Episode Transcript
[00:00:00] Speaker A: Fiscal dominance is an economic condition that occurs when a country's debt and deficit levels are sufficiently high that monetary policy ceases to be an effective tool for controlling inflation. In fact, persistently high interest rates in an environment of perpetually large deficits actually risk exacerbating inflation.
The best in Bitcoin made Audible I am Guy Swan and this is Bitcoin Audible.
[00:00:52] Speaker B: What is up guys? Welcome back to Bitcoin. Audible I am Guy Swan, the guy who has read more about Bitcoin than anybody else. You know, we've got a really good article today. This one's from Lynn Alden's blog or newsletter, whatever you want to call it. This is another piece commissioned by or by Lynn for Sam Callahan. And the last one he did was.
[00:01:17] Speaker A: Breaking down the correlation between global liquidity.
[00:01:19] Speaker B: And bitcoin, which I thought was really good and really kind of puts hard numbers to something we've talked about a lot. And this one does another really great I think paints a really good picture.
[00:01:31] Speaker A: Well, a little bit of a scary.
[00:01:32] Speaker B: Picture, but draws out a really strong analysis on why and exactly how it is from a numbers perspective or from understanding which different which routes we have and why Doge is just not is very unlikely to be even a meaningful diversion of the course or diverting us.
[00:01:55] Speaker A: From going down the path that it.
[00:01:56] Speaker B: Has looked like we are going down.
[00:01:58] Speaker A: Because we have reached a place where fiscal deficits and debt is in the.
[00:02:03] Speaker B: Government debt is so large that essentially the interest rates a high interest rate environment means just as much money printing or comparable amounts of money printing as.
[00:02:18] Speaker A: One where they lower the interest rates.
[00:02:20] Speaker B: And print money in order to allow the government to actually be fiscally to.
[00:02:27] Speaker A: Lower the fiscal strain on government.
[00:02:30] Speaker B: And when we still are in this place where we don't have they're not.
[00:02:33] Speaker A: Directly monetizing anything and they're still trying.
[00:02:36] Speaker B: To skirt around the fact that the central bank is funding the US government. And how do we judge or see.
[00:02:44] Speaker A: Where new buyers of treasury bonds, long.
[00:02:47] Speaker B: Term bonds and short term bonds are even going to come from and what's the dynamic look like as things are shifting and of course what does it mean for bitcoin? This is another really good one if you know you want to get that like kind of financial view of everything and see where the stuff is. Lynn always has fantastic analysis and Sam has put some really good ones together so we'll get right into it really fast. This episode is brought to you by folding Honestly guys, I don't know like fold is my my best way for stacking sats. I've got like another 300,000 sats since like the last two months and the price has been like stable and like.
[00:03:26] Speaker A: Kind of down in the low 90s.
[00:03:27] Speaker B: So I've been able to like I just every day, every day I stack sats. Like I'm telling you, use this as.
[00:03:32] Speaker A: Your banking and it's really hard to beat.
[00:03:36] Speaker B: My Link gets you 20,000 sats for.
[00:03:38] Speaker A: Free for signing up and it's actually a way to support the show because it gives me 10,000 sats as well.
[00:03:43] Speaker B: And you know what you can do?
[00:03:44] Speaker A: You can send that, you can withdraw.
[00:03:45] Speaker B: That to your BitKit wallet and you can set it up, you can do savings or spending. Which is probably my favorite thing about.
[00:03:52] Speaker A: That wallet actually is that rather than.
[00:03:54] Speaker B: Saying you're going to do lightning on chain and lightning are literally just designated.
[00:03:59] Speaker A: As savings and spending.
[00:04:01] Speaker B: And honestly I think that's such a.
[00:04:03] Speaker A: Simple and intuitive way to frame it.
[00:04:05] Speaker B: And it just the spending wallet quote unquote just uses their lsp. So just automatically opens channels, no channel management, that sort of thing. It's hard to get that right in a non custodial wallet. And BitKit has done an amazing job. You know where to find all of it. Now, without further ado, let's get into.
[00:04:25] Speaker A: Today'S article and it's titled Full Steam Ahead. All Aboard Fiscal Dominance this research piece on fiscal dominance in the United States was compiled and written by Sam Callahan and commissioned and advised by lyn Alden. Published January 2025 Executive Summary Structural fiscal deficits have surpassed private sector lending and monetary policy as the primary drivers of economic activity and inflation, marking a fundamental shift in the economy's liquidity dynamics.
Debt to GDP projections reveal the impact interest rate policy could have on fiscal sustainability. At a fixed 5% rate, debt to GDP would steadily increase over the next decade, while a 2% fixed rate would lead to a decline. However, this measure can be misleading as nominal GDP growth driven by fiscal deficits increases masking the extent of nominal debt accumulation and inflation in various forms.
The Department of Government Efficiency is unlikely to make meaningful cuts to federal spending, as only 14% of the budget is non defense discretionary, while 87% of nominal spending growth over the next decade is is projected to come from mandatory programs and interest expense.
Stabilizing factors such as the global demand for US Dollars and debt denominated in its own currency suggest an era of fiscal dominance in the US that's less dramatic than alarmists predict, but more persistent and intractable than optimists hope the deficit problem is unlikely to be resolved this decade running structurally hot, with steady nominal growth and ongoing currency debasement.
The fiscal backdrop today.
In September 2022, the UK guilt market crashed, nearly toppling the country's pension system. It all began with then Prime Minister Liz Truss's controversial mini budget, a fiscal package that consisted of unfunded tax cuts and increased government spending. This came at a time when UK CPI inflation was running above 10% year over year and its debt to GDP was sitting at levels not seen since the 1960s. The market plummeted on the news. Investors viewed the new budget plan as fiscally reckless and a massive sell off in the gilt market ensued. Consequently, pension funds, deeply tied to the gilt market through leveraged strategies, faced a wave of margin calls that threatened their solvency. This crisis couldn't have come at a worse time for the bank of England. It had been raising interest rates and implementing quantitative tightening, or qt, selling government bonds and allowing maturing assets to roll off its balance sheet. To combat inflation, it had plans to tighten further. But the market's violent reaction to the government's fiscal agenda forced the central bank to temporarily abandon its plans. Instead of continuing with its inflation fighting mandate, the bank of England had to intervene by purchasing gilts to stabilize the market and prevent a financial meltdown. This episode revealed how fiscal policy can constrain a central bank's independence. The bank of England's inflation fighting efforts were temporarily undermined by the need to address financial instability, a clear example of fiscal dominance. Moreover, the recent introduction of a new liquidity tool for financial institutions during periods of stress suggests that underlying vulnerabilities in the gilt market remain. The bank of England's struggle is not unique. Governments worldwide continue to run massive fiscal deficits even as debt burdens reach historic highs. This trend shows no signs of stopping, with government spending forecasted to increase further in the coming decades. This backdrop creates significant challenges for central banks attempting to combat inflation and produces an environment ripe for fiscal dominance. In the US debt to GDP is still hovering at levels not seen since World War II. But one big difference today compared to the last 40 years is that interest rates are no longer structurally falling. Since the late 1980s, interest rates have steadily fallen, making it easier for the government and Federal Reserve to manage and expand the debt burden. However, debt management gets complicated when interest rates start moving in the other direction. Over the past four years, the federal funds rate has increased five fold, while public debt has grown by more than 30%.
As interest rates spiked, so did the Treasury's Interest Expense on the National Debt Net interest represents the federal government's true cost of servicing its debt after subtracting offsets like income from trust funds like Social Security and Federal Reserve remittances. It excludes intra governmental interest payments such as those made to Social Security and Medicare trust funds which which are considered internal transfers. As such, net interest reflects the government's true out of pocket expense to external creditors, excluding any self payments that cycle back to the Treasury. Since these external payments must be financed by taxes or new debt, net interest reflects the cost that taxpayers ultimately bear. When looking at the last fiscal year, net interest was the second largest government expenditure behind only Social Security. The chart below shows how net interest has nearly tripled since 2020 as interest rates have risen. This massive debt burden, along with the associated refinancing costs, comes at a time when the government is projected to continue running large fiscal deficits for the foreseeable future. Together, these factors explain why fiscal dominance has become an increasingly relevant topic today.
Defining Fiscal Dominance There have been many definitions of fiscal dominance over the years, but one that explains it well comes from Daniel J.
Fiscal dominance is an economic condition that occurs when a country's debt and deficit levels are sufficiently high that monetary policy ceases to be an effective tool for controlling inflation. In fact, persistently high interest rates in an environment of perpetually large deficits actually risk exacerbating inflation.
We also propose a complementary definition.
Fiscal dominance occurs when fiscal deficits become as significant as when or more important than private sector lending and monetary policy in driving economic activity.
To understand fiscal dominance, it's essential to understand how money is created in the economy.
Broadly, there are two main mechanisms.
Private sector lending includes lending from banks and private credit markets. Non bank institutions, commercial banks and non bank institutions create new money whenever they issue a loan by crediting the borrower's account with a deposit. These institutions essentially create money out of thin air, backed by the borrower's promise to repay monetized government deficits.
When governments spend more than they collect in taxes, they borrow to cover the gap. If the central bank funds the government spending by purchasing this debt directly or indirectly, it expands the money supply. In cases like those of Argentina and Venezuela, central banks have directly financed government deficits by purchasing government debt outright, a practice known as direct monetization. In the United States and Eurozone, policies like quantitative easing are allow central banks to buy government debt from financial institutions in secondary markets, injecting liquidity into the financial system without directly funding deficits. Over the last four decades, fiscal deficits have become a more powerful force in shaping the economy. Historically, private sector lending has played a leading role in driving economic activity alongside central banks through interest rate policy.
However, as government spending has persistently outpaced revenue collection in recent decades, fiscal deficits have grown more influential on the economy and will likely continue to be a major factor moving forward.
Part of this shift stems from the sheer size and structure of the government debt. With over $36 trillion in outstanding debt and an increasing reliance on short duration borrowing, higher interest rates now rapidly increase the government's interest expenses. Think of this interest expense as payments flowing from the treasury to bondholders in the private sector. The term bondholder here is broader than it sounds. Consisting of households, money market funds, banks, pension funds, corporations, hedge funds and other institutional investors, these interest payments provide income for the bondholders which flows into the economy and asset prices. In this way, it can be viewed as a form of economic stimulus. Even as the Federal Reserve raises rates to constrain private sector lending, higher interest payments inject liquidity into the economy. This creates demand and counters the Fed's tightening efforts. This dynamic leads to an inflationary feedback loop. Rising rates increase government interest payments, which widen deficits and stimulate economic activity, keeping inflation elevated. At the same time, much of the private sector's debt is fixed and long term, making it less immediately sensitive to higher interest rates. In this environment, fiscal deficits become the dominant force driving economic activity and inflation, and traditional monetary policy tools like interest rate hikes lose their effectiveness, a hallmark of fiscal dominance. Ironically, in this environment, Federal Reserve interest rate hikes increase inflationary pressures rather than reduce them.
The Wrong Tool for the Job if we are indeed in an era of fiscal dominance, then the Federal Reserve is relying on the wrong tool interest rate policy for the job, bringing down consumer price inflation. This mistake could stem from the Fed simply employing strategies that have worked in the past without fully accounting for the structural changes driving inflation today. The charts below are from Lyn Alden's previous report on this subject and deserve to be highlighted again because they are critical to understanding how our economy is structurally different today compared to the last time inflation reared its ugly head. The charts highlight the year over year change in bank loan creation and corporate bond issuance alongside the year over year change in the fiscal deficit. In other words, they show how much of the economic activity is being driven by by the private sector versus government spending. The first one shows that for most of modern financial history, private sector debt creation was a larger force than the public deficit and associated public debt creation. However, the chart below demonstrates that the opposite is true today. Over the last 15 years, the fiscal deficit has grown much more rapidly than private sector credit creation, even during non recessionary periods, as shown in the green boxes in the chart below. The chart illustrates how fiscal deficit's annual growth has far outpaced the private sector's ability to create credit organically. In addition, the Federal Reserve indirectly monetized a percentage of this deficit through its QE programs, which led to money supply growth. Government spending has taken the lead, driving liquidity, economic activity and inflation in today's economy. The main takeaway is that private borrowing is a less critical metric in the current cycle because it's been crowded out by government borrowing and spending.
These insights clarify why the Fed's interest rate hikes are unlikely to curb inflation like they did in the early 1980s, when former Fed chairman Paul Volcker famously raised interest rates to nearly 20%. Inflation was largely driven by private sector credit creation. Perpetually large fiscal deficits drive today's inflation. This structural change limits the effectiveness of rate hikes since inflation is not primarily driven by private sector lending. In the current environment, making borrowing more expensive will not significantly cool the economy. The structural drivers of inflation require a different approach.
Structural fiscal deficits lead to persistent inflationary pressures.
We should stimulate when the economy is weak and rein in when the economy is strong. It's not the idea of stimulus or deficits that's dangerous, it's the failure to turn off the tap. Nobel Laureate Paul Samuelson Below is another chart from Lyn Alden that highlights how fiscal deficits have become structural rather than cyclical in nature. It shows how we are continuing to run massive deficits despite the unemployment rate being near multi decade lows. The green boxes below again highlight periods when the government ran large fiscal deficits even when the economy was in a reasonable state. Historically, deficit spending was a countercyclical tool used to stimulate the economy during downturns and scaled back during periods of growth in stronger economic conditions. Governments were supposed to run surpluses, reduce debt, and balance the budget, but this is no longer the case.
Today, structural deficits are driven by systemic factors and an aging population requiring higher entitlement spending, rising health care costs, and compounding interest payments on decades of accumulated debt. Said differently, these deficits are no longer a matter of choice but a byproduct of systemic obligations. This is what we mean when we call them structural. The problem is that these structural deficits, when combined with money supply growth, lead to increased inflationary pressures. However, inflation doesn't just show up in consumer prices measured by the cpi, it operates on a broader spectrum. If there are no significant supply constraints in energy, raw materials or other commodities during periods of fiscal dominance, liquidity injected through government spending often flows into financial assets rather than consumer goods, driving up prices for stocks, real estate, gold and Bitcoin. In other words, asset prices can surge in periods of fiscal dominance, even if consumer prices are stable or even declining.
This trend has become increasingly evident since CPI peaked in mid 2022. While most asset prices except bonds have soared, this divergence highlights a frustrating reality for households. While inflation may appear under control, according to the cpi, surging asset prices erode purchasing power and make them increasingly unaffordable for many. Asset price inflation favors high income earners and those who entered the period already holding significant assets, exacerbating wealth concentration and deepening social divisions. Ultimately, the Federal Reserve's rate hikes may suppress demand in certain sectors, but they cannot address the root cause of today's inflation structural fiscal deficits. These deficits are now the primary driver of liquidity and inflation, rendering the Fed's traditional tools ineffective. Worse yet, keeping rates elevated will only exacerbate the fiscal imbalance, increasing interest costs and widening deficits even further.
As we'll see in the next section, higher sustained interest rates have far reaching implications for fiscal sustainability and the future inflationary outlook. Underscoring how deeply the current economic environment is entrenched in fiscal dominance, where could the public debt go from here?
Net interest expense has emerged as one of the largest expenditures for the US government, surging 34% over the last year alone as the Federal Reserve raised interest rates at one of the fastest paces in history. To put things into perspective, net interest spending last fiscal year exceeded both Medicare and Defense for the first time ever.
This sharp increase in borrowing costs has further ballooned the deficit, creating a feedback loop of additional inflationary pressures. The question now is what happens to the public debt burden over the next decade if interest rates remain at these levels? To answer this, we must first define public debt. The total public debt currently exceeds $36.2 trillion, but it's essential to distinguish between its two main marketable and non marketable debt. Marketable debt is the portion of debt that trades on secondary markets, including T bills, notes and bonds. The interest costs of these instruments fluctuate based on market conditions. Since marketable debt is typically held by private investors, foreign governments, pension funds, etc. These the interest payments flow outside the government, representing a direct cost to taxpayers. This is why it's frequently labeled debt held by the public.
Non marketable debt is the portion of debt that includes instruments like savings bonds and trust fund holdings such as Social Security and Medicare trusts, which have fixed terms and aren't influenced by market fluctuations. These obligations are largely unaffected by market interest rates with payments classified as internal transfers. Non marketable interest payments simply reshuffle funds from one government account to another so they do not create an additional taxpayer burden like interest on marketable debt does. This is why for the purpose of this analysis, we will focus on the debt held by the public as its refinancing costs are borne directly by taxpayers and tied to to prevailing interest rates. As of December 2024, the total debt held by the public stood at $28.79 trillion.
To assess how different interest rate scenarios could impact the national debt over the next decade, we need to consider two variables 1 interest expense on existing and future debt and 2 the projected non interest annual fiscal deficit to accurately estimate the interest expense. The composition of existing marketable debt is key to understanding how quickly rising interest rates impact the government's borrowing costs. Different instruments have unique maturity structures and rollover rates dictating how often they must be refinanced at prevailing rates. Below is a breakdown of debt held by the public by debt instrument type. The maturity profile of existing debt matters because different instruments have unique maturity structures and rollover rates dictating how often they must be refinanced at prevailing interest rates. The higher the rollover rate, the greater the share of that portion of the debt that needs to be refinanced each year.
Here are the different instruments with their annual rollover rates. Treasury bills have a 100% rollover short term instruments maturing within a year requiring a 100% annual rollover. Their short duration exposes them fully to any change in interest rates, making them the most sensitive segment of debt.
Treasury notes 26.18% rollover medium term instruments with maturities ranging from 2 to 10 years and an average maturity rate of 3.82 years. This means that roughly 26.18% of the outstanding notes will require refinancing each year.
Treasury bonds 4.93% rollover long term instruments with maturities of 10 to 30 years and an average maturity of 20.27 years. Only 4.93% of bonds roll over annually, offering short term insulation from rising rates but creating a longer term vulnerability as rates remain elevated.
12.76% rollover treasury inflation protected securities have an average maturity of 7.35 years and an annual rollover rate of 12.76%. The interest expense on these instruments is calculated using the inflation adjusted principle. For this analysis, we used various fixed CPI inflation rates floating rate notes or FRNs 65.78% rollover. These notes are short term instruments with an average maturity of 1.65 years. This means that 65.79% of these notes required refinancing each year, making them highly sensitive to prevailing interest rates. These notes typically match market interest rates such as the sofo, but we used fixed rates for the purpose of this analysis. Today, the maturity profile of the public debt skews short term the government's recent reliance on short term instruments like T bills exposes it to significant refinancing risks. In the next year alone, $6.7 trillion in debt will need to be refinanced at higher rates, amplifying the fiscal strain. While longer term instruments provide some insulation, they too roll over into elevated rate environments over time, compounding borrowing costs.
Beyond refinancing existing obligations, we also need to consider the new debt the government must issue annually to fund operating deficits. These non interest fiscal deficits, representing the gap between spending and revenue excluding interest payments, are projected annually by the Congressional Budget Office, which we will take at face value for this analysis. These projections provide us with a baseline estimate of the amount of new debt the government will need to issue each year to cover its operating expenses. For simplicity, we will assume the maturity composition of new debt will mirror the current structure of marketable debt, meaning the percentage of debt that will be issued as bills versus notes versus bonds will stay the same.
The chart below shows the CBO's annual non interest fiscal deficit projections, along with the estimated percentage of each instrument that will comprise each new issuance for the next decade.
To assess the potential impact of interest rate policies, we modeled the growth of the public debt under fixed interest rate scenarios of 2%, 3%, 4% and 5%. The results reveal noticeably different trajectories for debt growth depending on the rate environment.
Under a fixed 5% rate scenario, the debt held by the public grows by 6 trillion more than it would under a 2% rate. This difference highlights how compounding interest accelerates debt expansion over time. The divergence becomes more apparent when viewed through the lens of debt to GDP ratios. At a fixed 2% rate, debt to GDP declines below 95%, suggesting more manageable borrowing costs and improved fiscal health. In Contrast, a fixed 5% rate pushes debt to GDP above 108%, highlighting the fiscal strain created by higher interest rates. However, debt to GDP has limitations that are often overlooked. While much attention focuses on the debt side of the equation, the GDP component can distort the picture. Large monetized deficits can fuel nominal GDP growth, artificially stabilizing or even reducing debt to GDP ratios despite significant underlying inflation and nominal debt accumulation.
Let's look at Turkey as an extreme example of this dynamic. In mid-2021, its fiscal deficit became unstable and began to balloon.
Yet despite its deficit blowing out, Turkey's debt to GDP ratio actually declined during this period, from 40% in 2021 to 27%.
This may initially seem counterintuitive until one considers the parabolic nominal GDP growth that occurred fueled by rampant inflation and deficit spending.
Annual inflation surged above 80% year over year, eroding the Turkish lira's purchasing power while boosting nominal GDP figures. On the surface, Turkey's debt to GDP metrics appeared reasonable. But these figures masked a deeper issue. The fiscal deficit was driving currency debasement, which in turn inflated nominal gdp. This dynamic created the illusion of fiscal stability even as nominal debt and inflation spiraled out of control.
The US may experience a muted version of this dynamic in an environment of fiscal dominance. As nominal GDP and inflation run hot, debt to GDP ratios may appear stable or even decline, masking the extent of nominal debt accumulation and inflation in various forms. These findings illustrate the intricate relationship between interest rate policy and fiscal sustainability.
Lowering rates could meaningfully reduce interest expenses, making it one of the simplest levers for policymakers to pull to alleviate fiscal pressures. However, doing so risks stoking inflation and undermining central bank independence. Conversely, maintaining elevated rates to curb inflation exacerbates fiscal deficits, increasing the debt burden through rising interest costs and potentially compounding inflationary pressures. This analysis underscores the paradox facing central banks in an era of fiscal dominance. Higher rates strain government finances and worsen deficits, while lower rates invite inflationary pressures and fiscal complacency. Striking the right balance with this is one of the greatest challenges facing policymakers today.
Who will buy the debt?
The sustainability of the US Fiscal outlook hinges on identifying the buyers who willing to absorb the surging issuance of debt as structural fiscal deficits continue. It's important to remember that while the Federal Reserve controls short term interest rates, long term rates are determined by the market. If investors lose confidence in the fiscal path, then bond prices could crash and yields could spike. This creates a vicious cycle. Rising yields increase borrowing costs, which widen deficits and amplify inflationary pressures. This dynamic can quickly spiral into a full blown crisis for highly indebted nations similar to the UK Gilt crisis. This is precisely why it's vital to who will be buying US Debt if structural fiscal deficits are expected to persist for the foreseeable future.
Over the past two decades, domestic institutions and households have increasingly picked up the slack and financed government deficits. This shift raises questions about the capacity of domestic institutions and households to continue absorbing such large volumes of treasury debt. In an environment of rising rates and persistent deficits, banks have become increasingly constrained by post global financial crisis regulations like the liquidity coverage ratio, which requires them to hold significant amounts of Treasuries for financial stability purposes. While this has boosted treasury demand, it also caps the bank's ability to take on more, especially in a rising rate environment where fixed income assets lose value.
Insurance companies and pension funds have been key buyers of Treasuries because they help them match their future payouts with stable predictable income. However, in a rising interest rate environment, they may prefer shorter term treasury instruments because they carry less interest rate risk and allow for more frequent reinvestment at higher yields, especially during periods of rate volatility. This dynamic could limit their future appetite for long term bonds. Similarly, US Households who indirectly hold Treasuries through retirement accounts and mutual funds are sensitive to broader economic factors like income growth and inflation. If we enter a period of persistently high inflation, this diminishes real returns, reducing the attractiveness of investing in long term treasury bonds. If US Domestic institutions and households reduce their treasury buying, some believe foreign investors might step in to fill the gap. Recent headlines have highlighted record high foreign ownership of Treasuries, but this is misleading. These figures reflect the nominal size of their holdings, which have naturally increased alongside the massive growth in treasury issuance over the past three decades. A different story emerges when you break down the percentage of treasury debt held by foreign investors. Over the last 15 years, foreign share of US debt has declined from 47% to 30%.
This decline reflects several factors including geopolitical tensions, diversification away from Treasuries and concerns over the US Weaponizing the dollar as a policy tool. The freezing of Russian reserves served as a stark reminder of these risks, accelerating a shift toward neutral reserve assets like gold, which has seen record central bank purchases in recent years.
Now some believe that the private sector will continue to be able to help finance the growing deficits and absorb the new issuance. One reason there's hope is a new buyer has recently stablecoin issuers. Former House Speaker Paul Ryan recently said that that stablecoins could be the solution to stave off a debt crisis, saying that they have become an important net purchaser of US Government debt. As stablecoin supply has skyrocketed, so has their appetite for T bills. When looking at the latest treasury data on foreign holdings of treasury debt, from July 2023, Tether was the 9th largest holder of T bills compared to other foreign countries.
Since then, Tether's holdings of T bills have exploded to $84 billion, up more than 400%. This means that as of today, Tether is likely right outside the world's top five holders of T bills. But while stablecoins are filling some gaps in short term demand, they do not address the long end of the yield curve, which is critical for the US Government's funding needs. When asked whether Tether would consider adding long duration treasury debt to its reserves, CEO Paolo Arduino dismissed the idea. He explained, the single most important thing for stablecoins is that we need to be able to liquidate our reserves immediately and pay out our users. Arduino further noted that holding long duration government debt poses significant liquidity and geopolitical and financial risks, emphasizing his preference for holding Bitcoin as a long term reserve asset instead.
The growth of stablecoins is a promising development for treasury officials, but it will not fix all their problems. A lack of demand for long duration bonds. For that, they may need to turn to the Federal Reserve, as foreign ownership in Treasuries has steadily declined over the past 15 years. The federal Reserve has almost doubled its share, mainly through QE programs post global financial crisis, and that's where all of this is likely headed. Should global appetite for Treasuries continue to wane, it's the Federal Reserve that will likely end up as the buyer of last resort to stabilize the bond market, just as the bank of England did two years ago to save the gilt market.
We're already seeing hints of this. After implementing QT in 2022, the Fed meaningfully slowed its pace of balance sheet reduction by mid 2024. If demand for Treasuries continues to falter, the Fed's role in stabilizing the market will likely deepen, even if doing so runs counter to its stated goal of combating inflation. However, such interventions have significant costs. Purchasing Treasuries through QE programs expands the money supply, injecting liquidity into the financial system. This ultimately results in asset price inflation and the erosion of purchasing power in the dollar. As structural deficits persist, the treasury faces a shrinking pool of buyers, foreign Investors have significantly reduced their share of US Debt holdings and domestic institutions are approaching capacity due to regulatory and market constraints. In this environment, the Federal Reserve increasingly becomes the buyer of last resort, a role that has profound implications for financial stability and the currency's purchasing power. The sustainability of this system hinges on either a dramatic fiscal reform or a reconfiguration of global capital flows. Without such changes, the Treasury's reliance on a shrinking pool of buyers raises significant risks for the U.S. s long term fiscal and inflation outlook.
Can Private credit, or doge, save the Day?
Until now, we have focused on the structural nature of fiscal deficits and why the Fed's current monetary tools are insufficient to address the underlying drivers of inflation. Today, the potential solutions for overcoming fiscal dominance are limited and come down to two basic one, the private sector grows to become the dominant force driving economic activity, or 2 fiscal deficits are meaningfully reduced.
One sector that some believe could help shift the balance of power back toward the private sector is private credit. This market, consisting of loans from non bank institutions like private credit funds, hedge funds, private equity firms and insurance companies, has experienced significant growth over the past two decades. However, if you zoom out and view private credit in the context of the broader economy, it remains a relatively small player, comprising just 2% of the total non financial debt market.
When considering this, it becomes clear that private credit is likely too insignificant today to to fundamentally alter the structure of fiscal dominance. Of course, the more promising solution lies in addressing the root cause, government spending. If the government can cut spending and reduce its fiscal deficits, then perhaps it can change the nation's fiscal trajectory and move away from this period of fiscal dominance. This is the goal of the newly proposed Department of Government Efficiency, or doge, led by Elon Musk and Vivek Ramaswamy. This is an advisory commission rather than an official government department. Musk has famously vowed to cut at least $2 trillion in federal spending, roughly 30% of last year's federal budget. Although this sounds good on paper, achieving such a target will be quite challenging given the composition of government spending. Last year the government spent $6.75 trillion with 4.1 trillion, or 61%, classified as mandatory spending. Mandatory spending includes entitlement programs like Social Security, Medicare and Medicaid, which are legally required to provide benefits to eligible recipients. Even if Doge wanted to, this spending can't be cut. To change these programs, funding eligibility or benefits, Congress must vote to amend the laws, a daunting task in the current polarized political climate.
Compounding the issue, President Elect Trump recently stated his unwillingness to touch Social Security or Medicare. In addition, the Republican Party included protecting these programs as one of the 20 promises in its 2024 GOP platform.
If the incoming administration follows along party lines, that leaves discretionary spending, or 26%, as the only realistic target to trim spending. The problem is that defense spending makes up nearly half of all discretionary spending, and given the rising geopolitical tensions and congressional pushback, it's unlikely that DOGE will be able to cut meaningful defense spending from the budget. The same 2024 GOP platform mentioned above promises to strengthen and modernize the military, and in fact the CBO projects that defense spending will continue to rise over the next decade.
That realistically leaves only 14% of the total federal budget non defense discretionary spending available for DOGE to focus its efforts on to implement cuts.
But even if the department cut the entire $948 billion of non defense discretionary spending, it would still fall well short of Elon Musk's $2 trillion budget cut goal. Furthermore, if Musk meant that he would cut at least $2 trillion over time, even if they managed to cut 25% of this annual non defense discretionary spending, achieving their objective would take more than eight years.
The bigger issue is that the mandatory spending portion of the annual fiscal deficits is poised for rapid growth over the coming decade as a greater portion of the aging population becomes eligible to receive benefits and interest expenses compound.
According to the CBO's projections, interest expense, Social Security, and health care will account for 87% of the nominal spending growth over the next decade. This means that no matter how much government officials cut the discretionary portion of government spending, the growth in mandatory spending will likely offset the cuts and keep fiscal deficits perpetually high. Even if the government implements material spending cuts or tax hikes to address the deficit, the structural reliance of US Tax receipts on asset prices creates a challenging feedback loop. In a highly financialized economy like the US Asset prices are critical to federal tax revenues, with a significant portion coming from taxes on capital gains and dividend income. If spending cuts lead to a decline in asset prices and the resulting drop in tax receipts is larger than the savings from reduced spending or increased taxes, the deficit can actually widen instead of narrow.
The chart below, originally created by Lyn Alden, highlights how correlated federal tax receipts have become to the equities market performance. It shows how in 2021 a booming stock market drove a significant rise in 2022 tax receipts. Conversely, the market downturn in 2022 caused a decline in 2023 receipts, while the market recovery in 2023 fueled a rebound in 2024 revenues.
Despite low unemployment throughout this period, the stock market, not the labor markets, has become the dominant driver of federal tax revenues. This dynamic puts the US In a tougher position than countries like Canada in the 1990s or Germany in the 2000s. Canada addressed its deficits with reforms on a tax base less reliant on financial markets, while a strong manufacturing and export economy supported Germany's austerity. The US Economy, however, is deeply tied to the stock market, creating a strong incentive for policymakers to support equities rather than risk a drop in revenues from falling asset prices. The result is a fragile cycle. Fiscal spending drives asset prices higher, rising asset prices increase tax receipts, and those receipts sustain further spending.
All of this boils down to one simple discretionary spending cuts alone cannot resolve the deficit problem. Without significant reforms to entitlement programs and and fundamental changes to the tax system, structural fiscal deficits will persist, dominating economic activity and serving as the main driver of inflation. As long as these mandatory programs remain untouched and asset price performance and tax revenues remain entangled, the fiscal dominance train will continue to barrel forward at full steam.
Navigating Fiscal Dominance the world is engulfed in an era in which fiscal policy, rather than monetary policy, is the dominant force driving economic activity and inflation. Unlike the countercyclical deficits of the past, today's fiscal deficits are structural in nature and rooted in systemic obligations like entitlement spending, rising healthcare costs, and compounding interest on decades of accumulated debt.
Central banks today face the difficult task of trying to manage inflation while addressing the escalating costs of sovereign debt. As this report highlights, interest rate cuts could offer a meaningful path to fiscal sustainability by reducing the government's interest expenses. However, this threatens central bank independence, which could lead to a loss of confidence in the currency.
Meanwhile, the structural nature of fiscal deficits means that even well intentioned initiatives like DOGE are unlikely to put a meaningful dent in government spending. In an era of perpetually high deficits and persistent inflation, central banks traditional tools become ineffective at combating inflation, creating an increasingly uncertain economic backdrop. At the same time, there are several mitigants that suggest the fiscal dominance train is likely to run hotter and longer than many analysts expect. Without derailing outright, the global demand for US dollars, largely driven by trillions of USD denominated debt worldwide, provides a stabilizing force that can, quote, keep the wheels on the track for a lot longer than people think. In addition, the U.S. s debt is denominated in its own currency, giving it flexibility unmatched by many other nations. Lastly, the size and diversification of the US Economy enable it to absorb and disperse this debt over time.
While federal debt is growing at a 7 to 8% annual rate, this is significant, but not yet at levels associated with major fiscal crises.
Historically, severe currency crises tend to occur when a nation is dealing with extreme impairments such as war, economic collapse, or large external obligations. It cannot print its way out of conditions that the US does not currently face.
This combination of factors points to a fiscal dominance era that is less dramatic in any given year than alarmists might predict, but also far more persistent and intractable than optimists might hope. The deficit problem is unlikely to be resolved this decade, nor is it likely to culminate in a sudden collapse. Instead, it will run structurally hot, punctuated by occasional moments of drama, while nominal figures steadily rise amid ongoing currency debasement. In this environment, holding hard scarce assets such as real estate, equities, gold and Bitcoin offers a pragmatic way to preserve purchasing power and navigate the pressures of fiscal dominance. These assets provide a hedge against the gradual yet persistent erosion of purchasing power in an era where fiscal policy rules the economic landscape.
[00:54:11] Speaker B: All right, and that wraps it up from Sam Callahan and Lynn Alden and this I don't have a ton of.
[00:54:18] Speaker A: Time for a guy's take here, but.
[00:54:22] Speaker B: One of the things that they brought up that and this is something that I've talked about on the show a couple of different times and the main idea here is trying to make it clear that we there is no, there.
[00:54:38] Speaker A: Really is just one path forward.
[00:54:40] Speaker B: And I've talked about this on the.
[00:54:42] Speaker A: Show before for is that we are.
[00:54:43] Speaker B: Getting to this place in the traditional.
[00:54:48] Speaker A: Finance world where we are asking which path we want to see the inflation.
[00:54:56] Speaker B: On rather than whether or not we can curb or prevent inflation.
It would need a truly radical shift.
[00:55:07] Speaker A: In order to, to somehow get off.
[00:55:09] Speaker B: This course and well intentioned projects like.
[00:55:14] Speaker A: Doge, like I have a lot of high hopes for Doge.
[00:55:17] Speaker B: I think there's some really interesting things.
[00:55:18] Speaker A: That could be done and it would definitely be valuable.
[00:55:23] Speaker B: But one of the things to actually take note of because it's funny that this is used as a defense for, you know, why we don't need the income tax and all of this, this stuff. What's funny is if you actually look at the framing in a different way.
[00:55:38] Speaker A: You can realize how big of a.
[00:55:40] Speaker B: Problem all of this is and how much of a, how little of a.
[00:55:45] Speaker A: Dent this is actually making in it.
[00:55:48] Speaker B: Is Elon Musk talks about like we could get rid of, and I think Vivek specifically mentioned this too, is that.
[00:55:54] Speaker A: We could get rid of the income tax if we moved removed $2 trillion from the budget. And if we removed in an effort.
[00:56:03] Speaker B: To explain why that's not the end.
[00:56:06] Speaker A: Of the world and it wouldn't destroy.
[00:56:08] Speaker B: Everything and our government wouldn't. That the society wouldn't collapse. As they say, if we remove $2.
[00:56:14] Speaker A: Trillion from the budget, we would just be back to what the budget was.
[00:56:19] Speaker B: In 2019 and 2020 and we could get rid of the income tax and everything. I mean, obviously 2020 was.
[00:56:27] Speaker A: Shifting back to 2020 would not be a disaster. Except here's the problem.
[00:56:31] Speaker B: We were not on a sustainable path in 2020. Just because following 2020 everything got accelerated doesn't mean that if we went back to 2020, everything would be, you know.
[00:56:45] Speaker A: All sunshine and meadows before COVID We were still kind of screwed. And that's $2 trillion. And as Sam breaks down in this piece, is that that's not really even on the table without significant coordination and.
[00:57:01] Speaker B: Cooperation from Congress House, like all of these different disparate groups who are very much at odds.
[00:57:10] Speaker A: And I don't, I do not see anything fundamentally changing in that way.
[00:57:16] Speaker B: And that's if they can just cut all of federal discretionary spending, which is.
[00:57:23] Speaker A: Only half of what is proposed. But there's just no way to get those numbers without hitting Social Security, Medicare and Medicaid. And granted, these things are disasters.
[00:57:34] Speaker B: They need to be cut.
[00:57:36] Speaker A: They.
[00:57:36] Speaker B: If, if we actually want to fix health care and we actually want to fix retirements, we want to fix any.
[00:57:41] Speaker A: Of the problems they have to be cut because they are a. No. Massive, massive part of exactly the problem we have. They are the sources of our problems, not the solutions.
[00:57:55] Speaker B: And you could see this with. I mean, they've basically been dead on.
[00:57:58] Speaker A: Arrival since the beginning.
[00:57:59] Speaker B: Like, Social Security wasn't never had a.
[00:58:01] Speaker A: Sustainable trend at all.
[00:58:03] Speaker B: They basically just lit like an 80.
[00:58:06] Speaker A: Year fuse on our financial future.
[00:58:09] Speaker B: This is actually why I tweeted not too long ago that like, we have to cut.
[00:58:14] Speaker A: Like, the only way to actually solve this from a fiscal perspective is in.
[00:58:19] Speaker B: A government spending perspective is to cut.
[00:58:21] Speaker A: Like 80% of the budget. Like, we have to fundamentally and radically rethink what the role and operation of government is.
[00:58:31] Speaker B: And that as Sam breaks down in.
[00:58:33] Speaker A: This piece, is that that literally does not happen.
No, I know that.
[00:58:39] Speaker B: That literally cannot happen without Congress.
Yeah, you see you see the, you see the recording happening.
It just goes on forever.
[00:58:51] Speaker A: Goes on and on.
[00:58:55] Speaker B: Yep.
You want to say hello to the audience?
[00:59:01] Speaker A: Well, say hello.
[00:59:03] Speaker B: Here, let me, let me give you the microphone.
Say hello. Hello.
All right, Buddy, can you go find mama? Daddy needs to finish up this episode later, buddy.
[00:59:21] Speaker A: He literally says, but essentially that cannot.
[00:59:25] Speaker B: Happen without Congress because we're talking massive.
[00:59:29] Speaker A: Change to built in obligations that are being carried forward and getting worse with time.
[00:59:37] Speaker B: That's a really big thing about the.
[00:59:40] Speaker A: Issues that we're sitting on right now is that every single one of them, even if we kept everything perfectly static.
[00:59:48] Speaker B: It all grows, it all grows at an rather shocking pace now because where.
[00:59:55] Speaker A: We are in the state of a lot of these problems, we've put them on a trajectory where doing nothing makes them significantly worse and they're starting to feed back on themselves. Perfect example is just the amount of debt such that a change in the interest rate results in more inflation. Like think about how crazy that is.
[01:00:16] Speaker B: Is that we have so much debt.
[01:00:19] Speaker A: The US government is so indebted and they are so reliant on printing money in order to keep the, the economy propped up that whether they increase interest.
[01:00:30] Speaker B: Rates to try to keep, to try.
[01:00:33] Speaker A: To rein in the creation of new money through debt and to try to.
[01:00:37] Speaker B: Rebalance according to the actual resources so the money can, excuse me, so the.
[01:00:43] Speaker A: The economy can actually attempt to price debt at some sort of resources, real sense to its cost in resources that even if we do that, we do not curb inflation because a roughly equal amount of inflation will simply come from interest payments rolling over the debt we already have.
They're going to have to roll over almost $7 trillion at whatever the prevailing interest rates are.
[01:01:13] Speaker B: And what that essentially amounts to, or the reason this is so significant is just that we've gotten to a point.
[01:01:19] Speaker A: Where the debt is so large and.
[01:01:21] Speaker B: We'Re having to roll over so much of it in a higher interest rate.
[01:01:27] Speaker A: Environment that these small percentage changes in the interest rate are essentially outpacing. They're a more significant change in the amount of money needed then what it.
[01:01:40] Speaker B: Alters than how it affects the market economy's creation of more debt.
[01:01:45] Speaker A: And that basically is an indication of fiscal dominance, is that the debt that.
[01:01:50] Speaker B: The government debt and fiscal policy essentially controls more of the direction of economic resources. And we've reached a point where the debt, even the maintaining of the debt that the government has to do paying through the economy is still even in.
[01:02:12] Speaker A: A situation where they are trying to.
[01:02:14] Speaker B: Not be the main resource allocator they still end up doing it just through the debt structuring. And somebody has to buy that.
[01:02:23] Speaker A: Somebody has to be willing to buy the long term debt and the worst inflation gets.
[01:02:28] Speaker B: I don't really see, I mean, I do. It's interesting that stablecoins and this is actually what we talked about on the show not too terribly long ago about stablecoins and about tether and everything is.
[01:02:40] Speaker A: That they are buying short term debt.
[01:02:43] Speaker B: And I think I was, I think I was having a conversation with Preston Pish about this, which I don't remember. Was, was he on the show recently?
[01:02:50] Speaker A: I don't know, but he had Paolo on the show and when he was speaking with him and asked him about.
[01:02:58] Speaker B: What, what would get you to buy.
[01:02:59] Speaker A: Long term debt, he, he almost, there.
[01:03:02] Speaker B: Was this look of almost like a snicker, like he was almost laughing about the fact that like oh, we would never do that and completely dismissed the idea because they have.
[01:03:12] Speaker A: Why would they take on that risk when they can buy short term, short term bonds and basically not be stuck.
[01:03:19] Speaker B: Somewhere and they have a liquid market.
[01:03:21] Speaker A: To dump them on.
[01:03:22] Speaker B: But it's crazy too because Sam points out that the very nature of all.
[01:03:26] Speaker A: Of that dead is actually a permanent demand or a semi permanent long term demand for the dollar itself. Which means because everybody is indebted by the dollar, everyone has to be in a disinflationary pressure to trying to obtain dollars as fast as they can so that they don't default, so that they.
[01:03:53] Speaker B: Don'T basically have their financial or political lives ruined, whether we're talking about a country or company or an individual.
[01:04:02] Speaker A: All right, now I want to highlight a few things before we close this out.
[01:04:06] Speaker B: Like I said, I don't, I don't have a ton of time for a guy's take, but there are some things I really wanted to hit real quick. So they reference the Argentina and Venezuela and just talking about like how, how.
[01:04:18] Speaker A: Government debts are monetized.
[01:04:21] Speaker B: And this is just so wild to.
[01:04:24] Speaker A: Me says so quote, in cases like those of Argentina and Venezuela, central banks have directly financed government deficits by purchasing government debt outright, a practice known as direct monetization. In the United States and Eurozone policies like quantum quantitative easing allow central banks to buy government debt from financial institutions in secondary markets, injecting liquidity into the financial system without directly funding deficits.
This just blows my mind that like these are the same thing.
[01:05:01] Speaker B: Like if you create an artificial market for something in order to, you know, get around the fact that somebody isn't.
[01:05:09] Speaker A: Buying it, it's not any different than if you bought it directly.
[01:05:15] Speaker B: And it's funny that they try to keep up this facade that, oh, we're.
[01:05:21] Speaker A: Not buying it directly, we're just buying it from the market.
[01:05:24] Speaker B: But that literally just means you're buying.
[01:05:27] Speaker A: It from the guy who's buying it.
[01:05:29] Speaker B: To encourage him to do so is.
[01:05:32] Speaker A: That he knows he can also offload it to you.
So there's no. You're just manipulating the price. You're making it appear as if there is buy pressure that isn't. Which is exactly what buying it directly does. You're still just creating money out of thin air by a central bank in.
[01:05:50] Speaker B: Order to prop up a market. And it is wild to me that.
[01:05:54] Speaker A: These are seen as different things.
[01:05:56] Speaker B: And I don't mean to like Sam and Lynn.
[01:05:58] Speaker A: Lynn think it's a different thing thing.
[01:06:00] Speaker B: I just think, like, you don't get to the Argentina or Venezuela situation until.
[01:06:05] Speaker A: Everything is terrible, where the market is so utterly destroyed and devoid of any interest in buying it that they don't want to hold it for a short period of time in order to then offload it to the central bank. That's a wild level of failure to have to get to in order to basically admit that you've been monetizing your own debt. I don't know.
[01:06:29] Speaker B: Every time I read something like that.
[01:06:30] Speaker A: And I'm just like, really?
[01:06:33] Speaker B: You know, it's just like, you know, government says they don't buy student debt and they don't give out student loans.
[01:06:41] Speaker A: But then they guarantee student loans and they have a special market and a different price for it and different rules for it. And so it still just massively balloons the amount of student debt out there.
[01:06:52] Speaker B: And it essentially funnels a whole bunch of people.
[01:06:56] Speaker A: It's a debt scam. It funnels a whole bunch of people who can't afford the debt and don't.
[01:07:00] Speaker B: Even know what the hell they want.
[01:07:01] Speaker A: To do with their lives into a college or university that doesn't even care whether or not they know what the.
[01:07:06] Speaker B: Hell they want to do.
[01:07:06] Speaker A: They just give them some generic degree.
[01:07:09] Speaker B: That doesn't even mean anything and has no trade on the other end of it, no prospect for a job out the other end.
[01:07:16] Speaker A: And so then they start life four years later with $100,000 in debt rather than right out of high school, and.
[01:07:23] Speaker B: They have no better prospects. In fact, now they just look like.
[01:07:26] Speaker A: They'Re stupid with money and they need a job more than they could actually.
[01:07:30] Speaker B: More than they actually want or would.
[01:07:32] Speaker A: Like to have a job. They simply need one.
[01:07:36] Speaker B: And so again, they're going to take.
[01:07:38] Speaker A: And do whatever they can immediately at whatever price they can. And, and they're even going to have less optionality because now they don't have the damn time to actually find a good job, let alone have a degree that actually cared whether or not they got one after the fact because it was funded by a whole bunch of people who didn't give a shit as long as they got a piece of paper with the right stamp on it. And then it looked like government success. This is the thing we've talked about over and over and over again. This idea that if you just give.
[01:08:07] Speaker B: The appearance of, of going back to what was the.
Oh, it was Ross Stevens. It was a.
[01:08:13] Speaker A: It was the Stonehenge letter, a Stonehenge.
[01:08:17] Speaker B: Stone Ridge letter that talked about the cargo cult. The, the idea of the tribes after.
[01:08:25] Speaker A: World War II who.
[01:08:26] Speaker B: They had planes that would come over and end up dropping supplies and were in the area. And so they witnessed this was like their exposure to the modern world for the first time.
[01:08:36] Speaker A: And so after they left, people actually came back and they were seen building fake planes like big giant birds, wooden birds, and building towers out of bamboo. And given this appearance that there's an airport and there are these big metal.
[01:08:54] Speaker B: Birds here and so welcoming them, you.
[01:08:56] Speaker A: Can come land here thinking that this would bring them back. This is such a perfect analogy for everything that government does is that, oh, we need every.
[01:09:07] Speaker B: Everyone needs to be highly skilled and.
[01:09:10] Speaker A: Needs a productive role in the economy and good judgment and good decision making.
[01:09:16] Speaker B: And all this stuff.
[01:09:17] Speaker A: You need all of these great things. And what do all of these people have? Oh, they have a college degree. A vast majority of them have a college degree when they also have all.
[01:09:26] Speaker B: Of these other things that want.
[01:09:28] Speaker A: And so what we're going to do is we're just going to give everyone a college degree and then everyone will be skilled and everyone will make good financial decisions and everyone will have a strong, stable life position. All you do is destroy the meaning of the degree.
[01:09:43] Speaker B: Anyway, it's really funny. There's one of the lines actually in this. As they start get into their analysis, he literally takes, says the cbo, we're going to take what they say at face value in order to do the analysis. Which is kind of funny because like that suggests this is a pretty conservative estimate because I mean as far as I've seen, the CBO is historically always under, under guessing. You know, their, their pr like almost every government agency. It's like, how are we going to do this. Well, like, what was the projection? There's, like, this chart.
Oh, it's hilarious. I bet I have it on my computer somewhere.
Probably saved without any.
Without any tags or references or anything, so I'll probably never find it, even though I'm sure I have it saved somewhere. But it's a list of economic projections from, like, government agencies. I don't know if it's the CBO specifically, but it's one of those things where every time, you know, something goes up, it was like, oh, my God, it's going to get worse. And then it's all the projections, like, oh, no, no.
[01:10:51] Speaker A: We just needed to do this temporarily.
[01:10:53] Speaker B: In order to get things back in.
[01:10:54] Speaker A: Line, and then it will be fine.
[01:10:56] Speaker B: And then we play this game over.
[01:10:57] Speaker A: And over and over and over and.
[01:10:58] Speaker B: Over again, and somebody made, like, a collection of them, and it's a chart that just shows the actual, like, growth in the debt and the deficit, and it's just, like, kind of stable. And, you know, every. At every point, you look at the trend, and it basically just drags the tree trend out forward. And then it shows all the projections and like, dotted. Different dotted colors, lines. And it is so funny because it's nothing but a billion projections painted on this thing that all just take whatever it is and then just point it down like, don't worry, it's all gonna be fine. And they just say that, don't worry, it's all gonna be fine. Don't worry, it's all gonna be fine. It looks the same thing over and over again. It's going up and. And the projection is just that it's going to go down over and over and over to the point that it almost looks like you're looking at, like, a drawing of a centipede or something with just hundreds of legs underneath it. If anybody happens to have that on them and wants to DM me or tag me on Nostr, that would be amazing. But one of the real takeaways of this whole piece is really kind of summed up in this.
Well, first off, just going back to the idea. When they mention structural deficits or structural debt obligations, that's what they were saying when they were referring to Medicare and Medicaid and these things that are foundational, they're the obligations that are ongoing and.
[01:12:24] Speaker A: Are just set to increase by the.
[01:12:27] Speaker B: Nature of previous obligations and need an act of Congress. There's nothing. It's not discretionary spending. It's not stuff that's being redecided every single time you know, every week or.
[01:12:37] Speaker A: Month, it's simply there and it is.
[01:12:39] Speaker B: Growing and there's not anything you can do about it unless you have overwhelming support to get rid of it or stop it. What's interesting, when the, the money supply just has to grow, it has to.
[01:12:50] Speaker A: Grow in some way.
[01:12:52] Speaker B: And this quote, I think is really kind of sums up the entire perspective.
[01:12:56] Speaker A: It says if there are no significant supply constraints in energy, raw materials, or other commodities during periods of fiscal dominance, liquidity injected through government spending often flows into financial assets rather than consumer goods, driving up prices for stocks, real estate, gold, and Bitcoin. In other words, asset prices can surge in periods of fiscal dominance even if consumer prices are stable or even declining.
[01:13:28] Speaker B: Basically the understanding here is that inflation.
[01:13:32] Speaker A: Doesn'T necessarily have to move through the economy, and it certainly doesn't have to move through the economy fast if there is a particular place, if there's no.
[01:13:41] Speaker B: Specific reason for it to move through the economy.
[01:13:45] Speaker A: It could just be created in the.
[01:13:47] Speaker B: Financial system with a bunch of financial intermediaries and middleman and debt creators and institutions and then stay there.
[01:13:56] Speaker A: Basically, whatever it is that they are.
[01:13:58] Speaker B: Holding on to in order to deal with the incoming flood of money, they will simply reflect the price, the new price based on the money supply, far.
[01:14:09] Speaker A: Faster than everything else in the economy.
[01:14:11] Speaker B: In fact, it could just not trickle.
[01:14:13] Speaker A: Down for a really long time. And this actually feeds back on itself. As assets go up in price, well then it becomes the thing that rich.
[01:14:22] Speaker B: People want to buy instead of spending it elsewhere in the economy or starting a business. Because it doesn't matter.
[01:14:31] Speaker A: What they're trying to do is get a return. And if the apparent nominal, the best nominal return is just in soaking up a crap ton of mortgages and holding onto them, well, then that's what they do.
[01:14:41] Speaker B: If it's just buying a bunch of gold and, and buying a bunch of.
[01:14:45] Speaker A: Stocks and buying a bunch of Bitcoin.
[01:14:46] Speaker B: And everything just goes up, well, then.
[01:14:48] Speaker A: That'S what they do.
[01:14:49] Speaker B: And then everybody else goes like, well.
[01:14:50] Speaker A: I should, that's what I should be doing.
[01:14:52] Speaker B: Because that's what rich people do.
[01:14:54] Speaker A: And it's this huge loop of just.
[01:14:56] Speaker B: It's why everything becomes.
[01:14:58] Speaker A: It's the financialization of everything and it's the growth and inequality is that everybody.
[01:15:03] Speaker B: Who gets to play in that game.
[01:15:05] Speaker A: Gets to get rich.
[01:15:06] Speaker B: And everyone who can't or doesn't have the time or, or doesn't understand it stays poor. And this has really kind of been true for a long time. But asset prices and CPI won't really have anything to do with do with each other.
And that's all that, that's really kind of the norm because that's partly how.
[01:15:28] Speaker A: They define CPI in order to make.
[01:15:31] Speaker B: Sure that they aren't the same. Because if you know the price of mortgage, of prices of owning a home and stocks and gold were in the cpi, were heavily weighted in the CPI according to their portion of the economic activity. Well, CPI would be high all the time. What's really interesting about the environment we're in now is that Bitcoin is a new player and Bitcoin has entered into.
[01:16:00] Speaker A: Is is in this playing field. It is in the game now. The, the piece has been moved onto.
[01:16:06] Speaker B: The board and it will react to all of this flood of money faster and with higher signal than anything else. And this was actually, I think it was Sam Callahan who just did the piece that it is a is the highest correlation to global liquidity to a.
[01:16:26] Speaker A: Measure of global liquidity.
[01:16:27] Speaker B: And, and I will link back to that one because I think that's the last one that Lyn Alden commissioned from Sam.
Basically breaking down the connection between Bitcoin and available global liquidity and getting rid of all the noise like ignore all the short term stuff like what happens when global liquidity goes up, bitcoin goes up and they're actually very very strongly correlated. And that's also a really important. I think that's a really good piece as a partner to this one. If you kind of want to get an idea of what will Bitcoin look like. Like what does this mean if we are reaching a point where even under a fiscal dominance scenario, enormous amounts of liquidity just has to be pushed in to financial assets and there's not really any liquidity is either going to be directed into the economy through QE by the Federal Reserve or through interest payout and government spending in the financial sector. So it's just like two different avenues. It's like which, which spigot is is it going to come out of. But both of them just go straight into financial assets. And what's funny, he has a really good section in this piece on the projection of what the debt and the debt to GDP component and all of that stuff.
But what's really funny is how easy it is actually to predict and how kind of irrespective of regimes and who, you know, who's in office or whatever on a 10 year if you just span it out a little bit past presidential terms, it's shockingly reliable. Like really, really reliable.
I broke this down in.
[01:18:10] Speaker A: What was the video?
[01:18:11] Speaker B: It was a two sats video.
Oh, when should I, when should I sell my bitcoin video? And I laid out the government debt and what I expected it to be. And if you go all the way back to the 70s and you do every single decade, it's basically doubled every 10 years. Like it's just a simple exponent.
[01:18:35] Speaker A: It's a, there's a Moore's law of.
[01:18:37] Speaker B: The amount of debt and again, doesn't matter which president. In fact, the only times it's a.
[01:18:43] Speaker A: Little bit over doubled every time.
[01:18:45] Speaker B: And the only time in which that.
[01:18:46] Speaker A: Wasn'T reliable was the very first and that was just because it tripled.
[01:18:51] Speaker B: So all projections and analysis and everything aside, you kind of pull back and ignore all the noise and just look at the Trend. Well, in 2035 it's going to be like 70 trillion. And in 2045 it'll be like 150, 180 probably. And yes, this recent election was a little bit unprecedented. Yes, it has had a big shift. I believe in people's mentality and frustration with the establishment.
[01:19:24] Speaker A: But does that mean systemic change?
[01:19:28] Speaker B: I'm inclined to think, think no.
[01:19:31] Speaker A: But I guess if you were sick.
[01:19:33] Speaker B: Of politics and you were hoping it might take a back seat, I would suggest getting buckled up because that's not going to happen.
In an era of fiscal dominance, government.
[01:19:48] Speaker A: Remains the center of everything.
[01:19:51] Speaker B: Politics is driving the economy.
So buy bitcoin and get ready for a lot of.
Just get ready for a mess, I guess.
I don't know, it makes me, it always makes me think again, like, you know, what's the timeline for this?
[01:20:08] Speaker A: Like, how does.
[01:20:09] Speaker B: Because bitcoin will alter the ability to price.
[01:20:15] Speaker A: It will alter their ability to price.
[01:20:17] Speaker B: Debt outside of the opportunity cost of bitcoin. Like, things will shift that way. But bitcoin also has to be really, really big for that to work. Like, we need enormous amounts of liquidity, like literally treasury bond level of liquidity.
[01:20:37] Speaker A: In order to begin to talk about.
[01:20:41] Speaker B: That level of course correction.
[01:20:43] Speaker A: I mean, and I do think it is happening.
[01:20:45] Speaker B: I think it's happening in a very minor sense.
[01:20:49] Speaker A: But bitcoin is still this weird, stupid thing.
[01:20:52] Speaker B: In fact, there'll be a piece that I'll be covering very soon that is.
[01:20:56] Speaker A: A quote unquote apology from the Financial.
[01:20:58] Speaker B: Times crapping on bitcoin all these years. And it is the, it's very short and it's both awful and kind of entertaining.
[01:21:10] Speaker A: But it's such a perfect example, I think, of where the state of things are for a certain part of the.
[01:21:17] Speaker B: Establishment thinking and how we are still very, very far from bitcoin being normalized.
[01:21:26] Speaker A: In the minds of a lot of people.
[01:21:28] Speaker B: Now it's normalized in the sense that it exists and it's there and people.
[01:21:33] Speaker A: Have to deal with it.
[01:21:34] Speaker B: I think the, one of the biggest leaps that have happened in recent years.
[01:21:39] Speaker A: Is the capitulation of people not no.
[01:21:42] Speaker B: Longer saying bitcoin is going to die. They're having to admit that they can't make that claim without feeling like they're going to get called out and they're.
[01:21:51] Speaker A: Going to feel stupid very soon. So now they just resort to hating.
[01:21:55] Speaker B: It and calling it stupid and saying it's run by, you know, who just want to speculate and make everything bigger.
[01:22:03] Speaker A: And then I won't make a prediction.
[01:22:04] Speaker B: About it because there's no amount of.
[01:22:08] Speaker A: There'S no amount of regulating stupidity in the world.
[01:22:11] Speaker B: And stupid people will make it as big as they want it to be.
[01:22:14] Speaker A: It will forever go against me.
[01:22:16] Speaker B: But it's not because I'm wrong. It's because everybody else is wrong. And I really think this era is when we have reached that point.
[01:22:22] Speaker A: But that's a far cry from a legitimate asset in the minds of a.
[01:22:27] Speaker B: Lot of people, especially in the establishment.
[01:22:29] Speaker A: Especially in government circles.
[01:22:32] Speaker B: Like, I think they see it. I think they see it like most.
[01:22:36] Speaker A: Of us see crypto. I don't think there's any distinguishing in their mind.
[01:22:40] Speaker B: I think basically all the things that we say about crypto being scams, baseless, there's no, they don't understand what it is they're holding on to. They're just trying to create new tokens out of thin air. I think for the overwhelming majority of people, that perspective is exactly, exactly the same. They, they don't see bitcoin as any different. And that is all they see in the entire space. Bitcoin's just kind of king of it all. So anyway, really interesting piece. I think it does a great job of laying out like solid analysis rather than just kind of broad explanations. But like, let's actually look at the numbers and see where things are going. And I also highly recommend actually going.
[01:23:28] Speaker A: And looking at the charts.
[01:23:29] Speaker B: There's some really good charts to actually accompany a lot of this that I think can help you see where those trajectories are and just kind of get the proportion, like understand the difference between one and the other. Like why, why is it that short term debt, you know, those short term instruments are the ones that have to get, like, turned over constantly. And how much does it affect, like, realizing that it's like 67% percent.
[01:23:52] Speaker A: That's just a huge.
[01:23:54] Speaker B: The, like the maturity rate is. Or maturity time is an average of 1.56 years.
[01:24:01] Speaker A: Like, that's crazy.
[01:24:03] Speaker B: I don't know all this. I'm. I'm just a nerd. It interests me. And the shout out to Lynn Alden for putting the research together. Shout out to Sam for another really cool breakdown of all of this stuff. Honestly, it's a lot of things that we talk about and it's like, we kind of know that this is the case, but, you know, a lot of it's just associations or loose connections. It's good to have hard numbers. It's good to have someone sit down and be like, listen, this is what it is on the table. Let's get a real analysis. And instead of some buzzwords or some, let me lay out the incentives and tell you how it's probably going to work.
[01:24:39] Speaker A: Let's look at it.
[01:24:40] Speaker B: You know, let's test this with the real numbers. So I appreciate it and always a big fan of Lynn and Sam. Great people. All right, thank you guys so much for listening. Don't forget to sign up with Fold. If you do use my link, It'll.
[01:24:56] Speaker A: Get you 20,000 sats for free.
[01:24:58] Speaker B: And I have a fantastic episode coming with John Carvalho. We are talking about what they're doing at Synonym and Pub Key, which we.
[01:25:06] Speaker A: Just covered the introduction for, if you haven't heard that yet.
[01:25:11] Speaker B: Definitely I will have the link in the show. Notes is a really great precursor to the conversation because this is just super cool tech. Like, I'm just super stoked to finally dive into this with him. And that will be coming really soon.
[01:25:23] Speaker A: So stay tuned.
[01:25:24] Speaker B: And while you're at it, check out the BitKit wallet. Check out Pub Key website and the coming app. They are building some awesome shit. All right, with that, I will catch.
[01:25:36] Speaker A: You on the next episode of Bitcoin.
[01:25:38] Speaker B: Audible.
[01:25:38] Speaker A: Stay subscribed.
[01:25:40] Speaker B: Keep stacking stats, share it out to all of your friends and I will be right here waiting for them. I am Guy Swan. And until next time, everybody.
[01:25:49] Speaker A: Take it easy, guys.
You're sitting in the middle of the biggest upset in both monetary technology and in the monetary stability of the fiat system.
[01:26:17] Speaker B: Don't it up gambling.
That one's just my two sats.
