if the economy is booming if it's running on all eight cylinders why is it that 40% of Americans are worried that they're not even going to be able to put a roof over their head or put food on the table moving into 2025 believe it or not I don't know that the debt in and of itself is a problem for the government right now why because there's plenty of demand for treasuries if there wasn't a lot of demand for the treasuries the tenure wouldn't be at 3. 9 wouldn't be collapsing in yield skyrocketing and price so there's obviously a ton of demand and it's not like the bond market doesn't know that we're running these wartime deficits it's not like the bond market doesn't know about all the off-balance sheet liabilities people need to realize what's bad about the debt isn't necessarily the debt it's the government spending the example I always use is it's like a heroin addict so a heroin addict can have a credit card and run up the balance on the credit card to 100,000 buying heroin which destroys their body destroys their mind and destroys their soul right so we could come in to that heroin addict and say guess what we're going to take your balance all the way down to zero so you no longer have any debt so is that problem solved or is that an even bigger problem because now he's going to go and do more of the same what ruined him to begin with you see that's exactly like government spending it's not necessarily the debt that's bad it's the government's spending which distorts the overall economy let me give you another statistic here that I think you'll find interesting in the late 1880s we were on a gold standard okay so let's take a 15-year time frame from 1880 to 1895 we had about 30 right thought my head 30 to 40% deflation deflation think about the benefit that ACC CRS to the poor and middle class if we had prices going down by 40% over a 10 or 15E period even if their incomes aren't going up their purchasing power is incre ining massively and by the way during that time nominal wages went up sure not down if nominal wages are going up and prices are going down purchasing power for the poor middle class is just going absolutely through the roof so this is 1880 to 1895 now let's fast forward gold standard let's fast forward to when the Fiat standard went bananas right Peak Fiat Insanity from 2008 Q 2020 QE Infinity Q T Q BL the fed's balance sheet to 89 trillion you know M2 money supply went up by 25% in 2020 but no inflation got it got well no we did have inflation if you look at compounded inflation the CPI from uh 2008 to 2023 it went up by right around let's say 30 or 40% let's rewind to the late 1800s where you saw a about the same amount of deflation let's just say 30% 30% now what's fascinating about that is is that the M2 money supply the amount of currency units chasing goods and services went up in the 1800s that 15year time frame by 150% okay but what will blow people's mind is that from 2008 to 2023 on this Fiat standard run a mck it went up by 150% the exact same so then what you have to do is you have to ask yourself okay what was the Catalyst why did one 15-year time frame have deflation versus or said another way why did one period benefit the poor and middle class and the other period hurt the poor and middle class I've done a lot of research on this and the one main variable that I can find is government spending as a percentage of GDP if we look at the 1800s federal government spending was about 5% of GDP said another way the overall output of the entire Society came from the private 95% of it came from the private sector right where now it's 50/50 so who spends money more efficiently is it the government or is it going to be the private sector always the private sector so is it any surprise that the private sector represents 95% of the economy we have more goods and services being created to the extent where prices are going down even though the money supply is going up at the exact same rate you see so the main takeaway here is if we want to create this Society that's going to be more uh let's say friendly to the poor and middle class it doesn't come with more government it comes with less government because that 50% of government spending to GDP all that's doing for the most part is distorting the economy it's distorting the ability to create more goods and services which will drop prices and that's that benefit that acrs disproportionately to the poor and middle class so that's why the debt in and of itself isn't really the big problem it's the government spending you know so what's really interesting here is is you say okay well George I get the reference to Japan Japan's at what 230% debt to GDP right now the United States is about 110 or 120 and I understand that 34 trillion in debt is huge but could we be the next Japan or what a lot of people would argue is the dollar going to turn into toilet paper and we're going to go the way of Argentina so I think it's a very fascinating ju position because if you look at the two central banks and the two policies you know not now but back when the hyperinflation in Argentina was just getting started they had very similar policies so how is it that one economy produces deflation and the other produces hyperinflation and how do you know if the US is heading towards Argentina or Japan and I think another thing that's I've been wrestling with quite a bit and I haven't come to a definitive conclusion on this but I think a large part of it could be the way the currency was created to to begin with so hear me out on this one let's say that I lend you a dollar and I do so by just taking a dollar bill out of my pocket and giving it to you and then the next day you're like you know what George I don't need this dollar I'm going to go ahead and pay you back so you give me that dollar and we still have a dollar we still have $1 so when I gave you that money or lent it to you M2 money supply did not change and when you paid it back it didn't change it still won now let's think about this a different way let's say I'm your bank and you say okay George I want to borrow a dollar yeah and I say okay I lent you that dollar how did I do that I didn't give you a green piece of paper I simply added a digit to your checking account right so now instead of having zero in your checking account you have $1 right what did we just do to M2 money it increased it increased by $1 so then what happens is the next day going through the exact same example you say you know what I don't want the dollar anymore I'm going to pay you back so then when you pay me back you don't give me a green piece of paper I just simply change the balance on your bank account from $1 back down to zero where it started so you see what's happened is those two scenarios I lent you a dollar one scenario didn't do anything to M2 money supply the other scenario increased M2 and then it decreased M2 so money was created and money was destroyed yes just by the process of lending and paying it back so now let's think about it in terms of a pie chart let's say this pie chart represents 100% of the currency so 100% % of the yen in existence or 100% of the Argentinian Pesos in existence and let's just take into extreme for the thought experiment and assume that 100% of the Yen that exist were lent into existence now let's assume that 100% of the Argentinian Pesos that exist were printed literally printed into existence so if demand goes down for those Argentinian Pesos there's still the same amount of pesos it's just you have the same amount of Supply demand goes down so the value theoretically most likely goes down as well but with the Japanese Yen if demand goes down for the Yen what happens the debt is paid off therefore the supply goes down with the amount of demand so as demand goes down Supply goes down as well because you're assuming that if there's less demand for the Yen that people still have the Yen debt they're going to go ahead and pay off that debt which decreases the amount of currency units so you see how it's a complete night and day difference based on on the pie chart and how much of the overall currency has been lent into existence compared to how much of the overall currency was printed into existence and if you look at Argentina the majority of it especially lately was them literally just printing like pieces of paper to send out where with Japan the majority of it I would argue was lent into existence by the banking system itself so that's not yet conclusive it's just something I've been thinking about I've started to research it and it seems that I could be on to something there but that may explain the difference between Japan and Argentina and if it does then you have to look at the pie chart for the United States and the US dollar which would be even more extreme than Japan my favorite investor of all time is Jim Rogers and one of the reasons he's my favorite is because he has a knack for just putting things in the most simple terms possible which at the beginning when you first hear it it sounds oversimplified but when you think about it it's actually very profound the very first interview that I heard with Jim Rogers it was in I believe the original Market Wizards books with Jack schwager which I'm sure you've read many many times and he was talking to Jim about his investment philosophy and how he's made he's been so successful he says all I do is just sit in my chair and do nothing and the guy says okay well well how does that he says what the retail investor does is they're always trying to do stuff yeah they don't have enough patience so what I do is I just sit my chair I do nothing and I wait for a big pile of money sitting in the corner and when I see it I go pick it up and then I go back to my chair and I just wait for the next pile of money to appear in the corner and I'll go pick that up as well and the interim I don't do anything and I think that's a great Philosophy for people right now and the good news is that we're in this time when the curve is inverted so to time this and to know what to do it's actually pretty easy if you believe if your base case after listening to me and looking at the yield curve is that this time is not different it'll likely play out like it has pretty much every single time since since the 1950s all you have to do as a retail investor is sit back wait do nothing personally uh I'm just in gold and t- bills so I'm waiting to increase and add to that 801010 you've got the main positions that you built but with that cash position you're just you're building up a lot of dry powder you're getting paid 5. 5% on that and then what happens is I'm looking at the yield curve and it's not complex all your viewers need to do is watch two numbers the yield on the 2-year Treasury and the yield on the treasury that's it all you have to do is just wait for that 2year treasury yield to go down lower than the 10year treasury Now is it going to immediately hit the fan no of course not there's some timing there but once you see that kind of it might just dip and then go back down but once it stays there for let's say a month or two you know that that's the trend at that point in time you have to realize that that's usually when you have the hard Landing when the FED will have to start and I said have to start dropping I didn't say choose to start dropping that's a big difference I think the FED is going to have to drop rates they not going to choose to drop them and then what you do is you sit back you ask yourself okay why is the Fed dropping rates or why are we having this hard Landing is it because of a war is it because unemployment's going up is it because of the Middle East is it you know why is it here why is this happening and then you make a decision you analyze and you make a decision on what is cheap and what is expensive and that's the pile of money that's just sitting in the corner so right now it seems like all this stuff is happening and it's so complex but in my view this is the easiest time uh to be an investor because all you have to do is just sit back you know build your cash position have the dry powder be liquid be patient watch the yield curve and then assess once it's no longer inverted and then take action if you think about why the curve inverts it starts with the banking system and the financial institutions not only in the United States but outside of the United States cuz banks have balance sheet capacity which they could allocate in several different ways number one they could lend into the real economy uh to entrepreneurs and businesses who are trying to create more goods and services or they could go ahead and buy the 10-year treasury let's say just the risk-free asset with safety and liquidity being a premium so what happens when you go into a cycle like we're in right now that we've seen over and over and over and over again going all the way back to the 1950s is the banks and the entities in the financial economy start to take risk off the table because they look around and they say okay there's no good opportunities out there to lend when you look at the risk versus reward it's not just the reward you have to include the risk so what they do with all that balance sheet capacity is they start buying the long end of the yield curve because that's their best bet and that along with the FED increasing interest rates is usually when you get the inversion which is just a fancy way of saying short-term interest rates are higher than long-term interest rates so it's all just the market telling you that there's a lot of risk out there that a lot of times the stock market quite frankly isn't pricing in you talked about 2.
8% GDP growth okay well let's put things into perspective it's not that like that's awesome year-over-year I mean that's higher than expectations but expectations were incredibly low when you look at the trend line that's still below Trend growth and as our good friend Jim Rickards always points out that's the definition of a depression an economic depression another thing that I would say is if you look at these economic Cycles I mean going back to the GFC how many people were out there preaching in 2000 even at the beginning of 2008 that we were in a recession now everyone if you look at the Wall Street Journal the archives which I do a lot they were all talking about a soft Landing they're talking about the genius of the Federal Reserve how they just brought interest rates down to a perfect level or up just to a perfect level to where they can you know beat inflation but they don't have to worry about jeopardizing the unemployment rate going up too high it's it people say this stuff it's just unbelievable you know how this time it's different this time it's different this time it's different now the cycle has been longer than usual what we typically see is 18 to 22 months uh as you said earlier we've gone about 24 a little over 2 years but that's assuming we're not in a recession right now and you say George well how can you say that if you've got real GDP growth at 2. 8% well fine that's also assuming that the CPI or the deflator that they're using is actually accurate right because that's real GDP so if you take nominal GDP and let's say you deflate it by 2% and that's what gives you the 2. 8% but really the deflator is 5% or 6% or 7% which I think most of your audience would agree is the real inflation rate well now all of a sudden you've got negative GDP if they just calculated the numbers honestly or more honestly like they did in the 1970s and the 1980s but all the proof that we need is just sitting right there in the bond market and let's go back to the banks and look at what the banks are doing because and I go back to the banks because they're the ones that have the most Intel right they're the ones that are dealing with the entrepreneurs they're the ones that are dealing with the multinational corporations they're the ones that are dealing with commercial real estate they're the ones that are dealing with the consumer and most importantly they're the ones that are dealing with other Banks and as you know most of the dollars in the world are created by lending them into existence meaning the banks create the majority of the dollars it's it's not the Federal Reserve or the treasury or the government or anything like this it's the banking system lending them into existence so just look at the monetary Aggregates I mean since 2022 M1 money supply and M2 money supply in the United States is down down and to give your viewers some context the last time that happened with M2 money supply we were in the Great Depression not the Great Recession the Great Depression of the 1930s so if we have this booming economy why aren't the banks lending just ask yourself that do they not want profit are they somehow not greedy of course not the reason they're not lending is because the risk reward doesn't make sense because when they look out at the real economy they see storm clouds they don't see a booming economy they see a lot of problems they see massive counterparty risk I mean let's not forget that we're just in the middle endings of a banking crisis we go back to 2023 with signature First Republic and to your earlier Point Credit s we were talking about that how all these Banks basically went bust in March of 2023 they came out with the bank turn funding program the btfp the FED had to come in and quote unquote save the day but all they do is just really kick the can down the road and since that time for whatever reason the mainstream media thinks that oh we dodged a bullet you know we have averted the crisis well no you didn't because every single month we hear in the news that another bank goes bust another bank goes bust and not just in the United States you say well Georg is just the midsize banks with commercial real estate okay well that matters believe it or not that actually matters and that impacts the big huge Banks not only domestically in the United States but maybe uh to the same degree these Banks outside of the US in the euro dollar system why because it increases counterparty risk and if you increase counterparty risk you decrease dollar liquidity because the banks are the ones that provide that dollar liquidity to begin with but then we fast forward more recently and we look at noran chukin bank another thing that we discussed earlier this is this big Japanese bank that had to take a 10 billion dollar loss because their dollar funding costs went up because you guys know that the way Banks make money is they borrow shortterm and they lend long-term well that's fine when your borrowing costs are 1% and then you buy treasuries at 3% but what happens when your short-term borrowing costs go up to 5 5.
25% well the 3% that you're making on the treasuries now all of a sudden becomes a loss so you have a negative carry on those and this has nothing to do with the deposit flight that we saw with signature First Republic or Silicon Valley Bank back in March of 2023 this is a completely different risk that the banks are facing so what they inevitably have to do is they have to sell those assets that're yielding 3% those are the risk-free assets I. E treasuries the ones that you're guaranteed to at least get your principal back yeah you can debate as whether or not your purchasing power is the same but you're at least getting your principal back they have to sell all those and they have to buy an asset that is yielding more than their funding costs let's assume their funding costs are 5% that's what they're paying hang on the liability side of their balance sheet okay great well think about how far out the risk curve they have to go to get s or 8% which is exactly what they need well if we listen to what their statement was when they announced this $10 billion loss they're going to have to the only way they're going to be able to get that return they need is to buy Clos to buy derivatives and what's the underlying asset for these derivatives oh well that would be commercial real estate in the United States and it also be junk debt which by the way these corporations they can't get normal debt from a bank so they have to go to some guy a sponsor for a clo which is borrowing money from the bank to give it to the borrower that can't get it from the original Bank to begin with so you have this massive daisy chain of risk and what these Banks realize is that they're all interconnected people think that oh well if Silicon Valley Bank goes Bust or nor and chukin well it doesn't really matter to the whole system they look at it as though it's an isolated instance and what they have to understand is the global monetary system is simply a network of bank balance sheets you know the example that I like to give people to understand how the banking system works right now let's remember if the banking system fails guess what happens to the economy it crashes there's no way that you can have a financial crisis and not take the economy down with it that's just the way things it's not the system I want but it's the system we have so going back to the example that I like to give people to get a visual of how the banking system works it's very similar to these tour to France races you know if you go back to the 1800s the way the banking system was set up it was interconnected to a certain degree but not extensively to where there was all this systemic risk so if you had one Bank go bust back in let's say the late 1800s when we had Free banking it would be similar to seeing one of these bike crashes in the tour to France where the guys at the front of the pack are separated by like 20 yards where each guy is there's 20 yard of distance between him and the next Rider so if one guy crashes gets a flat tire goes over the wall well it sucks to be him but it only impacts that one rider that's the way the system was but you fast forward to the 1950s when the euro dollar system was created as a result of Breton Woods because the way Breton Woods was set up the global economy depended on the United States running deficits to the extent where there are enough dollars getting out of the US and the US couldn't do that so the banking system outside of the US said well we have all this demand for dollars we'll just create these dollars by oursel and now we don't have dollars we don't have Bank Reserves but we'll just create these dollars by lending them into existence so the offsetting asset is just simply that dollar asset that we just created by XYZ Corporation borrowing the money and then what happens is when they transfer that liability that they just created to another bank well that bank just extends them credit and they go back and forth and back and forth and back and forth to where every single bank's assets are the other Banks liability and vice versa you see so then we get to the 1950s where it's like a tour to France crash where they're not just separated by 20 yards let's say they're more tightly together now they're not all compact but they're tightly together let's say in a straight line so if one guy goes down and gets that flat tire he takes out let's say 5% of the other Riders but now it's to the point where every single Rider isn't yards apart or inches apart they're millimeters apart they're millimeters apart so if one of these bikes goes down at the front of the race then it just wipes out it's like a domino effect it just wipes out all these other Riders where 90% of them fail and it's the exact same way the banking system is set up right now and we know we know the banks are seeing this because we don't have to watch what they say or listen to what they say just watch what they do and the fact of the matter is they're not lending into the realcon they're buying treasuries which are the safest and most liquid assets for the banking system and this tells you that they're looking out at the other Riders and they're seeing the guys at the front of the race and they're seeing that every single one of them is about to have a flat tire even though they're going 50 mph then that's a reference to GDP so you look at GDP and you say oh it's 2. 8% right well the banks are telling you that although it's 2.
