Lately we’ve been led astray over and over again by supposed ‘experts’ with decades of experience who can’t seem to stop making colossal mistakes.
But I’m not just talking about individuals. I’m talking about institutions too.
And one institution in particular that’s been an abject failure lately has been the central bank. That includes the Federal Reserve in the United States, the Bank of England in the UK, and more.
The Federal Reserve, for example, despite its leaders’ decades of experience, completely failed to predict that their policies over the past few years would have any consequences. It’s extraordinary.
These people honestly thought that they could print trillions of dollars, keep interest rates at 0%, and that there would never be any consequences until the end of time.
And then, when inflation began to take hold last year, they failed to recognize it. They chastised people who pointed it out.
Later, when they finally did acknowledge inflation, they insisted it was transitory. And then when they ‘retired’ the term transitory, they promised to do something about the growing inflation problem… eventually.
Finally, in March 2022, they made a very ceremonial 0.25% interest rate increase. File that away under “too little, too late”.
But now their tune has changed. Now their policies smack of panic and desperation, and they sound like they’re running around with their hair on fire with no clue what to do next.
It hardly inspires confidence.
Earlier this week we saw another example.
The Bank of England made a stunning announcement that they would step in to prop up their rapidly-declining bond market. Investors around the world cheered the news, and global financial markets surged.
The euphoria lasted about 24 hours.
The next day, markets tanked again as investors realized, “Hang on… I don’t believe these people.”
Central banks have enjoyed unparalleled respect and gravitas for the past 30 years; going back to Alan Greenspan in the 1990s, central bankers have been viewed as infallible superheroes who always know what to do.
Now they just look like a bunch of amateurs.
In today’s podcast, I walk through my analysis about what might happen next. Specifically, I argue why I think there’s NO WAY they’ll follow through on their interest rate increases. Simply put, continuing to do so will bankrupt their governments.
Ultimately this means that inflation, at least some inflation, is here to stay. And I also discuss a couple of key asset classes, plus one surprising country, that can do well in this mess.
Click here to listen.
Today we’re going to go back in time, october 19, 1469, to the city of Viadali in modern day Spain. Now, I say modern day Spain because at the time, spain was really just a series of independent kingdoms. You had Castile and Navarro and and Aragon and so many different kingdoms across the peninsula, counties and Duchies, and there was no unity to Spain at all. And there in the city of Adelaide, in the cathedral that day, standing at the altar, was a 17 year old kid from Aragon. His name is Ferdinand.
He came from a noble house called the House of Tristomera. Ferdinand, by all accounts, was somewhat of a genius. He was considered to be a child prodigy. He was chess and checkers prodigy, even as a child, beating the pants off of everybody in the court. He was an athlete, he was a horseman, he was a great soldier.
He was battle hardened in combat. He was known as a great military commander. And people even said they wrote about at the time, they even said he was good looking. So he pretty much had everything going for him that you could ask for as a 17 year old kid. And on top of that, he was in line for the throne of Aragon.
Standing next to him at the altar was his cousin, which seems incomprehensible to us, but it was pretty normal back then. People married their cousins from time to time. And his cousin was an 18 year old. He was 17, she was 18. Her name is Isabella.
She came from the neighboring kingdom of Castile. Now, again, at the time, there was no unity. There was no such thing as Spain. There were these independent kingdoms. And the marriage between Ferdinand and Isabella created the foundation for what would become Spain, the Kingdom of Spain, eventually even the Empire of Spain.
And they had a very successful marriage. Ferdinand and Isabella financed Christopher Columbus. They expanded the dominion of Spain. And by the time Isabella died in 15, four, ferdinand died about a decade or more than a decade later in 1516. And by the time Ferdinand died, what they left behind was greatly was far, far greater than what they had started with, with these two independent kingdoms.
Now they had a whole empire. And the guy that was left over sort of holding all the marbles from that was their grandson. His name was Charles. Charles was heir to essentially all the kingdoms in Spain. And on top of that, because they had very fertile, and Isabella had been very deliberate in selecting the marriages and betrothing their children they had married their kids, essentially Charles mother, into another very powerful house in Europe, the House of Habsburg.
The Habsburgs had claimed to the Holy Roman Empire. In fact, at the time, the chief Habsburg of the house of Habsburg was the Holy Roman Empire. Holy Roman emperor. His name was Maximilian. And in 1516, Charles inherited all the kings in Spain.
A couple of years later, his grandfather, the holy Roman emperor, died too. Charles became the holy roman emperor, as well as the emperor of Spain. So this is a guy that literally overnight, in 1519, became the most powerful person in Europe. He had all of basically central Europe. He had Austria, he had Hungary, he had Germany, he had the Netherlands, he had parts of Italy and Sicily and Spain.
This guy was overnight just the most powerful person on the European continent. And by all accounts, he was a complete failure. You’d think that somebody with that much power would have been able to figure it out and do some good in the world and leave behind a great legacy. He didn’t do any of those things. Charles was a failure, made terrible decisions, terrible decision after terrible decision after terrible decision.
He’s known to history as Charles V, although depending on where he was, if you’re talking about in the Netherlands, or for example, he was technically was Charles I was in Spain. He was Charles the fifth holy roman emperor, depending on where he was. He had different names and different titles. This is a guy that had so many titles, you could look them up on wikipedia. It’s about a paragraph long.
Of all the different titles that he had. This guy had so much power, so many counties, so many duchies, so many kingdoms. It was absolutely insane. And yet he was a total failure. This is a guy who inherited this very powerful kingdom, and yet, through his just horrific economic mismanagement, he ran up massive debts, massive deficits.
He constantly had to borrow money from Spanish nobles, forced loans. He had to borrow money from German bankers. It was just terrible. When it came to managing the economy and managing his own finances at the same time he inherited his crowns. Remember what happened in 1517?
This is the start of the great reformation in Europe, where you had people that realize, you know what? I think I want to break away from the catholic church. And you had the origins of protestantism and Lutheranism, and this is a time of great social upheaval in Europe. And it was a time that a leader, somebody as powerful as Charles was, he could have been the guy to create strength and unity, to calm down the tension and say, you know what? We all have our differences, but we’re all the same, and let’s just bury the hatchet.
Let’s all just get along and respect each other and be fine with our differences and be fine. But he didn’t do that. Now, instead of creating strength and unity in society, he fanned the flames of social upheaval. And with his own fanaticism, he persecuted people with different beliefs. He supported the inquisition, which was actually used as a weapon to stamp out intellectual dissent, as well as actually rob and pillage people of wealth.
Anytime there was a person of wealth that was brought before the Inquisition. The first thing they did was take away all of their assets and basically he cheat all the person’s assets to the state. So Charles became actually quite wealthy by going after all these evil people of intellectual descent and stealing all their money. So again he could have been a person of unity but instead he became a person of division. There’s actually a story where the King of Spain, it’s unclear whether it was Charles or his son who was really cut from the same cloth.
But in the late 1550s there’s actually an event where they burned a bunch of heretics I think also in the city of Vague. It was as attended by 2000 people. And at one point, according to legend, the king walks by one of the condemned, he was about to be burned at the stake and this guy is begging for mercy. And the king looks at him and says if my own son were as wretched as you, I would carry the wood myself to burn him. So that’s the kind of guy Charles is and the sort of cloth that he’s cut from and his family at the same time.
You think about all the different terrible decisions and mismanagement. He inherited a burgeoning protocolist economy in the Netherlands. He left it on the brink of civil war. He inherited all these free and prosperous cities in Germany. He left them overtaxed and vanquished and moving really backwards instead of forwards.
He had been moving back towards the feudal system instead of forwards into capitalism. He inherited the world’s dominant reserve currency, the Spanish dollar, the Real de Ocho. It was the silver currency that had become really the reserve currency around the world, in the Americas, across Europe, et cetera. And yet somehow this guy managed to engineer the worst inflation since the collapse of the Roman Empire in the 400s. He inherited a dominant military but he suffered some really embarrassing and completely unnecessary military defeats.
All in all he was pretty much a failure. This is a guy again who was pretty much from birth brought up to become the Holy Roman Emperor, the Emperor of Spain, the King of Spain, lord of the Netherlands, all these things. This is a guy that was bred to rule. He had all this experience, decades and decades of experience. Latent to his reign, after literally decades on the throne, he provoked his sworn enemy, a guy named Suleiman the Magnificent from the Holy Roman Empire.
He basically called Suleiman a butcher and practically dared the Ottomans to invade, which the Ottomans did. Wow, what a surprise. He boxed this guy into a corner, suleiman the Magnificent, into a corner. The guy actually had a real army and had the will to fight. And late into his reign he ended up losing charles ended up losing the Kingdom of Hungary, he lost the city of Budapest, which back then was just Buddha lost.
The city of Budapest lost basically the entire Hungarian kingdom, plunging Europe into a major geopolitical crisis. Everybody in Europe, the French, the Austrians and Germans, everybody was completely terrified of what was going to happen. The Ottomans basically like it was like Russia and China rolled into one supervillain today. That’s what the Ottoman Empire represented. And here you have Charles V with decades of experience on the throne, essentially daring his sworn enemies, say, come on and invade me.
I double dog dare you, and made this big speech about how he would fight to the death. It would be such an honor for him to die trying to kill this evil butcher, Suleiman the Magnificent. I mean, it was such a ridiculous thing. And of course, then he ended up losing Hungary. He lost the war and plunged Europe into a major geopolitical crisis, saying, oh, my God, we’re all going to end up being invaded by the Ottomans.
He also on top of that, he continued to wage really idiotic and overly expensive wars that he couldn’t afford. And finally, when he was completely exhausted and had exhausted his finances, he signed a terrible treaty to end the war. It’s called the Peace of Augsburg, which is really one of the dumbest peace treaties ever signed that really just paved the way for future conflict. He completely destroyed the Calvinist, the Ana Baptist, and it ended up leading to the 30 Years War, which is even more expensive war, even worse war later on because he signed such an idiotic and stupid peace treaty. One of my favorite historians, who I love to read, named Will Durant, calls Charles V the most impressive failure of his era.
And if you really read about Charles V, that’s probably a pretty good way to label him, if we think about that today. Let’s be honest, there are probably plenty of contenders for that title today. The most impressive failure of this era. There are a lot of contenders for that title, and I’m sure your brain is probably racing right now with examples. Too many names come to mind of the most impressive failure of this era.
There are a lot of them. We’ve talked about many of them. It goes back to this concept of the experts, these allknowing, all powerful, unquestionable people that are supposed to just know everything and guide us to perfection forever and ever, until the end of time and never make a mistake. They’re infallible and they’re perfect and they’re going to just walk across the water and fix everything in our lives. These same people with decades of experience that are tough and respected by everybody around the world, and yet they’ve continued to lead us astray over and over and over again.
To be fair, it’s not just people, it’s not just the individuals, and it’s the names that we’re all thinking right now. But I’m not saying them, lest I be canceled off the internet again. But we’re talking about institutions as well. And there’s actually one institution in particular that I want to talk about today, and that’s the institution of central banks. So we’re not really going to talk about even an individual.
We’re going to talk about central banks. And this is really important because again, what I hope to sort of shed a little bit of light on is just this is one man’s opinion expressing his first amendment right to have an opinion and talk about at least where I think the pocket is going to be. And if we think about this with respect to central banks and this is a really critical trend, central bank, we got to talk a little bit of history here. Central bank goes back to the early 1006 hundreds. The first sort of protocol bank in Europe was the bank of Amsterdam, which was launched in 16.
Nine had a whole lot of responsibilities ranging from currency, bills of exchange, discount, some elements of financial stability. A couple of decades later, in 1664, was the Swedish central bank, the Riksbanken. Then later on in 1694, at the end of the century, was the bank of England. And over time, the central banks were essentially had more and more and more power, more and more authority, more and more autonomy, specifically over the currency. And this is a really, really big deal, what central banks really do, and this goes really into modern day central banking.
Central banks essentially control the money supply, controlling the money supply. Essentially they have all the control they need to set and influence interest rates. Now, this is a complicated process by which central bankers buy and sell bonds. They call it open market operations. They’re buying and selling bonds to increase and decrease the supply of money.
That’s all very complicated and it doesn’t really matter. The bottom line is that central bankers have the power to control interest rates. This is really critical. It’s a really important thing to understand because interest rates are basically the price of money. If you think about it, when you go out and borrow money, interest is the price that you pay for the money that you borrowed.
So interest is the price of money. It’s literally the price that you pay for money that you borrow or the amount that you receive for money that you lend. Interest is the price of money. So you’re talking about a group of people that has the ability to control the price of money. And when you control the price of money, you have the ability to control the price of pretty much everything.
So we think about interest rates, right? What has to do with interest rates? Well, probably in our own lives, most people borrow money to buy a house. Most people don’t just plop down hundreds of thousands or millions of dollars in cash to buy a house. Most people borrow money from a bank.
And so that makes real estate and real estate purchases and home buyer activity. Extremely sensitive to interest rates when interest rates are low and cheap when you can borrow money. Just a year and a half ago, people could borrow money in the United States at 2.5% for a mortgage. Now it’s six and a half going on 7% now. So obviously, when rates are low, people can afford to borrow more money, so that means they can afford to pay more for a house when rates are higher.
Now it’s more expensive to borrow money, so they have to borrow less, which means they can afford to pay less for a house or real estate. Prices are extremely susceptible to changes in interest rates. It’s the same thing with really any consumer behavior. When you people borrow money to buy cars or to upgrade the kitchen cabinets in the bathroom, they borrow money at. Businesses borrow money because they have to invest in new equipment or new factories or whatever it is they’re doing.
All these things are subject to when interest rates are low, interest rates are high. It changes behavior, business behavior, consumer behavior. And then it’s the same with asset prices. Interest rates have a huge impact on bond prices, which we’ll get into later. Extremely influential in stock prices.
So overall interest rates, changes in interest rates have an extreme economic impact. And we know that now from experience because we’ve seen it interest rates across the world. Wherever you are in the world right now, chances are you’re living in a country you’re listening this in a place that has seen their interest rates go up. Their central bankers have been increasing interest rates. Very few countries have been cutting rates, most countries have been increasing interest rates.
And we’re seeing now the effect that has on the economy. It’s wrecking havoc in financial markets.
The experts don’t call it a recession, we’re not allowed to say recession. But I mean, a lot of places are in recession right now, and a lot of that is because of these changes, these increases in interest rates. So when you think about that, that’s an incredible amount of power for a single institution, a central bank that’s an incredible amount of power for a single institution to have, especially when you consider that nobody in that central bank, nobody on those committees is actually elected. In the United States. We have what’s called the Federal Reserve System.
The central bank is called Federal Reserve banks. And the Federal Reserve system is actually comprised of twelve different Federal Reserve banks. These are all regional banks. For example, there’s one in New York and there’s one in Dallas, kansas City, San Francisco, all different places around the country. Minneapolis, Minnesota.
All these twelve different Federal Reserve banks. Each one of those Federal Reserve banks is essentially directed by a board of directors. Well, guess who selects the board of directors? The majority of the seats on the board of directors of the central banks are actually selected by these big commercial Wall Street banks. So it’s these big Wall Street banks that select the people that make up the central bank.
So we’re giving the power to control the money supply to the banks themselves, to the commercial banks, the big Wall Street banks, the investment banks. These are the guys that actually make the decisions about how to set interest rate policy and whether to increase or decrease the money supply or whether or not some factory work is going to lose his job because of what they do with interest rate policy. It turns out that the key decision makers that are actually making those decisions and pulling the strings and selecting the people that make those decisions are actually the big Wall Street banks. So it’s a rather perverse system when you think about it and just riddled with conflicts of interest. But these people are supposed to be the supreme experts when it comes to the economy.
They’re infallible all knowing, all powerful, all seeing and yet somehow they’ve completely missed it. They totally failed to anticipate inflation. They totally failed to say oh gee, we’re going to keep interest rates at basically zero. We’re going to print trillions and trillions of dollars. Then along comes covet, we’re going to print trillions of dollars more.
We’re going to slash interest rates to zero and we anticipate absolutely no problems with this whatsoever. So the experts upon experts here when it comes to the economy fail to anticipate inflation. They failed to anticipate the consequences of what they did. Then when inflation actually came around they completely failed to recognize it even when it was right there in front of them. Everybody else could see it but the central bankers said oh nothing to see here.
So they started off early in 2021 when inflation was starting to rear its head and they just denied it. They rejected there’s no inflation. And then they started gaslighting people making you think that you’re crazy because you saw inflation and people think well wait a minute I see inflation. My costs are going up. I see food going up, fuel is getting a little bit more expensive and they could just say inflation?
What do you mean that’s no inflation here? Then they finally roll this out and they said okay fine, it’s transitory. It’s transitory. And then the transitory became a bunch of false promises and they said okay by late in the year they said okay I swear to God we’re going to do something about it. We are absolutely going to do something about inflation.
But later and they kept on with their money printing. They were dumping hundreds of billions of dollars into the housing market. They were dumping $65 billion a month into the housing market literally right up until March 2022. And finally they had a very symbolic ceremonial 25 basis point increase. When I say 25 basis points means zero point 25%.
One quarter of 1% increase in interest rates in March. So inflation had been going on for more than a year and they finally increased interest rates by zero point 25%. So these people were totally asleep at the wheel. They totally missed it. They failed to anticipate any consequences.
They failed to recognize the consequences. They failed to do anything about it. When they finally did something about it, it was basically nothing. Talk about too little too late, right? And now, six months later, now it says hair on fire.
Oh my God. We have to do something about inflation. This is very desperate panicky. Whatever it takes at all costs, we’re going to keep raising rates forever and ever until the end of time. There’s nothing that we can do.
That’s too much. We’re going to keep doing this no matter what the cost. This is now the sense of a complete and utter desperation on the parts of these central bankers. This does not inspire confidence. It’s very panicky.
The policy, the comments, the speeches that they give, these are not the actions, not the words, not the speeches of people that have things under control. I would also point out I was talking to a friend of mine today and he pointed this out to me and I have to bring this up. It is actually very unfair what they’re trying to do now. So when you think about it, inflation has actually been around for a really long time. There are different types of inflation, right?
We have asset price inflation and we have retail price inflation. Asset price inflation is when we see the prices of stocks and bonds and real estate and so forth increase in value when there’s no real kind of underlying driver behind that. And that’s what we’ve been seeing for a really long time. The stock market, for example, you had companies that were trading at 10 times 1200 times earnings. I mean, just outrageous price earnings ratios.
Outrageous price revenue ratios. Outrageous cyclically adjusted price earnings ratios. I mean, the valuations were astronomical, really astronomical. We talked about this a lot in our writings. That valuations had only been that high couple two, three times ever in all US financial history.
This is a prime example of an asset bubble or asset price inflation. But they were totally fine with that. No problem with asset price inflation because when asset price inflation is taking place, basically it means the people that own those assets, which are primarily very wealthy people, continue to get even wealthier. On the other hand, now we have retail price inflation, which actually the big thing that you hear them talking about is wage inflation. Wage inflation.
Wage inflation is when workers make more money. So completely fine. When the price of whatever that pick your overpriced stock goes to the moon even though there’s no fundamentals behind it, that’s completely fine. But when some factory worker gets a 5% wage increase, we got to put that guy out of a job. We got to raise rates immediately so that that poor guy loses job immediately because we can’t have that.
We can’t have any wage inflation. Oh my God. That’s the end of the world as we know it. And it’s extremely unfair actually when you think about it. It is actually kind of a bizarre form of almost like antisocialism in a way where they really take care of the markets and all the market participants in the professional class and all of that.
But God help us if a factory worker gets a 5% wage increase. Now we gotta go and raise rates to the moon and cause a recession to prevent that from happening. So that’s what’s going on in the US. But this week and I’m recording this here now this is September 30 of 2022. It’s been a bizarre week and if we think about what’s happened this week in the bank in England, in the UK for a little while now, the British pound has actually been sliding horrifically.
UK government bonds, which are called gilts, have also been falling too. A lot of this has been made worse because of various policies have been put in place by the new British government. So what they’re trying to do is basically they’re trying to cut taxes and deregulate the economy and really trying a new approach with inflation. They’re saying our economy is too regulated. We need to eliminate the constraints on supply.
We need to liberate the economy and allow people to produce more easily and so forth. And that’s their approach. But you know what? The market doesn’t like it and so people are selling off the bonds and British government bonds are falling. So what’s happened?
Well, the Central Bank had to step in and fix this and this is where things get really interesting. But we need to talk a little bit about bonds. Bonds are basically like stocks. Bonds are type of security. So when normal, when regular individuals need to borrow money, you go to a bank and you just get a loan.
When governments or big corporations borrow money, they issue bonds, right? So bonds are basically fungible securities that can be traded so a corporation or government government can go. For example, just a couple of weeks ago the Treasury Department in the US issued about $50 billion worth of treasury bills. This is a type of bond that in this case matures in about six months. So these things you can buy treasury bonds and denominations as little, as small as $1,000 I think sometimes even $100 and they’re basically all the same.
So everybody that buys this particular bond, everybody pays the same price, they’re all worth the same. It’s sort of like Apple stock. If I have one share of common stock of Apple and you have one share of common stock and Apple, they’re all worth exactly the same thing. They’re all the same. They all mean that one share equals one share equals one share.
They’re all different now, different assets are not. That’s the concept of fungibility and finance. It’s called fungibility. Other assets are not fungible. If you think about a Ford Mustang if I have a Ford Mustang and you have a Ford Mustang, it’s not the same thing, right?
My Mustang might be different than your Mustang. I don’t have a Mustang. I’m just using that as an example. But Apple stock, government bonds, the same issuances, they’re the same, they’re fungible. And because of that, very easily very liquid markets that can be bought and sold and so forth.
So you have investors that are buying and selling bonds, just like investors buy and sell stock. And just like stock, bonds also have a price. So Apple stock has a price. US government bonds of a particular issuance like that has a price. You rarely hear people talk about bond prices because it’s a little bit of a complicated formula.
Usually you hear people talking about yield, so they’ll say like, the yield on the ten year is 4% or something like that. So yield is essentially a proxy for bond prices. Bond yields and bond prices are related to each other and they’re actually inversely related. So bond yields go up and bond prices go down and vice versa. So the bottom line of all this is really that what you saw over the last week is UK government bond prices falling.
Yields were rising, bond prices were falling because nobody wanted to own them. Everybody’s selling, everybody’s saying, I’m disgusted with the British government, I don’t want to have anything to do with this. I’m going to sell government bonds. So this is like what investors do. They throw a temper tantrum when they don’t like what a government does and they sell government bonds.
And so bond prices really start falling. And this happened a lot this week. British government bonds, gilts, they’re called, really were falling and they’ve been falling for a while. So what happened is the Central bank stepped in and said, we’re going to save the day, we’re going to stabilize the market because that’s what we’re doing. And there’s actually a lot of reasons behind this.
One of the reasons behind this is because there were a lot of pension funds. Pension funds tend to buy government bonds because they are considered to be safe investments. But now these pension funds were sitting on these bonds and the bond prices were collapsing. And so the pension funds are going, oh my God, we’re losing tons and tons of money here. Our entire portfolio is collapsing.
And to make matters worse, a lot of these pension funds actually borrowed money to buy government bonds. So they were facing margin calls. It was just a pure meltdown scenario. And the government goes to the central bank, says, you’ve got to do something about this. So the central bank, the bank of England, steps in.
Early this week and says we’re going to intervene in the bond market, we’re going to save the day, we’re going to prop up the bond market, we’re going to create stability again until this crisis passes. And essentially what that means is they’re going to go and they’re going to print a bunch of money. They’re going to print money so they can artificially prop up the bond market. They’re going to print money, buy bonds and artificially prop up the market. And they do this basically to try and save these pension funds.
Now this is a huge reversal in their policy because up until this point the bank of England. The central bank. Like pretty much most central banks around the world is saying we’re going to raise rates. We’re not going to buy bonds. We’re not going to intervene in the marketplace.
We’re going to raise rates. The market is going to do what it’s going to do and that’s it. So now all of a sudden overnight they reverse themselves and start buying bonds, reducing rates. And this announcement was met with just market Euphoria. Around the world stock markets went up, bond market surge.
Everybody was happy again. They said oh central banks are on our side again and it’s going to be great. And that sentiment that Euphoria lasted about a day, like literally the next day the whole market broke loose. Everything started falling again because people realized I can’t trust these people. This is really the big trend that we’re talking about.
For about the last 30 years central bankers have enjoyed unparalleled, really respect and dignity and grandeur and gravitas for the past several decades. It goes back to the 1990s when you had Alan Greenspan running the Federal Reserve in the United States. Everyone thought Greenspan was a god among men. It was just so wonderful and Greenspan engineered this incredible economy and then you had even the global financial crisis. People credited, this was in 2008, 2009, people credited the Federal Reserve was saving the world, saving the economy because they printed trillions of dollars to do this.
Mario Draghi, who was the central bank president, the European Central Bank president, they said, oh Draghi saved the Eurozone and all these things. And everybody always treated the central bankers as like all these people, they really know what they’re doing and we can trust the central bankers because they know everything and they’re always calm and they are steady and they always have the answer, they always know what to do, they always have the solution. Well that’s not the case anymore. Now based on everything that we’re seeing, you look at this, just what happened this week in the UK. The central bank stepped in and said we’re going to save the day.
And people said yeah and that lasted a day. And literally the next day people said I don’t believe these guys, they’re not going to be able to do it. They don’t have the ability. They don’t have the wherewithal, they don’t have the resources. It’s not going to happen.
I’m selling, I’m out. And I dare you to bail me out, right? And that’s what happened in the UK this week and we’re seeing the same thing in the US. People just don’t have the confidence in the central bank that they used to. This is an institution that’s supposed to have the experts upon experts, the greatest experts in economics, the guys that are supposed to always have the solution, the steady hand, decades of experience that are supposed to be able to make sure that nothing bad ever happens.
And people don’t have the confidence anymore in the central banks. They are not buying that the Federal Reserve is going to be able to tame inflation because now they realize all of a sudden they go, oh, we have this massive energy crisis. But it turns out the Fed can’t just print oil like they can print money. The Fed can’t print food like they can print money. They can’t create technology, they can’t do the things that the economy actually needs.
They can’t create more labor like they can create more money. They can’t do any of these things, the things, the resources that the economy actually needs. The Fed is completely powerless to do anything about it. And they even acknowledge this. Chairman of the Fed gave an interview not too long ago where he was telling a member of the media and he said, oh, we finally understand how little we understand about inflation or when grilled by politicians.
I think it was actually Elizabeth Warren who was grilling about this and she’s saying, so just so I’m clear, when you raise interest rates, is that going to bring down the price of food? And he said, no, not especially now. I said, Will it bring down the price of gas? No, it’s not going to do that either. Is this going to do anything at all?
Is this going to impact inflation at all? And the answer is no. It’s not really going to do anything about inflation, but they’re doing it anyways because it’s that old expression when all you have is a hammer, everything looks like a nail. And so they just their single hammer is we’ve got to manipulate the money supply, we got to raise rates because that’s all they know how to do. Bear in mind, these are the experts with decades of experience, right?
They’re supposed to be able to land the plane and get us out of this mess. And yet everything they do seems to just make it worse and worse. Now the goal, the miracle that these guys are trying to realize is they want to raise rates enough to bring inflation down, to tame inflation, get inflation back to 2%, but without causing widespread panic, widespread financial devastation, widespread economic devastation. So they want to be able to they call that a soft landing. This is a total fantasy.
This is a complete and total fantasy. And simply put, inflation is not this just easy issue. It’s easy to understand but it’s not so easy to fix because they got hit by all sides. We talked about this before. Inflation has really been a function of both supply and demand, right?
So all the really cheap ultra low interest rates that they have I mean this is the central bank. They created really, really low interest rates. And then the federal government came in and started dumping free money, just shoveling free money into the economy. I got to say not only did the central bank slash interest rates to zero but they also went and they gave speeches and they went to Congress and they wagged their finger and says the government needs to do more. There needs to be more fiscal stimulus.
There needs to be more basically there needs to be more free money from the government. You got to look at this and go, wait a minute dude.
You’re not an elected official. Who are you to go to the elected representatives of the people and tell them what they’re supposed to do? Honestly, it’s disgusting when you think about it. But here comes this guy who’s supposed to be the expert with decades of experience claiming to be the expert of experts, the king of kings with central banking going up to Capitol Hill, wagging his finger at Congress saying you need to do more. You need to give people more free money.
Completely oblivious of all the consequences that would have really quite sickening. But these people did this. They made their low rates and the free money and they created artificially high excessive demand, right? But at the same time there were supply issues as well. So too much demand.
And then they gave another one of these experts, another emperor whose name escapes me right now I can’t think of who it is but said, oh let’s lock everybody down. What could possibly go wrong? Let’s keep people terrified in their homes, locked in their basements watching fear porn on TV so that they don’t go out and work. Let’s keep people home. Let’s give them incentives to not work.
And so we created all these supply issues through lockdowns, public health policy and then all these other things too. This anti fossil fuel fanaticism, god help us if we drill for another barrel of oil in the United States of America even though energy prices keep going up. Well that would be the worst thing in the world. So it’s this kind of anti fossil fuel financing combined with the public health policy and all the crazy things that they’ve done that have created supply issues, anti capitalist, anti productive policies, let’s raise taxes. Let’s do things to make it more difficult for people to do business, more difficult for people to go to work.
Let’s create more licensing issues and more regulatory issues. This is the way these people function. So they created supply issues to make it more difficult to create supply. And they gave everybody a bunch of free money and stimulate demand. Duh, you’re going to get inflation from that, right?
But it turns out the central bank can’t do anything about supply. They can’t fix supply, they can’t put people to work, they can’t change any public health policy. They can’t create more energy, they can’t create more food, they can’t produce anything except for policy statements and basically create money, print money. That’s all they can do. So really, in this case, because of all that, I think the best that the central bank can hope for is a combination of slightly lower inflation and higher unemployment.
I think if they get to 5% inflation and 7% unemployment, why would they be taking a victory lap? They will be ecstatic. 4% inflation and 8% unemployment, they will be more than happy to deal with that. I think that’s really the best that the central bank is sort of hoping for. And I think that’s probably the best case scenario at this point because there’s not really anything they can do.
The critical issue that you got to realize is that governments, there’s just too much debt in the system now. There’s way more debt than there ever has been literally in the history of the world. Way more debt than there was the last financial crisis back in 2008. And there’s more debt back then there was in the previous financial crisis in the 1990s. And so the debt issue is really important to remember.
Today is the last day of the fiscal year in the United States, september 30, 2022. So it started October 1, 2021, and the fiscal year runs through September 3022. So last day, the fiscal year, the government national debt in the United States grew by $2.4 trillion this fiscal year 2022, which literally ends today. But it wasn’t just the $2.4 trillion. The total amount of new government debt that was issued this year was actually about more than $14 trillion.
$14 trillion, right. The difference between the two, the two and a half to $2.4 trillion versus more than $14 trillion. The difference in that is because the government had a bunch of old debt that matured. So if you think about ten years ago in 2012, the US. Federal government issued like a ten year bond.
This is technically ten years are known as notes. They issued a bunch of ten year notes. Well, guess what? Now, ten years later, those ten year notes matured. And so the federal government says, oh shit, I got to pay all that money back that I borrowed ten years ago.
So what do they do? Well, they don’t actually pay the money back. They just go and borrow another whatever amount of money they need to pay off the old debt by borrowing new money. Right. So that doesn’t count as new debt because you’re basically just taking new money and paying off old money.
So the net debt doesn’t actually increase, but they are issuing new debt. And the reason that’s important is because back in 2012, when they borrowed money, they were borrowing money at 1.5%. Today they’re borrowing money at 4%. So that’s a two and a half percent difference. And if you think about that, that two and a half percent difference.
Over $14 trillion, right? Two and a half percent more interest that they had to pay on the $14 trillion worth of new bonds that they issued this year. That’s about $300 billion in extra interest that they’re going to have to pay every single year. Every single year. So essentially, the interest payments that the government has to make every year just went up by $300 billion.
So you can start to see why this is such a big problem. So if the Fed keeps raising rates like they say, they say, we’re going to keep raising rates, whatever it takes. Okay. All right. Well, let’s see what happens.
Let’s see what happens if you raise rates to seven and a half percent. Right. And they have to refinance. Let’s say. $10 trillion in debt over the next year.
That’s going to be another hundreds of billions of dollars is going to be another five. Six. $700 billion in annual interest that they’re going to have to pay every single year. Plus the 300 billion from last year. We’re talking about almost an extra trillion dollars a year in annual interest expense.
This is completely bankrupting to the government. The federal government will be completely bankrupt if they keep raising interest rates because they simply cannot afford it. There’s so much debt, if you think about this, $30 trillion, actually, now almost $31 trillion is the US. National debt. So if the national debt at $31 trillion and they raise rates to 7%, that’s over $2 trillion a year in interest, right?
That’s half of total tax revenue, right? That’s before you pay Social Security. That’s before you pay for the military. That’s before you pay for the light bill at the White House. They’re shoveling $2 trillion out the door just to pay interest on the national debt.
And on top of that, they go farther and farther into debt. Every year they went to debt another $2.4 trillion in fiscal year two two, and probably going to be another two $3 trillion next fiscal year. So you can see why this is completely and totally unsustainable. When you have a government like the United States that is so heavily in debt, tens of trillions of dollars in debt, you simply cannot have normal interest rates. You cannot have five, six, seven, 8% interest rates because the government’s going to go bankrupt.
And that’s the bottom line, is that higher interest rates will bankrupt the government. And there is no central banker that wants to be tied to that. No central bank is going to have the courage to say, I’m going to tame inflation. I’m going to do whatever it takes, even if I bankrupt my own government. Nobody’s going to do that.
And it’s not just the government. It’s not just the government. Again, in the UK, they went and did this. The central bank intervened because the pension funds are losing money. So basically anybody that owns bonds, pension funds, banks, insurance companies, they’re all going to suffer huge losses.
They’re all going to require massive bailouts. And again, no central banker wants to do that. No central banker wants to create this massive financial crisis, this systemic, existential, game changing, earth shattering financial crisis that will bring down an entire nation. Nobody wants to be tied to that. So there’s a certain point right now you got to imagine they’re all talking, we’re going to do whatever it takes.
They’re not going to do whatever it takes because that means bankrupting the government. So most likely, if the idea here is to try and figure out where’s the puck going to be, the puck is most likely heading to inflation because that’s the only other option. In order to not bankrupt the government, there is a limit on how high they can let interest rates get. And once they reach that limit, that’s as far as they’re going to go most likely to come back down. And ultimately that means that they will let inflation rein.
They reach that limit, they go, okay, we think the government can afford 5%. Once we get to 5%, that’s it, we’re done. And if inflation is still 6%, you know what, we’re all going to have to live with 6% inflation. And that’s the deal. And that’s the consequence of having a government that is so heavily in debt.
And it’s not just the United States. You’ve got Italy and you’ve got I mean, most of Europe is this way. I mean, the UK is this way. Spain, Germany, Japan. Oh my God, Japan is so heavily in debt.
I mean, even China is sitting on a mountain of debt. Most of the world really is sitting on a mountain of debt, which is why they just cannot afford to have high interest rates. They can’t do it in Europe. You have all these governments that for years have been borrowing money at negative yields. So what are you going to do if you’re Italy and you’ve been borrowing money at 0% or -25 basis points and now you got to pay 4% forget it, you’re done, you’re done you can’t possibly do that, right?
And so because the central bankers, they may be crazy, they may be panicky, they may be desperate, but they’re not stupid. These are not stupid people. So they know all this. And because of that, there’s no way, there’s no way that they can possibly, unless they’re going to say, you know what, I’m going to bankrupt the whole world. I’m going to bankrupt the government, I’m going to do whatever it takes, because frankly, I think they’re going to realize rationally, that a world in which all these countries are bankrupt and the financial system is bankrupt and the banks are literally bankrupt and the pension funds are bankrupt, that that’s worse than 6% inflation.
And I think between the two, those two evils, they’ll definitely take the lesser of the two evils and the lesser the two evils is going to be 6%, even 7% inflation. And if they can get to four with 8% unemployment, oh my God, that’ll be a major victory. They will make monuments to themselves. They will be so excited about that. And I think that’s the situation that we’re looking at now, the financial implications of that are I think it makes sense for people to be prepared for.
I think everybody recognizes now inflation is not transitory. It is not transitory, and most likely is not going away anytime soon. There are some things sort of in the short term, if all of a sudden Vladimir Putin keels over and the war in Ukraine ends, that’s definitely going to be a huge financial bonanza. You’ll see stocks go up and everybody’s going to be happy. It’ll just be a big happy boom all over again.
The happy rally, oil prices will come down. Everybody’s going to be happy again. And because of that, inflation is probably going to go down a little bit just off of that, and they’re going to go, you see, we told you it was all Putin’s fault. But realistically, that’s not the case. Inflation, again, is a longer term issue that has a lot to do with not just Putin, although obviously the war in Ukraine has a major impact on that.
But it’s fanaticism against energy markets. It’s all the craziness with the lockdowns, the public health policies, terrible anticapitalist legislation and regulations, the money printing, the free money that they gave out from the government, all those things really, that’s what impact. And you can’t just expect that’s all just going to go away in a couple of months. That was years and years and years in the making, and it’s going to take a while to work through. So preparing for a longer bout of inflation is something that actually makes a lot of sense.
There’s a lot of history behind this. But one of the things, and this is not in any way me giving financial advice again, this is a guy expressing his First Amendment right to have an opinion on something. And when I look at history, I see that real assets do tend to make a lot of sense in an inflationary environment. These are talking about things that the world actually needs. Stuff energy, valuable minerals, valuable metals, food, and even, I would actually argue, productive technology.
These are the types of things that we’re talking about. Energy is a no brainer. We’ve talked about this before. Energy is in really a massive crisis right now that I think is only going to get worse. We can see this in Europe where governments there are now scrambling, trying to figure out how do we make sure people don’t freeze to death in the wintertime?
Because we’ve screwed this up so badly, we got to make sure that people now aren’t going to freeze to death in the wintertime. A lot of this is, yes, the war, but it’s so much more than that. It’s a lot of this environmental fanaticism. Look, don’t get me wrong. I’m very much in favor of taking care of the environment, and there are a lot of things that I personally do on my own.
But this is not the way to do it. This kind of fanaticism where we say, oh, let’s go, we did a whole podcast about this. Let’s go down the road. Instead of oil and gas, let’s do wind and solar. It turns out in many respects that’s actually much worse and it’s dirty.
The kinds of minerals and things you’ve got to pull out of the ground to do those sorts of things. The resources that are required, you’re not actually saving on your CO2 emissions. It’s a really expensive way. The energy return, on energy invested, on oil sorry, on oil, on wind and solar is actually really bad. It just doesn’t make any sense.
We talked about this before. Nuclear is the answer. But you have all these greenies, all these energy fanatics in government that just continue to ignore the obvious solution. Every quarter, actually, the Federal Reserve Bank of Dallas, one of the regional Federal Reserve banks, conducts an oil survey, an energy survey of oil executives. And the last one just came out a couple of days ago on September 28.
They’re hilarious. I’d actually encourage you to check it out. You can just sort of Google or whatever search engine you use. I actually use brave myself. It doesn’t sound right when you say I’m going to brave this, but yeah.
So go to your favorite search engine and look for Dallas Federal Reserve oil survey and you can see the one from September 28. And actually they’re pretty hilarious because they’re bunch of oil executives really just complaining about how all this ESG environmental, social governance, all this sort of woke capitalism nonsense, has really gutted exploration. You can see this proven oil reserves, proven energy reserves in the United States are falling. There’s very little new discovery. The shale reserves are running out.
The oil executives, don’t take it from me, these are the oil executives saying, hey, the shale reserves are running out. People think that all this shale oil in the US. Is going to power us and give us all this new energy reserve. No, it’s not. They’re running out.
And we don’t have any new exploration because you can’t get financing, you can’t get government permits, all these things that are preventing us from new exploration and adding to our reserves. So this is a really big problem. And because of that, even though I think energy investments really have a lot of potential in some, I think like nuclear live a really, really long life ahead of them. There are a lot of things that make energy very, very contentious right now. I think, honestly, these green fanatics, they’re totally full of themselves.
One of my partners today told me he’s in the UK. And he said he called me this morning. He said, I spoke to a coal producer in Africa, and he was telling me that his phone has been ringing off the hook for months for all these European governments, all these hardcore environmental fanatics in Germany that want to buy coal from them. And they were talking about buying the dirtiest coal imaginable. There’s different types of coal.
This is really dirty coal mine from child labor in Zimbabwe so that these Europeans can heat their homes, basically taking a fuel source away from Zimbabwe and shipping it to Europe. And he said right now, they’ve got literally over 1300 trucks going from Zimbabwe to the port of Mozambique, and they can’t build the infrastructure fast enough so they can ship all this coal to Europe so that these people don’t freeze to death in the wintertime. But they refuse to endorse nuclear power, which would slash CO2 emissions and provide inexpensive power literally, for the entire continent, eliminate their dependence on Russian gas for decades and decades to come. But they don’t want to hear it, right? They don’t want to partake in the obvious solution that’s staring in the face.
And so they say, oh, let’s go get the dirtiest coal imaginable from Zimbabwe and bring this up from there. But we love the environment. I mean, these people are so full of shit, and it’s impossible to take them seriously. On the mineral and mining side of things, again, these are also real assets. Mining is certainly less controversial than energy.
You don’t have the same picket lines of people saying, we don’t want you’ve got so many people that are against energy, more oil expiration, I’ve got to help you. You can’t have anybody just looking for new barrels of oil. Mining is less controversial, certainly, than energy, but there is some controversy around it. It’s definitely not green friendly. And you don’t get the ESG marks.
You don’t get the big private equity funds coming in that are concerned about their green report cards and so forth when you get into the mining business. This is why one of the reasons why I like agriculture so much, agriculture is a lot easier. It’s super relevant right now in many respects. There’s hardly anything more relevant in the world right now than being able to produce food. And there’s nobody forming a picket line saying, we don’t want any avocados here.
It’s very safe. You get support from the government. It ticks all the boxes from the green stuff, the ESG funds, all those things. So this is one of the reasons why I like agriculture so much. The last one I want to leave you with though, is technology.
And technology has long been tied to technology investments only good when interest rates are really low. That’s remarkably silly if you think about technology. And I think one of the ways that the world has gone wrong with its development of technology is if you think about the last 100 years or so, I mean, you can even go back thousands of years. The invention of the wheel, going back however many millions of years ago that was, and the ability to produce steel and all these things, some of which we’ve talked about in the past, this is productive technology. In the past 100 years, the automobile, the radio, the microprocessor, the invention and popularization of the Internet, all these things give us the ability to produce more and less time with fewer resources.
This makes everybody better off. It makes everybody wealthier. A lot of that has changed in the last 15 years. There’s been a shift from when you think about the advent of the personal computer, it made everybody more productive. The advent of even the early days, the mobile phone was something you could be more productive and you could take work with you on the go and all these things, it made everybody more productive.
Now, technology, I think really since not to knock it, but since 2007, since the iPhone came out, most technology, I think that was sort of the high watermark. And since then, the iPhone, since 2007 on most new technology has really been consumer technology, not productive technology. It’s consumptive technology. It’s technology that helps us consume better. When we think about, for years, among the top tech companies, amazon, Facebook, Apple, Netflix, considered a tech company.
I mean, this is not a tech company. It’s a media company that just happens to deliver its media using technology. But this is considered a tech company. Amazon, basically, it’s tech that helps us spend more money, helps us shop. Facebook is a tech company that helps us swipe and scroll and scroll and swipe.
Helps 14 year old girls feel shittier about themselves because there’s somebody out there that’s prettier and more popular. Apple, that creates the devices that help us swipe and scroll. Netflix, where we can just waste away hours and hours watching the tinder swindler or whatever. I mean, all these technology companies, it’s not really technology. It’s actually ways to make people waste time and actually be distracted from the work, from the productivity that they’re actually doing.
Real technology will solve problems. Real technology creates ways to do things better, faster, cheaper, better, using fewer resources, using less energy, less electricity. That’s what real technology, productive technology does. And not just swiping and scrolling. And I think that productive technology is absolutely a real asset.
Real assets are the things that the world, the stuff that the world really needs. I mean, it could even be an intellectual property. This is productive technology. This is a real asset. It’s not just swiping and scrolling.
It’s things that actually move the needle to make people more productive so we can do more with less. Productive technology is absolutely a real asset. And one of those that I think makes a lot of sense from a macro perspective, I would say countries even, who can live within their means, who have fairly liberal economies, who produce real assets like AG mining, energy and technology, these are places that can actually do well. And ironically, the United States actually does have a lot of potential here. The US has a lot of minerals, a lot of resources, a lot of energy potential if they could just get out of their own way.
Lots of agriculture, lots of farmland, lots of brainpower to create really truly productive, game changing, productive technology. All of these things the United States actually does have. Not the only country that has this, but there are not that many in the US is one of them. It has the potential to do this. The problem right now, obviously, is there are just way too many emperors obstructing the way we know who they are, too many people with decades of experience who just keep screwing it up.
And I think the end of the story here is that if the United States is able to get rid of it, charles V and all the other little emperors out there, I think the US actually stands a reasonable chance in this environment that is going to be, I think, years and years, if not decades. We’re going to be dealing with inflation, we are going be dealing with energy issues and all these things. I think the US actually does stand a reasonable chance they can just get out of their own way. Thanks very much for listening. I hope you got something out of this and we’ll speak to you again soon.