We're in a debt spiral and we ain't in Kansas anymore! w/ James Lavish
ilm
In today's episode I'm joined with James Lavish James is a charter financial analyst a hedge fund manager and the author of a weekly newsletter called the informationalist now James and I today we talk through the current macroeconomic landscape the looming debt spiral and bitcoin. If you'd like to learn more about James or follow his writings and thinking you can follow him on Twitter at jameslavish or go online to jameslavish.com/newsletter to subscribe to his weekly newsletter also of those links below. Let's get started.
00:00.54
ilm
Yeah, so James lavish. Thanks for being here I can I yeah I can hear you go good now I ah glad you're here. Yeah I love your your thoughts and ah your your writings and I mean you're on tons of podcasts and I'd love to.
00:02.63
James Lavish
And Wow hi man. It's good to hear good. Can you hear me is this good.
00:17.79
James Lavish
Crazy.
00:19.14
ilm
Have a conversation with you today about just your views on I mean the the debt spiral and what in the world does that mean to nonbit bitcoin Twitter people and where we are in the macroeconomic landscape and what do you think the the endgame of where we are right now will will result and I guess. And this is like 6 things. Um, but also like how in the world. Do we get to where we are right now like we've we've got quite the mess on our hands. What's the way out can the fed fix it and how did we get to this place so here talk through all of that you have 20 minutes I'm just kidding. Yeah.
00:42.64
James Lavish
No god yeah, okay, so the the answer is no, there's I I mean look well first of all. Thank you for having me Jim I appreciate I'm honored to be 1 of your early guests on this new show and I'm sure it will do fantastically. So um, and happy Friday I'm in kind of a friday mood. So I'm gonna warn your your viewers who may be used to me going a little bit debt spiral doom. Um, loop podcasting. But I mean if it gives you any idea of how my mood is today I'm wearing a pink floyd t-shirt I mean I'm still kind of I'm in I'm I'm in business mode here because it's it's a workday but um.
01:34.17
ilm
You know that the the James that I know on a personal level is ah laid back in Colorado taking it easy. So this seems right in line with with my familiarity with you so nothing out the ordinary here.
01:43.81
James Lavish
It's perfect. Yeah, it's good I get ah sometimes sometimes people ask me if if I could just take an hour or 2 on a Monday morning off to just. Not freak them out for the whole week. But yeah I like to you know? And honestly I just like to tell the truth and really what What's been going on the last year in particular is I've been trying to I've just been trying to help people see what's going on. You know and trying trying to get and and make it relatable to them to understand where we are where we're going and I mean I'm ultimately I'm I'm an optimist and ah I'm a you know Um I'm a diehard optimist forever perpetual and. I believe that we're going to find a way out of this I believe that bitcoin in particular is is ah is a key component of that. But your main question is like where are we? How do we get here and and where are we going in the macro world like in the you know and at all. Comes down to money so when I talk to people about you know what I work on and what I'm what I focus on I typically just try to explain to them how the money is broken and how the system is broken and so you know you know what? it's like when you you have a family that.
03:12.47
James Lavish
Some people believe in this political party and other people believe in this political party and you know and you can tell it's Friday because I keep saying you know I'm I mean I'm such I'm I'm in real chill mood. But ah the bottom line is. It's not either political party. You and I and Jeff Booth had this conversation I think when we're standinging there in in the lodge and and telly ride a few weeks ago and the bottom line is it's it's ah the system that's broken. It's the system of money that's broken. It's the incentives that drive the decisions around that money. That is broken and so when when we look at these massive and gargantuan and mindummbing numbing numbers of the the treasury piling on $2000000000000 of debt in and just the last few months. It's almost inconceivable. You just can't. Wrap your brain around it and you're like well how is that possible and who's buying it. What's going on and what does it mean is I mean are we collapsing the answer is no, we're not collapsing not today but we are setting the stage for a a. Monumental collapse and that's the problem and that's what I want people to understand is that we can't do this forever and the treasury itself knows it so people are blaming the treasury but let's call it what it is. The system is broken. You have the white house.
04:45.26
James Lavish
And legislatures legislators they're they're up in Dc and they and they make law and in that law part of that law is the budget and what we spend money on as a country and they spend too much money now the treasury's job. Is to so just to facilitate that spending it's to make sure that whatever is signed into law and what are we? Whatever we have agreed to spend money on the treasury can facilitate that and they do that by trying to balance a budget and by issuing debt. In times of need. Well, we've been in a time of need for a long time now we've been running perpetual deficits because we spend too much. We don't produce enough. Um, and that's really not even the the problem we we produce plenty as a nation I mean you and I are sitting here on a Friday working hard. And we actually are working you know people say like they'll look at the sale you're having you're doing a podcast. They may not understand all that goes into it I understand I've done it I understand what goes into this this is work and it doesn't just start with flipping a switch and you have a lot of components that go into this, you're buying software. You're. Interact with people you're you're trying to maximize your reach you know, um, you're spending money on devices and and inputs and there's there's a lot of there's a lot that goes into it and that's production and we and you know we are. We're blessed to be doing these things you know.
06:18.18
James Lavish
Pontificating on these things on a Friday but there are people out there um out and you know you can't hear it but there's construction going on 2 streets away from me and there are people out there working every single day and so the government taxes that and then they take that and that's their income.
06:38.44
James Lavish
Um, but they're spending way more than they than they take in an income and so enter the fed. So the fed's job is to maintain and restore sometimes confidence in the us dollar and how do they do that? Well their job is to. Ah, they say they've got 2 mandates full employment and low inflation right? and their definition of low inflation is a constant 2% annual rate I don't know where that came from I mean I actually I know it came from ah it came from europe. Ah, you know half a century ago but that's where we've glommed onto as ah as a world. There's a global financial system that 2% inflation is that's normal. Okay, well we'll talk about this but there is no normal right? That's not normal. Inflation is not normal. So. But the fed's job is to make sure that people have confidence in the dollar and that they have confidence in owning treasurys which means that they have to make sure that people believe that inflation is not so far out of control that when they invest in a bond or they hold dollars. That it's not just melting away on them that that's actually worth something at the end of that period of holding those dollars or holding those bonds and that's kind of where we're at where those where those are the 3 you know main players in the United States financial system and.
08:13.30
James Lavish
And we're not even talking about the banks. They're another massive player and huge influence on that first set right? and on that last set right? So they they are a huge behind the scenes influence but those are 3 main players who are who are making chess moves to keep this whole charade going. And the charade is the debt charade and that's where we're at and that's kind of what what we're looking at today and that's what I've been trying to teach people over the last few years as a long answer for a Friday afternoon but here we are.
08:47.94
ilm
Now you're good actually. Ah I usually wait till about two thirty or 3 for my for my afternoon latte. But ah I accelerate that one over up to noon. Ah yeah, well little tired Friday but now this is great. What? ah.
08:53.90
James Lavish
Keep it going.
09:04.32
ilm
Is this new like how do we get to this place of debt and all these parties with mixed interests like is this a symptom of 2008 financial crisis and suddenly like this is a band-aid or is this symptomatic of something that's been happening for longer like.
09:13.30
James Lavish
Um, yeah.
09:22.50
ilm
Are we the first people have encountered this or as is this only happening right now in the us or is it elsewhere and it's another question is this? Maybe it's happening just here or other places business first time in history its does this happened sorry for like 5 questions and 1
09:27.39
James Lavish
Um, yeah.
09:35.89
James Lavish
it's good question you know ah no um it's no it's not the first time in history. It's happened, but it's it's it's different um in a number of ways. Um the real problem if you go back to the the main problem is. And if you ask people and you just walk around the street you ask people? What's a Us dollar backed by they'll say two things they'll say gold or they'll say the military you know like those are 2 things that people usually will fall back on but the reality is the Us dollar is backed by nothing. Is backed by the good faith of the Us government. That's it and so what happened is 1971 Richard Nixon made a play that he knew that the way we were spending money we we were never going to be able to keep up with it and so he.
10:14.85
ilm
Um.
10:27.70
James Lavish
Took us off the gold standard officially took us off the gold standard and and when he did that it means that people couldn't if you go back and look at old us dollars it. It would say that they're exchangeable for a certain amount of gold right? But they're not on that. That's not on the dollar anymore. You know all you've got is that weird eyeball at the top of the pyramid. You know the all-knowing eyeball and that's the us government. Um, and so ah, but the problem is they took us off that standard. So now there's no check and balance there right? So you can just keep issuing debt. And print more money right? So this is where the issue comes in is that the the money is not really worth It's it's only worth what people believe it's worth so it's ah it's ah it's this generally accepted. Note. That people believe whoa. Well, that's worth $100 and if I take that and I go over here. It's going to be worth $100 to that guy. Well the United States is in this wonderful position that we benefit from the fact that we have the global reserve asset in the us treasurys and the global reserve currency in the us dollar which means that us dollar is is the one that people are are using around the world more than any other currency. But here's the issue is that when we got off the gold standard. We started running massive deficits because there was no check and balance there was there was no worry about. Do we have enough gold in the in our.
11:59.18
James Lavish
Ah, vaults to exchange for these notes that we're putting out there because now they're not exchangeable for gold. So well, they're just well. They're just exchangeable for dollars. That's all they're exchangeable for you know so or goods and services for whatever people believe. Those goods and services are are you know the price of those are but the issue is that we are running these deficits which is and in running deficits just spending money. We don't have okay so we're borrowing money in order to create productivity. Now debt in and of itself is not a bad thing. It's not a terrible thing if you if you use debt responsibly you can own a house. You can start a business you know like if you have I like to give this example if you have $10000 but you want to go start a restaurant. You've got this place that you know people are asking for food. There's a lot of there's a lot of office buildings around there and you you know that you can have a great restaurant right? there and so you've got this opportunity but you only have $10000 but it's going to cost you $100000 to open that restaurant small restaurant. So. What do you do? Well maybe you're able to borrow the rest of that money and open that restaurant today right? So meaning that you've borrowed that $90000 now you've got 100 and you can you can buy your ovens and your your cookware and your diningware and you can.
13:34.69
James Lavish
Hire employees and you can buy all the the food and you can as soon as you're done with that in a few weeks you can open your restaurant and start generating productivity and so that's you know that's that's pulling productivity from the future into today because instead of having to. Work and work and work and work and save money and save money and save up that ten that $10000 to make it $100000 well now you've pulled the productivity from the future into today and you're creating so debt and as long as you didn't borrow too much as long as you you know you probably would be a better example if you you borrowed. $30000 against that 10 but the bottom line is as long as long as you're you're covering your expenses. You know you're covering them the the interest on that debt and all the other expenses you have and you're generating a profit continually that's large enough that you have this the the ability to. Um, to ride the wave of of economic cycles. Well then you're okay, but the problem is many people take on debt that they just take on too much and we're in that situation now in the United States where we have taken on too much debt and we're in what we call a we're we're in a. Get spiral and I can I can talk about that a little bit more but I'll kind of pause there and and let you ah let you ask questions or or or maybe reflect on it.
15:01.73
ilm
Yeah, like to because we can. We can continue go into like what is the debt spiral and yeah, what would be what's that step look like let's let's keep let's keep going on that for a bit. Yeah.
15:15.29
James Lavish
Yeah, pull that thread so on that thread. So okay, you the problem with debt is sometimes you're taking on debt that has too high of an interest rate that that ah you can't really pay back. Okay, so say you're a single parent. You've got a few kids. You know and you've got ah your whole you hold 2 maybe even 3 jobs in today's day that's not abnormal. You know, many many people have 2 jobs the last employment report showed a rise in in double employment of ah 100000 people and it's just this last.
15:49.49
ilm
Wow.
15:52.80
James Lavish
This last ah week you know it's it's crazy so people are taking on second jobs because they're not. They're not keeping up. Okay, they're not keeping up with inflation but let's just let's just walk through that so you you so you have mandatory expenses right? You've got your house your car payment. You've got gas to get back and forth to your job if you're not ah you know if you're not fortunate enough to be working remotely and you have to have to actually go to an office or a facility or you know and so and you've got to pay for food. You got to pay for your kids's food and your kids' clothing and you know they're growing they need they need new shoes. You know so those are mandatory expenses and so if your jobs are not covering those expenses. What do you do? what? you're going to take out a credit card. It's the easiest fastest way to make sure that you're covering your expenses. But the problem is you're running up debt on that credit card. You're still not meeting those expenses and you're falling behind. Well, you're eventually gonna run up that credit card and it's gonna be full and you're gonna have take out another credit card and then eventually that's gonna be full and you take out another credit card and now you're paying on that. Third or fourth credit card. All you're using it for is to pay the interest on the last 2 or 3 credit cards and you're you're not you' you're nowhere near making your ah the margin you know you're not meeting the margin and you're going under. It's called the debt spiral. You can't get out of it.
17:22.19
James Lavish
Let's look at the United States so if you look at the United States in particular and all fiats are in this position or all modern fiats are in this position. The us is not alone. It's just the us has has the benefit of of being as I said the the global reserve. Asset and global reserve currency. So we're going to be able to perpetuate this for a lot longer than I think people think I believe people think but so if you look at the United States and we were say that the United States is a company on The New York Stock Exchange you would call it a zombie company. Why. Well a zombie company as you know Jim is a a company that ah is not generating enough income to cover. Its its interest expense. Okay, so typically. Ah, ah, um, a healthy company will be generating enough income annually to cover their annual interest expense by. 7 8 9 10 times. Okay, so it's not a problem at all the United States is not is not only not covering it. It's it's it's it's at like a point five coverage which means it's um, it's not even it's not even covering the the interest expense which means that it's a zombie company. Well the United States also has mandatory expenses right? So you have your you have social security medicare medicaid. Okay, you've got some. You've got some internal expenses that are that are signed into legislation. These are all signed into legislation.
18:55.80
James Lavish
You have to be paying these expenses every year that's number one that's a big chunk then you've got a next chunk which is military expenses. Okay so it's about. So if you if you say that? ah you know Medicare Medicaid and all that I mean it's it's now. Ah, it's kind of a moving target. But.
19:00.29
ilm
To.
19:14.92
James Lavish
Ah, if you look at last year okay so I kind of went through this last year and I wrote a thread on it back in August of last year okay and these these all these expenses have gone up. But if you look at it back in. In in terms of 2022. Um, you know you have you have expenses of entitlement entitlement expenses that were upwards of three point seven trillion dollars so and then you add on your.
19:51.63
James Lavish
Military expenses which is about $800000000000 now those are not signed into legislation but those are long-term military contracts with defense contractors that you you have to be paying these? okay especially if we plan on going to war in every single country. Um, it's another issue but.
20:09.97
James Lavish
So you've got about $800000000000 of defense spending. Okay, so now you're at about four point five trillion dollars give or take now entitlements all that that have gone they've gone up as employment goes down that those go up and and you know the need for unemployment all that that's that's going to be rising here. But let's call it 3 point 5 or four point five trillion dollars of of expenses last year we were running about $600000000000 of expense on interest payments. Okay, so now as an as a country you know we're we're. Taking in. Ah if you look at if you look at the debt clock and I and I like this and maybe we can share the screen is that is that something we can do let me see I don't see it. We can do that here.
20:55.25
ilm
I Don't know I don't know I hadn't had a chance to figure that one out yet.
21:06.91
James Lavish
But for your listeners you can just go to ah, you can go to debtclock.com okay and or I think it's dot org us debtlock.org and it'll show you continuously where where our our expenses are our debt and all that. And of course it's down right now. So I won't be able to to tell you but um, so and I'll I'll look it up here you you might have to cut this part out Jim but let me look up the exact debt so we get people numbers so they can they can understand exactly what I'm talking about here. But we're talking about and these are numbers that come in from these come in from the cbo. Okay, the congressional budget office every single year they put out budgets and they tell you exactly what they expect so they're expecting to take in about $4000000000000 three point nine trillion dollars okay of of tax collections this year okay these are a lot of numbers. We're gonna go back start at the top they're taking in about three point nine trillion dollars which is 10% lower than last year okay that's what they're taking in as tax revenue.
22:10.53
ilm
So.
22:23.22
James Lavish
And they're about to spend this year they're going to spend about five point five trillion dollars okay so right there you can tell it that math doesn't work. Okay and 1 of the biggest problems is are the interest on our debt. Is growing so rapidly last year it was $600000000000 this year. It's getting to be about $1000000000000 okay, so we're just like that single parent who is issuing more and more debt. Okay, we're we're borrowing more and more money. Now. We're borrowing at higher interest rates just like on a credit card the next credit card. You get a higher interest rate next and that's what's happening to us. Okay, part of that has to do with just because the fed is has raised rates but also it has to do with the market realizing that we have so much debt that's coming onto the market they're they're they're demanding a higher interest rate for that. So now the treasury is issuing this debt and they're having to pay more and more interest on that. So when you when you pull out all of those numbers you see that we've got this this gap. Okay, that's just growing and growing and growing that deficit is growing. It's getting worse and worse and worse. Okay. And so we are in what's called a debt spiral. So what is your choice if you're in if you're the United States government and you ask me where we are okay here this is where we are. Our deficits are growing. We we issued $2000000000000 of debt in just the last few months.
23:56.63
James Lavish
Because we need to borrow money to pay for all these things part of that was because there was a a log jam of you know there were a lot of things they had to pay for in June that because we had that debt ceiling crisis and they were holding off a lot of expenses and they all came due but you know we're worth $3000000000000 above where we were last year. That's the only number you need to know okay doesn't even matter what the but the the debt ceiling was we have borrowed $3000000000000 more this year that's 10 % more? Okay, so we are we are in the same spot as that as that. Single parent but because we're the United States government we have ah we have a few other options. 1 thing we can do we have basically 3 main options and then a fourth sneaky option. But the 3 main options are you can either be. You can institute some fiscal austerity. Which means cut spending okay which is meaning that you're going to cut spending on on certain entitlement programs because we just heard that those that that's the big expense you have to cut entitlement spending in order to bring this bring this deficit down.
25:12.54
ilm
Um, yeah, that's ah I think that the word like I'm not I'm not much a fan of ah, an entitlement in a lot of things but like I think the the term entitlement there is is actually merited like that is social security Medicare those are things like you've literally paid in. It's not a handout from the government those yeah I paid that that is mine.
25:13.26
James Lavish
Well, that's just political suicide. You know jet you right.
25:30.17
James Lavish
Um I paid for that. Um, yeah, exactly exactly I I mean I've been paying for my entire career and I get my my I get in this little statement every year it says what my social security.
25:32.45
ilm
I am entitled to that.
25:43.60
James Lavish
Payment will be if I retire at 62 or 65 or 70 It's just it's pathetic. But I paid into it. You know I paid all that money into it for for decades and I'm gen x I'm not expecting to get much from it unfortunately because of what we're talking about here. Okay, but let's walk through it. You can cut spending but that's political suicide neither party will do that they'll try to push the other party to do it to be fiscally responsible. Take the blame and then not get elected on the next round but neither party will do it. The second thing they can do is raise taxes. Well we know from. Many studies over many ah years and centuries that raising taxes ah winds up just disincentivizing productivity and it takes it takes away the ability for thriving companies to reinvest money. Into ah into good investments that will grow productivity over time you know, research and development New New Divisions new products you can't do that if you're being taxed and it's taken away and given to the government for um, you know, ah just silly spending.
27:01.83
James Lavish
So that's the second thing you can do. But so you you end up getting back to the same place. It doesn't help productivity and you know you wind up with the same tax dollars eventually. The third thing you can do is just issue more debt. You know you can so when ah when a bond matures and we don't have money to pay for it. We just. Sell another bond take that money pay for that first bond and give people back their principal they wind up buying that new bond with that principle and so it's just this circle. That's a third thing we do and we're issuing more and more debt right? Um, but that can only go on for so long before you get to a spot where. People realize that they're dollars their their're bonds they're they're not worth what they were before why because of the fourth sneaky option which is allow for and hide perpetual high levels of inflation. And when you do that you allow for inflation to create productivity in nominal terms meaning we're producing the same goods but those goods cost more because of inflation and so the tax dollars are higher. Because of inflation and it's really just fake productivity and so they take that fake productivity that they tax and they use those cheaper tax dollars to pay down debt that they issued years and years and years ago so it would be like if I borrowed $100 from you today.
28:36.96
James Lavish
And ten years later I pay you you back that $100 well who had the benefit from that. Well I I got $100 when it was worth $100 now I give you the hundred dollars back and it's really worth about 50 that doesn't sound like a good deal for you. You're the one who's loaning me the money in this situation I'm the us government. And you're the citizens. Not a good deal, especially if you're if you're a european or an asian country. You're you're China and you're you know, lending me dollars. You're getting them back and you're looking them thinking but these are worth a fraction of what they were so why? do you think China is letting their. Us treasurs just mature off their balance sheet and they're not reupping the same thing that Russia did that was a tactical error for us to freeze their assets. So there's another reason for them to do it but they don't want these dollars that are worth less and less every year and they know that's what's going on. And you're seeing. That's why the bricks nations have have been trying to you know commingle and congregate and get a a not a competing currency but an option against the the treasury because they don't want to be holding treasurys anymore. They want to be able to buy oil and gas. And their own currencies. So that's kind of where we're at we're at a spot here Jim where we're taking on so much debt so rapidly that the market is realizing it. They're forcing higher interest rates and the fed is lost a little bit of control at the long end of the curve here because.
30:13.40
James Lavish
It's the it's the what we call the bond vigilantes and I wrote all about this in my newsletter this last weekend. It's the bond vigilantes that are that are refusing to buy long-term treasuries at 4% they want them higher four and a half Four point seven four point eight approaching 5% now. So if you look at that ten year treasury. It's going higher and higher and that isn't because people think that you know the fed's going to be raising rates here. People think the fed is going to be lowing rates next year if you look at the fed. If you look at fed fund's futures. They believe the fed's going to be lowering rates next year so why is the tenure going up well because people realize that this high perpetual level of perpetual inflation is going to eat away at their dollars and so they're not going to loan the money they're not going to loan money to the us government at 0 interest rate. Policy anymore. They want to be paid for that that risk of high inflation perpetual inflation that the fed quite honestly is working and I they're not working with the bls but they. They are not demanding the bls make it look any better than it really is because again the fed's job is to restore confidence in the us dollar and so the Bls The Bureau Bureau of labor services that that creates um the the different measures of Cpi and and.
31:37.54
James Lavish
And the other inflation measures they're there there they make it look as good as they possibly can pulling out. You know, very sensitive things like energy and how.
31:46.13
ilm
Yeah, that like this week yeah energy housing used cars and food was it was a you know pretty basic stuff. You.
31:54.44
James Lavish
Whatever they whatever they need whatever they need to pull out. Yeah, the stuff that you kind of need those are mandatory expenses for people you know heat their house eat their food drive their car to work like those are kind of mandatory expenses pay for the house.
32:09.40
ilm
School James the secret is go by go by a new big screen Tv and you just ah, you just leveled out your inflationary hit because the Tv's deflationary and now you're you're breaking even things are good i.
32:21.93
James Lavish
that's right, that's that's right that's right so yes that's kind yeah so that's that's kind of where we're at. That's the debt spiral I wrote all about it ah last year and in in my newsletter you can find it's ah it's pinned on the thread of my ah. Ah, my profile on Twitter but you know in our little Friday fireside chat here. It seems depressing. It seems very very bleak. Um, but I'm not depressed I'm actually optimistic. And I'm optimistic because we found this wonderful incredible thing called bitcoin that I think can help us out of this mess and so yeah.
33:00.38
ilm
Miss a couple things so one when I'm a very simple minded guy. So I try to keep I have keep things pretty simple and I I guess when I tie this back like when we're talking about numbers like this. It's hard to lose touch with reality. Like my I have four young kids my oldest turned six this week and ah he was saying yesterday. Ah that he can talk he can count to hundred million billion trillion quintillion to start going off and at that point it's like it's just you can make up words because no one even knows like I don't even know. Is is dodecca dillian like I mean that's is that 12 whatever like I don't know so we lose we lose touch with reality once we get to these numbers and if if a a if a small business or a large business or a household was managing money in the same way. Our government is like. You'd be in big trouble now. The government is able to kick cans a lot farther down the road but it's it's it's very sobering to think about this is the this is our government this is impacts everybody? Um, and I would not I would be I'd be very concerned if this is my house I'd be looking at manbabe. We've got a downsize. We're going to have to. We'll be living out of the car for a bit hope you like camping you know so I don't see how this goes for the for a government and you you sit here. It's like all right? Obviously you have a lot of smart people thinking through this and a lot smarter than me. But if if this was my personal household and the way this happens we roll a debt like it's it's hilarious. A few months ago
34:35.73
ilm
You know, big politician came out and said hey we've we've never defaulted on our debt. Do we default on our debt regularly. It's ah it's a habit of ours. We just don't default in the same way that like we come out and say like Michael Scott I declare bankruptcy you know we're getting faulting other ways.
34:44.27
James Lavish
It's it's.
34:49.79
James Lavish
We're we're yeah we're we're soft defaulting every single day by having inflation inflation. Yeah, the inflation number is just this number they they picked out of the air and they said okay, why is it 2% well that's why is it 2% because that's what they can get away with 2% is like.
34:52.22
ilm
Exactly.
35:06.39
James Lavish
Okay, well 2% of my you know of my income is kind of eaten away every single year so in order to keep up with that Jim you've got to be getting. You know you got to be getting at a 10 % raise at least every few years are you getting a 10% raise every few years I know that no most most people are not that's number one so that winds up that winds up creating this this this system that the top earners the 1% or is the people who own companies. The people who own assets they get wealthier and wealthier. Because those things inflate every single year assets inflate right? We just don't inflate until you go in and demand them That's what we have we have over 100000 people who actually I think it's over a quarter of million people have have been on so have entered or been on strike at some point.
36:00.50
ilm
2
36:01.25
James Lavish
Since the beginning of the summer in the United States and that's that's because they're demanding higher wages. Why are they demanding higher wages because it can't keep up like they're not. They're not able to keep up with the inflation and so they the 2% is okay because it's just low enough that. People they don't they almost don't even notice it. It's just it's it's a sneaky tax right? And that's what is that doing that's allowing for the government to continue to continue this charade of debt. The debt trade now. You know your your question you and this a really important thing so people ask me all the time they're like well why would s and p and fit downgrade. The Us debt are they do they think that there's really a chance that Us would default. And the answer is no so if you know to quote Lynn Alden here if you are a sovereign if you are if you have a if you're a country that you issue debt in your own currency. You would never default. Why would you? you could just print money and look at Japan. Okay, the bank of Japan has been buying their own debt so much so for so long that they now own the bank of Japan owns more jgbs japanese government bonds.
37:34.45
James Lavish
Than anybody else in the world they own over 50% of of outstanding Jgps I mean this is just insanity. They print. Yeah, exactly exactly.
37:39.60
ilm
That's what happens when you do in ah an emergency purchase regularly. It's well let's so where where the government is like if this is my household. It's sort of I mean we're rolling over debt to new debt. That's what's happening and that would be like oh gosh babe the ah. Credit card bills due and I go check the mail and there's a new mastercard there and it's like hey you're you're approved here you go hey let's roll it over in the next month aba we're not going to make it right? Hey we just got this visa in the mail. Let's roll it over and you keep doing that. Um, and what's really putting a squeeze on is not just this growing amount of debt.
38:01.92
James Lavish
Just roll it over.
38:16.47
ilm
But each time we get new credit card in the mail. Maybe initially our interest rate was was 5% but then we rolled it over to the visa and it's it's 15 and we roll over the massaccard now. It's 20 That's right right now. The fed raises rates. We're putting that pressure on ourselves. So's if I again take it back to a base if I was if this was my household.
38:26.81
James Lavish
Um, act is we hearing you know that? yeah that.
38:35.64
ilm
And I could control all right I'm about to get a diners club card in the mail and I could control the interest rate I have to pay I would say well heck, let's make the interest rate 0 I'll be able to actually start paying this down any principal I'll pay will go towards astead at 0 and I can get myself out of this. So again and obviously not now how it works but why not if the government can set the interest rates for the debt. The the interest rate on the debt we're going to pay why doesn't the government just come in and say hey new debt payments is zero then yeah, we could just buy our own debt. No one else is going to like actually but I don't want to say that you could you explain to me why we don't do that as a kind of as a country.
38:52.46
James Lavish
Um.
39:07.65
James Lavish
Yeah, that's a good. It's okay, we did that a little bit but the problem is that you know when you when you run 0 rate policy zirp you wind up it. It does become inflationary.
39:09.87
ilm
Because I would do that if I was an individual could set me an interest rate.
39:25.15
James Lavish
Right? And so our issue here is that we're trying to the fed is trying to they're trying to bring down inflation by cramping demand right? So when you when you crimp on demand to bring down. Spending all right? So if you just think about it in terms of if you're a company. Okay and it costs you So think of big terms. Not even just individuals big terms if you if you if it costs you more money to borrow then when you when you need Capital. And a lot of companies have what's called ah a bank line of credit. Well that line of credit just gets more and more Expensive. You know a lot of those are variable rates and so it becomes more capital becomes more expensive and and when they go out to issue a bond. It's more expensive and so. That means their margins come down that means their spending comes down that means that they can't they can't pay their workers as much and so that that pulls down their their profits and so they're less profitable which means that there multiples in the stock market will come down which means that. Asset prices come down which means that that's less money in the pocket of people who are selling stocks or borrowing against stocks to go and you know spend on things and so it all it all brings productivity down and it brings eventually often. What happens is it. It.
41:00.70
James Lavish
Pushes a number of large companies or institutions to break and then you know you have what's called a credit event and you have a drop off a cliff. So what? you'll often see here. Jim is the fed keeps rates high. They raise rates that keep them high. Higher than longer higher for longer than they should have and then you see a sudden spike in unemployment and we're in a recession and that's what's going to happen I mean that's likely very likely. What's going to happen in this in this cycle again. So but you can't keep interest rates that low because it's just going to if you lowered interest rates now. People go borrow again and go spend again. It's kind to just it's gonna perpetuate the inflationary issues right? So you've got to keep inflation high enough that you you can't you you don't want to go into a situation like in the 80 s where we all me. Ah we we were on the edge of of. Interest rates getting out of control and then Volker came in and and raise rates to almost 20% at one point I think they touched 20% you know and so we couldn't do that now we would I mean we would cripple the government with with interest expenses that would just be that would actually be laughable. Um, because we're back then we were we were running um at about a 30% debt to gdp and today we're running about 125% so that would not work. Um, so 12025? So what? ah.
42:21.68
ilm
Um, wow.
42:35.92
James Lavish
So that's the point though and go back to your statement of you. You take out another credit card. It's more It's higher interest rate. Okay, let's go back to it. So let's go back to Fitch and ah and standardism poors and why moody's hasn't jumped on this yet I have no idea I cannot figure out what they're thinking. But. What they tipped off to the market gym is that not that there's a higher chance of the fed of the of the treasury defaulting but rather the higher chance that inflation goes unchecked and that if you're investing in those bonds you're actually getting a negative real return. So inflation is higher than there were than the interest rate you're getting on that bond and so they they tipped off the market mean the market already knew this and the you know the bond vigillante is already out there but they said yeah we agree there is a there is it. There is a distinct probability that. You're going to get a negative real return on those bonds and so we're going to lower the bonds from the highest rating Aa a to double a plus. They're still you know they're a great place to keep your money. You're not going to lose it all. But. When you get paid back that principle. It may not be worth quite what you thought? what? what you planned on it being worth because of high inflation and so that's the issue and what you're talking about and I 100% agree with you. We're defaulting every single day and that's in the form of a soft default which is called inflation.
44:08.11
ilm
So There's the ah, there's a lot of the problems. So How how does this work out like where here's where I see things right now like I talk with normal people daily about money and obviously ah you know I'm looking out my window right now to our account Square and there's people out. And drinking coffee and on walks and stuff and it's I think where things are right now I don't think most people are aware of the the gravity of the situation. Um, but I think it's about to hit you think through? Um, just a few weeks ago.
44:29.70
James Lavish
Um, yeah.
44:44.82
ilm
And ah student loan payments. You know, federally owned student loans became you know you can to pay them again for year. It's been years. So I mean it's been what three and a half years so three and a half years ago if you're student loan payment was four hundred bucks a month. Okay well I have four hundred bucks a month and I can go get coffee with some friends and my avocado toast once every.
44:46.79
James Lavish
They could yeah.
44:56.24
James Lavish
Person.
45:03.66
ilm
Once a week once every two weeks and then ah when the covid shutdowns happened um and they cancel your student loan payments for a bit. Um you suddenly had $400 in excess and you were given some you know fifteen hundred bucks and those covid payments.
45:06.75
James Lavish
Um, right.
45:19.71
ilm
So you had $400 in excess to go spin on avocado toast and coffee and you couldn't spin on anything right? then. So then you saw savings rates go through the roof the best they've been in decades and your everyone just got fifteen hundred bucks to go and sock away or most people did something in their yard or whatever and that's when ah the the coinciding of house projects with the.
45:36.11
James Lavish
Yep.
45:39.37
ilm
The the ah lack of production of these. Ah these assets.
45:44.16
James Lavish
And stimulus checks that were that were that were deposited straight into people's accounts. Yeah but but that's a good point that you know these these interest payments have kicked in again. That's number 1 number 2 when you look at the demographics Jim the lower. You know the the lower 80% are struggling. They're taking on more debt and it's not because they think they they think that they're you know it's not because they're optimistic about the future. It's because they're struggling today and so those credit card the credit card amount the the credit card debt in this country is just going.
46:15.56
ilm
Um, yeah.
46:23.63
James Lavish
You know, straight in a straight line almost exponential number one and and you're seeing defaults start to tick up. You know.
46:25.55
ilm
It looks it looks almost exactly inverse of what happened in March of 2020 March April May Twenty Twenty saving rates were the best. It's been in decades accounts and everything was just it was it was impeccable. So it was it was great but again at that point everyone had.
46:42.41
James Lavish
That's right.
46:45.30
ilm
These people had $400 in excess and they were just given fifteen hundred bucks and then we we weren't we weren't facing the reality of the taxation of this inflation yet. So suddenly like cool I can do this and people are going out and doing things and then after several months inflation started to pick up and people are realizing it and suddenly it was like instead of going out and getting coffee daily.
46:48.70
James Lavish
I try.
47:04.82
ilm
Now I can do it every few every every few days then it was once a week and then reach a point where like hey I'm back where I was I can go out and get coffee with my friends once a week um oh crud what happens is my $400 short loan payment comes up again and that's where we are. We were back to a point where things were. Just about as tight actually more tight than they were prior to covid without even having these debt payments and suddenly this is back. So I think there's a lot of people between the age like 25 to 45 who are about to be in a lot of pain and I who knows what's going to happen but I would not be surprised if in a few months like the the consumer spending just.
47:26.60
James Lavish
Might see.
47:40.33
ilm
Falls off you know, Falls off map and you know use cars start getting out there like it's yeah when we look at again a few years back average balance of savings, accounts and savings rates were phenomenal and it was just a spike where we had this injection of capital.
47:43.95
James Lavish
Um, yeah.
47:57.70
ilm
Um, and then it's the inverse. It's all it's like it's not this gradual thing. It's just sort of fallen off the map and the the other side of like credit card the average ah delinquency on credit cards. The average ah amounts on credit cards are just abysmal and ah.
48:10.81
James Lavish
Um, yeah, yeah.
48:13.84
ilm
Yeah, who again I think it's just going to get more dire I'm curious to see how the how they're going to government's going to respond to this What the implications are going to be with with homes I mean houses cost a fortune. Ah I mean the houses are like the least affordable, they've been in in several decades.
48:26.40
James Lavish
Um.
48:30.54
ilm
What's going to happen. Let's say the fed. Well if the fed pivots and starts dropping rates. There's pint up demand for people to buy houses look. There's a lot of people who want own a house right now. But the interest rates I don't think the yeah the the the cost of a house has not gone down in tandem with the rise of interest rates. So the affordability is not.
48:39.76
James Lavish
There They're black him out. Yeah.
48:50.35
ilm
Even doubt it's just the interest rates have skyrocketed the house prices have maybe gone down to hair.
48:52.10
James Lavish
That's right? Well, that's because yeah, that's because nobody's selling because what are they? they're not goingnna they're not going to give up their their two and a half three percent mortgage why would they do that they wouldn't so until that happens you there.
49:01.73
ilm
Death.
49:09.19
James Lavish
So what's going to happen. Well I see it kind of in 2 different paths right? So either. We we kind of plunk along here and the fed keeps rates too high for too long and we do have that whoosh moment of a bunch of layoffs. We go into recession. You have a spike in unemployment. And we go into like this kind of hard landing. Okay then hardish landing that's kind of the optimistic case. Um the pessimist. The pet. The pessimistic case is that we have a major systemic.
49:35.53
ilm
I Like how that that's the optimistic case. Okay, let's so.
49:47.77
James Lavish
Far-reaching default that has counterparty risk with contagion that produces an event like we saw back in 2008 that we have a major. Credit event that ah or in 2019 where you saw the the repo market lock up you we have a we have a credit event that forces that all markets sell off every single every single thing you own sells off it. It all. Correlates to one and it does it in in in like face melting fashion where you just cannot even believe how quickly it happens and all happens like a 1987 black monday moment where everything sells off. Everything correlates to and why does it happen? Well it happens because you if you're a money manager and you walk into the office and you have a massive event like this. You don't know where your counterparty risks are you don't know where your margin calls are going to come from. You don't know what assets are worth what you sell everything and often you sell things that are more liquid. Things like bitcoin because they're liquid. They trade all day every day 24 7 you can be selling that on a Sunday if if bad news comes on a Saturday night. You know, um, but everything correlates to 1 and you have a so just a drastic downturn of you know.
51:21.48
James Lavish
10 Fifteen 20 25% maybe even more of assets and it's it's extraordinarily painful now the thing is the fed can't have that the treasury sorry can't have that and really the fed by extension. They can't have that why. Because of the deficits we're running. Can you imagine if our tax receipts go down by another trillion dollars I mean it would be catastrophic. You know for this country to try to weather a a period and it'd be catastrophic for the entire world. Because in reality what we're talking about is the treasury market locking up and if that happens then the entire financial system crumbles. So you've got to keep the treasury market going. Well, how do you do that? You do it by turning on the money printer the treasury press a button on the fed and it. Dumps trillions and trillions of dollars onto the fed's balance sheet and the fed through yeah through the dealers through the bank major dealers they go and buy up the Us treasurys and keep that market going and so that's what people are talking about when they say. Qe infinity like that's the moment so that would be very scary. it'll be it ah it'll be a v in my mind. It would be a v recovery where you have this steep drawdown ah a credit event and then the treasury market gets disorderly or locks up.
52:54.75
James Lavish
Treasury steps in the fed steps in they shore up the market. They dump a bunch of money on the market and here we go again and the same thing and so I would recommend and this is what I do is if you don't own any bitcoin own a little bit I own bitcoin and gold and silver. Because I believe that that type of event in those types of events. There's going to be a a ah ah flea to stores of value where you you know you can hide money not literally hide from the government but hide it from the from the risks that are out there. And these things they they hold their value over long periods of time and so it'll be interesting to see in this cycle. What bitcoin does and if it breaks away and really becomes that store value that everybody's talking about. But I think that's still a ways off I still think it's considered a risk asset. However. Because of its scarcity value. It is something that would absolutely own at least 2 or two percent if you're not a believer become a believer do your work figure it out. Um, and and it may just save you because if the worst case scenario happens. Which I don't believe would happen in this cycle but it is out in the future that the world just stops believing in the dollar and then you know then you have to have something protect your wealth and so um because the entire financial system will be reset.
54:30.40
James Lavish
So but the optimism the good news is that we do have bitcoin and we do have a system that we can run in parallel that we can onboard to over the course of the next decade or 2 and that's my hope is that we run this system in parallel. And eventually that becomes what people use as a store value as they spend their dollars and that gives me hope because otherwise you know that we can't do this forever and as the treasury said themselves earlier this year this isn't where we are. On an unsustainable physicalal path. So um, do your homework and and and and read up on it. But that's my and that's why but I have hope because thank god for bitcoin period.
55:22.48
ilm
Awesome James thanks for ah going through and talking that out with me. That's that was really helpful from a yeah again, how do we get here where are we and what's so what? do we think a way out of this is so I appreciate your time and in chatting.
55:33.77
James Lavish
Yeah, yeah, yeah of course of course I'm I happy to be here and is it's great to spend a little time with you on a Friday gym looking forward to the next time we get out to Colorado together that'd be fun. So yeah, so thank you thank you for having me and I appreciate it.
55:45.51
ilm
Let's do it. Yes, Sir. Thanks.
