The House of Cards: Evaluating Economic and Financial Warning Signs
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Walking the money for the rest of us. This is a personal financial on money, how IT works, how to invest IT and how to live without worrying about IT. I'm your host, David stein.

Today is episode four forty nine. It's titled the house of cards evaluating economic and financial warning signs. I have a friend that shares with me paid instagram reels that invariably warn n about something bad that is going to happen economically or financially. I sometimes watch a portion of the video or read the transcript.

Usually it's the repeat of some dire prediction in which the dome's day day event keeps getting punished back, because the thing ever, or is some financial or economic news item, such as the federal reserve studying central bank, digital currencies and IT, gets totally blown at a proportion. Fear mongers is highly lucrative because we all crave solutions that alleviate fears. We wanted somebody to tell us it's gonna.

Okay, we don't engage in fear mongering that money for the rest of us. But we also don't stick your head in the sand. There are times when we step back and us, what if the house of cards comes crashing down, be at the stock market or our home currency.

At what point should we start to worry that economic and financial developments are off track and heading toward a major disaster? Fortunately, there are actually things that we can look at to decide whether things are really, really going wrong. Occasionally get thoughtful emails from listeners and plus members who aren't level headed investors, but they sometimes begin to worry as they consider things that could go wrong.

For example, here are some recent questions from listeners and members, which i'll address in this episode. First, at what point do you get concerned enough to have serious doubts about the house of cards? The stock market collapsing IT appears to me that the stock market is just juiced with the federal serve printing money.

What personally gives you the confidence to stay in the market given our country's financial situation? Another question, at what point does our level of debt and interest payments on the debt begin to cause serious problems for america? In your opinion? How would one diversify to protect assets against the loss of political stability? And finally, listen to read about brazil, russia, india and china intending to set up their own international banking system in order to bypass the swift system, which is a system of banks for trenching funds and to generate their own currency.

And the listener asked, does that change anything with respect to the dollar collapsing? Notice all of these questions have some element that involves what I consider the most lucky thing about our financial system, money. Aristotle in politics route, wealth is often assumed to consist of a quantive of money, but money is the thing with which business and trade are employed.

Money is used for transactions. Wealth is not having a stack of currency, aristotle continued. But at other times, on the contrary, IT is thought that money is nonsense and entirely a convention. But by nature, nothing that's true. Money is nothing.

IT has no intrinsic value, although there is an unlimited supply, because if you can be created at a the air, you can create as much as you want, even though it's not tangible, really worth anything yet. We can use IT to buy things. And amazingly, other people accepted.

We've been traveling in england for the past few weeks, and we have a friend in cornwall who is a ramos's SHE mentioned how thrilled he was when someone just one of her works and gave her money. But then he laughed when I mentioned he saw this beautiful, tangible thing for a worthless piece of paper, or perhaps some digits in her bank account. I have previously shared this quote by former fed chair Allan Greenspan.

He said there's nothing to prevent the federal government from creating as much money as IT wants and paying IT to somebody the federal government working in tandem with the central bank, can create an infinite amount of cash. Mini apple is to reserve bank president neil cash Carry said exactly that. In the early days of the covered nineteen pandemic, on sixty minutes, when ask if the central bank can flood the financial system with money, cash Carry replied, there is no.

And to our ability to do that, there is an infinite amount of cash at the federal reserve that can freak us out an unlimited amount. But having all this money flowing to the economy isn't sufficient. There needs to be something to buy, food, transportation, health care services, Green span and testifying in front of congress, highlighted this problem of the government creating money, but say to pay social security benefits.

He said, the cash itself is nice to have, but it's got to be in the context of the real resources being created at the time those benefits are paid, so that you can purchase real resources with the benefits. If there's nothing to buy, money is useless. There needs to be real things, real resources to buy.

We need a dynamic private sector economy that is producing tangible goods and services, money for people to use, that needs to be convenient. There needs to be enough to make change. We should be able to easily transfer IT, borrow IT, spend IT.

And if IT, if it's not convenient, that people won't use IT. That's why most crypto currencies language, no one uses them as money are very few do. Instead, they hurt IT, hoping IT will go up in value. Because crypto currency, except in some developing countries where their home currency doesn't hold its value and is inconvenient, there you see more use of cyp to currency.

But in develop nations where the currency systems work, you're not seeing IT money needs to be convenient and IT needs to hold its value, its ability to purchase a consistent quantity of goods from our an hour from day to day, not necessarily from month the month, because there is some loss of purchasing power through inflation. There needs to be a baLance between convenience and holding its value. And that's what central banks do, along with the federal government, make sure that there's enough money in the system to facilitate transactions.

But central banks can create real wealth in terms of goods and services. IT can only create digital money. We've been traveling in england for two weeks, and I haven't give a much thought to the british pound because we have very little cash. I've gone to the A, T. M.

Once, so I have little exposure to the pound, even though we've been spending money, but mostly using a credit or but it's been amazing to me as we ve used our phones to summer, complete strangers to come pick us up and take us somewhere using uber. We've booked logging on airbnb and I had strangers let us stay at the house. We use our phone to book train tickets to right across the country.

And even though some of the trains get cancelled due to a shortage of staff, there was another train thirty minutes later, or in one time we went thirty minutes earlier. I don't know anyone who Operates the train system and yet IT works for me. We book a rental car at enterprise and they let me drive this Mercedes worth over thirty thousand pounds off a lot.

And they didn't even check my drivers' license. They don't even know if I can drive. They had upgraded us because the vehicle we booked was unavailable.

When do I get worried about the financial system, the economic system? It's when I can no longer trust others to facilitate the transactions like we talked about that I have to worry about the uber driver, whether hill robots. We have to worry that I can't safely walk down the street or that i'm not able to cross the country safely.

Knowing very few people David grave n has booked on of everything, talked about three fundamental primary freedoms, the freedom to move to live where we want to travel. That's a basic freedom. The freedom to disobey orders, not to break the law, but to display order if we don't like our job, to quit and find another one.

And the freedom to reorganize social relations, to choose our friends, to not spend time with our family, if we don't want those are basic freedoms that need to be there for an economic and financial system to work. First of well being, there is also basic goods that an economy of financial system and society should provide. And i've discuss this in the past.

They're from Robert and award skills book, how much is enough money in the good life in the basic goods include health, security, respect, personality, ability to pursue a plan of creativity for ourselves, have a private space or on garden. Harmony and nature were in york tails area, and there's all these public walking trails that go through private grounds. And that's just how this country has evolved.

Other basic goods include friendship, leisure. So I start to worry when those basic freedoms and basic goods are violated, not on the margin. There will always be political debates about laws, taxes at set, but there's gently agreement.

I think that these basic freedoms and basic goods are inevitable, that everyone should have them, and there shouldn't be fundamental violations of those. And if there is that, I not only started to worry about the society, but then I worry about the economic in the financial system. A few weeks ago, I mentioned our car rental car.

We were sitting in the car, I was attacked and someone broke the back when SHE eld and tried to steal a luggage. That's the exception, though. One incident most of the time in the the area, we felt completely safe.

Countries that provide those basic freedoms in good, attractive. Those are places where people want to go and live and work, either come legally or illegally. I would be worried if more people wanted to leave my country than wanted to come in.

But there was less opportunity where I lived. I would be worried if entrepreneurs weren't starting new businesses, if they couldn't raise capital, if there wasn't sufficient dynamism in the economy. But instead he was stagnating.

There was a loss of hope. The questions from the listeners were a sort of big picture, questions on the currency, on the government finances, on the stock market. I care about what's happening at the local level, on the streets, is their trust.

Is there a viBrant private sector? Are people selling things on the street, creating things, helping each other, smiling, laughing? That's what life is. And in most of IT at at that level, IT isn't about the federal budget deficit or the national debt or the currency.

Those things are important, but those things will fall apart if there's not trust and creativity and dynamism at the local level, at the individual level, regionally. Now let's address some of the specific concerns regarding currency and government finances. The question was, at what point is our level of debt and interest payments on the debt begin to cause serious problems for amErica in your I looked at the data and that's what amazing is we can see the data and we can see projections.

The non partisan congressional budget office in two thousand and nine, U. S. Ran a budget deficit. The federal government spent one point four trillion dollars more than IT received.

In tax revenue, this was during the great financial crisis and the deficit as a percent of the economy. The output, or GDP, was nine point eight percent in two thousand twenty. During the pandemic, that budget deficit was three point one trillion dollars, almost fifteen percent of GDP, I think, was the biggest budget deficit the U.

S. Ran since world war two in twenty twenty one. IT was two point eight three hundred dollars, about twelve percent of GDP last year.

Twenty and twenty two is one point four trillion dollars. So it's smaller, but as big as I was on an absolute basis in two thousand nine, about five point four percent of GDP. But i'm cern.

This year, the budget deficit jumped up again one point five trillion dollars due to less tax revenue, but also spending is higher than last year in that trend. And I link to IT in the notes where the congressional budget office forecast the revenue is a percent of the economy and the cost for social security, medicare, medicare directionally spending interest. They go out to twenty fifty three and what matters.

And we discuss this in our update on the national debt is how big is that total deficit as a percent of the economy? Because that is rolled over into the total public debt, the national debt as a percent of the economy. What matters is its not its absolute size, but its size relative to that dynamic private sector that are paying the taxes to service the debt.

And if the private sector isn't growing, then we have problems, as I mentioned, and the private sector doesn't grow. If there's not trust at the local level, the federal debt held by the public in twenty twenty three is expected to be around one hundred percent. The total debt, including intergovernmental holdings, because of, for example, of the social security trust fund.

They own government bids. They owned about six point eight trillion dollars. The amount that the public owned is twenty six point two train dollars. So the total gross dead is thirty three train dollars, hundred and twenty four percent of GDP. Just the dead held by the public, about one hundred percent.

And the congressional budget office project, by twenty, fifty three, thirty years or now, the public dead as a percent of GDP will be a hundred and eighty percent. So IT will keep growing and include everything. Interest medicate in the national debt will be much, much higher.

The total debt will be well over one hundred, two hundred dollars. But relative to the size of the east, they're projecting one hundred and eight percent. Is that too much? Is just the number.

Japan's gross debt to GDP currently is two hundred and sixty percent. There are interest rate, the ten year government bond interest at zero point seven percent. There isn't the concern there, not that there shouldn't be, but the absolute number of the debt doesn't matter.

The size of the debt relative to the economy does matter in terms of the ability, the service. But again, the dead, the dead is held. It's an asset.

It's all these people. You and I own government bonds and we're getting interest income off of IT. What matters isn't the debt size.

The size relative the economy matters more. But the true measure whether we should be worried is the level of interest rates. Interest rates are determined by inflation expectations.

They are determined by expectations regarding what the central bank is doing with its policy rate. And we discuss this last week, the fed fund rate in the U. S. Is over five percent to expect you to stay at that level for month. And that has that has LED to longer higher term rate.

But it's that third element, which i've mentioned in the past, the term premium that really matters in terms of whether financial market participants are worried or not about government finances. That term premium is additional yield ld higher interest that investors demand to hold onto this debt and its negative. All the concerns out there about the national debt.

If we look at the level of interest rates, the term premium is negative. IT was over one point three percent most of the time from the mid nineteen seventies to two thousand five. The term premium was over two percent from two thousand and eight to twenty eleven, but it's been negative most of the times since twenty fifteen.

In other words, as the the united states fiscal situation has worsened with government shut downs, with dead ceiling crisis, the term premium has dead negative. I'll start to worry when I see a positive term premium, which means higher interest rates. But for now, i'm not overly worried. We look at inflation expectations. They've come down ten year expected inflation between two point four and two point six percent.

Now the lack of political consensus regarding the debt ceiling, passing the budget, bringing IT to the bringing to fall government shutdown IT, it's concerning, but IT needs to show up an interest rate and it's not and IT my and it's one reason I don't own long term bonds like a long term bond fun with IT, let's say twenty year duration. When I own longer term bonds, I buy an individual bonds so I can lock in the yield and lock in the return and hold up to maturity. But we can focus on interest rates and what comprises those rates before we get worried.

And and all the data there regarding the the budget deficit, the national debt projections. And we can see japan as example. Apparently if you're debt to GDP over two hundred percent is still doesn't cause a concern because who wants to that in japan, mostly japanese households and businesses and they're getting interest income they owe IT to themselves.

And the same for U. S. National debt, most of its owe by households and businesses in U.

S. Before we continue, let me pause and share some words from this week sponsors. Before we continue, let me pause and share some words from one of this week.

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At linked in. That comes last, David. That's linked in. That comes last, David, to post your job for free terms and conditions apply. Next question is, at what point do you get concerned enough to have serious doubts about the house of cards? The stock market collapsing IT appears to me, the stock market is just trust with the federal zr pending money.

What personally gives you the confidence this day in market given our country's financial situation? But clearly, a big jump in in interest rates would put downs ard pressure on the stock market. Those higher interest rates impact households and businesses so that that that would concern me.

So I focus on interest rates. If I don't see earnings growth, there's a lack of productivity increases within companies, a lack of new products, a lack of basically lack of corporate its growth, which is the life blood of of stock returns. If earnings aren't growing, the dividends aren't growing and then remise, we just own a bond because we need growing cash low for the stock market to increase.

But the stock markets comprised of thousands and thousands of companies, they're incredibly diverse, dynamic, seeking solutions to problems, getting customer feedback, adapting its very, very bottom up. The stock market is not controlled by the federal. We saw a forty percent increase in the money supply during the pandemic.

That was a combination of quantitative using with the federal reserve purchasing bonds and U. S. Government running a budget deficit to G, D, P. Of fifteen percent when there is a federal budget deficit. And the fear reserve is buying bonds that essentially sending money into the economy.

Free money and IT inflated the Price of lots of things, not just the stock market houses, watches, and because there was so much more money and the supply of real resources was constrained because of the pandemic that LED to inflation. But in the past year, when the us. And global stock market have appreciated or have returned nineteen percent in the past year, we've seen the money supply actually decrease.

And that drop in liquidity is because the federal reserve has shunk their baLanced the number of bonds that they own by almost trying dollars in the past year, more than ten percent drop in the the value of treasury bonds and Morgan c securities at the own. So it's gone in the opposite direction. Fewer asset.

The government has had the issue additional bonds to replace the ones the federal erd owned, and that LED to less cash in the economy, about a seven percent drop in the money supply, which is cash checking accounts, money market accounts in the past year. And the stock market still in up because the stock market anticipates increased earnings growth over the next year. So I monitor we monitor what central banks are doing, the amount of money being created, but but not what drives financial markets.

The private sector drive financial markets. Central bank actions can influence IT. But over the long term, over decades, if there is not a growing private sector with growing earnings, cash low, then. That's what drives the stock market, not the fed.

The next question then is this listener that was reading about what brazil, russia, india, china doing the idea that they want to set up their own currency, a new banking system, and maybe they will. A reserve currency is a currency that central bank's own. They have this money that they could create, but they go out and they buy dollars and they buy europe s with their domestic currency.

And if we look at the reserve currencies around the world, this is data from I M F. Fifty nine percent of reserves held by central banks outside of the us. Is in dollars, twenty percent in euro and six percent in the japanese, and people still use the dollar.

Even central banks hold the dollar. Half of global trade is invoiced in the us. Dollar, nobody y's telling companies to invoice their trade in U S.

dollars. They choose to do that on their own. That's how the system has evolved.

So fifty percent of trade is invoice in the dollars, even though U. S. Is tenth overall. And trade, U. S.

Dollar is used in terms of a foreign exchange transaction, about six point six trillion dollars per day. Ninety percent of borne exchange transactions are done in the dollar. Instead of converting from yen to europe, there's a conversion from yen to dollars and dollars to euro.

The U. S. Dollars involved in the vast majority of trades. us.

Dollar is the currency most used by businesses outside of the us. To borrow. There's thirteen trillion dollars of U.

S. Dollar borrowings by non bank entities. Private businesses and households that live outside of the us.

Includes five point eight train dollars of bank lands. That's huge. The second largest is fortran euro debt by nonbank entities based outside europe. M, so there's three times more dollar denominated foreign debt than there is eos. And then the third is japanese yann, about fifty five tran yen, which requests to three hundred and seventy two billion dollars of yen borrowing by nonbank entities outside of japan.

I'll worry about the dollar collapsing when the amount of dollars being used in foreign exchange amount of dollar borrowings, the amount of trade invoice in dollars when that seriously declines, and the trend is down and the trend is not down that stayed about that level for the past few years. Not that IT has to, but these are bottom up decisions made around the world by individual businesses. And IT can change.

If IT changes and IT will change, I suspect the dollar will be less dominant in the decades ahead, but that doesn't mean it's going to collapse. The final question is how would one diversify to protect assets against the loss of political stability or any other of these bad events could happen. That's what diversification comes in.

I use an asset garden approach, and I I share my portfolio every month. My percentages in the holdings on money for the rest was plus i've about four ten percent stocks, fifteen percent in bonds, and many other asset types of public assets, private assets. I have hedges such as gold I do on corpo, currency, real estate, land.

We just diversify. So we scale a position. So no one big position, if IT goes against us, can harm our financial standing. And then we maintain our flexibility and spending.

So were not overly indeed the the worst in the world is to suffer some type of financial calamity and have too much debt and be having to make decisions because our debt. But we should monitor, that's what we do on this podcast and on plus membership, we monitor these trends. We monitor the trend with interests.

We monitor the national debt. We monitor merried things to see if things are really falling apart and they are not. There's definitely some concerns, but at the local level, which is the most important, our safety or security, our basic freedoms, there's still there.

And there's there as you travel most places around the world. And that's that's incredible. Have the freedom to travel and to be and to do and create. That's the lifeblood of our financial economic system, not the budget deficit or central banks. They do influence.

But ultimately he is the trust and making sure the amount of money in the system doesn't get out of wax with the real goods and services that are being created by the private sector. That episode for forty nine. Thanks for listening.

I have loved teaching you about investing on this podcast for over nine years. Some topics, though, I just Better explained in writing or with the chart. And that's why we have a weekly free email, news letter, the insiders guide in that newsletter.

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