that receipt and get that gold back any time. Eventually, those receipts started trading because if I'm going to go get my gold to buy a horse from you and then you're going to go give that gold back to the goldsmith for a new receipt,

Starting point is 00:07:34 I might as well just give you my receipt because then you can go get my gold whenever you want. And so the goldsmith's caught on to this and they realized we've got a lot of gold. Nobody's redeeming it. We can lend it out and start to make bank here. And so what you had happened was a rapid expansion to the money supply in these local economies when the goldsmiths realized what they could do. And before you have 10 pieces of gold, let's say, that are all on deposit with the

Starting point is 00:07:59 golds, you've got 10 pieces of gold in circulation. But now the goldsmith loans one of those pieces of gold out. So now you have one piece of gold trading twice, once as a piece of gold and once as a certificate of redemption. So you have an expansion of the money supply when the goldsmith starts lending that gold out. the invention of fractional reserve banking. Well, eventually this causes bubbles and prices start to skyrocket and then that debt has to start getting repaid and then that whole system unwinds. Everybody goes to redeem their receipts because they realize there's not enough gold

Starting point is 00:08:28 there. You have a run on the bank. This should have been outlawed. Wasn't outlawed. By the way, this is very old. Eight hundred years ago, we have records of this happening in Italy, the banking crisis that looks very similar to our financial crisis, you know, 12 years ago. So we have that should have been outlawed. But it wasn't, instead of that, that it was nationalized. And so now you have banks no longer have the risk of having a bank run because you have the invention of the central bank, which operates as a bank to the banks. So if one bank is at risk of a bank run where everybody tries to go get their gold,

Starting point is 00:09:00 well, the central bank just gives them gold that's they're drawing from the rest of the system. But the problem is you can't eliminate risk. You can only transfer risk. That transferred risk from the individual banks up to the entire system. And I use the example of being next to a cliff a lot. If you have 20 people next to a cliff, one person falls off, what are the rest of the 20 going to do?

Starting point is 00:09:20 They're going to back away from the edge, right? But if you have, if you give everybody a rope, well, if one person takes a step, well, the other people might be able to pull them back, right? But that means the individual risk has been transferred to the hole. So nobody backs up anymore because now one individual doesn't have the risk of falling off. So you get close enough, one, two, three people fall. The entire system falls off. And so you can't eliminate risk.

Starting point is 00:09:41 You can only transfer it. And that's exactly what happened at the invention of the central bank. That risk was transferred to the system through the central bank. And to test that, you'd say, okay, well, then at the invention of the central bank, you should probably see an increase in large scale panics or busts or recessions or depressions. Well, after the Federal Reserve was started in 1913, seven years later, you have the first recession that was called the Great Depression in 1921. And there's a great book about that called The Forgotten Depression by Jim Grant.

Starting point is 00:10:14 And James Grant, actually, I think is his author name. And so that was called the Great Depression because it was the worst one up to that time. And it was caused by an artificial expansion of the monetary supply. Free market rain, they allowed it to just solve it for itself, fixed itself within 18 months. They repeated their mistake, though, artificial expansion of the money supply, easy credit. Cause the next one, Great Depression started in 1929. that one was so much worse because they tried to ease the pain of that one. And that one then became known as the Great Depression going forward because it was so much worse than the first one.

Starting point is 00:10:48 From 1913 to 1930, so you've got 18 years, you have two of the largest depressions that our country had ever seen after the invention or the implementation of the Federal Reserve in America. And then from there, what you had happened was one of the ways they made it tried to make it easy for the economy to ease the blow of the Depression. was confiscating everybody's gold because remember, this was a bank run. This was a run on gold just like the goldsmiths. And so they took all the gold from everybody, gave it to the Federal Reserve, this was FDR, and made it illegal to own gold. And then he repriced gold higher once the Federal Reserve had it all and allowed him an artificial expansion of the money supply as a result of that. And so this was only able to be done through the monopoly on violence that the central government it has because a little individual bank, Goldsmith, wouldn't have been able to get away with this.

Starting point is 00:11:42 And it turns out that the rest of the world was doing the same thing. World War II happened. Everybody runs out of gold. So they come to America, they say, you've still got gold. Let's just have you be the central bank to the entire world. So you went from banks, the invention of banks where people centralized their money with the banks to the invention of the central bank where all the banks centralized their money with the central bank. Then in 1940 at Breton Woods, you had the rest of the world centralized the money supply under one central bank, the Federal Reserve, who said, trust us, we'll hold all the gold, we'll give you paper, and we promise that you can come get your gold at any time with that paper, at the age-old scheme. And it only took 30 years from then

Starting point is 00:12:21 for America to print so many more dollars, same exact thing that the Goldsmith did, same thing that the banks did. Federal Reserve printed so many extra dollars. The U.S. spent all these dollars into existence that the rest of the world said, hey, we better go get our dollars because if we're not the first ones to go get our gold, then we're not going to be able to get it. And it turns out we are two weeks away from running out of gold. And so Nixon did to the rest of the world, what FDR did to American citizens. And he said we're confiscating the gold and move the world back onto a credit standard, which it hadn't been on for thousands of years. And so for the last 50 years, that's where we've Benet, and now we're facing the inevitable consequences of unprecedented levels of monetary expansion

Starting point is 00:13:04 as a result of no ties on money creation. And that's the history of what brought us to today. I love that. So fantastic. A key difference I'm noticing in that timeline is the 2008 Great Recession where Bernanke decided to kind of forgo the gameplay or the playbook, I should say, they used at the Great Depression, and he chose instead to lower interest rates, et cetera. In your mind, is that the right thing to have been done at that time? Meaning, you know, the alternative is entering potentially another Great Depression or creating something of a smoothness from then on to ultimately create the inequality gap we see today.

Starting point is 00:13:44 But relatively speaking, we've endured a much easier economy than the Great Depression. So I'm curious, what's your opinion on that movement by Bernanke in general? That's a great question. Going back to what FDR did, in 1921 for the first Great Depression, they allowed that one to resolve itself naturally. There was no intervention. The government balanced their budgets. The Federal Reserve raised interest rates. And that depression, again, it was the worst one in U.S. history up to that point. They called it the Great Depression at the time. It solved itself within 18 months. It was difficult, but it fixed itself. At that time, Hoover said, if I'm ever in power when something like this happens, I will do everything in my power to

Starting point is 00:14:25 make it easier. I will do all of these interventions, all of the stimulus, whatever. While he got his opportunity, and in 1929, things started to fall apart, he embarked on, at that time, an unprecedented level of government intervention. The Federal Reserve did not raise interest rates like they did the first time. And FDR actually ran on the platform of free markets, saying Hoover's doing all of this wrong. He shouldn't be intervening. Yet when he got into office, he doubled down on everything and increased everything that Hoover had been doing. So the idea that Hoover was a free market and then the FDR came in to try and fix it completely false. And what FDR did was I mentioned what he did with the gold, right?

Starting point is 00:15:03 He took everybody's gold. He then repriced gold higher now that he had it all for himself, allowed a bunch of money to be printed as a result of that. Another thing that he did was in an attempt to push prices up, he did crazy things like burning cross. Imagine that. During the Great Depression, the worst period of economic suffering in our history and they're burning food in an attempt to make it more scarce to push prices up. And so the idea that Bernanke was looking back and saying, we're not going to repeat the mistakes of the Great Depression by not intervening and not printing and not doing that is completely misguided because they did do that during the Great Depression. The only thing that you could say is they didn't do it

Starting point is 00:15:46 enough to cause prices to go up. Now, I would argue then that that's a good thing. If they would have been able to, then they would have made things much worse. And Bernanke wasn't the first one in this recent line of central bank intervention. We have to start back at long-term capital management. It was a hedge fund that collapsed. And that was, I can't remember that. I think it was 89 or, no, I mean, 98. And so the Federal Reserve came in and they bailed out, they forced Wall Street to basically bail out long-term capital management so that it didn't knock down the rest of the financial system. Long-term capital management, they were engaging in relative value trades, where they would short one thing, use the proceeds to buy another thing that were almost identical,

Starting point is 00:16:32 and they would do it when the prices diverged a little bit from each other in the expectation that the price would come back to each other. And so they just did it with so much leverage that eventually something happened. They entered the trade because they expected prices come back together, but prices didn't come back together. Prices kept on diverging. And when that happened, they were so leveraged that they had to start closing out those trades. Well, if you buy a short to close and you sell along to close, that's going to push the prices of what you're long down, the price of what you're short higher because you're adding to the buying pressure and the selling pressure and make the problem worse. So they couldn't get out without risking collapsing the financial system. So the

Starting point is 00:17:13 The Federal Reserve stepped in and said, all right, Wall Street, bail them out. That led to the Greenspan put later when he lowered interest rates. They had already crossed the Rubicon. Hey, we can bail out the system. They lowered interest rates to soften the blow from the dot-com bubble bursting, which would have only hurt some people's stock market, stock brokerage accounts, wouldn't have bled over into any sort of financial crisis. And that lowering of interest rates led to the housing boom, all that artificial money flooded

Starting point is 00:17:40 into housing because everybody thought, hey, when the stock market falls, housing still goes up. And so all that money flowed into housing. We know how that turned out, but they had already crossed the Rubicon before. So that led them to, hey, we can do this. We can bail out the financial system, save the banks. Well, we think that that was the end of it. But we have to remember that in 2018, when they had finally started tightening after saying for so many years that all that QE was temporary and that they'd eventually undo it, by the end of

Starting point is 00:18:08 2018, the markets were on the verge of collapse. In 2018, they couldn't handle it at the end of 2018. They had to stop raising interest rates. And that was what started to push the market back up. Well, one year later, in September 2019, repo market blows up. And so now they have to start QE infinity or not QE. And less than a year after that, they had to bail out the entire system when COVID hit. And so all of these things, all of these levels of intervention, plant the seeds for a much greater crisis next time, and they usually happen in greater and greater frequency as time moves on. Yeah, and greater and greater magnitude as well. So what's your opinion on where the Fed is now? All this talk about tapering, you mentioned their non-QE efforts. Can they actually taper from here?

Starting point is 00:18:55 What do you think the expectation of the playbook is? And Jerome Powell just got a second term as well. Does that add to the equation in any way? It's almost like a universal statement now that I hear from everybody. It's like the Fed can't taper, they can never taper, they can't type. The reality is if they want to, they can do anything they want. So the question is not whether they can or not. The question is, how long will they do it for and to what extent will they do it? And in my opinion, Jerome Powell getting in for his second term here, solidify the taper, especially in light of the data that's coming out of the last couple of months. We're seeing inflation records broken every single month that go back decades.

Starting point is 00:19:32 And then just today, even though it was fake jobs numbers when you remove the seasonal adjustment, the jobs numbers, jobless claims showed lowest jobless claims since 1969 when they're seasonally adjusted. And so when you look at the Fed's dual mandate, they've got maximum employment and stable prices. They said we're going to ignore prices in favor of employment. Employment's there from the data that they look at. And so if they don't try and at least look like they're going to attack inflation, they'll blow all credibility that they have and they can't do that. they have to look like they're going to start attacking inflation now. And the minutes from their FOMC meeting from this month show that they are,

Starting point is 00:20:08 almost everybody now is saying, hey, we're open to raising rates sooner if inflation continues to increase. And so they are going to be reducing their balance sheet. The word minimum has been thrown around a lot because they said we're going to purchase, they've always been purchasing a minimum of 120 billion per month. And now they said we're going to reduce that by 15 billion, but it's still a minimum. So it's still unlimited. But if you look at how much they've actually been purchasing since August of last year,

Starting point is 00:20:34 August of last year, their balance sheet was at $6.9 trillion. Right now it's at $8.6 trillion. That means in 15 months, their balance sheet increased by $1.7 trillion. That's on average $113 billion a month. So that's a lot, but it's not above what they said they were going to be doing at $120. And so they're going to stick to what they're going to say they're going to do right now, and they're actually going to taper and they're going to reduce their purchases by $15 billion a month. And if they get the chance, they will raise interest rates.

Starting point is 00:21:01 But the problem is it will spark a crash. It's inevitable. You cannot expand the money supply, especially at this scale, without it causing malinvestment and a misallocation of resources that leads to problems rot lurking under the system. And so you don't notice it a lot of times until you start to tighten and pull back that easy money. And so it's not the tightening that's going to cause the crash.

Starting point is 00:21:28 It's already there. They're just going to reveal it. And then once it does, they're going to have to reverse course and they're going to go, you know, full blown. They're going to 120 billion a month is going to look like child's play compared to what they're going to have to start purchasing. They're going to have to start purchasing out on the yield curve to drop long term rates. We're going to have to do all sorts of things that will make the last year and a half

Starting point is 00:21:49 look tame in comparison to deal with the next crash. Now that $120 billion a month, what exactly are they buying? Are they buying government bonds off the market? I've noticed that there's a lot of mortgage-backed bonds being purchased, for example, whereas in 2008, that was an obvious solution was, okay, a lot of these mortgages are going bad. The Fed will buy them up. When COVID hit, it was instant. It was like, we're going to start buying mortgage-backed securities, and they really haven't stopped. So is there this underlying rot happening, say, for example, in the real estate market that isn't really talked about because the Fed is already kind of smoothing it over by purchasing these things. Maybe just talk to us a little bit about what they're buying and why.

Starting point is 00:22:32 What they're buying has a lot to do with what they're legally allowed to buy. So in the aftermath of the great financial crisis, when they suddenly were allowed to buy mortgage-backed securities, whereas before they were only allowed to buy treasuries, that's partly why they buy those two things, mortgage-back securities and treasuries. The other things that they've been buying, they haven't actually been buying. They were accounts set up the treasury called special purpose vehicles that purchased things like high yield bond funds. And so that, you know, junk bonds basically.

Starting point is 00:23:02 And so they can't buy those themselves. So it's like, you know, an 18 year old who wants to get drunk can't go into the liquor store and buy alcohol for himself. He has to send in his 21 year old cousin to go buy alcohol for him, gives them the money. Same thing. The Fed can't buy junk bonds for themselves. So they give the money to the treasury to buy for them. And so mortgage-backed securities were part of the whole apparatus that they were buying in order

Starting point is 00:23:26 to smooth out the volatility that they were scared of happening in the financial markets. One other reason for the large level of mortgage-backed securities was to push mortgage rates down. So when mortgage rates go down, there is a huge amount of extra spending power that hits the American wallet. Everybody refinanced their homes. And either cash-out refinance. and you get a large chunk of change to go do whatever you want with, or now your mortgage rate is much lower and now you have extra cash compared from what you were paying before your expenses go down. And then anybody who wants to get into a house can do that, although that wasn't the primary goal. And so the increase in income for Americans through mortgage rates being lowered

Starting point is 00:24:12 was a huge reason for mortgage-backed securities being purchased. And so that's what they've been buying, the treasuries, mortgage-backed securities, and then the other things held at the Treasury. 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 00:28:41 some kind of monetary reset. In your opinion, what does that look like exactly? The debt jubilee, we look back at history and they can seem very apparent when these things happen. But while it's, they actually take much longer for these things to unfold than it looks like when you're just, you know, reading a history book. One thing that is true, though, is that the de-leveraging always happens. Sometimes de-leveraging happens through inflation and sometimes it happens through deflation. But de-leveraging following leverage is, it's an iron law of economics that you cannot avoid the de-leveraging. It does happen. The only question is whether it's through inflation or deflation. And the reason that that happens is because

Starting point is 00:29:27 leverage itself is simply borrowing purchasing power from the future into the present. And so if you think about, let's say you earn $10,000 every single month, the only way for me to spend more than $10,000 is if last month I only spent eight. And so I have a surplus of two now. This month, I can spend 12. Or I can borrow from the future with debt and I can spend 12,000 by putting two of it on a credit card. Well, next month, I have to pay that back by only spending $8,000 of my income. And so leverage is simply taking purchasing power from the future and bringing that forward into the present. There is no way around that. The only way that it's dealt with is either deflation or inflation. And so deflation would be the example of next month, austerity. I only spend

Starting point is 00:30:15 $8,000 and use that left over two to pay back what I spent last month. Inflation is more insidious because the effects of it are not understood or seen by most people at least at first. And so when the reason why you can de-leverage through inflation is because either way, there's the same amount of purchasing power in the system being transferred or being spent. And I like to use the example of a pizza a lot. If you have a pizza, that represents the total wealth in the system. The number of slices in the pizza represent the number of currency units in the system. So yeah, eight slices of pizza.

Starting point is 00:30:57 That's $8, let's say, represent the entire economy. If you have another participant enter the economy then and say, I would like a slice of pizza, one person can give. up their slice and give it to that new person, and then you still have eight slices of pizza, and each slice represents the same amount of wealth, same amount of pizza. Or you can have every single person with a slice of pizza, shave a tiny slice off of their slice, make an extra ninth slice, and then you have nine slices now, but they're all smaller than they were before. And so when you have the amount of leverage that we have right now, usually policymakers opt for

Starting point is 00:31:34 slicing off pieces of everybody's purchasing power in order to repay that debt because the debt has grown so large and who are the biggest debtors? The governments and the large corporations who usually have a large amount of influence on the government. And so when you are choosing between inflation or deflation, because you have to de leverage somehow, the people with the power are going to choose the ones that the path that benefits them the most. And inflation benefits the borrowers because they don't have to pay it back in real purchasing power in real wealth. They get to pay it back with newly created money

Starting point is 00:32:10 that was purchasing power transfer to them as a result of everybody else, all the savers and lenders losing it. And just in case you're looking at this and thinking, okay, well, it's a good thing I'm not a lender then. If you have got a pension or a 401k with a target date fund or a balanced mutual fund, or if you have cash in a bank account, you are a lender. And so those are the ways, those are the areas of purchasing power that get that purchasing power transferred away from them in order for that de-leveraging to happen. Not a lot of people may be aware of this, but the Fed has an actual plan for if the U.S. defaults on its debts. I think a lot of people just realize or think that the U.S.

Starting point is 00:32:51 can't default on their deck because they can always print more money. But they do have a game plan. So walk us through the playbook that the Fed has put together just in case this happens. This is one of the most, one of the craziest things that I have stumbled upon recently. And a lot of people look at the federal government defaulting as kind of like a black swan, not even, like less than that because they think that it's just impossible. Like it'll never ever happen. And a black swan is not something that is unpredictable. A black swan, a black swan that is something that's predictable, that's just considered basically impossible. Like, you could have imagined when people only thought white swans existed, you could have

Starting point is 00:33:31 imagined, hey, we could find a black swan someday, but clearly that's impossible because swans are white. Well, we can imagine the government defaulting, but clearly that's impossible because all they have to do is come up with a vote to raise the debt ceiling. And given today's level of political polarization, in my book, it's not a 0%. The odds aren't 0% of defaulting. And clearly the same line of thinking sits at the Federal Reserve because they have a plan and what they will do if the United States does default. And just to be clear, defaulting on debt means, hey, we have a debt ceiling.

Starting point is 00:34:06 It's all a legal thing because it's just numbers in a computer. And they run up debt ceiling and they cannot take on new debt to pay off the old debt. So their old debt, they can't make the interest payments on. And then if it's bad enough, they can't make payments to all the other things. They have to make payments to like government sales. and military and Medicare, things like that. And so the first thing that the Federal Reserve would likely do is part of their plan is making the interest payments on the defaulted debt.

Starting point is 00:34:31 And so right away, you have a de facto merger of monetary and fiscal policy. You lose all independence from the Federal Reserve. They've never been independent completely from the government. They've been independent based on partisanship. But this merges them completely. You get a merger between the central bank and the central government. They make those payments so that anybody who has. debt owns a Treasury that they would have stopped receiving those interest payments on,

Starting point is 00:34:55 they keep on receiving those interest payments. So you have a transition immediately where the Federal Reserve enters into a position of fiscal authority over Congress, because that was Congress's domain through the Treasury, and now the Federal Reserve steps in in that place. What they might also do, which Jerome Powell has stated that it would be unthinkable to do this, but he wouldn't rule it out in case of a bad enough crisis, which means, you know, if the United States defaults, that's a bad enough crisis. They would take on other payments as well, like military, Social Security, Medicare,

Starting point is 00:35:27 or whatever. Now, the final thing that they would do is at least for U.S. banks, they would change the reserve requirements so that a defaulted treasury would count towards reserve requirements. Because the last thing you want is a repeat of the financial crisis when all the banks are trying to dump worthless securities, you know, mortgage-backed securities, they were basically a bond that wasn't making payments anymore because all the mortgages inside weren't making payments. Everybody's trying to dump them. Nobody has a collateral they thought they had, and you bring down the system. So the first thing they would do, or the second thing would be,

Starting point is 00:35:59 hey, if you've got one of these treasuries, it still counts as full collateral. Do not sell it. And then finally, what they would probably do is open up swap lines and emergency channels in order to buy treasuries at full price from anybody who is trying to sell them. Because another thing that they would not want happen is treasury prices to just collapse. Because the entire global financial system sits on treasuries and you can't have treasury prices collapse. So, if you study history, none of this, if you study history, none of this should be surprising. It's all happened before 300 years ago in France. John Law was a guy who was in charge of the central bank in France and he got the entire country

Starting point is 00:36:38 to give up their gold and silver. He issued paper currency that was backed by gold, silver and shares of his Mississippi company, so land in the United States. He used that paper currency to inflate the money supply so that he could pay for economic agendas. Well, pretty soon problems cropped up. And what happened was people were selling Mississippi shares because they were, hey, this might not be worth what the price of these shares are at. He had to print more dollars to buy shares of the Mississippi company.

Starting point is 00:37:06 Well, what's backing up the money? Well, shares of the Mississippi company. So you have this strange turn of events where you're printing money to buy something to keep the price up. But that price being up is what's backing up the value of the currency that you're printing. But what are we doing today? We're printing money to buy treasuries to keep the price of treasuries up because they back up the financial system. And so pretty soon people realized, hey, if they're buying these things at full price,

Starting point is 00:37:30 that means that I can sell them at a premium. They're worthless, but I can sell them higher than they're actually worth because somebody is printing money to buy them. It would be like if Apple right now said, I will buy any iPhone for $3,000. Everybody with an old iPhone would turn it in for $3,000 because they're worth way less than that. They would soak up the entire market. So when you buy things with a money printer at an elevated price compared to what the natural price would be, you incentivize selling.

Starting point is 00:37:59 And so a couple years ago, they soaked up so much of the treasury market that the Federal Reserve now owns more treasuries than all central banks combined. This happens. Federal Reserve will own all treasuries besides the U.S. banking system. Nobody's going to hold on to them anymore because they're worthless, but somebody's paying full pot for them. And that's exactly what happened 300 years ago in France. The people like Richard Cantalon, who we know of because of the cantalon effect, he sold everything, bought gold and silver, became fantastically wealthy from it.

Starting point is 00:38:28 And that's exactly what happened today if something like this happens. So you brought up the jobless claims earlier and mentioned the seasonality effect. What does it look like with the seasonality adjusted? And why do you think so many people are quitting their jobs or not returning? So right now we have the tightest labor market in history. And today, as of the day of this recording, jobs numbers came out. The jobless claims data shows that we have the lowest jobless claims since 1969, over 50 years. And everybody's running victory laps on this trending on Twitter and things like that. When you look at the data, the real number, the number is only that low. It's

Starting point is 00:39:08 the 199,000 jobless claims, it's only that low because of seasonal adjustment. So that's them trying to smooth out the numbers. They've got a built-in method to smooth out the numbers. Well, they're smoothing out the numbers made it appear like it's the lowest jobless claims in 50 years. When you remove the adjustment, jobless claims actually increased, went up to like 260,000. They went up by 7.6%. And so the seasonal adjustment trying to smooth out data here clearly failed.

Starting point is 00:39:38 The real jobless claims actually went up. So complete false data, we still have a massive labor shortage. And so that is something that is consistent and persistent to today. And unlike, this is something that I probably have more of a contrarian view on than others, unlike some of the other things going on right now, I view this personally as a very good sign, a very good thing. Now, we obviously have kind of an elephant in the room reason why some people are getting fired or quitting because there are legal things coming out about who can work,

Starting point is 00:40:08 at certain jobs based on recent history and medical stuff. But that doesn't account for everything because when you look at new hires, it's also exploding. And so if you get pushed out of one job because of a specific reason, you wouldn't be able to then go get a new job. And so one of the trends that we're seeing right now is people quitting because they hate their jobs, because most jobs, it is astonishing how many jobs for decades now have been absolute trash. I say that, sympathetically, I've had jobs before where on my way home, I feel like crying. You know, it's just absolute garbage. And Malcolm Gladwell talks about this. There are three components necessary to have a job feel meaningful. One of them is complexity. One of them is

Starting point is 00:40:54 autonomy. And the third one is a short connection between seeing your work and seeing the results, the fruit of that labor. Many jobs today have no complexity. They're monotonous. You have one. repeated task over and over and over again, zero complexity, a lot of jobs that can be just done by a well-written computer program. And so complexity is out the window for many, many, many jobs. The second one is autonomy. The number one reason people quit their job is because they hate their boss, right? They have no autonomy. They're told exactly what to do, when to do it, when to clock in, when to clock out, when to take their lunch break, when they can go take a bathroom break like they're still kids in school. And so autonomy is out the window for most jobs. And then finally,

Starting point is 00:41:42 seeing the fruit of your labor, this is something that especially in today's day and age, a lot of people are missing out on. If you build something with your hands, you do the work and then you see the result if you're a mechanic or something like that. But for a lot of jobs, all you have is a specific task. There's no connection, no visible connection between the results, the good that's being done as a result of your labor. And so you have this massive turn of events. where because of the stimulus checks and because of the universal basic income through the child tax credits, because of stock prices going up because of crypto, just exploding because of all the new money, you had a trigger come in where suddenly everybody's like, I can quit. I've got two months, three months, four months saved up. I can quit and I can go look for something better. And it put employers back on their, you know, it took them off guard. And suddenly you're hearing stories everywhere of people like, hey, I got offered a job and I told them I couldn't take it. And they said, okay, well, what do you need to take it? And they said, okay, I want this, this and this. And then employers like, done, we need labor because everybody's quitting. And if you come here and you don't like it, you're going to quit. I'm going to have to hire

Starting point is 00:42:44 somebody else. And every time I have to hire somebody, I have to retrain. And so employers are caught off guard and it's turned into a dynamic that's been putting a lot of power in the employee's hands, very different trend from the last couple of decades. And a lot of people are just saying, I can move now. Another result of COVID was remote work, right? Everybody gets to work from home. I don't have to live in the city. I don't have to keep up these high. expenses. I can go somewhere else. I can even get a job that's better for me that pays less and say, screw it to the system and go live somewhere for much cheaper. A lot of people going into small businesses, becoming contractors, doing online things. And so we're seeing a huge shift,

Starting point is 00:43:21 a huge trend that I view is absolutely fantastic for most people to escape the system that's been that people have been trapped in for so long. And so this is one of those things that, at least from what I can tell, is a very good sign, very good trend going forward. Does inflation play a role in that moving forward, meaning like as the cost of living continues to go up, people are going to demand higher and higher wages, and that could ultimately affect net out in this positive work environment where wages are more aligned with where they should have been for a long time? Well, probably not, unfortunately.

Starting point is 00:43:55 So at least in the short term, when you look at the way that new money works its way throughout in economy. Typically, that new money hits asset prices first, then it hits goods and services, and then it hits wages. And that's just simply a result of who gets their hands on the new money first. And so theoretically, if you could press a button and have complete control over the system and you could have all the new money created go straight into the hands of poor or low-class, middle-class individuals, then theoretically you could say, okay, you get the money first. But the problem is, even if you were able to do that, which you can't, it doesn't flow that way. But even if he could make it flow that way, what happens is the goods and services

Starting point is 00:44:38 stays the same. The amount of stuff in the economy stays the same. Then the money explodes. So if before you had all the money was needed to buy all the stuff, now you double the money. Well, now to buy all the stuff, you need double the money. So if you want to buy some of the stuff, you need a lot more money than you did before. And so when you have a lot of individuals who barely were making ends meet before, get their hands on new money. They're not investing it. They're spending it. And that's backed up empirically by every data point we have out there. When you put money into the hands of individuals that are not already wealthy, they have to spend it on the stuff that they are buying like rent and food and clothes and energy. And that bids up the

Starting point is 00:45:17 prices because there's not a corresponding increase of goods and services. And that corresponding any increase of goods and services doesn't happen until much later after prices have gone up to signal to the producers, it's time to create more of it. Right. And you mentioned the cantalone effect. Speaking to that lack of it flowing through to the common man, you know, a lot of people were following that saying inflation wouldn't happen while the velocity of money continues to decline.

Starting point is 00:45:44 What are we missing as it relates to the velocity of money because inflation is obviously risen as velocity has been low? Well, I think you hit the nail on the head there that we've seen record-breaking inflation for months now, decades-long records being broken, and Velocity hasn't budged. Velocity is one of those that is just complete absolute trash. It is worthless. And part of it is because, empirically speaking, we're looking at, we're living through it right now.

Starting point is 00:46:10 Anybody who still thinks you need velocity to have inflation has been living under a rock for the last eight months. It does not work. But secondly, the actual math is wrong. If you look at how velocity is calculated, it assumes you can quantify the money supply. Now, there are ways to estimate money supply like M2 and M1, but it is impossible to accurately and in total quantify the money supply. Let's say you can even do that.

Starting point is 00:46:37 The velocity of money equation is built on the GDP formula. Well, GDP is another one that's complete trash and garbage and worthless because it assumes an evenly rotating economy, which is not true. It's not reality. It works in a textbook on a page, but when you actually apply it in reality, all you have to do to have an increase in GDP is increase the money supply. And so there is no validity to the velocity of money, both empirically speaking and when you look at the math. But finally, let's say, even ignore all that. Velocity is not at a record low. We've been this low before in 1940. in the early 40s. What happened after velocity hit this low? It skyrocketed because people were

Starting point is 00:47:24 dumping money. They were spending money fast. And what happened as a result? Inflation spiked. And so velocity tends to spike when people start dumping currency, especially in cases like Weimar, Germany, when you have hyperinflation. And that's something we don't want to see. When you start seeing velocity spike, that's not regular inflation around the corner. That is people dumping the money. That's people dumping the currency. and we're nearing the end when velocity starts to spike like that. Let's take a quick break and hear from today's sponsors. No, it's not your imagination.

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Starting point is 00:51:07 prospectus at fundrise.com slash income. This is a paid advertisement. All right, back to the show. Fantastic. Super interesting. So talking more about currency, the Fed has obviously been considering a CBDC or central bank digital currency and they're becoming more and more popular around the world. Very often, I'm only hearing about why that is a bad thing. But funny enough, you've mentioned that there could be some major benefits to CBDC. So talk to us a little bit about what those potential benefits might be. So this is an area where my sartasm might need some work because there are huge benefits to a CBDC.

Starting point is 00:51:46 The question is for who? Because there are big downsides and big benefits. The question that has to be asked is for who? Because in reality, a central bank digital currency is a tyrant's wet dream. It is absolutely terrifying for a population that has to use it. In a nutshell, here's why. If you want, I'm going to go to the extreme here, if you want totalitarianism to work, if you want complete, I'll just say central planning.

Starting point is 00:52:14 If you want to be able to centrally plan an economy and have that be effective, you need three things. You need perfect knowledge, perfect and complete knowledge. You need absolute control and you need pure morality. And so here's why you need those three things. You need perfect knowledge because the reason the pricing system works, pricing system exists is because of information. If you have the production of wheat this year drop in half, that means half of the wheat will have to be consumed this year. You cannot consume more wheat than what is produced. And so that information has to be sent out into the economy,

Starting point is 00:52:52 and that's sent out simply by prices. So I might buy one less loaf of bread because the price doubled. A bakery might continue to buy everything they bought before, but some people will consume less and on net, it will be half because that's all that was produced. So that's what pricing does. It sends information out because nobody can know everything about everything. And so you have to look at prices to make a decision and say, I'm going to buy less bread because I still need water or I still need gas or I still need something else. And so prices are how we make that decision. And prices are decentralized, perfect knowledge in absence of price manipulation. And so in order to, that's the first thing you need. You need perfect knowledge. You need every

Starting point is 00:53:31 intention and decision and price information of everything in existence, all to be consolidated under one roof. The second thing you need is absolute control because just because you know what needs to be done to plan the economy, it does no good if you don't have the power to make that decision. And so there are a lot of legal loopholes right now, or legal fences, I should say, that prevent the Federal Reserve from doing things that they would want to do to control the economy because all they're able to do is buy mortgage back securities and treasuries and lower interest rates. There are a lot of other things that they could, you know, I say fine tune in quotes in order to manipulate the economy if they had control over those things. That second thing

Starting point is 00:54:13 that you need is absolute control so that you can actually do something with that perfect knowledge that you have. And then the third thing that you need is pure morality. Because if you have all of the knowledge and you have all of the power, but you have the wrong motives, then you're, are going to use that and abuse it in a way that's not going to be good for the system, but it's going to be good for your buddies. And so this is, you know, philosophically speaking, kind of the idea for Jesus as the king of kings, you know, somebody who's omniscient, has all the knowledge, somebody who's omnipotent, who has all the power and who is sinless, somebody who's, you know, perfect and morality.

Starting point is 00:54:46 And that's because it's an ideal that is impossible for a human to attain. And so we decentralize that. But a CBDC attempts to centralize that and basically become God over the economy. in a way that a central bank digital currency can only do. And so in order to understand why, we have to define that. Well, right now you have a bank account with Chase or Bank of America or Wells Fargo or, you know, wherever you have it. A CBDC is simply bypassing the banking system. It's an abolition of the banks and everybody then, merchants and individuals have an account with the Federal Reserve instead, with the central bank instead. What that does is it consolidates

Starting point is 00:55:25 all of the information about every single transaction that takes place under one roof. So instead of that being decentralized through the banking system, now you have it in the possession of the central bankers. You can run software programs, you can artificial intelligence, well, or machine learning, I should say, in order to try and understand that data. The second thing it does is it allows control, because if you as a central planner see that there is a certain segment of the population based on whatever criteria you want. Let's just say a wealth level. You can see, hey, this certain population has too low of a wealth level and that could

Starting point is 00:56:05 destabilize the system. So we are going to just credit some money into their accounts. Or if you want to stimulate, let's say there's not enough money flowing into something with an economic or political agenda. Let's say solar panels, good example. We will credit everybody $1,000, $10,000, whatever it is, and it can only be spent at a merchant that is licensed as a green energy company. And so you can fine-tune the economy or you can attempt to fine-tune the economy because you have all the information and the control to credit people's accounts for very specific purchases. And this is something I can't remember her name.

Starting point is 00:56:43 I think it's Omerova. She was Biden's nominee for the head of the office of the comptroller of the currency. She wrote a paper that was recently published on the people's ledger on how to implement a CBDC. And she said that it would be essential to have the ability for the Federal Reserve to debit people's accounts. Well, number one, then you do away with the need for the IRS, right? Because you can automatically tax the economy, fine-tune taxes. You don't need to wait for Congress. You don't need to wait for a new president to roll out a new tax cuts and jobs act or anything like that.

Starting point is 00:57:15 You can tax the economy, fine-tune where you think it's being over-end-a-old. It's reheated. Gas prices are going up, double the taxes, whatever it is. You can debit people's accounts if this was, in her words, if inflation is running too hot in extreme circumstances. So even at this level, they understand inflation is a result of monetary expansion, deflation is a result of monetary contraction. So if inflation is running away from you, just take half of everybody's money. Then you'll get deflation. It'll stop the inflation. And so that's why I say that CBDCs are a tyrant sweat dream because it allows fine-tuning of the economy, but ultimately, Ultimately, it will fail. It's destined to collapse under its own weight because just because you have the pricing information and the transaction information and the control, you can't fix the problem of morality and you also can't fix the problem of perfect knowledge because every pricing choice that's made is an internal decision based on subjective value. There's no such thing as intrinsic value.

Starting point is 00:58:13 We can talk about subjective value if you want. That's probably a longer conversation. But you can't understand the intentions behind it. And so you end up with malinvestment, misallocation of resources that are so large that you collapse the system under its own weight. So it's a little bit easy to understand how that would work or could be implemented in a communist country like China, but it's hard to imagine that flying somewhere like the U.S. My question, I guess, is if the U.S. did attempt to implement their own CBDC like that,

Starting point is 00:58:40 what happens to cash? Would they ban all cash? Would you have to turn in your cash like you did your gold? What happens to the USDs that we have in circulation now? They would almost certainly be relegated to a black market. Anytime you have things like this happening, again, all throughout history. Even recently, I think it was probably about five years ago, India overnight. It was their equivalent of the $20 bill.

Starting point is 00:59:04 They just said, hey, this is no longer legal tender, and you have 48 hours, it might have even been 24 hours, to turn in all of those bills of that denomination, and we're going to replace them with a higher denomination. And the reason they stated for this was because, oh, they're being counterfeited. Oh, there's money laundering. Oh, there's fraud. But really, it was because they wanted more control and they wanted more taxation ability over their people. And so you have things like this happen all the time where they roll out a CBDC at the beginning. It will be something like a trial program. But eventually it'll get to the point where they say, all right, in order to do business in America, you must have an account, a wallet at the Federal Reserve. So every business, every merchant, cannot legally do business unless it goes through their account at the Fed. And as an individual, if you want to do transact, if you want to buy from any business, you will need a wallet to do so because the only way to get money into a wallet is from another wall. And so you have a week to turn in all of your old dollars, all of your cash, and we will give you the equal number of

Starting point is 01:00:08 those in the new central bank digital currency. There's no loss to you. But if you wait too long, legally, those are not legal tender anymore. And so it would relegate everything like that, cash, Bitcoin, things like that, barter to a black market or at least a parallel market. And you would not be able to buy or sell without an account like that. And you ask about like what, like, it seems unbelievable how we get into that, but it would be on the back of a dollar failure. And so if we get to the point where the federal government defaults or, you know, they start unlimited QE up again after an emerging markets crisis happens later next year as a result of the tightening. And then everybody in the world dumps treasuries and then dumps dollars.

Starting point is 01:00:50 We have hyperinflation here. And the dollar actually fails. What you'll probably see happen is the federal government say the problem was counterfeiting and fraud and the problem was cash. The problem was we didn't have enough control. Or the problem was the Federal Reserve being part private. They didn't have the legal ability to do what they should have been able to do to solve the problem. So we're going to absorb the Fed underneath the Treasury. We're going to issue new dollars that are digital, like the greenback that we issued under the Treasury during the Civil War. And so they will give it a new name. They'll bring the Federal Reserve on the monetary policy under fiscal policy. I think that's how it'll be rolled out on the back of the failure

Starting point is 01:01:29 of the current dollar. You know, I just had Brent Johnson on the show, and he's obviously famous for his dollar milkshake theory of the dollar, potentially getting stronger over time. and it has been getting stronger. It's the DXY right now is almost at 97, which is getting into that danger range that he kind of highlighted on our episode. You know, back in March of 2020, it shot up all the way to almost 103, 102.8. So 97 isn't too far off. And things really started to get squirrely once the U.S. dollars essentially got to 100. What is causing the dollar to spike as of late?

Starting point is 01:02:04 And what might be some of the effects from that that we should see or expect? So I always say that Brent Johnson, he's probably one of the most misunderstood people in Mac are out there, essentially because when the dollar is spiking, it's just versus other currencies. And that's what probably 90% of people don't understand. They think, oh, the dollar's going up. That means gold's going down or stocks are going down or real estate is going down or the dollar is getting stronger relative to everything else where it's gaining in purchasing power. It means none of that.

Starting point is 01:02:31 It's measured against other currencies. And so it just means it's going up relative to other currencies. So then you have to ask, well, why is it going up relative to the currency? that it's measured against in that basket. And the answer is because of the corner that the Federal Reserve is in right now being pushed into tapering and tightening. So with the unprecedented levels of inflation that we've been seeing recently, and now those jobs, those fake jobs numbers that we talked about, we're seeing the Federal Reserve saying that they're going to continue the taper. They're going to potentially even raise interest rates faster than they originally anticipated.

Starting point is 01:03:06 it. And this is tightening at a level that is faster than the rest of the world, greater. And so relative to the rest of the world, that's making the dollar appear stronger. And also you have players just front running that. And so when you see inflation like this and you see, okay, well, it's going to take a long time for the Federal Reserve to react to this and even longer for the effects of their reaction to work its way out into the economy, it's ludicrous for me to hold on to a 10-year bond paying 1.6% when inflation is 4, 5, 6, 7, 7, 8%. I'm not going to do that. So I'm going to sell that. Well, that puts downward pressure on bond prices, which is upward pressure on interest rates and eventually in absence of manipulation, an absence of a buyer with a printer,

Starting point is 01:03:50 then you get equilibrium where eventually the interest rates will reach at least the price of inflation to have real interest rates not be negative anymore. But the problem with that is emerging markets. Problem with that is countries that have to get dollars in order for their economy to survive. Because as this happens, the dollar gets more expensive. Well, that puts a lot of pressure. And emerging markets crises almost always happen as a result of unexpected dollar spikes because it just gets harder to get your hands on dollars and you need dollars to do global international commerce. And so I think it's very likely that within the next year, as we see interest rates go up, especially short-term interest rates and the dollar go up, we're going to

Starting point is 01:04:30 see some sort of crisis pop up in another country that's going to bleed over into a balance sheet of a Eurozone bank that's completely over leveraged right now and spill over into the financial system. And that could be a crisis that will cause them to turn tail and have to push that dollar back down and ease again. Got it. So that begs the question of where to park your money. And a lot of people are talking about real estate right now, although that is even at all-time highs in most cases. What are your thoughts on the U.S. real estate and home prices? And is that the safe haven that once was? Yeah, that's a great question. It's very easy to just look at the prices and the average prices and you look at the Case Schiller index and you're like, oh, prices, they have to

Starting point is 01:05:11 come back down, right? At this point in an economy, when you have this level of manipulation and expansion and financialization of everything, you have to start asking compared to what? Because comparing things to dollars eventually starts to break down. So you have to start comparing things to other things. When you measure home prices in gold, they're not at all-time highs. When you measure home prices versus the stock market, it's not at all-time highs. And the reality is that the current housing market is nothing like it was 12, 13 years ago. Well, right now, new supply is what to watch because there's nobody sitting with three or four

Starting point is 01:05:48 empty homes just watching the price go up so they can sell it to the greater fool. The people are living in a house. When they sell it, they move somewhere else and they buy another house. Investors and institutions are increasingly making up more and more of the buyers of these homes that are getting sold. So when one person sells their home, sometimes they're selling it to another person that's going to live there, but growing. Increasingly so, they're selling it to a company that's going to put a renter in there. And so you can't look at the supply of resales. You have to look at new homes that are being built because after the financial crisis, developers got destroyed. And we were probably optimistically five, but probably closer to 10 years away from new supply

Starting point is 01:06:33 catching up. And now what are we seeing with supply chains? Well, you can't get supplies. You can't get steel. You can't get labor. And so new homes aren't being built. They keep on getting delayed. They keep on getting delayed and delayed and delayed.

Starting point is 01:06:45 And we're not seeing new supply catch up with demand. man. And so the tapering will likely put a break on prices going up because mortgage rates are going to go up. And that's it. The cost of servicing that debt is a huge, almost the sole influence on affordability of these homes. But that's not going to last long like we already covered. And when they have to slam interest rates back down to bail out the economy one last time, stimulate debt growth, we already know how much a drop in mortgage rates influences the extra cash that people have. So if they peg it mortgage rates to 2% or 1% or even lower, the refinancing that people are going to be able to do, the buying of greater price houses that people are going

Starting point is 01:07:26 to be able to do, the cash out refinances when the prices go up as a result from that, the cash that they're going to have as a result. These are all things that are going to make housing prices explode in dollar terms. Purchasing power is another question, but in dollar terms, especially when you're using fixed rate mortgages to buy real estate. estate, it's by definition shorting the dollar. And so it's a play on profiting on inflation when you can use fixed rate debt to buy an asset that makes up so much of an economy that the people in power are incentivized to keep those prices going up. There's a lot of talk right now about buying farmland. Not everybody can afford farmland,

Starting point is 01:08:05 but related to real estate and that same kind of idea, would you advise someone buying up some farmland if they could afford it? Yeah, that's a great question. The short answer is yes, and there are very easy ways to even just get exposure to farmland, even if you only have a couple of bucks inside of a regular, you know, like a Robin Hood account or something like that through ETS. But the reason why it relies on understanding two things. The first thing is the trade deficit that America has right now.

Starting point is 01:08:32 And then the second thing to understand is what happens during high inflation. And I like to look at Weimar, Germany as a very good example. In America, we make very little things, very little of the things that we consume ourselves. Most of what we consume comes from other countries. That's the trade deficit. We buy more from other countries than we sell to other countries. What we have to do to get that stuff is give something, right? Well, what do we give right now?

Starting point is 01:08:56 We give dollars, which are essentially worthless, right? Looks like we're winning. We're handing out these worthless pieces of paper, and we're getting all sorts of goods, all sorts of consumable items in return for it. And so we don't have to make anything. We don't have to do anything productive to make these dollars. We can print them as a country. And so just to put this in perspective, if you're an individual and you're really good at counterfeiting,

Starting point is 01:09:18 let's say you're an artist, you can counterfeit dollars, you're going to do that to pay your bills, right? You're going to put your own to deposit those dollars in your account, pay your mortgage with it. You're going to go to the store, buy stuff with it until you get caught. Once you get caught, then you're going to have to provide something of real value to the world in order to get your hands on purchasing power. And so you're only able to exchange that at that point, once you're caught real wealth in exchange for other wealth that you want. And so for now, you're living high on the hog by printing up fake money, but once you get caught, you're going to have to resort to whatever skill you have in order to create value. One of the things that America

Starting point is 01:09:53 does right now is farm. We've got a lot of farmland, pretty good at making food. And so what you have right now is a situation where billionaires and institutions, a lot of big money is scooping up farmland. So when big money starts to do something, you have to ask yourself why. So now we have to go to the inflation example. And I really like to use Weimar Germany as an example. When hyperinflation set in, very few people were winners. Almost everybody was a loser. But there are two really good books on the hyperinflation, Yemar, Germany. One of them is when money dies by Adam Ferguson. The other one is the downfall of money by Frederick Taylor. And I can't remember in which one, but one of them details kind of like the day-to-day lives of people that are going through this. And farmers were

Starting point is 01:10:42 getting rich because it turns out when luxuries go out the window because you were living high on the hog, but it was fake wealth and everything starts to collapse and everybody has an abundance of money, but nothing of real value, the people who still have the ability to create real value, especially necessities like food, they start to attract all of the capital. And they still can make pigs. They can still make eggs. They can still make cows because they're farmers. And so they get to sell those at higher and higher and higher prices because that's what everybody wants more of. And when asked what they were doing, because everybody got mad, they're like, hey, you're taking advantage of us. You're getting rich. You're exploiting us in this poverty. When asked what they were doing

Starting point is 01:11:20 with all the riches they're accumulating, they said they were paying off their mortgages. That goes back to what I said earlier about shorting the dollar, taking out fixed rate debt to capitalize on inflation. But essentially, what you have to do when inflation starts takeoff is you have to provide the world something of real world value in order to get your hands on the currency that somebody else wants in exchange for the goods they're trying to buy. And if everybody doesn't want dollars anymore, we'll have to get, let's say, euros or yen or Bitcoin or gold or silver, whatever it is. We have to provide something in order to get that. And farmland, farm, food, that's one of the only things, one of the biggest things

Starting point is 01:11:56 that will still be doing because almost everything else we don't make ourselves. And so when something like this happens, if we loop back around to what I was saying about the trade deficit that we have right now. We think we're taking advantage of the world. We're sending out all these paper dollars. We're getting real goods in return. But when you look full circle, what is the rest of the world doing with those dollars, especially China? They're buying land in America. They're buying real estate. They're buying stocks in America. They're buying dollar denominated assets. So what we're actually doing is trading ownership of our assets like land in stocks and real estate to the rest of the world in exchange for consumable goods, not assets,

Starting point is 01:12:41 that we're using up. And they're buying real estate and land and farmland with it. And so when you take, when you look at the full circle, you're seeing everybody who is in on what's going on, realizing, hey, the best way to take advantage of a future drop in the value of a currency is by using that to buy an asset that will have to be repriced upwards in the face of that hyperinflation. and that data is backed up by the net international investment position, the N IIP. You can look at the charts. We have one of the lowest NIIPs in the developed world. And that's just a result of we hand dollars out.

Starting point is 01:13:17 They buy our assets. We don't buy their assets. We buy their goods. Fantastic. You've mentioned a number of amazing books during this podcast, but I'm curious, what is the best investing book that you've come across that really resonated the most or maybe the one that you recommend to people who are just getting going? So I read a lot, though I can't limit it just to one. So I apologize. I'm going to have to

Starting point is 01:13:37 take advantage here and recommend a few for different reasons. I would say the first place to start would be anything by Jack Schwager. He's written the Market Wizards series. He started back, I think it was the 80s with Market Wizards. He's written like five or six of them now, unknown market wizards, hedge fund market wizards, the new Market Wizards, all different books. And just absolutely fantastic because he interviews the best investors in the world. And when you read a couple of those, you start to see parallels and you say, okay, every single successful investor for decades now have done the same thing. Pattern recognition sets in you, start to see, hey, these are the things that make you

Starting point is 01:14:16 successful at investing. The second group of books that I recommend, probably more than any others actually, is by Nassim Taleb, not all of his books, but three of them, Black Swan, Anti-Fragile, than skin in the game in that order. Black Swan, anti-fragile, skin in the game. And it applies to things outside of investing as well. But if I would have read those books early on, I would have been saved massive amounts of money that I lost when I couldn't afford it if I would have understood things that he

Starting point is 01:14:46 explains very, very clearly about risk management and some other things in those books. And then finally, this is a new book. Just came out a couple months ago is Safe Haven by Mark Spitznagle. Safe Haven Investing for Harsh Times, I believe is the subtitle. Fantastic book about cost-effective risk mitigation. A little bit of math. So I would recommend getting the physical copy, not the audio copy. But all of those fantastic that I recommend a lot.

Starting point is 01:15:14 Amazing. And actually, Jack Schwagger was a guest on TIP. Early on, Preston and Stig interviewed him. It was episode 85 years ago. We should have him back on, but I'm a big fan of those books as well. Last serious question I have for you, and the podcasters listening won't understand this, but there's a chart on your computer behind you. And I love that you display these during your videos, but this particular stock pick seems

Starting point is 01:15:37 to be going parabolic, so I have to ask which one is it? That's the two-year yield. Even better. The U.S. treasuries, the yield of the two-year U.S. treasuries. So that's an indication of what's – it looks like a penny stock or a new crypto, a new token, doge coin, whatever, but it's the yield on the two-year treasury. So take that for what it's worth. Oh, boy.

Starting point is 01:15:58 All right, great. Listen, before I let you go, Joe, I want to make sure I give you the opportunity to hand off to our audience where they can learn more about you, find Heresy Financial, follow along with anything else you want to share. The number one place is on YouTube. My channel is called Heresy Financial there. And then the second place is on Twitter, handle this Heresy Financial on Twitter as well. Joe, this was a blast. I would love to do this again sometime soon. You're just a wealth of encyclopedic knowledge, and it's really awesome.

Starting point is 01:16:28 I learned a ton, and I know our audience will as well. So we'd love to have you back on and do this again sometime soon. Thank you. I appreciate it. I'd love to anytime. All right, everybody, that's all we had for you this time. If you're loving the show, don't forget to follow us on your favorite podcast app, so you get the episodes automatically.

Starting point is 01:16:45 Joe and I originally connected on Twitter, so you can always find me there at Trey Lockerby. And check this out. We have this amazing new feature on the Investorspodcast.com. but now you can actually follow along with your favorite billionaire. That's right, we've listed the billionaire's portfolios on the platform so you can compare your own portfolio to what they have. Simply Google TIP finance and it should pop right up. And with that, we'll see you again next time.

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