Luke Gromen: Foreigners To Dump Bonds If U.S. Dollar Continues To Strengthen
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Very pleased to welcome to Monetary Matters, Luke Grohman, founder and publisher of Forest for the Trees. Luke, it's really great to see you. So glad you're here because the US 10-year interest rates have just gone up and up and up. The US 10-year is up over 100 basis points since the Federal Reserve cut interest rates.

How are you thinking about what's going on in bond markets right now, the massive sell-off? How does it play into your longer-term thesis? What are your thoughts? I think it is a tantrum of sorts, but I think consensus view is kind of, well, they're just pricing out recession. And I don't think that's the case at all. I think what's happening is we are now getting to the moment that we've been warning about in our research to our clients really since the mid part of 2022, which was

The Fed screwed up this time by trying to play Volcker a la 1980 or circa 1980 when the US government had the balance sheet of Argentina circa 2004, the debt to GDP. And what we said was that because the Fed got aggressive in fighting inflation, they were going to eventually paint themselves into a corner whereby

if they raised rates they were going to strengthen the dollar beyond some too strong level and that has been shown to trigger aggressive selling of long-term treasuries by foreigners as they raise dollars to defend their currencies and if the fed tried to loosen they would also send the long end of the treasury curve significantly higher

because they would be likely doing so at a time when inflation was not back to their target and possibly bottoming out and even re-accelerating. And so

We've gone through some fits and starts to this, but to my view, this tantrum is something much more important than just a tantrum. I think this is we are getting to that moment where we've been saying is common. That has always been mathematically inevitable since the Fed made the mistake of not letting inflation run higher for longer, which is they raise rates. Longin's going to keep running away from them.

they cut rates, long end is going to keep running away from them. And that's likely going to continue. You might get a brief, you know, if you really crash things for a moment, maybe you get a brief bid. But basically, until they get the dollar down or some other type of dynamic, you're probably going to continue to see the long end of the treasury curve sell off. And Luke, what is mathematically inevitable that you're referring to?

at this point where they're going to have to get much more aggressive in terms of how they manage yields which is to say from here if they strengthen the dollar hike rates long end's going to run on them if they cut rates weaken the dollar that should still get them some mechanical bid for tenure for maybe a moment but ultimately

it likely won't last long and you'll get more of what we've seen since September, October, which is the long run will also go as it begins to get concerned about inflation, especially given the bottoming inflation metrics we've seen, the prices paid we saw in services ISM last week. So that was, that was, that's where they're, that's the inevitability. That's where they are stuck. Now, what they need to do in some way, shape or form is de facto yield curve control. And there's,

I don't think they'll ever do explicit, but that's what is inevitable, I think, ultimately, as a result of how the corner they've painted themselves into. And so by cutting interest rates or keeping interest rates higher, the dollar has strengthened a lot. And that is what you primarily attribute to the sell-off in treasury yields, longer-term treasuries, and that's why yields are rising. So what can the Federal Reserve do to get the dollar down?

cut interest rates when they shouldn't be yeah essentially that's the easiest mechanical way to do it uh have them come out and cut another you know 50 basis points or so the dollar will go down um especially with inflation picking up um will they do that who knows what inflation's doing suggests they shouldn't be cutting so suggest if anything they should be raising standing pad or raising so uh if they were to cut here or continue cutting um

then I think ultimately that would reflect in a weaker dollar.

So do you think that the 10-year yield is going to reach the 5% bogey of late October, early November 2023? And do you think it will exceed that? What do you think happens from here, Luke? I think 10-year yield is going to keep going up. I think it'll head towards 5%. I think it will break things just like it did then. And I think as soon as we start getting auctions, treasury auctions that are sloppy enough like they were in 2023, in late 2023,

the Fed or Treasury or somebody will step in and take action to rectify that. Now,

I just saw today, if you recall, the 30-year had a 30-year treasury auction in November 23, effective failure, five basis point tail on a 30-year auction. The bond market veterans I talked to said that was effectively a pseudo failure, right? So that's the trend we're back on. We are back into dollar up, everything else down markets, maybe gold up too. We've seen that year to date.

But dollar up, gold up, everything else down until the treasury market dysfunctions. And I don't know if that's 4.85 on the 10-year or 4.9 or 5 or 5.1, but I don't think it's 5.25. I don't think it's 5.5, but we'll see. But the mechanics that are in place now until the dollar's weakened is this 10-year yields up and everything else down.

10-year yields up, everything else, including stocks, Bitcoin, gold. I thought that you were a bull on those relative to bonds because you've pointed out a trend of just assets other than bonds going up and bonds going down, all in price. Yeah, no, secularly, that's still the trend. And the reason that's still the trend is the only thing that'll break that trend is if we get the 10-year go to 5.25%, 5.5%,

and we see receipts plummet, we start to see banks have problems again, and the Fed stands in and goes, "We're not going to do anything about it this time. We're not going to do BTFP," which is just yield curve control for banks. "We're going to let banks fail. We're going to let depositors over $250,000 lose all their money."

That's never going to happen. So that's what you would need to break the secular trend of gold versus bond. Gold over TLT up, Bitcoin over TLT up, stocks over TLT up. However, the one...

trend you know gold gold could rise but right now we are in in a back into this regime of of dollar up gold up maybe everything else down bonds stocks bitcoin um oil maybe we get a counter cyclical move here too as well given these sanctions but that's a separate discussion but yeah so we're into another one of these counter moves uh that we've seen over the last 10 years where yeah the bonds

go down less maybe than gold but they're not going to go up until the dollar if we can

And what is sort of so magic about this 5% level? Like, why do you think assets are going to go down once the 10-year hits 5% or 5.25%? We probably have already started to hit the threshold where the 10-year is problematic here, I think, in the UK, elsewhere. I think it's ultimately a function of debt to GDP in Western sovereigns being where it is. But for whatever reason, we can just kind of look back empirically and go,

Once a 10 year in the U.S. hits 4.8 percent, it starts to get it start the stock markets, et cetera, start to sell off. And some of that's a function of where the dollar is at that particular moment. And, you know, DXY at nearly 110 today at 4.8, 4.9 percent. I wouldn't be surprised at all if you continue to see kind of what we've seen in stock markets over the last couple of weeks, three weeks, which has been kind of volatile and volatile to the downside.

Yes. Luke, I'm going to throw a narrative at you. The narrative is basically the reason that the dollar is so strong is because the U.S. economy is stronger and doing much better than basically any economy at the world of size, much better than Japan, much better than China, much better than Europe.

And as a result, the U.S. can handle higher interest rates, whereas 4% or 5% in Europe will crush Europe. Japan, they're not even thinking about it. China, Chinese long-term bond yields are actually lower than Japanese bond yields, which is a crazy thing to say, but it's true. And as a result, the dollar is stronger basically because the U.S. economy

measured in real GDP, consumption, investment, basically any metric, employment is outperforming the rest of the world. To what extent do you agree with that? And to the extent that you disagree with it, can you share why? Well, I think it's true. I think it is outperforming. What I think is the thread that often doesn't get pulled is the US economy is doing well. The US economy, let me back up, the US economy can't do well if US stocks are falling, full stop.

And depending how you want to phrase it, the reality is, is that foreigners own $57 trillion of US assets. And that's $22 trillion net, $57 trillion gross. And they own $8.5 trillion of US treasury bonds. And yes, the US is doing better. And

Foreigners are short $13 trillion in US dollar denominated debt and then the Eurodollar markets, however other big. And so the dollar at some level gets too strong. And once that starts happening, foreigners act in their own enlightened self-interest, which is, oh, we are weaker. OK, we need dollars. OK, break the piggy bank. America is the piggy bank. They break the piggy bank, sell treasury, sell treasury, sell treasuries.

This wouldn't matter. This would just be a recession for the US. This would just be, you know, it is what it is, except US debt to GDP is so high and deficits are 7% of GDP, right? That's part of, hey, the economy is doing so much better. Yeah, well, we're also running 7% fiscal deficits. Nobody's running close to that. It ain't even like, it's not even close. Like we're making France look completely like austere. So the issue is that if you look at US IRS data,

It shows the personal consumption expenditures, which is two thirds of the U.S. economy that is doing better than the rest of the world. 100% of the growth in PCE is just net capital gains plus taxable IRA distributions. Right. I mean, we're living in a situation where 10% of California's budget is coming from the stock gains from four companies, the exact stock count from four companies.

So once the dollar, the mechanics of this are so predictable. Once the dollar gets too strong, foreigners start to get squeezed on their dollar borrowings. They start selling dollar assets aggressively. Treasury yields go up. Stocks go down. U.S. receipts go down with stocks because, again, net capital gains plus taxable IRA distributions alone are 200% of the growth in U.S. consumer spending.

And that does not include stock comp, stock based comp. Stock based comp for execs is taxed as ordinary income. So once stocks fall enough, it becomes mathematically impossible for the U.S. economy, for the U.S. consumer economy to grow. And at two thirds to 70 percent of the GDP, if the U.S. consumer economy isn't growing, the U.S. economy won't grow.

So it's very much like the Jenga scene in the big short where he starts pulling out the bottom blocks and the whole tower comes down. The US economy is the tower and the bottom blocks, it's the dollar and it's US stock market. And once the dollar gets too strong,

pull that out foreigners start selling stocks once stocks start falling consumer spending starts falling receipts start falling we saw that in 2022 there were most traditional economists in 20 to 2023 were surprised when the u.s deficit almost doubled in 23 versus 22 with a strong strong economy and it was a strong economy why we weren't surprised we were telling people look the deficit's going to blow out because stocks are falling so i think that's the sort of

the the thread that doesn't get pulled which is the dollar is up the dollar is is too strong foreigners are going to start selling and they will keep selling and the reality is we have seen we saw it in september 2019 when repo rates spiked we saw it in march 2020 when the treasury market essentially crashed the off-the-run market crashed in in the middle of covid

We saw it in the third quarter of 2022 when we saw the move index blow out and we saw treasury yield spiking. We saw it in 1Q23 with the banking. It wasn't a banking crisis. It was a treasury market problem. We saw it in 3Q23 when inflation was coming down and the 10-year was selling off sharply. We've just seen it over and over and over, which is...

the US Treasury market has repeatedly dysfunctioned once foreign once the dollar gets so strong that foreigners have to start dumping dollar assets to cover their dollar short to service their dollar debt and what I was going to say is that this doesn't this wouldn't matter it's being okay well the US has a recession so what well because the Fed didn't let inflation run higher for longer in 2022

and let inflation erode U.S. debt to GDP from 125% down to 70% to 80%, U.S. government can't afford a recession. In recession, the U.S. deficit goes up 600 to 1,200 basis points in the last three. So you're going to talk about a 7% deficit.

you'll be at 13 to 20%. Oh my gosh. That's like World War II level. There's no private sector balance sheet for that. So then the dollar is going to, they're going to squeeze out global dollar markets. The dollar is going to go up super. That'll be your dollar super spike, but it won't be good for stocks. Stocks will be super crashing. And

Yields will be spiking too, because by the way, as the dollar's going up, foreigners, they've got $8.5 trillion in treasuries to go. Move it now. So your effective deficit, your effective supply of treasuries won't be in a U.S. recession. It wouldn't be 13% to 20% of GDP, right, the deficit. It would be 13% to 20% of GDP plus...

i don't know two trillion a year let's say they sell uh of their eight and a half trillion they own to to raise dollars so that's another ten percent another eight percent so you'd be looking at a 21 to 30 percent of gdp deficit oh by the way did gdp be falling so it'd probably be closer to 25 to 32 that's this that's the machinery that's now in place that is a machinery that is great for everything but the dollar and then some way down that path gold and maybe later down that path bitcoin but other than that

That's what has now been triggered, again, for the fifth time since 2019. You're describing a dynamic where when there's a bull market in stocks, people who make money on stocks, they pay capital gains tax if they sell them. And that generates a lot of income for the treasury, and that can lower the deficit. So for example,

I don't know if it's fiscal year 2000 or 99, but like Bill Clinton had one year where the US actually ran a government fiscal surplus. I believe that was the year they said the world's going to run out of US treasury bonds. Obviously, now we kind of have the opposite problem. And as you would say, as bad as the US deficit to GDP is, in 2022, deficit was 5.3% of GDP. In 2023, it was worse at 6%. I don't know where 2024 is going to come out. But you're saying

That is including the very, very large capital gains and bull market in stocks of 2023 and 2024. And if that ever reverses, the deficit will actually be bigger. Oh, and by the way, in a recession, as you say, you have automatic stabilizers. People go on unemployment. That costs money. That increases the deficit. Perhaps you have tax cuts. That cuts the deficit. And therefore, the deficit will be even bigger.

Yeah. And it's more than just capital gains, capital gains and net and taxable IRA distributions are like, those are big enough all alone. But then you look at, at, like I said, the, the, the stock-based comp is taxed as ordinary income, you know? So that, that starts, you know, we saw that in 2023, it shows up right away. You know, if you look at individual income taxes in the United States,

which is about half of total receipts of the federal government, the top 5% of taxpayers pay 62% of the individual income taxes, 31% of overall receipts. They're not making that money on an hourly wage. Much, if not most of that money is based on stock-based comp. And there's always some degree of stock-based comp. Like I have personal experience with this. I worked at a big bank in the early 2000s that was big in the mortgage market.

And I was at the executive comp level of whatever rating that was within their org chart. That said, every quarter I got like, hey, here's another, you know, $5,000 worth of stock that'll vest at X price. And here's another $5,000. Here's another $5,000. It'll vest in, you know, six months time at X price.

and the stock went up and up and up and up. And then the stock went down and down and down. And on the way up, you spend that money like you've already got it on the way down. It's gone. And that's the type of dynamic. And you've seen this, you know, it's huge in California. Like we were just saying, Bloomberg had an article last month or a month and a half ago pointing out that 10% of the state's budget comes from four companies, exec comp,

And like this is a state that was running $100 billion deficit. And then as that goes up 40%, and it's running close to flat.

Well, if NASDAQ goes down 20, 30 percent, they're going to be running a huge deficit again. You know, same type of dynamic. It's really that combination of net capital gains plus taxable IRA distributions. But the big one that's hard to know is exact comp. And you can see it in 2023 because the deficit blew out by 400 or 500 billion dollars more than anybody was thinking. You can see it. We put it in our in charts for our clients showing. Look.

stocks and receipts. Like if you show me where stocks are going to be in six months, I will bet my house receipts are going to follow it. It's that tight. And that's the real, you know, the dynamic, like the American economy is the strongest in the world as long as stocks keep going up. And as long as the deficits keeps going up, if those two things reverse,

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Thanks for listening. Let's get back to the interview.

Yeah. 80% of people who employees at Nvidia are millionaires and they're paying taxes on those gains. And you're saying if that reverses inflows receipts into the treasury are going to reverse the deficit will blow out even more.

Luke, I want to highlight a point you made earlier. So the rest of the world, so the entire world minus the U.S., rest of the world, is a net creditor to the United States. They buy foreign U.S. debt because the U.S. is a huge borrower in the government bond market, the biggest by far. But also, when the dollar goes up,

the rest of the world is squeezed. You would think that because they are a net creditor, they own more dollars than they owe, that when the dollar goes up, it would be good for them. However, for some reason, I talked about with Robert McCauley, formerly of the BIS, when the dollar goes up,

I think it's because of the liability structure, even though they own more longer dated treasuries and types of reserve assets, agency mortgage securities, the funding with the short term money that needs to be rolled over, that gets what's impacted. So you referenced earlier some numbers about, I guess, gross net. And could you just go over those numbers as well as explain that dynamic of just why the rest of the world gets squeezed when the dollar goes up, despite the fact that they technically are a net creditor and that they

own more US dollars than they owe, but still they get squeezed.

Yeah, so it's ultimately just a function of the system, which is, you know, we sent our factories and jobs to China, which is an oversimplification. But China is a big part of it. So let's just say China. We send our factories and jobs to China. China sends us stuff. We send them dollars. Chinese reinvest dollars back here in our stocks and bonds, which go up. And that creates demand for Chinese goods. And it's a virtuous cycle as long as interest rates always go down and stocks always go up.

after the US has run and by the way before China it was Japan and Europe and Hong Kong and sort of there's been this Daisy chain back to the early 80s 70s of different foreign countries that have sort of served that role or stood in that role and so the gist of it is the aggregated surpluses

is that foreigners now have $57 trillion, the net international investment position of the United States, it's $57 trillion gross, which means foreigners own $57 trillion more in assets, or excuse me, that's their gross asset holdings. The net international investment position

is 22 trillion so foreigners own 22 trillion dollars more of our sat assets than we own to theirs and included in that is is eight and a half trillion dollars of treasury bonds and so the flip side of it though is foreigners since bernanke uh al turned the dollar into a funding currency by with zerp with zerp interest rates they borrowed uh

They borrowed $13 trillion in dollar-denominated debt. So that's $22 trillion net long. You've got $13 trillion, though, in debt. You've also got the who-knows-how-big euro-dollar, which is a sort of dollar liability structure of some unknowable big number, etc.,

The issue with why they sell when the dollar goes up or gets too strong and the level of too strong has been coming down over time as debt goes up, which makes sense, is really twofold. The first is that cash flows to service debt require that money now.

The other issue is that by way of the systemic structure, as the dollar goes up, global growth slows. Part of that is a reflexive reaction to the higher cost of dollar debt servicing.

But as the dollar goes up, essentially global growth slows. As global growth slows, the share of interest, number one, as global growth slows, the U.S. government's share of total global borrowing goes up. And so then the dollar goes up faster and faster.

which forces foreigners to sell faster and faster. So it feeds back on itself very quickly. So it's those really those two dynamics. It's that the debt's got to get serviced now. And then there's this feedback loop where growth slows as the dollar goes up. And as growth slows, and as the dollar goes up, rates go up. The U.S. share of global growth needed just to

finance US debt from the US government goes up and up. And once that gets too high, you get the squeeze higher in the dollar and the drop in everything else as everything else is sort of thrown overboard to try to raise dollars. Thanks for explaining that, Luke. You've got this chart showing the two things. Number one, the growth in US federal debt, and then also the amount of price insensitive buyers of US treasuries. And you show how the growth of the debt has exploded higher, which of course,

of course, everyone knows, but that actually the amount of money that is from price insensitive buyers of US treasuries is actually flat to down. So explain why this matters and also who are the price insensitive buyers and if they're not buying, who has been buying? The price insensitive buyers are foreign official accounts and they haven't bought an incremental treasury bond on net in over 10 years now.

foreign central banks foreign official accounts they don't necessarily buy to make money they buy for um political reasons they buy to manage their currency etc they've stopped buying uh and they've and and so that to me is really kind of the one of the the big years of this entire macro cycle over the last 10 years which is as debt goes up u.s debt continues to go up u.s federal debt has risen eight percent kager compounded annually

For the last 17 years, since 2008, U.S. federal debt's risen 8% CAGR. And since 2014, price-insensitive buying of treasuries, foreign central banks, has risen 0% CAGR. This ties back to sort of that initial point I made where at some point, the Fed was going to get into a spot where they are, which is if you hike and the dollar gets too strong, you lose a long end. And if you cut into too high of inflation, you lose the long end.

Who's been the buyer has been a combination. You've had the foreign private sector. Once rates got high enough, they are profit motivated. Practically speaking, when we look at the foreign buyers of treasuries, we find that Japan's barely bought any. China's been a net seller. Then number three is the UK. Interestingly, they have been by far the biggest marginal buyer sector.

of US treasuries on the foreign side, which is interesting because it's not trade driven. They're a twin deficit country. So it's all financial, it's hedge funds, it's pensions. And what's interesting is their own country is having some debt problems. So how long can UK debt problems go on before they start selling treasuries? And the reality is,

Probably can go on for a while because the Bank of England has already made a secret tool where they will lend money to pensions and hedge funds to buy gilts so they don't have to sell treasuries to unwind positions. And that nobody is going to be told who is tapping that line conveniently for that. So that's fairly probably...

it's probably a good for treasury pricing good for guilt pricing it's really good for gold and bitcoin pricing though because the implication is there will be stealth liquidity injections that nobody knows about you'll just see it show up in gold you'll see it show up in bitcoin uh stocks global liquidity more broadly uh and then you look at who else the marginal buyers of treasuries have been and it's been uh the fed

since 2014 in a big way. The Fed's balance sheet's gone from $4 trillion to $9 trillion back to wherever it is, $7.7 or something. And oh, by the way, the Fed has never sold on net any 10 plus year treasury bonds since 2010. So they've been QTing, but it's all at the front end where there's collateral, et cetera, et cetera. At the long end, the long end is not a real market. If the Fed...

the feds having a hard time selling into an inverted yield curve without really hurting that market uh you've regulated banks into it you regulated money market funds into it um and then most recently um one of the biggest marginal buyers has been mom and pop you've regulated us you haven't regulated us retail you have incented us retail is a is the more accurate way of putting it by raising rates so

you have cobbled together a group of creditors. Now we've gone from whatever rates were to, you know, wherever rates are today, the price, you know, the price of, of long-term bonds has fallen sharply since 2014. And the price of gold has gone up sharply and the price of stock, you know, sort of more inflation sensitive assets. So there's been an, a component of inflating to keep that going on, but they've been able to cobble together a series of, of buyers and,

at a price that the U.S. government can still afford most of the time without Fed printing, but not all the time. And that's where we get into this treasury market dysfunction and why I think the Fed's mistake was not getting that the GDP down.

is that price as debt goes up, the price that the US, the rate that the US can afford without the Fed supplementing that with balance sheet growth or BTP, whatever we want to call it, not QE, liquidity injections, the yield that the US government can afford keeps going down and down.

So, yeah, the Federal Reserve has been a massive buyer of U.S. treasuries since 2022. They have been doing quantitative tightening, so rolling off. But it is the just letting assets roll off and expire and mature, not direct selling the 10 year, 20 year, 30 year treasuries that are on their balance sheet. A massive, massive huddle.

buyer of US Treasuries since 2020, and continuing to 2023, was the US banking system. And so now you're saying mom and pop. I'll add hedge funds, but just on the banks, I think

uh i like uh price sensitivity a price sensitive buyer or price insensitive buyer uh i might posit it's something of a spectrum so you're right the people's bank of china when they buy a treasury they you know they have zero care in the world about uh the the price of that uh security but i would say also like when silicon valley bank bought a bunch of treasuries well actually they bought agency workers back securities but very similar um like they

I guess they were relative buyers. Insurance companies, they buy treasuries at 1%, they buy them at 6%, and they're not always more keen to buy them at 6% than they are at 1%. I'd say the banking system is actually less inclined to buy treasuries now than it was in 2020 when yields were 1%, 1.5%. Tell us, you said banks were regulated into buying them. Talk about the regulatory changes for banks as well as what's your outlook on...

how much treasuries, how much duration I should say, banks will be able to buy in the coming years. Do you think that there could be more regulatory easing on banks? You know, 20 minutes or so ago,

you said, where is the private balance sheet capacity to buy us treasuries? And I made a note of it and I just said, uh, what if they make it up? Like the, you know, they made up the capacity last time when banks buy treasuries, they're not using real money. They're using money that is deposited that they just did. They just create. And they could do that again. You know, they did it during world war two. Uh, they'll, they'll do it again. Like the money, the money will be found. Right. You know, even. Yeah. Yeah.

Yeah, I'm counting on it. It's my base case. Like, it's the reason why, you know, I own as much gold and Bitcoin as I do. It's a reason why gold and Bitcoin have outperformed as they have in the last couple of years. Really, immediately after 1Q23, they found the balance sheet. Like, oh, banks, you took 30, 40% losses on your treasuries. Never mind.

We'll just open out the BTFP and BTFP is just yield curve control for banks. Like, oh, you've got a 30, 40% loss on that. Don't worry. We'll lend you at par. Okay, great.

that's fine like again i'm not a purist about this stuff in either direction right the purists on the fed side were like oh that's not qe and the purists on the you know the monetary side are like that's not right they're printing money and i'm like in the middle tommy lee jones when harrison ford's pointing his gun at him in the fugitive i'm like i don't care buy me bitcoin buy me more gold buy me more stocks like i don't care that i'm looking at it as from from sort of the functionalist side which is

Yeah, they'll find the balance sheet. They've got a fiat currency system. They'll find the balance sheet. That's the easiest thing in the world. It's just the cover. And then, you know, what's the trigger for it? Absolutely.

And so there's quantitative easing where the Federal Reserve or a central bank expands the official money supply and buys U.S. Treasuries or agency mortgage-backed securities or other stuff, and they hold them on their balance sheet specifically with the goal of lowering long-term yields in order to stimulate the economy. Then there's other facilities.

that, you know, technically not quantitative easing that you argue about the purists. But do you think that the Federal Reserve will resume official quantitative easing that, you know, even Ben Bernanke himself would say, yes, this is quantitative easing? Or do you think it will be some sort of facility that, you know, is referred to as shadow QE? I think it's more likely it's shadow QE. But I think it'll depend on how acute, how far they let this go, right? And sort of where the break is.

And when I say this, I mean this sort of dollar up, everything else down machinery until Treasury market functions. I think the Fed has gotten increasingly sensitive over the last two to three years of they, we are not financing the government, which is total horse crap. Of course, they're financing the government.

And that's fine. Like, again, I'm not a purist on this thing. Like, this is how this was always going to end. Like, there's a reason why 100% of fiat currencies have gone to zero against gold in history. There have been almost no governments in history that when they need the money and the choice is, you know, we honor and respect the message of the bond market sending rates up.

and we slash our entitlements and we slash our spending and we shrink ourselves massively, or we just print the money to cap yields. There are no great powers in the world that I'm aware of that have ever said, you know what, bond market, you're right, we're wrong, we were irresponsible. No.

And when you look at those cases throughout history where every time a central bank finances the government, you know what the central bank always says early on in that process? We're not financing the government. This is purely for the functioning of the bond market and the lower long-term...

Again, I don't care. I don't care. Call it whatever you want. If it walks like a duck and swims like a duck and quacks like a duck, it's a duck. So I think ultimately they'll keep doing this. They can always find the balance sheet. To me, the key is ultimately sort of the triggers to it, which is when and why. And that's I keep harping on this true interest expense as a percent of receipts, right, which is just

Gross interest plus entitlement pay as you goes. Every time those have neared 100% of receipts, the dollar goes up fast, the treasury market dysfunctions on a short lag, and then they come in with, this isn't financing the government, and this isn't blah, blah, blah. Don't care. And my point here is that in the last four months through either November or December, I think November, true interest expense was 103% of receipts.

And now stocks are starting to get a little choppy, which we've talked about, right? So there's some lag benefit from what the stock market did. But ultimately, we're kind of getting to that point where, hey, the first thing you're going to see when true interest expense, 103% of receipts, first thing you're going to see is the dollar go up and up and up. And then shortly thereafter, you see 10-year yields go up and up and up and up. And

Like I can tell you what comes next. This movie stocks are going to go down and the receipts are going to start getting crappy. And then true interest expense is going to be 105, 107, 110% of receipts. And then we're going to have a 10 year or 20 year or 30 year auction that has some enormous basis, you know, tail three, five basis points, six basis point tail.

And the Fed's going to come in or the Treasury's going to come in and they're going to do something, whether it's run down TGA, although Yellen has already largely done that, or like she did in 2022, or, you know, she's going to shift to the front end, which, you know, is still an option. They'll do whatever and it'll not be QE or whatever. But that's this is a very, very predictable. I guess just happened over and over and over for the last five years.

And you said U.S. true interest expense. What is that? How do you calculate that? Why do you focus on true interest? Yes, the true interest expense is just the gross interest expense plus the current portion of entitlements divided by total federal receipts. The reason I focus on that

is that a number of different veteran gray hairs that have been doing this longer than I've been alive have said, look, Luke, nobody has a problem until the sovereign has to print the interest. And then that's when you start to get into debt crisis fiscal problems. And

On that front, US, just on the interest side, gross interest is 25% of receipts, which is the highest since 1984, 85. But they still got some room, right? Usually that doesn't get to be a really big problem for a sovereign, a non-reserve currency sovereign until you're probably 35 or 40%. But

Like Moneyball, right, where the market was systemically underpaying for guys that walked a lot in baseball versus guys that hit a lot of singles, even though functionally it's the same thing. Entitlements are functionally just the interest payment on the $100 trillion off-balance sheet liability of the U.S. government.

and we know there's zero chance they're going to cut that anytime soon and so i say that's just interest so when i add those two things together those two uncuttable interest payments uh relative to receipts it's been a very useful metric hey every time it gets to 90 92 dollar starts going up a little bit after that tenure yields start going up a little bit after that stocks start getting choppy a little bit after that oops our receipts came in way light oops 10 years up more up dollars up more quick

And then wash, rinse, repeat. And then we get, you know, dollar liquidity from somewhere and gold goes up another few hundred points. If it goes out, it goes up another, you know, couple, you know, $10,000. And we start the whole darn thing all over again. Stocks go up a bunch more. And then we sort of wash, rinse, repeat. There's a windfall of treasury receipts and the true interest expense is a percent of receipts comes down a bunch. And then the Fed goes,

He says, oh, inflation's picking up. Let's tighten. That's a good idea. And it's like, oh, here we go again. And so it's just, you know, it's like Groundhog Day, except on a little bit longer, you know, a little longer cycle. So true interest expense is what the U.S. government is paying on its debt, as well as all entitlements of Social Security, Medicare and Medicaid? Yeah, it's it's yeah, exactly. It's it's it's defined in the TBAC report. It's HHS plus Social Security.

Okay. That makes sense. And that's been rising as the US interest rates have gone up, it's paying more and more on its debt. And then also, Social Security has gone up because of inflation, it's adjusted by inflation, so that's gone up. You talked about unfunded liabilities. Explain why that concept is so important. And then also, how would you measure the unfunded assets? When Nvidia goes to $3 trillion,

That is an unfunded asset that could be taxed. And, you know, if we have a fiscal crisis, there's a lot of taxation power in the in the U.S. economy. So how are you kind of judging the unfunded liabilities versus the unfunded assets of the government? Yeah. So the unfunded liabilities, I mean, you can get a lot of different estimates. I mean, it was, you know, Dallas Fed President Richard Fisher had it at like 80 trillion in 2008. You've had Kotlikoff.

He's had it at somewhere north of $200 trillion for years. I say, you know, usually 80 to 100 trillion for easy math, because I can sort of point the two people who spent a lot of time digging into it, you know, years ago. So arguably, it's probably higher.

And I figure that's safe. But in the end, the only thing that matters is the current portion, right? It's ephemeral. It's nothing until it's run through the income statement, which is Social Security, Medicare, Medicaid, Health and Human Services, right? So that's the part I focus on. In terms of taxing, again, yes, you're right. And you can look back at the top U.S. marginal tax rate.

going back 100 years and look at it relative to US federal receipts as a percent of GDP, that top marginal tax rate has ranged from, I don't know, 28 to 94% going back to like 1920. And the American government's never gotten more than 20% of GDP, full stop, full stop. So yes,

In theory, sure, they could grab Nvidia and they could grab people's land and people's houses and they could do all these things. And at some point, number one, you're going to have legal challenges. And remember what I said before, the U.S. government is critically marginally dependent on stock prices rising. So they come out and put a windfall tax on the NASDAQ to fund a fiscal problem. What do you think is going to happen to the price of the NASDAQ?

It's going to crash. Okay. So now you're taking a windfall profit on a number that's 20, 30% lower. What did you actually get? No, by the way, the structure of the dollar reserve system as it's been structured post 71 and certainly post 1980 is bring all your capital here. You put a windfall tax that's telling people take your capital somewhere else.

And it's fun to say, well, where else are they going to take it? I don't know. They'll take it somewhere. People don't like having their money taken, you know? And so they, you know, they can take it out and they can pay down dollar debt. If you're a foreigner, they can take it back to there. They can build their own capacity. There's a lot of stuff you can do with money. So that's the challenge is, is yes, there are lots of assets you can tax on the asset side of the balance sheet of the United States without question. But again,

you always only get 20%, no more than 20%. And you're like 19% now. So sure, they could raise taxes a little. They're not going to get much more. Interesting. You're saying, wait, what's always 20%? Corporate taxes? Total receipts as a percentage GDP.

The total marginal tax rate, the top marginal tax rate in the United States has ranged from like 28 or 30% to 94% over the last 100 years. And they have never once gotten more than just short of 20% of GDP in receipts, total receipts. Like you can raise tax rates as much as you want. Like people will, like you're not going to get more than 20%. Interesting. Luke.

In very shortly, President-elect Donald Trump is going to be inaugurated as the President of the United States. How do you think his administration affects everything we're talking about? His incoming Treasury Secretary, Scott Besant, has some plans for Treasury policy, perhaps issuing a lot more duration. He's been a critic of the...

policy of issuing a lot of treasury bills, which Yellen has done. Also, Mnuchin, her predecessor, who was the treasury secretary for Donald Trump, the first time around, also did that. And also, the Department of Government Efficiency, which promises to drastically reduce government waste and expenditure and might lower the deficit. And then tariffs as well. How does that cocktail influence

what we're talking about. Investors should have no confidence, no conviction in sort of anything for the next two to three months at least. And I think that makes it for a very risky short-term environment for pretty much everything but the dollar and gold, basically. And it's all the same. We'll put upward pressure on the dollar, which will accelerate the machinery we let off talking about in terms of dollar up rates up until something really breaks. Taking them each one by one, I think Besant is a brilliant man.

I also think that his two predecessors were not stupid. And that begs the question, if they weren't stupid, why did Yellen in particular issue so much paper at the front end at higher rates than the long end at lower rates? There's two possible answers.

Answer one is that's the only place she could do it without spiking long-term yields and crashing the US. And by the way, the 10-year is the functional real economy yield of this economy. She couldn't issue what she needed to issue at the long end without blowing up the US bond market, the US economy, and the global economy. Or she's stupid. Those are the two most possible answers. And we have a huge, huge clue if you look at Fed holdings of 10-plus-year treasuries.

supplied in the latest TBAC at the end of October. The Fed has not sold a single 10 plus year treasury bond on net since 2010. That's a big clue that the answer is not Yellen and Mnuchin were stupid and that's why they didn't term out the debt. The answer is, is they couldn't. There's no market there in the size they want to issue at.

without the reverberating effects of, oh God, it's not five on the 10 year, it's seven, it's seven and a half. And receipts aren't 5 trillion, they're 3 trillion. And oh, the deficit's not 2.2 trillion, it's 4.5 trillion. And GDP is not 27 trillion or 28 trillion, it's 25 trillion. Oh my God, what did I do? And I think at some point, Besson's got to get in there and go like this. I would have loved to have been a fly on sort of the first briefing, right? Of like, hey,

Here's why Yellen and Mnuchin didn't term it out. Oh, right. It's like the Ben Roethlisberger meme, right? That you get a gift, right? Oh. So that then leads to another set of sort of what does he do? Well, I think in the short run, he probably continues to do more bills, but he has talked about.

a program of dividing the world up into sort of, you know, green, yellow and red trading partners. And green gets certain treatment, yellow and red. And part of being in the green club is, hey, you take 50 year bonds, you swap out your bills for 50 year bonds and we give you military protection. And, you know, you're in sort of the good trading group. Maybe that can work. Maybe that can work.

I suspect it will require a much higher price of gold as sort of a quid pro quo. In other words, there's been some discussion, maybe gold has some involvement in some way, shape or form with this. Hey, revalue gold to 5,000 an ounce. Give us your bills. We'll give you 5,000 an ounce for your gold. And

You buy 50 year bill or 50 year bond. That could work. That could that could in theory work. And, you know, devaluing the dollar to five thousand dollars an ounce from twenty seven hundred an ounce is probably a prerequisite. You know, you could also throw some gold out on the curve. In other words, hey, you know, you take 50 year bonds, but also every 50 year bond face value has, you know,

$100 worth of gold bullion valued at X. And now that makes a lot of sense to a creditor because there's no credit risk to a treasury bond. There's just inflation risk, especially in the 50-year duration. When you look at our fiscal situation, you would have to be functionally handicapped to buy a 50-year treasury bond with no concession, or you'd have to have a gun to your head.

And the gun to the head could work. It could work. But it works better when there's not another big trading partner who's doing more functional volume in the real world than you are, right? Besson's going to sit down with a country and say, listen, you want to be in the green group. You've got to buy these bonds and this and that. And otherwise, we're going to cut you off access to our economy.

And you can't support China in de-dollarizing or else we'll cut off your access. And like I said, Mr. Besant, last year, China bought 434 million smartphones. Your country only bought 140 million. Last year, China made 30 million cars. Your country only made 10 million. Last year, China bought 26 million cars. Your country only bought 15 million. And oh, by the way, Mr. Besant, in 1999, your country bought 15 million cars. So in 26 years, the growth of your country's car demand is zero.

In 1999, China was buying, I don't know what it was relative to 26 million. It was a lot less than 26 million. It was a lot less than our 15 million.

So my point is that they're, you know, hey, Mr. Saudi Arabia, we want you to do this. And MBS in Saudi Arabia is going to go, that's fine, Mr. Besant, but here are the facts. Last year, or excuse me, in 2023, we did $29.7 billion in total trade with America. In 2023, we did $110 billion in total trade with China. And China's per capita oil consumption in 2021 was still only one-fifth

And they've got four times more capita population. So like, don't tell me like, oh, like if we're going to put a gun to people's head, we better be prepared to pull the trigger because if we don't pull, if we're not prepared to pull the trigger, they're going to go to China and go, okay, what's your offer? You know, when you're selling your house, when you only have one buyer for your house, the buyer has all the power. When you have two, two buyers that desperately want your house and you're the seller, the seller has all the power. So I think,

As I'm looking at it now, I don't think the incoming administration has the leverage they think they have. And I think if that's correct, that's going to further add to this next two to three, four, six month period of volatility and uncertainty and dollar up and everything else down because things aren't going to get nicer in that front.

You know, Doge, I think Doge will fail on its face. I've been pretty vocal about this. If they try to cut spending, you're going to create a recession or a slowdown. The dollar is going to go up. And for all the reasons we described earlier in the podcast, your deficit, the GDP at 7% now is not going to go down. It's going to go up and it's going to go up a lot. And foreigners are going to sell treasuries on top of that. You're going to create a financial crisis for the same reason we talked about earlier. So to me, look, if they weaken the dollar first, if there's a deal with China to devalue the dollar against Yuan before they Doge, that could work.

uh but failing that doge doge doge is dead on arrival in my opinion and you've started to kind of see elon back away from that already right it was it was you know so it was two trillion and now it's like well maybe it's not because oh by the way the hundred basis point increase at the long end you know a hundred basis point increase in rates is

370 billion pro forma in interest expense and that's just on the interest expense side like to the extent rates go up 100 basis points and there's a lagged impact on the slowdown of the economy it's probably closer to a 400 to 500 billion dollar increase in the deficit because again the fed screwed up by not getting that the gdp down to where they should have when they had the chance taking a little pain in 22 and 23 with inflation now there's only you know you'd have to take big big pain or you got to devalue the dollar a lot first so the tariff side again

I think it depends. I think it depends on how it's deployed. I think it's inflationary. And here, too, this is how the Fed screwed us by not getting debt to GDP down while they had a chance, while there was a crisis, while people would have accepted it because of COVID. It strains credulity to think that the ordering of our current global supply chains was disinflationary and supportive of the bond market. In fact, that's absolutely undeniable. China was disinflationary.

reversing those flows, strange credulity to think they're also going to be disinflationary. And the problem is, is like, they're going to be inflationary. That's how I would bet. And if they are inflationary, they're going to be inflationary with a bond with a 10 year that is like a knife's edge of causing problems with a US debt to GDP that is way too high because we didn't get it down while we had the chance and didn't repress bondholders when we had the chance and a deficit that's already at like borderline wartime highs.

um you know wartime levels so like terror i think they're gonna try tariffs i think they'll do tariffs i also think you know dollar up everything else down uh is probably going to be the outcome and this is in 2016. again china's doing 434 million smartphones a year buying and selling 140 million uh you've already seen china curtailing certain battery car battery components for cars and certain raw materials they've got a lot more leverage too they're going to retaliate

you know they're going to retaliate against uh you know last year or a year prior a supply chain where raytheon ceo said we cannot go to war without china we have so many so much of our supply chain in china so like whatever you think the number dod is going to spend if you're going to put tariffs on china on your right hand your left hand is is going to get you know it's is going to get punched by china raising the price of stuff on you on the other side and so

you know, that's, you know, that's, that's going to put upward pressure on rates, upward pressure on the dollar, downward pressure on risk assets, upward pressure on volatility, upward pressure on gold. So there's, it's, it's a very big cocktail of uncertainty that is being framed, I think, is much more certain in terms of the outcomes than they are. And, and they're being framed all, you know,

Hashtag America. Yeah. Which, great. Like, I, you know, yes. And China's no wilting flower on a PPP basis. They're like multiples bigger than we are in certain key things. And you think they're going to just sit there and take it? Like, maybe, but it doesn't seem like a wise bet to make. So you don't think tariffs have, Trump has much negotiating power with tariffs. And also, you don't think tariffs could meaningfully reduce the deficit by generating income?

As with anything, it's matters of degrees, right? Let's take it for illustration to an extreme, right? Extremes inform the means. Let's say we put 100% tariff on everything that comes into this country. Immediately, prices on the shelves are going to go up. People say, well, the dollar will just go up a lot to offset that. That's the, okay. But what did we start the show by saying? If the dollar goes up, like the dollar's already too high.

like that's again people are saying things and not looking at second and third derivatives very important second and third derivatives tariffs up 100 we're gonna have a bunch of money come in okay dollar's gonna go up a bunch okay foreigners are going to dump bonds like never before they are going to dump stocks like never before u.s consumer spending is going to fall like never before to use use trump's words

US tax receipts are going to fall like never before. Treasury is going to dysfunction like never before. It will drive an enormous crisis and it will drive a tanking in risk markets and consumer spending and GDP. Bigger picture strategically, again, the post '71 system is very well defined, particularly post 1980. The United States rule, supply the world with dollars

and for a long while, not anymore, the risk-free asset to recycle those dollars into. In other words, we send our factories and jobs there, they send us the stuff, we send them the dollars, they buy our stocks. Well, if we put the 100% tariffs on it, that is a declaration that is over. 100% tariffs, high tariff rates are a declaration

that the post 71 structure of US dollar reserve asset is over. I, Donald J. Trump, am ending it. And I think that might be what is at work here. And I think that's ultimately a very good thing for America.

And the last thing I want to own are treasury bonds. The inflation in this country is going to go nuts. The Fed is going to have to do some sort of yield curve control to contain yields as inflation explodes higher. The world isn't going to sit around and go, oops, I don't have enough dollars. I guess I'm just going to sit here in my factory and starve to death and let my wife and kids starve to death. All seven and a half billion of us know.

They've already got other pipelines, things set up in terms of whether it's the Chinese payment system, whether it is this gold settlement system. There's lots of way now. Gold probably needs to be five or 10 or 15 or $20,000 an ounce to sort of resume that role. Again, that would be a really good thing for the US because suddenly the dollar would be competitive again.

in global markets we would have to make a lot more of our own stuff wages here would explode to be great for the middle and working classes it would be basically a complete reversal of the 1980 to 2020 regime right so like I put something the other day I said you know 1940 to 1980 what's good for GM is good for America 1980 to 2020 what's good for Goldman Sachs is good for America

what Trump's talking about with tariffs is going back to some version of what's good for the defense industrial base and the US middle and working classes is good for America and what's good he was voted he was voted with that mandate you know 100 yeah and that is a it's all just about right being the spider and not the fly right what's normal for the spider is chaos for the fly the bond market in that world has to get crushed on a real basis and

the United States government and consumer cannot afford a 10-year yield much beyond five. So that world, in my opinion, again, the second and third derivative strategically of, hey, let's tariff to finance ourselves, US wages explode, US investment in productivity equipment explodes, bond market yields explode until the Fed comes in and goes, we will buy every 10-year, every 10-year everything to keep yields at five and a quarter.

And we're going to keep the front end at two and a half. And we'll print as much money as we need. We'll send our balance sheet to $40 trillion, $50 trillion, $80 trillion, $100 trillion. We don't care. This is the second and third derivative of the breakdown of that system. It's sort of like the monster in the closet that no one wants to open because they know what it means. And

like again spider or fly you own a portfolio where your traditional 60 40 portfolio the 60 port portion of your portfolio in equities it's going to explode higher and the 40 portion of your portfolio is going to clip a coupon and it's going to go to zero on a real basis over four years

Like it's going to go from buying you a house to buying you four eggs, but you're going to get your coupons. You're not going to default and you'll make money on the stock side and gold will rise relative to stocks and Bitcoin will rise relative to gold. Like those are the second and third derivatives of this whole hashtag America tariffs. Yeah. But let's make sure we pull the rest of those threads. That's what's common. And I agree with you. That was his mandate. Will he do it? Maybe.

I think he might. I think that's what he's talking about. But he can't come out and say that. Not yet, at least.

In that spiral, you talked about the cycle of tariffs cause a stronger dollar, causes foreigners to sell treasuries. I think this intermediate step between step one and step two, which could exacerbate it, is because of tariffs, the Federal Reserve gets worried about inflation. So they not raise interest rates, but they keep interest rates higher for longer. And that strikes the dollar even more. It could, right? And it could. And I'm reminded of a conversation I had

years ago with somebody very credible not guessing with a major technology exec in southeast asia or in the first trump administration and the conversation was something like look if you know if you had to choose china or america what would you choose like we don't want to choose if you had to choose america what would you or if you had to choose china or america what would you choose like we don't want to choose but if you had to like if we had to we probably have to choose china

And that to me is like the variant perception. Everyone I talk to in the West is sure that if they put a gun to people's heads, they won't have to pull the trigger and they'll choose the American market, which is in all sort of tangible ways, smaller than the Chinese market. And a lot of major markets, multiples smaller in terms of volumes, not dollars, volumes.

But in terms of net consumption, US is still way bigger because China is a huge massive exporter and the US has been and is expected to be, perhaps you disagree, the consumer of last resort. We buy everything from Korea, from Africa, from Europe, we buy everything. And China, they make a lot of the stuff. Also, people recycling the dollar deficits into US treasury assets,

the treasury market is big enough to do that is chi is the chinese bond market big enough to absorb all these flows especially when the chinese 10 year is what like i don't know one percent or very very low uh i mean if if all the money that's going into the us treasury market now went into the chinese bond market china would have like negative one percent yield right oh it wouldn't go they don't want it there like they don't want it there right because to be clear the reason why the treasury market is so big is because our industrial manufacturing capacity was sent to china

right the deal was you get rid of your manufacturing capacity and then you run deficits to supply the bonds china has no interest in doing that they're showing you what they're going to do they're going to use gold they're they'll the gold market now can the gold market absorb the treasury market absolutely it can add a zero there you go done more than you add a zero to the gold market it absorbs the entire global bond market and what happens

a bunch of Indian housewives get rich and a bunch of Chinese consumer balance sheets are completely recollateralized. So I think that's the direction. And it ties into the point before of like, what happens if there's tariffs? That's a good hint of what will happen if there's these draconian tariffs, right? Is, oh, geez, we're going to sit here in our factory and starve to death. No, it's going to be wildly disruptive, to your point, and bad for sort of everything.

uh except the dollar and then someone's gonna go hey you know will we now value gold at you know 500 barrels of oil you know maybe putin will come out and say something like that and china will go done

And, you know, we'll settle on, you know, the Bitcoin lightning network or whatever it is. Right. Or we'll settle some sort of direct block chain that completely avoids the dollar system and done. And then you'll see this fracturing of markets. You know, we'll see. But that's yeah. China has no interest in.

in making its bond market big enough because again the obverse of making your bond market big enough is sending all of your manufacturing somewhere else sending all those middle class and working class jobs somewhere else there's zero chance China's interested in doing that so

Yeah, and I agree. There's a lot of what they do that is secondary processing. But again, 434 million smartphones versus 140, 30 million cars produced versus 10, 26 million cars consumed or bought every year versus 15. And there's an article today in Bloomberg highlighting that basically we import no Saudi oil. China's Saudi's biggest client. Like, is Saudi really going to cut off the Chinese? Really?

Really? So debt to GDP before COVID was 105%. It spiked to 130%. Now it's around 120%. Where do you think it's going? What do you think is a red line for debt to GDP beyond which the US can never recover from? And I'll just be polite, Luke, and I'll let you know, this is my one and only kind of setup question.

Because when I talk about a red line, I recently interviewed Daryl Duffy, professor of economics at Stanford. He talked about how when he was in his 20s, how the IMF said that for, I think, global debt to GDP, once global debt to GDP hits 60%, there will be a red line.

And now global GDP is close to double that, maybe a little bit less than double that. So these red lines keep on getting higher and higher and higher. What would give you the confidence if you were to answer my question of debt to GDP 130%, 140% cannot be breached to actually say this is a red line. Is there a red line or does the red line not exist? On a gold standard, there's a red line. And everybody when he was in school in 1980 still had very firm memories of the gold standard. And it affected their thinking, right?

Is there a red line in our system? No, there's no red line. Now, the red line is the rate of inflation and the red line is the real interest rate, right? So we are seeing when I say U.S. true interest expenses is over 100% of receipts, what I'm saying and when I say they've got to weaken the dollar, what I'm saying and that when I say the U.S. government can't afford over 5% without triggering this crisis,

That's your red line. What I'm saying is the red line is real rates, right? The United States government cannot afford its debt now without negative real interest rates. And debt to GDP will go up and up and up, and the dollar will go up and GDP will go down, and you'll go into a debt spiral. And so red line, it is a trap question because what does it mean, right? So

We're there from the standpoint of we need negative real rates just to afford what we are spending today. And can we get them? Sure. The release valve is inflation. Great. That's why I own gold and why I own Bitcoin is I have no doubt that the red line is not like, oh, full stop, unplug the government. It's over. No.

They're going to do what every government in history in this position is done. A twin deficit running debt to GDP and deficits to GDP this high. They're going to print money and they're going to call it other things and they're going to say it isn't and blah, blah, blah. And I don't care. You know, where was the price of gold when Daryl Duffy, you know, in 1980, right?

Was it $2,700 an ounce? No. Okay. Right. I think it did go down, I think from 1980 to 2000, and then it went up a lot, a lot more than it went down, but you can have, you know, 20 multi-decade periods of gold going down. Yeah. And there's, there's a couple of different reasons for that. Some of which are, you know, massive productivity gains, right? So there's, that's certainly a way out of it. You know, what was the price of a hops? Right. Lower. Right. You know,

How many 30-year-olds were married with kids with a house when Daryl Duffy in the 80s was in school? And how many are doing that now?

You're starting to see the social impacts of this inflation of no red line. Right. There isn't a red line. You know what the red line is? It's inflation. And when they start stringing up policymakers from flagpoles, that's, you know, when you start having the CEOs shot in the streets in New York, those are your red lines. Those are the things that are, you know, in the physical world. And ultimately, like CEOs are getting shot in the streets in New York.

We are having sort of domestic instability. New Orleans, domestic instability. L.A., if these are partially arson driven.

And all of that is, you know, it's tied to look, we need inflation just to afford our government debt. We need inflation above the rate. You know, we need R below G or else we go into a debt spiral. Right. And that's a nicer economic way of saying it. But when you hear as long as R is below G, we're fine. The I don't care Tommy Lee Jones version is we're already over the red line. Like we have to inflate. And now, you know, the Fed's job is basically managing inflation.

you know, trying to play Obi Wan Kenobi to mix my metaphors is like, this is not the inflation. Right. Larry Summers, like Larry Summers is a very serious economist. He said if we measured inflation as Ocon did it in 1983, it peaked in 2023 at 18%. And that the GDP didn't fall more than that. That's trouble. Right. So we're there, right? Like we're there on the red line from the standpoint of from here. It's about, you know, okay, what are the red lines? Well, the red lines are the show social aspects.

you know if you've liked the start over the last two months to 2025 sadly i think it's going to get more in state anywhere i think we're going to see more social instability why because we're an inflationary regime because we're past the red line of what we can afford without inflating it away um

You know, gold, Bitcoin, you know, Bitcoin's at ninety five thousand. You know, Fartcoin has a billion dollar market cap as of a couple of days ago, at least. Why? Because we're already past the red line where the government can't afford its current debt like obligations without printing the money, without creating currency units. They can create infinite currency units. It's the value of the currency units and the social impact of

as those currency units are eroded relative to the real world,

that are the red lines. And so R has to be less than G. R is the rate of interest, G is the rate of growth. I have nominal GDP right now growing at about 5%. So that's real growth plus inflation for our audience. And isn't most parts of the yield curve below 5%? So isn't R slightly below G now? And I should say, of course, the US economy has been growing over the past four years incredibly, incredibly hot. Yeah, absolutely. And

Gold has gone from 1800 to 2700 and Bitcoin has gone from 30,000 or 35,000 to 100,000 and home prices are up despite rates going, mortgages going from three to seven. And so affordability has gone through the floor and stocks have gone through the roof and wealth inequality has gone through the roof and instability is starting to rise troublingly. So yeah, that's what I mean. Now,

If the dollar goes from 110 to 115 in the next three months, and I would bet a good chunk of money that 10-year will go from 4.8 to 5 or 5.1. And I'll say, hey, what's your nominal GDP looking like relative to those rates now? And you're going to be like, it's below. And now we're in a debt spiral. Now you get into...

And oh, by the way, that's probably where we're in a tariff war or where we're in an economic breaking where inflation is going up. So now what do you do, Fed? Like it's a really tricky environment potentially for all those reasons. But that's why like academics like to look at a number of hard red line, right? That's not what I do, right? It's about the functional side of it is, yeah, hard line, red line. Of course, there's no red line. You're in a fiat currency system. The fiat, the red lines are like we're already beyond it from a social aspect.

Luke, it's been so great getting you to be a Monetary Matters. Thank you so much for sharing your views. Two final questions. One, tell us about your research service, Forest for the Trees, FFTT. And second question, what would it take for you to be a buyer of a U.S. 10-year Treasury note? Would it be 9%? Would it have to be 12% yield and 10%?

The US deficit is only growing at 1%. GDP, would it have to be an actual surplus during a recession? What would it have to take, Luke? What do we have to do? In the issue with saying it's a percent, is it 9% if we don't change anything?

9% would mean the US government's going to have to spend 20, sorry, 36 trillion. 9% is 2.7. So about 3.3 trillion a year in interest. 3.3 trillion a year in interest outlays all by itself. Plus...

around 3.1 trillion in entitlements. That's about 6.4 trillion in true interest expense. Receipts are right now 5 trillion, but at a 9% interest rate, receipts are probably going to be about 3 trillion.

so you're going to have a true interest expense number of almost actually above probably but right around 200 percent of receipts uh your deficit will be exploding you will be into a full-on debt spiral and the only way they will be able to pay me my money and my parents their entitlements will be if they are printing a lot of it so there is no rate that makes long-term treasuries attractive to me what makes them attractive to me is the value of the dollar relative to gold in other words

For most of U.S. history up to 1989, the official value of U.S. gold at market price was never less than 20% of the foreign-held portion of U.S. treasuries. In other words, market price of gold times 261 million official ounces divided by foreign-held treasuries was never less than 20%. Today, that number is 8%, even with this huge move in gold.

in 1980 when we had an honest to goodness dollar crisis it was 135 percent that's what a gold bubble looks like uh most of the time in u.s history it's been about 40 percent so i would say you know if i haircut 40 percent collateralized by official gold the foreign held portion say 30 percent we're at eight now that's up 4x so at what's that uh ten thousand dollar gold

depending on the fiscal trend, I would start to think about selling some of my gold to take a treasury at five. If at 50, 60% collateralized or almost $20,000 gold, I would sell a lot of gold and buy a lot of treasuries. So the issue is the relative value of the dollar, not where treasury is. The debt we have, there's

rates beyond five they can't afford without without like I said we're already beyond the red line they can't afford their debt today without negative real rates there is no rate it's all about the dollar you get the dollar down you write up my you know you you write up the gold you write up um even stocks you write up Bitcoin enough I would think about it right where you can make the point where it's a then then it starts to make sense you know

And if we got 135%, right? Great. And well before 135%, I'm dumping all my gold at 80% gold collateralized, right? So 10 times here at $27,000 gold, boom, you can have it all and I'll buy all the treasures you want.

You heard it here first. This is what it will take for Luke Grohman to dump all of his gold and buy treasuries. Luke, final word. Tell us about your research service. Absolutely. It's fftt-llc for more information, fftt-llc.com for more information. We aggregate a large amount of publicly available data in a unique manner, looking for investable bottlenecks for our clients, themes, et cetera. So you can get more information about both our mass market and institutional research products there.

Thank you, Luke. Thank you, everyone, for watching. Two things. Number one, a reminder, as always, people can find Monetary Matters not just on YouTube, but on Apple Podcasts, Spotify, and wherever else they get their podcasts. And secondly, throughout this conversation, we never have talked about it, but there have been references to modern monetary theory or MMT. I am proud to say that on Thursday, so one day after this interview will be released, Thursday, January 16th,

I will be hosting a debate between two intellectuals, one on the pro MMT camp, one on the anti MMT camp and the pro camp. I'll be interviewing Nathan Tankus on the anti MMT camp. I'll be interviewing Robert Murphy. It will be a debate.

perhaps a little confrontational, controversial, yes, but definitely respectful as well. That will be streamed simultaneously live from the Zero Hedge YouTube channel, as well as this YouTube channel, Monetary Matters, and we'll release it later on all podcast apps. Thanks for watching. Remember to check out vanek.com slash NLRJack to learn more about the VanEck uranium and nuclear ETF. Thank you. Just close this door.