The Dollar in an Increasingly Multipolar World ft. Luke Gromen & Larry McDonald

30:36Right now, if you look at entitlements, all in, that's Medicare, Medicaid, Social Security, and Health and Human Services. So it's a broad, broad category. But that is, this year, it'll be about$3.1 trillion, which is almost 70 % of tax receipts. Almost 70%. Defense is another 20 % of tax receipts. That gets us to 90 % of tax receipts. Now we look at treasury spending. It's running over a trillion. That's another 25%. You're at 115 % of tax receipts. Tax receipts are highly dependent on the margin on U.S. stocks going up. If stocks go up, receipts go up. If stocks go down, receipts go down. You're at 115 % on the big three.

31:22Nothing else you can cut matters. You can cut parks and services. Nobody gives a crack. department of labor education you know all this stuff doesn't matter uh the only things you can cut to make a difference to try to shrink it doesn't matter in terms of you're not going to save that much money for the problem you're not going to say you're going to get a lot of crying yeah you're exactly and you just can't cut that so you've got to cut entitlements defense or interest all right well the only way to cut interest is is by cutting rates so you know we're going to re-incite. So let's take that one away.

31:56Now you're left with entitlements or defense. Okay. We're going to cut entitlements in an election year? There's no freaking way. Now, so are we going to cut the fence in the middle of a rising cold north? There's no freaking way. So what are our release valves? Our release valves, our rates are going to keep going up or the Fed's going to print the difference. The Fed's going to implement more QE and yield curve control, which now we overlay that on all these other bullish overlays for commodities. It's like, oh my God, number one, if you're looking out 10 years, how can you not have a bigger allocation to commodities and industrials, gold, et cetera?

32:40And what are you doing buying the 10-year treasury at 4.3 when the short term's at 5.3? Stop. It's a blood spoil. It makes no sense as an investor. The other thing I would say that most people, when I lay out this second part, I see their body language just drop because they realize how trapped the Fed is. And that is, I frequently hear, we just need to run a balanced budget. We just need to run a balanced budget. Let's just cut to run a close door, or not even a close. Let's just cut deficits back to 2 % of GDP, which is kind of where they should be, given where unemployment is, given where the economy is, what GDP is doing, where it was under Volcker.

33:26Okay, let's do that. I just said before, trailing 12-month deficits are at 8.4 % of GDP. So we need to cut 6.4 points out of government spending, out of the fiscal side, right now. to get the two. 8.4 minus 6.4 is 2 % of GDP. 6.4 % of GDP cut right now would drop GDP by 6.4 % right now. By way of comparison, when Lehman blew up, four-year GDP was down three, and that was enough to nearly take down the whole system. In COVID, when we shut the whole frigging economy down. Full-year GDP, I think, fell six annually. Maybe at the worst, it was down eight or 12 and one quarter. But the point here is, and this is what people don't realize, is it's too late.

34:22Unless you get an energy productivity miracle or you have a time machine, we get into an 84 DeLorean with a flux capacitor. We go back to 1989 and we go to our politicians and do the biff, like, hey, stupid, hello, hello, being a doll, there's no fix for this. And we know this. This isn't speculation on my part, because we can go back to 2014 with Obamacare, which the Supreme Court says was a tax increase. It was functionally a tax increase. The Supreme Court said it was a tax increase. What did it do? You go back to the Wall Street Journal, December 2014, Obamacare will help reduce the deficit by pushing the government's biggest expenditure, a bigger share of that, onto U.S.

35:02consumers. It was a tax increase. You raise taxes on small and mid-sized businesses, increase premiums to reduce the government's health care expenditure. OK, great. That's what we should do. Right, Luke? Oh, wait. Fast forward 15 months in 2016. Guess what the deficit did as a percent of GDP? It rose. The U.S. implemented an effective tax increase to reduce the deficit. and within 15 months it increased the deficit because guess what happened when people had to pay for more of their health care to take it off the government's plate? They didn't buy as many cars. They didn't go out to eat as much.

35:38The dollar went up and that weighed up because we were crowding out global dollar markets. So what I'm saying is we know that if they tried to cut pretty much 6.4, the system would collapse. Even if they cut three, which the system would probably still collapse. Within 15 months, the deficit's not going to be 5.4. The deficit's from 8.4. The deficit's going to go to 10 because you're actually going to be reducing current incomes and people don't understand the dynamic that it's a little bit, and I don't want to make light of being sick, but if you wait too long to get treated for certain diseases, they don't say, well, it's okay.

36:19They say, here's some opiates and we're going to make you comfortable. We're going to put you in palliative care and this is all we can do for you. And so the palliative care in this case is more QE or yield curve control or miracle. And miracle is productivity, massive productivity boom from any number of different things, technological, demographic, et cetera. We can talk about that. But I find that it's just very poorly understood that they're this cornered. Now, behind me, we run a conversation on Bloomberg with institutional investors in about 20 countries. And it's all 99 % buy side. So it's hedge funds, mutual funds, pension funds.

37:05And we're constantly talking about these things and different trading themes. And one part of the conversation that's been talked about in recent months is on the fiscal side, a lot of this fiscal, the Democrats quite brilliantly, they've approved a lot of fiscal because they knew the Republicans would potentially take the House and stop them. And now they're slow walking a lot of this fiscal in from spending that from what from what from the debate is a debate. But from all the spending that's been approved in recent years, especially in the last like 18 months, there's a certain amount of it that hasn't really gotten into the economy yet.

37:45Whereas it's not really like say you have shovel ready projects in environmental. Take the U.S. power grid, for example. You take Biden's infrastructure plan. And, you know, they want to do build back better. The U.S. power grid is like in some parts 30, 40, 50 years old, some parts 20 years old. We're going to put all these electric vehicles on it. There's 200 ,000 new electric vehicles in Texas. And the grid is buckled, literally almost broken down three times since, I think four times in the last recent years. The estimates around this spending are upwards to fix the power grid that you're going to put all these electric vehicles on is anywhere between$5 trillion and$6 trillion.

38:28Now, some of that's already in the hopper. But what are the investments? I'm thinking, looking out the next 10 years, I'm thinking about aluminum, copper, because this capital is going to go to work. We have to fix the grid. But some portion of the fiscal has been implemented. Some portion has not. Have you given any thought to what's been implemented? What isn't? And why that's creating more? Because we technically potentially should have gone into recession based on a lot of indicators out there leading economic indicators. ISM, Ralph Powell's done a good job looking at some of these things, but we haven't because of this drag out fiscal.

39:08Have you looked into that at all and how that's playing out in markets? I have. We've done a lot of writing in the last four months in particular about fiscal dominance, that basically the Fed's not in control anymore. The U.S. government is. It's interesting when you go back, the weakest economy that we've had was in 2Q and 3Q last year when U.S. fiscal outlays were declining year over year. Other than that, the rates haven't impacted overall headline GDP as much as many people, myself included, initially, you know, I had 28 years of experience teaching me the wrong lesson, that the Fed is dominant and the Fed is going to drive a recession.

40:00And there have been several people who have been very influential in my thinking over the last year, really. The first was Warren Mosler, who's a monetary system expert, is known for MMT, obviously. MMT is really an explanation of flows. It's a very politically charged word, right? People think of, hey, print money and give it away. Modern monetary theory is this. Correct, correct. But it's really much more of just a description of how private public sector flows of money work in a fiat system. And Mosler earlier this year was saying the Fed has it backwards. words. No one alive in trading has ever been alive in trading when U.S.

40:50debt to GDP was 120%, when U.S. deficits were 6%, 7 % at the start of a tightening cycle, and now they're higher. Yeah. So right now, the U.S. deficit is anywhere between 6 % to 8 % of GDP. I just want to make that ... Whereas the last 50 years, it's averaged around 2 % to 3%. Yeah, exactly. And then Moser's initial point was the interest is the Fed's adding to demand because the debt's so off. And this has never happened before. And then Charles Calamiris put out a white paper with the St. Louis Fed back in early June. I read it and my jaw dropped because it talks about this fiscal dominance in much more specific terms.

41:32And when I started looking at it through that lens, what I come to conclude is the U.S. went into fiscal dominance in September 2019 in the repo rate spike. Because for all the noise about what caused the repo rate spike, yes, there was regulatory. Yes, the bottom line was there was too much supply of treasury paper and there was not enough private sector balance sheet. That's the very essence of fiscal dominance. And once that happened, how did the Fed respond? We saw rates and repo went from whatever, two to eight virtually overnight. And within 48 hours, the Fed said, no, we're printing money.

42:19We're going to bring that rate back down. At that point, the U.S. went into fiscal dominance. Obviously, we had COVID. We had the fiscal impact that you highlighted. Fast forward again, we see the banks have been getting stuffed with treasuries, encouraged to buy them for regulatory reasons, etc. There's de facto QE, particularly when the SLR, Supplementary Leverage Ratio, was exempted from March of 20 through April of 21. Again, the Fed starts raising rates and the banks get upside down. If the Fed really wanted to permanently stop inflation and permanently slow the economy, as in 2019, they should have just stood aside.

43:05But they didn't. They came in with BTFP. They quickly sort of guaranteed, kind of don't want to be explicit, unsecured depositors. Again, fiscal dominance. And so I think we are in, to answer the question of how am I thinking about the fiscal impulse, from a top-down perspective, most market participants are still playing by the old rules of the game of the last 40 years, which is the Fed is dominant, watch rates, watch the private sector. But there's new rules. 120 % debt to GDP, 8 % of GDP deficits, foreign central banks not buying any treasuries on net still. Banks now full with treasuries.

43:53The game has changed. We are fully in fiscal dominance. And so it gets to a very different outcome, which is the biggest driver for marginal GDP is the federal government and deficits, number one. And number two, Fed rate hikes are functionally acting as stimmies, just like the stimmies we all got in COVID, right? So in COVID, let's take a step back and see things for what they are. In COVID, we ran a big deficit. The federal government ran a big deficit by handing checks to people. And the Fed bought those, basically monetized that by doing QE. And global supply chains were shut down or disrupted by COVID.

44:36So you'd have a bunch of new money pumped in to the system as supply chains to provide goods against that pumping in of money was curtailed. And we got inflation on a leg, very high inflation, highs in 40 years. OK, let's fast forward to now and the Fed rate hikes. We were talking about before at 5 percent, if they just stay here, we're going to have a trillion three in interest. Trillion three. That's just a stimmy. It doesn't go to everybody. It goes to wealthy asset owners. and so it's a little bit more sterilized. A lot of those asset holders are overseas like that money actually leaves the country to some extent because people that own treasuries around the world get our interest doesn't really come back to us.

45:18It does but it does. It does yeah exactly and there's some whole bunch of perverse political impacts right so basically we're helping China fund their military to put up a defense against us by raising rates because they still own whatever 800 billion but that's again separate discussion. So you have a trillion three in interest estimates, increased fiscal impulse based on what the Biden economics are doing, Bidenomics, inflation, et cetera. Again, it's not direct to consumer, but it's defense and it's inflation reduction. It's reshoring. It's these environmental imperatives. And what's the Fed's rate hikes doing to the private sector?

45:54They're curtailing. It's not as drastic as COVID, but we We can see it in the ISM. We can see it in production indices. We can see it in all these. The private sector is shrinking. The lending, and it's going to shrink more from the lending survey. The private lending survey is done by the Fed. There's not much functional difference between what we did in COVID, stimmies, curtail production, add nine months, holy crap, we have 8 % CPI, to 1.3 trillion in interest stimmies, curtail production a little less. And yet consensus is, oh, don't worry, inflation's going to stay low. Ain't going to stay low.

46:36You're pumping money into the system via fiscal, paradoxically via rate hikes. And so most market participants are still playing the old game of, hey, the Fed's dominant. Fed's not dominant. Fiscal's dominant now. Everybody's long the last decade's portfolio. Everybody's still long. So to me, this is like, we are going to see the greatest migration of assets of wealth in the history of humanity in the next three, four years. Absolutely. Now, if you think about waste, you brought up some of the problems. Here's what I hear. So one of the people, one of the investors in our book, I think one of the most brilliant guys that I've met on Wall Street over the years, Mark Chaball was at Moore Capital for years at Goldman Sachs, now runs the family office.

47:28But Mark's point in my book and in our conversations, I can say this with permission, is financial repression. And let's just describe what that is. It's when you keep the rate of interest below inflation. And so I'm thinking about that. I want investors listening to us right now to see what the next decade is going to look like, because it's not just about, you're right, it's about yield curve control and that type of thing. But aren't they going to have to force the entire US pension system to own a greater percentage of, say, treasuries? Or aren't they going to have to force the banks to regulation to own even more treasuries?

48:05So in terms of financial repression, and I've read some of the white papers out there, and there's some interesting white papers that are coming up. We're looking at really, I don't want to say China-like state demands, but in order to get through this, there has to be some type of pressure on the private sector to own treasuries because the Fed can't do it all. So I'm going to have three points on this. I'm going to try to remember them all here. Um, the first is yes, absolutely. And you're seeing some of these white papers. So Calamira's, for example, is white paper on the U S being in fiscal dominance highlights that, uh, the rate of inflation to get out of our current debt position.

48:51Um, if you don't do any financial repression, given current levels of deficits and given current levels of, um, uh, basically the status quo system where it's set up. You're going to need 40, 4-0, 40 % CPI inflation. No one, no, look, I read that paper and I've been thinking inflation would be higher. I think my jaw dropped. He notes that if you financially repress the banks, what you do is you increase reserve requirements. So exactly, hey, you have to own way more treasuries against your capital base, and you're starting to already hear that, right? Every time you hear the Fed come out and say, oh, the banks are a little unsafe, banks are fine.

49:38The banks are a little unsafe, we need to increase capital requirements 20%. We've seen a number of these, that is them going, oh shit, we have a fiscal problem and they're setting the stage for this financial repression. So Calamiris noted that if you significantly raise reserve requirements, so they got a lot more treasuries against their asset base, number one, and then number two, slash the reserve rate back to zero. Right. So right now the Fed is paying, paying these banks to whatever, 5.3, 5.2. I don't know what the number is percent against their excess reserves to to keep those reserves in that trillion dollar box that you refer to.

50:25Right. That's the reason that trillion dollar box is still there now that they've earned their way out of it is because they're getting paid to keep it there. The Fed's basically bribing them not to lend the trillion dollars in that trillion dollar box. So what the Fed could do is say that trillion dollars in that trillion dollar box. Now you get zero. Now, normally the Fed would go or those banks would say, well, fine, we're going to take it out. We're going to lend it across the economy. GDP up, inflation up. OK. What Calamira says, one step to doing this is you say, hey, you've got to hold that whole trillion as capital.

51:01And we're not paying you for it anymore. And if they do that, Calamira said it kills the banks, kills their profitability. but it gets inflation needed to get out of this mess down to like 16%, 16, 1, 6%. So again, yes. If you go all in with the financial freshman, freshman tools, you get inflation down to 16%. You kill your bank. And again, this ties back to my point by like, people don't understand how cornered they already are. Yeah. If you kill your banking system by stuffing them full of treasuries and cutting the reserve rate to zero, you get inflation down to 16 % in his white paper. And you go, oh my God.

51:41So, okay, that gets us to the second point. The dollar, as global reserve currency, fundamental underpinning is open and free flows of capital. And this is a side of it that I don't often hear. Yes, financial oppression, I think some version of it will absolutely happen. the problem is is you can only do a little bit particularly with foreigners you can do whatever you want to your own people problem there is is the boomers have all the money and they're net sellers like like there isn't a rate that you can raise rates to to convince a 70 year old boomer to change their time preference right like they're saying i got five good years left maybe maybe 10 I don't give a shit if the Fed pays me 20.

52:32I want my money and I want to go to Italy and I want to buy the fast car that I always wanted as a kid. And I want the third house and I want that. The U.S. government's rate sensitivity is way lower than the Fed, than these boomers. And so the boom. And that's and the boomers, I think, have 78 trillion of wealth, 78, 78 trillion of wealth. The millennials only like maybe$6 trillion,$6.5 trillion. And the oldest boomer now is 78. And when Lehman went down, the oldest boomer was obviously kind of like the early 60s. 63. It's a totally different ballgame. Yeah. But aren't those boomers at 78 more inclined to own fixed income now than they were after Lehman failed?

53:23So that's one possible thing that would help the equation. I think at some level, once you get immobile and sick, yes. But, you know, the average 78-year-old boomer is the healthiest 78-year-old in the history of mankind. And again, we just locked them down for three years and we told them they're going to die way sooner than they think. And so there's just a YOLO trade amongst boomers. I mean, go to any restaurant in any city in America and look around. You'll find that at least two thirds of the people are boomers. They go out to eat every night. They go on lots of vacation. And God bless them.

54:02Like, they've lived great lives. They're full out. But my point for this part of the discussion is they're sellers. They're not buyers on net still. And maybe in another 10 years, maybe they're buyers. Now, how can you get them to be buyers? Well, I don't want this to happen. But if you set the law so that when they die, their kids are locked up, right? Now you can financially repress their kids. So I get that$78 trillion. It passes to their kids. What do you mean by locked up? Yeah, you lock that up. In terms of what do you mean by kids locked up? Oh, their wealth, right? So the boomer dies. His estate passes to his 45, 50-year-old kid.

54:45Yeah. And the government says, sorry, we're going to take 70 % of that. Or you can't touch 70%. 70 % of anything a boomer hands you in a death benefit has to go into treasuries, into 30-year treasuries. Or no more step up in cost basis, right? No, there's a lot of different ways you can do that. Now, that brings me to my third point. So you can do that with the boomers. But again, you can't do that too much with international because that has dollar reserve currency status, right? We're already talking about this de-dollarization of commodities because out of necessity. But if you start telling foreigners, hey, we're going to pay you three when inflation is 16, you'll see what we've been seeing, which is they're going to give you the middle finger and they're going to sell treasuries and they're going to buy gold.

55:37And that's exactly what sell essential banks have been doing for 10 years because I think they've seen the writing on the wall. So that has that has that it's not just a Fed. That's a Treasury issue. Right. Because the dollar typically is the purview of the Treasury. Anyway. OK. Third point. And this is the big one that people tend to miss, which is the last 40 years have basically been about financially repressing foreign U.S. creditors. Right. For the last on average, for the last 20 years. Certainly since Lehman, the United States debt has grown by eight percent per year. CAGR, compound annual growth rate.

56:11The rate on that debt has rarely been above four and rarely been above three. That's like the greatest deal on the planet. Like I will borrow a hundred trillion dollars from anybody that will let me borrow 8 % more than that every year at a 2%, 3%, 4 % rate. It's stupid. I will do it for the rest of my life. And that's been what we've done for the last 15 years. And now the rest of the world, so basically that is akin to your kid having a drug problem and stealing from the neighbors, going in every night, breaking into the neighbor's house, stealing some jewelry, hocking it. You're like, oh, my kid's doing great.

56:52Doesn't affect me at all. Once foreign central banks stopped growing holdings of treasuries, once foreigners, in particular the central bank level, stopped growing holdings of treasuries, the U.S. has to fund more of its own deficits. And if you financially repress your own people, it's like your kid's stealing from you to have a drug habit. You end up poor. In the first scenario, your net worth, your net income isn't hit at all. You don't notice. In the second situation, where your kid is stealing your wife's wedding band and selling it for drugs and then raiding your bank account. So that's financial repression.

57:30So it is very much a decline in real living standards that, oh, by the way, suggests bullishness for a commodity portfolio over the next 10 years. So that's, you know, yes, they can financially repress their planning. There are some dollar implications in terms of reserve currency status. You can do too much the foreigners. And that's something that is almost always leapt out of these discussions of financial repression. And for a very simple reason, no one wants to talk about it because there's no easy answer. And number three, yeah, so repressing your own people. It's like, you know, your kid's stealing from you to fund a drug habit as opposed to stealing from the neighbors.

58:13You know, when we were repressing foreigners, by the way, we've run the system over the last 15, 20, 40 years. You know, and all of those back to Toteville and Teitler, you know, you go back to the late 1700s. And there were these predictions of the cycle of democracy, because no democracy has ever lasted more than 275, 250 years. And, you know, you really, with all democracies, there's like a cycle where you start off in apathy, which you think about, I'm sorry, you start off in bondage is actually the first day. Bondage, you think about the United States under the UK, right? United 1775, six, you know, Tea Party, that's bondage essentially, right?

58:53And then you've got spiritual faith. Then you've got entrepreneurship abundance, 1950s, 1960s. And then you have the apathy. Then you have a little bit of dependence, despair, back to bondage again. And you can see this cycle in the world in, say, Argentina. You can see it in the world in, say, Venezuela. You can see this cycle forming, and it's been out there. Other parts of the world, United Kingdom. I wouldn't say it's not a pure democracy. It's a monarchy turned into a democracy to some extent. It's not a real republic. But if you look around the world in that cycle, and if you look at the United States, the argument for the dollar is, we're the cleanest of all the dirty shirts.

59:40And that's essentially what's enabled the politicians to grossly be so irresponsible, right? Because we've always been the cleanest of all the dirty shirts. And now we look around the world and there are a lot of dirty shirts out there. And so, you know, how do you quantify the dirty shirts versus, you know, versus the politicians on Capitol Hill that have been so, you know, really recklessly irresponsible? You know, my friend Brad Johnson always says, well, everyone does this in all these capitals. He's 100 percent right. The dynamic that I think is grossly underappreciated is that in this whole discussion is the net international investment position.

1:00:19which in the United States from 1976 to 2012, the U.S. net international investment position was positive 10 % of GDP to negative 10 % of GDP. Basically a linear decline from positive 10 to negative 10 from 76 to 12. The way the world worked with the dollar and dollar diplomacy for that almost 40 years was Fed hikes rates, dollar rises, foreigners burn down FX reserves, their net international investment position effectively to defend their currency. They run out of those dollar reserves because they don't own that much, right? They only own zero to negative 10 % of U.S. assets on that, right?

1:01:06Even less in the 70s when U.S. net international investment position was positive. They burned out those reserves. Once they run out of those reserves, they have to devalue their currencies. The currencies fall. Their economies fall. Then there's a crisis. The Fed responds to that crisis, drops rates, and the U.S. sort of goes in and buys up foreign assets on the cheap, and we restart the whole cycle of relouching again. and that's kind of how it worked. And what most of the discussion around the dollar that I see and have seen for years fails to grasp is that the United States and international investment position since 2018 has been negative 50, negative 60, negative 70 as of 2021.

1:01:48It's bounced back a little bit, percentage GDP. These foreigners now own on a net basis$18 trillion of U.S. assets. And so in the past, when they would burn down those FX reserves, they didn't have enough dollar assets to really hurt us while they were going into crisis, especially because back then we hadn't offshort so much of our industrial base that we weren't so critically marginally dependent on asset prices rising for tax receipts, for consumer spending growth, for GDP growth, as we are now. And that's really only evolved since 2000 based on policies choices we've made. So now you've got foreigners, Fed raises rates, dollar goes up, foreigners start selling, and they keep selling, and they keep selling, and they keep selling, and they just sell more and more.

1:02:37And now they have so much in savings in the net international investment piggy bank, it's no longer them that break first. It's no longer what? It's no longer these emerging markets that run out of reserves and break first. It's now the U.S. banking system that breaks first. It's now the treasury market that goes dysfunctional first. It's now U.S. stocks that fall. So U.S. tax receipts fall. So U.S. deficits are blowing out in a good economy, in a 3 % unemployment economy, as we are seeing. And that is the dynamic of this dollar discussion that is poorly understood, which is these foreigners own so much of our assets because basically over the last 15 years, we didn't have a recovery as much as we hocked our assets to China and others to buy trinkets.

1:03:28it was petty wise con foolish. And so yes, the dollar is the cleanest dirty shirt, but not for the reason they think, which is to say the more the dollar goes up, the more they're going to sell these assets. And the more they're going to... The whole dollar wrecking ball thing, you know, the last 20 years, like 25 years ago, the dollar moved up, say, eight handles. So say from 90 to 98. What's happening is the negative feedback loop back to the United States, to your point, seems to be much greater. And I think what's fascinating about the 2016 election, the dollar strengthened so much because the Fed was focusing on a potential exit, potential unwinding of the program or raising rates or threatening QPT.

1:04:23And so this dollar strength in 2016, and all this negative feedback loop back to the United States and end up impacting the 2016 election. And now we have the dollar strength again. Is this adding to that dollar wrecking ball dynamic that you're talking about? And that's the paradox is, yes, it does, because ultimately it leads to more dollar strength, right? Because now foreigners are dumping treasuries to defend their currencies. Yields are going up. You can see the breakdown in correlations. Historically, 14-15, yuan down, treasury yields down. It was a very deflationary dynamic. 2018 to 2020, yuan down, treasury yields down.

1:05:09Now, yuan down, treasury yields up. Even though, okay, set aside 2022, say it was all inflation. We've been very disinflationary in 23, yuan down, treasury yields up. We saw it last year with the end. When oil prices increases put Japan into a current account deficit position, right? They need to sell their piggy bank. What do they do? Washington, give us our dollars back. Japan has a positive 60%, 60 % of GDP, net international investment position. What does that mean? That means they have 60 % of their GDP in assets, most of it in dollars. So when they get upside down, when the dollar wrecking ball starts to hit them, they just call it, say, sell treasuries.

1:05:52sell treasuries, sell treasuries. Well, that's fine in 2000 when Southeast Asia was doing it. The United States was running a surplus. We didn't need anybody to finance our deficit. Now we're running an 8.5 % trillion total deficit. So immediately it feeds back into the treasury market. Oh, rates go up. Well, what happens when rates go up? Oh, the U.S. banking system, we were just stuffed like, you know, foie gras full of treasuries. Now they're upside down. And this is the Treasury wrecking ball dynamic that I think is poorly. So in the short run, yes, dollar up, dollar up, dollar up. Yay, we're winning.

1:06:28No, you're not. You're losing. The dollar's going up and you're losing. If they want the dollar's super spike to continue, what will eventually be required is for the Fed to stand aside as the 10-year Treasury does what repo did. Because that's what's going to happen. because the supply demand at foreigners on seven and a half trillion in treasuries. That's his net international left decision. They have the option of saying, hey, got seven and a half trillion to go want to be done by the end of the day. We got to defend our currency against the dollar. Obviously, it's an extreme example. It's not going to happen.

1:07:01And people say, well, the Fed will just print the money to buy it. I said, exactly. And the dollar ain't going to frigging go up when they do that. We know that. We've seen it in 2019. We saw it in 2020. We saw it in 2021. And so the dollar wrecking ball is a strategy. It's generals fighting the last war. Can you make Dixie go up? Yes, congratulations. The dollar wrecking ball was supposed to break China before it broke U.S. banks. It didn't. It was supposed to break Russia before the treasury market started dysfunctioning again. It didn't. It was supposed to break China before it broke the U.K.

1:07:36guilt market. It didn't. And that's the reason why the order is reversed this time, why it's hitting us first, is this net international investment position. and into the balance sheet constraints, into the deficit sizes. If you run the wrecking ball, you turn foreigners into sellers, $7.5 trillion to go, want to be done by the end of the day. And the Fed's going, I got$1.2 trillion to do over the course of the year, want to be done with QT, under billion a month. And Treasury's going, hey, I got$2.2 trillion to go. And the banks are going, oh, shit, we're upside down. I got to sell some because my CRE credit losses are building.

1:08:17You told me to buy this stuff as high quality liquid assets to sell in a crisis. Now I'm a seller too. Uh-oh. What do I do? So now the banks are a seller. And the boomers are like, hey, I want to go to frigging Italy and drink wine because you locked me down for three years. And I got this treasury portfolio. I'm a seller. Who the F is buying? There's no buyer. Not at these rates. There's no buyer. And this is the part like the dollar wrecking ball. Like, can you make, well, no. Will the dollar go up on that? Yeah, the dollar will go to frigging infinity. Congratulations. If you stand aside and let the U.S.

1:08:50default on treasuries, literally, we're not paying any of it. The dollar will be at 1 ,000 that day on the Dixie. Congratulations. Where do you go? Do you want? They're fighting the last war. It is hilarious to me to watch people cheer this going up. And oh, by the way, as that happens, like stocks ain't going to be going up. You know, it'll be yields up, dollar up, U.S. defaults. And oh, oh yeah. So will everybody else. Great. Who cares? Like, it's like, well, you know, my neighbor died and I died of a gunshot when he died of cancer. So I was quicker for me. Like, you're both dead. Doesn't freaking matter.

1:09:29Europe will be in trouble. And it'll be in trouble. China be in trouble. And you know what the game will turn into is. All right, everybody take your gold and put it on the table. You know, call. Who's who really has gold? because the oil sellers are going to be going like, I'm not selling for this confetti paper. I want to be paying gold tomorrow. That's what Saudi says. Yeah, and it's gold. It's a whole portfolio of hard assets. And that might be the portfolio. It's the aluminum and copper to work on the U.S. power grid. It's platinum and potentially palladium for the hydrogen, and this green hydrogen dynamic around helping to create that green meadow that we want to create.

1:10:17And so there's all of these social goals around decarbonization. And then there's this financial dynamic that we've laid out on this call today, on this conversation. And so it just all points toward a portfolio of hard assets and companies that hold these assets. because companies have these assets in reserves, in size. Absolutely. And so you can get long, hard for companies that have them in reserves. Yeah, anything in closing you want to wrap up with? But I think it was a spectacular job you did. And I really appreciate that 20 ,000-foot view, which nobody really bothers. Everybody's microscopic.

1:11:00And we need, I think now we really need to have that Toteville, Tyler, that 20, because, you know, at the end of the day, Toteville and Tyler, what they used to say is a democracy can only last until the people realized they can vote themselves largesse from the public treasury. Right. That's why democracies don't last, because each generation that goes on is a little softer, not as stronger. They're voting themselves largest and eventually the spending overwhelms the receipts, the tax receipts. And that's kind of where we're headed. That's exactly it. And it's going to force, you know, the dollar wrecking ball dynamic.

1:11:38We were just talking about it brings forward, you know, yield curve control is coming. and every tick up in the dollar brings that forward. I don't know if it brings it forward a week or a month or a quarter, but it brings it forward. And that's where this goes. And that's ultimately where I think the financial repression will be, will be in the treasury market, in the Western sovereign bond market more broadly. And I think what we've been watching over the last 15 years has been those investors with the luxury of not having to mark a portfolio to market on a monthly basis or on a quarterly basis or on a yearly basis, making that move.

1:12:12So when you see global central banks stop buying treasuries on net in 2014 and moving into, in particular, what Zoltan's talked about, storing more of your FX reserves de facto in commodities, right? So historically, China used to sell out to us. We would give them dollars. They would take the dollars. They'd buy treasuries. And then those dollars, those treasuries were the piggy bank to buy commodities in the future, all priced in dollars. And what we've seen is a move by China to gain greater ability to buy commodities in yuan, but then also cutting out the middleman of the treasury market. They're not buying treasuries, and they haven't.

1:12:50They've been selling. And while people say they are in a dollar shortage, last year or in the last six months, they've signed two 27-year-long LNG deals with Qatar. That's just buying gas in the ground. And that's the whole trade. They are. They have the China has the luxury of not needing to mark their book to market monthly, quarterly. All they're doing is saying, I want to be locked. I think LNG bought direct under the ground is going to be greater value to me than buying 27 year treasuries. And then when I need the gas selling the treasuries and buying the gas, what they're saying is, is treasuries are going to collapse against gas.

1:13:33They're going to collapse against oil. They're going to collapse against gold. They're going to collapse against the stuff we need to live and run our economy. And I think that is the trade, and not even the trade. I think that's that secular three, four, ten-year investment that you let off by talking by. So I think it's important to see things for what they are in terms of how that system is evolving, driven by the factors of financial repression and over-indebtedness and geology that we talked about before. Well, thank you, Luke. And it was a pleasure to be back on Real Vision. I haven't been on in a while.

1:14:08Our book is When Markets Speak. I hope, Luke, I can count on you for a blurb because we'll be out in the next couple of quarters. And it kind of goes into the heart of this conversation. It looks at the next portfolio for the next decade, the next 20 years. And it's been great to share this hour and 20 minutes with you, Luke. Thank you so much. It was so interesting to hear Luke talk about the dangers of spiraling debt levels. It's something Raoul also brought up, but the two come to very different conclusions about what happens as a result of that. It's exactly what we wanted to do as part of this series, bring together opposing views or diverse views and let you decide what narrative makes the most sense to you.

1:14:54So weigh in, share your thoughts in the comment pages, and then join us on Friday when we wrap up the first week with three amazing programs. Raul and Juliette de Klerk talking crash or boom. At 1 p.m., I'll bravely be joining the pro macro insiders Raul, Julian Brigden, and Harry Malandri. And then we finish off with Ryle and I live on the daily briefing, unpacking it all and taking your questions, hopefully over a drink. I hope you'll join us for all of it. In the meantime, take care and good luck out there.

1:15:29What's up, revolutionaries? Thanks for tuning in to the Real Vision daily briefing. For more content like this, head over to realvision.com and get unfiltered access to the very best, brightest, and biggest names in finance.

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