There Is NO Market Crash Coming and Here Is Why | Fed Insider

just kind of thrown around the copies. Yeah, yeah, I saw it on Amazon now too, writing We're very well reviewed, five stars, so I can't wait. Yeah, thank you, So thanks for bringing that up. Shameless plug. He's talking about the book, The Uncommunist Manifesto. If you haven't got your copy, go to Amazon The Uncommunist Manifesto. It's a short read. It's about an hour read. Everybody should read it. In my opinion, communism seems like an old word, but it's

just rebranded today. Um. Instead of abolition of private property, it's you'll own nothing to be happy exactly. So let's dive right in, Joseph, because I got a lot to cover, uh, and we'll see how much we can get through. Sometimes I get a little too ambusious here, but um, look the markets are crashing, real estates getting marked down, stocks are going down, currency wars are erupting all around the world. The Bank of England just broke again. Um, you know,

I mean, stuff's going haywire. So I want to dig through all this. Um, but let's start with myth or fact. Last night on Twitter, you were and I were kind of engaged in this thing, and myth or fact does um, does the liquidity drying up caused the markets to crash? Now I know there's a lot of nuance here. Um. Jeff Snyder, I had him on a month two months ago, made month or two ago, and he said that, and I think, actually you were at the same event at George Gammons event where he was at and he says,

the ft has no control. Uh, the euro dark your market so big. The reason why the markets crashes there's a dollar shortage. So is the shortage of dollars myth or fact? Yeah, so that's a really interesting question. So how do you measure a shortage of dollars? So I'll tell you how I look at this and now I address how I think some other people might be looking at this. So shortage of dollars, we usually think of that as someone wanting to borrow dollars but not able

to access it. And the way this is measured is something called the f X swap basis, which is the premium that a foreigner has to pay when they borrow dollars in the market. So when we have major market disruptions, for example Lehman going down or what we saw during the March uh pandemic panic we saw the epics, swot basis widened significantly. What that means is that a lot of people who are trying to borrow dollars just can't get their dollars at market prices, and so they're having

to borrow at extremely high premiums. That, in my view, is what a shortage looks like when you have money to pay and you just can't get it now. The way that you can't get it meaning, um, it's it costs more than you're able to pay for it. So there's a market price for dollars, and there's also how much extra premium you have to get you have to pay for to to get those dollars. So that's that's

kind of helps measured. And the market price is usually set by the FED because the FED controls short term interest rates. So if you have to pay a whole lot more than the market rate that's roughly set by the FED. I think of that as there's a problem with the supply of dollars. There could be, as people say,

a shortage. And the way that this is fixed is the FED steps in and there with a tool called the Ethics Swap Facility, where they're basically lending a limited dollars for in central banks, who then take those dollars and lend it to their own banks, who then take those dollars and lend it to let's say a corporation or something like that. And so when the FED opens up this ethics swap facility, uh, what we see is that immediately the premium to borrow dollars in the offshore

markets disappears or it becomes very small. We see that consistently when the ethics facility opened up in UM during Lehman's collapse, in U during the Great Financial Crisis, and in March. And the thing is the f fex Soft Facility UM is actually still open. The FED never took it away, so it's operating on full force and there's very very little participation in it. And the reason being is that the premium premium costs to borrow dollars right

now is you know, not particularly elevated. So that's me suggest that there's no shortage of dollars. Everyone who wants to borrow dollars at the market price can get dollars. Now. That's the price to borrow dollars now. I think a lot of people also point to the U S dollars strengthening, and we see what's happening right dollar to euro euros below parity. We see the Japanese currency basically imploding, and

so that's making the dollar very strong. Now. I don't think of a strong appreciating dollar as a dollar shortage because there are actually very good fundamental reasons for that. The first, of course, is that the fits hiking rates aggressively. If um, if you're investing dollars in a money market fund, you're getting you know, three percent and maybe you'll get four percent soon. That's much higher than you can get

in Japan or Europe. And also there's a lot of geo political factors that are encouraging investors to move their money from let's say, away from the war zone in Europe because Europe is in is in a war zone right now, to the US. So dollars appreciating because it's becoming more valuable. I think of it as you know, Let's say I have a house and I add a pool to it. The price of my house goes higher, not because it's a shortage, but because I've made it

more valuable at higher rates. Make a currency more valuable. Um. Honestly, that's actually kind of part of the plan of what the Fed is trying to do. If you listen to trapa discuss his strategy to get inflation down, one of the pillars is to have a strong dollar. UM. So

it's proceeding as he wishes it to be. Now. UM. You know, when I look back through through the long lens of history, UM, we can see times where we, you know, used barley for money, then we used metals, and then um in hundred Spain found a huge silver mine in U in Peru, and then that increased the liquidity of money supply in the world, which caused uh inflation and massive acceleration. And then the silver mine ran out and then things start contracting. And so we can

kind of see throughout history. Every time you increase the money supply, you get booms and you get inflation, and then when the money supply starts running out, um, then you get contraction. Now the Fed has obviously said that, so they did. Uh, you know, there was a long list of que that was happening, right, So they're easing the money supply. Now they're going through tightening. And if I think about it, just um in super basic terms,

and maybe that throws me off. But if I because we're in a debt based system, money is created through debt. So if I lower the cost of borrowing, more people borrow, more money is created than you were talking about that, right, the cost of the dollars to borrow. If I increase the interest rate, then less money is created, less people are borrowing. So doesn't that I guess it's it's not a shortage of dollars, but it's a shortage of ability to access the dollars because now the cost of those

dollars is prohibitive to what I could spend on it. Well, that that's true, but there are other factors as well. So if I if I raise an interest rate. You're exactly right, there's less of a demand for dollars. But what if I'm willing to pay the market price for interest, but I still can't get any dollars. That becomes more of an accessibility functioning problem of the market. Right. So you're saying it's a shortage. I'm not able to get them when I want them. I'm thinking even when you're

paying market prices. I'm thinking a shortage of just there's not as much money in the system because less people are creating it through debt. So it's not that I can't get it, is that I can't get it at the price I need it, and so we just don't have the new creation amount of money has decreased well, because the FED is willing to lend infinite amounts of money at the market price. If you're willing to pay the market price, you can get all the dollars you need.

The shortage, in my view how I look at it, occurs when even if you're willing to pay the market price, as said roughly by the FED, you can't get it. That's that's what Yeah. So um, you're definitely right, though, So the whole point of raising interest rates in acense is to decrease, uh, the credit creation and thus the supply of money. But there's something really interesting happening with

the world now. You know, when we have a world where's largely based on private actors, this works because, for example, if the interest rate is higher and let's say I want to buy a house get a mortgage, I'm less likely this willing to do that because I'm sensitive to interest rates. So using interest rates as a tool to control inflation works when most of the economy is based on the private sector. But what if you have a world where most of the economy is actually the public sector.

Now we all know that Congress is never going to go into a spending plan and say how we're going to pay for it? Interest rates too high? That's never a question. So interest rates don't matter to public spending. So if you have an economy that's becoming more dominated by the public sector, that tool of slowing down credit creation through interest rates becomes less effective. Mm hm. That's a that's a good point because they don't have the

same constraints at the private sector exactly exactly. That's a kind but that's something that I think is becoming more obvious now when when the one hand, the FETE is trying to slow down the economy about raising rates. On the other hand, Joe Biden just announces he'll forgive you know, hundreds of billions of dollars in student loans. So they're

pushing against each other in a way. Yeah. And now with the with the central banks needing to buy money to prop up their bonds, which we'll get to that in a little bit. Um, that's a really good topic. We'll talk about it. Yeah. So I but I want to stick on this, so increasing the money supply and decreasing the money supply. So you recently had this article that came out on barrens Um. We'll put a link

to it down in the description below. And you were saying, how you know, for two years because of quantite of easing, Um, it doubled the central banks balance sheet to nine trillion UM of the nation's gross domestic product, which helped fuel significant gains. That's what you said, Um, and the que the easy the increase of the money supply, I put

downward pressure on interest rates. So the converse of what you're saying, so, um, it pushed the borrowing costs down because there was so much liquidity, right, which increased liquid in the system. Um, so there's that, and now the opposite of that is happening. So now they're tightening, and so now they're reducing the security holdings by what nine

five billion per months. It's the opposite of QWI, which would then put um upward pressure on interest rates and decreased liquid in the finance system, which which is what we're seeing exactly exactly right, and we see you see the effects kind of obviously right. QWI makes the stock market go higher. You reverse QWI, stock market seems to be going lower. So there's a lot of factors at play,

but I think that's one of them. Um. One way I think that I look at the money supply since I think, uh, it seems like you focus on this as well, is that I would also note that when you're looking on at money supply, you could broaden your definition of money to include not just let's say M two,

but you could also look at trudury securities. For example, if let's say I'm someone working at a company, Um, every week I get let's say a wire transfer from my company into my bank account, I'd say a thousand dollars If instead of receiving a hundred thousand dollars in my bank account, I got a hundred thousand a thousand in tugury securities instead, will that really make a difference

to me? And I don't think so. I mean, in many ways, just like a hundred dollar bill is money, so a hundred dollars in trudury securities is also a form of money. So when you're when the FED is going out and doing QWI by buying trudury securities a lot of times, rather than say it's increasing the money supply, I find it useful to think that it's just changing

the type of money people have. So, going back to the example that we just mentioned, instead of being paid maybe a thousand dollars in deposits in a bank, maybe I'm getting a sorry instead of being paid a thousand dollars and tredury securities, I'm getting a thousand dollars in a bank. The difference being that ted securities have a yield pay interest, but what I have in the bank doesn't.

So when the FED is doing KIWI on a large basis, it's taking away risk free assets that offer interest to people and replacing them with um deposits at a bank or basically money that doesn't pay interest, and that forces a lot of people to go and look for more risk or higher interest returns. And that's what kind of forces the whole keywi risk on in my view. So one day I had a tudury paying let's say a two percent. Today I have a bank uptosit paying nothing.

So maybe I go buy Apple bonds or Apple stock or something like that. Now QT does the opposite of that. Now interest rates go higher, there are more treasury securities for me to purchase, and so maybe instead of buying Apple, I go and I buy a two year treasury that's yielding four So that's that's out of how it works. In my view. You have this huge reshuffling of people going out of risk assets to just you know, parking it and uh and that showed security or the money

market fund for for higher return. There's lesson need to take risk. The risk free rate right, yes, it's it's getting higher. It's going to be four percent by the end of the year. A lot of people are going to have to look at that and say should I that's the stock market where maybe I lose a lot of money. Or maybe I can just put this at the risk free rate and earn four percent with no risk at all. And even though the four percent is still um are still in negative real return exactly. At

least it's at least it's known. At least it's known what my risk is as opposed to unknown. You know, could could the stock market dropping, you know, we don't know exactly exactly. So that's a big headwine two two risk assets and we see that already. Yeah, as you suggest. Yeah, now it sounds like so just kind of just to finish nail this point home on the on the shore stage of dollars. You you call that your definition of shortage of dollars when people want them but can't really

get them. Um, I'm looking at it just a total amount of dollars being created going up or down. So when the total amount of dollars being created goes up, we have more liquidity. We see assets go up. When the total amount of dollars goes down, then we see us go down. Not that people can't get them, but there's just less of them because they're not as cheap

as they were before. Right, Um, yeah, so there you have more alternatives when when you do QT you have higher interest rates, right, there's less than that for assets in general, when you have safer alternatives, like like we just talked about, well, and if I was going to borrow short at you know, zero point five percent and then go along at two or three percent, right, I may take those dollars because I can make that to

three spread. But when those numbers change, I'm not gonna I'm not gonna borrow the dollars because now that deal is not available to me anymore. Right, Yes, the cost of carry goes higher, so there's going to be less leverage, less ring, and let's barring obviously decreased this amount of money in the system now, So if we keep moving on to that. You know, Chairman Pal he's been pretty strong with his wording. I think he got hammered a

little bit a couple of months ago. He at the end of the meeting he got a little devish, and uh, they had to kind of backtrack that. In the last two meetings, he's been more harsh, more hawkish. I guess. Uh. He says that you know, they'll stay at it until it is done right, So like, stay at what right? I guess, continue tightening and tell what until inflation comes down. Um. He doesn't seem to be concerned about the stock markets

at all. Um really just focused on um inflation. It seems like, Um, you hear a lot of talk about you know, a pivot, a pivot, a pivot, a pivot. But again he doesn't care about the stock market. And and and ultimately, if you look at it, maybe the stock market hasn't even been hammered that bad as of now. But what we are seeing is the bond market, right, so there's a lot of volatility coming there. The vixus

spiking credit default swaps. Is that where you think the focus is, like the liquidity in the bond market exactly, that's where I think the big risk is. So when you're doing so so I imagine many of the viewers here are familiar with how bitcoin trades. Right, So if you have, for example, in bitcoin, when you look at the market, if you have a whale come in and unload a whole bunch of bitcoin, prices are going to

drop a lot. Right, that's a liquidity issue. Right, if you go and you sell a whole bunch of bitcoin, supplyingmand supplying exactly it's not just now. The trugury market is just like bitcoin in that sense, there's just supply and demand. You can you sell a lot of trudguries, you're going to get unstable prices, and that's exactly what's going on right now. So QT at a high level means that the public is going to the market is going to have to absorb a lot more trosury securities.

Now how much more? A lot more um? This sierra looks like the total issuance that it's okay, So issuance including QT that the market will have to absorb is about one point five trillion. Now, before the pandemic, the market absorbing about five billion UM a year, So it's going to have to absorb one point five trillion this year and the next and going forward because of our deficit, it's going to be at least a trillion a year

or forever. So that's a lot of supply into the market, and at the same time, the demand in the market it's not that strong. So during after the pandemic, the FED was basically the major buyer of troedery securities, and the FED is going away right now, so you're gonna have this huge supply and demand mismatch, which we kind of see manifesting in the troasury market. You see, sometimes the tenure goes up twenty point pony basis points a day.

That's pretty unstable. And we've trended steadily higher over the past few months because we have to find these new marshal buyers to absorb all that supply. And I don't know who that is. Like you mentioned, inflation is high, and who wants to buy a tenure treasure security yet four percent? You can get the same thing and money market account. Yeah so, and that's what happened on the

Bank of England as well, which I'm sure we'll get into. Yeah. So, um, if we if we stick with what you're saying, so just supplying demand, it's it's it's the most simple thing. You can take these super complex subjects and just break them down to just the equilibrium of supply and demand. And so back to just where we started with the money supply. When money is cheap, there's more demand for it, right,

and so back to the supply of treasuries. Um, so, if the government is going to mean to need to issue more trade they already are you said, it's gone up from there, having absorbed five million owns up to one point five trillion yea probably billion to If we look at the FED, seems to be focused on crushing demand, right, that's what they've said. They believe that if they can crush the demand side, then people will spend less money and maybe they'll bring inflation down. Um. The problem to

me seems that it's asset prices that are getting hammered. First. Um, if asset prices come down, then there's no cap gains, there's no iary distributions. We already have a huge balance problem, right, We're already running a deficit to the point that you're making. And so if we see asset prices come down, Um, then we don't see, like I said, the cap gains. We don't see that. We also see the reverse wealth effects of people spend less. So total tax receipts are

just going to plummet. Most likely seventy percent of the taxes come from the top ten percent of earners, which most likely make the majority of their income from cap gains distributions and things like that. That's seventy access eats come from that. Uh, And so we could see a massive it. We could see this, uh this f five million to one point five trillion or even more. We can see this deficit grow by levels that maybe they're not even anticipating or do you think that's too apocalyptic?

I think you're exactly right. That is the big picture. How are we going to pay for all these things? Or deficit? Is there's a forecast put out by the government based on law on the books. It's forecasts to basically be at least a trillion dollars a year forever. And that's just what it's on the books. Eventually, I'm sure they're going to give more free stuff. So, um, so that that that is the problem. It does seem apocalyptic, and um it seems like I think Stanley Drunken Miller

recently made a similar point just just last week. I think. So it's a big problem. So the way that I look at it is that it's never a financing problem because if you are the US government, you have a printing press, you can always always pay for everything interest rate that everything, just print it, have the fit printed, and pay for it super super easy. Um, but that has consequences as well. The consequences are not that I

can't make my interest rate payments. I always will be, but that if I print all this money, then I'll have inflation. So that is ultimately the constraint that the government has and we're seeing that right now. So in government just you know, created a couple of trillion dollars, gave it away and steamy checks and p P P loans and we had massive inflation. And not just us, but people all around the Western world did something similar, even worse, even worse. So, um, yeah, that that that

is the problem that we face right now. We're going to have it seems like we're on a very big inflationary trajectory. We're going to be able to afford all these payments. It's just that it will be inflationary. And it's the only way to stop this would be to convince Congress to not spend so much. And now that's

that's just not going to happen. Now, we're spending to reduce inflation the Inflation Reduction Act, Right, that's how it works, right, Yeah, if we spend all this money, we'll actually have it. I think it's I think it's pretty easy. You don't have to be the FED guy or a FED insider or economist. I mean, you could just ask the average person on the street, like do you think the government's

going to spend less money or more money in the future? Right, And unfortunately, as these things continue to uh evolve, I mean we're already seeing it. Uh specifically, we're seeing it more in other countries. But you know, with u b I things like that assistance in California, they want to give tax rebates to help offset the rising cost of fuel. Obviously in the UK they have a big deal with that where they're trying to offset energy prices. And so

it looks like more social spending is coming. Obviously there's this green transition that they're that they're pushing um and so, uh, it looks like spending is gonna go up. It looks like tax receipts are going to come down. And I think both of those are gonna happen at the same time. Now, you know, with inflation, maybe it kind of looks like GDPs going up inflation, but in real economic out but

there's there's nothing there. And then at the same time, if that's not already bad enough, at the same time, we have because of the currency wars that are going on, So we're pushing inflation to these other countries. Now we're getting to these currency wars, and it looks like we're seeing Japan, we're seeing China. In order to shore up their currencies, they're dumping dollars to buy their currencies in the open market to keep them somewhat propped up, which

is even more selling on the treasuries. Right, exactly, exactly. That's a special thing about the dollar. Everyone kind of has to manage their currency with respect to it because it is the world's reserve currency. And the way they do that is they keep a rainy day fund of dollars in case their own currency gets too weak. Then they use the rainy day hunt to basically show up their own their own currencies. So they would sell dollars

and buy their own currency. And but they're really that rainy day fund, which is usually held in the form of treasuries. So those sell trujuries like you suggested, and that's even worse for the trojury market. Um, so you've got a lot of selling, but I'm not sure who the buyers are going to be, mm hmm, which just exaggerates the problem absolutely. So there is some tail risk here for it that you could have a very uncontrollable sell off in the trojury market. Um, but it's a

tail RISKKET doesn't necessarily mean it will happen. It seems like the FED and you know better, you tell me, but it seems like the FED one and I think you and I have had this discussion before, where um, the FED doesn't want to surprise anybody, so they try to really broadcast far in advance what they're gonna do. They announced in November that they were gonna start raising rates.

We didn't see them raise rates until January. Um. And so they tell us this that they're going to do these things, but it also seems like they get really dug into their position and feel like maybe they have to hold with this. So like Jerome Power was saying, we can't get inflation, we're not thinking about thinking about raising rates. Um. Then he said we're gonna let it run hot. Um and then we got it right, and then it was like, well, it's transitory, and it seems

to be. You know, pretty much every pundent and economist out there says that they waited way too long. They should have started raising sooner, but maybe they were dug into that position of not thinking about thinking about they were't going to raise rates until I think it was, and so maybe they were dug in and finally said, okay, fine, we have to pivot. And what I'm afraid so one comment on that, But then too, if that's the case, if that, if there's some truth to that, then maybe

I'm also worried that they're also dug in. They're gonna raise rates through the end of next year. Uh. And like even if these treasury starts spiking there's no bids whatever, are they dug into that? And uh, and they have to kind of hold the kind of keep that confidence and then they're not going to pivot when they need to. So I think the FED was definitely slow to raise rates, and exactly as you mentioned, they were probably to dug into their view that they would inflish will be transitory.

And we see officials echoing that, um, you know, and that might have been political in some sense. So we saw the Trogary Secretary Janet yell And last year also say something similar and maybe those were the talking points. Um. But I want to be fair to them that it was a hard thing to do back then. It's it's hard to know how the colony would have involved. The clear policy here, I think was to keep buying mortgage backed securities housing, you know, more backed securities when the

housing market was going up a year. That was clearly crazy. But whether not the race rates that that that was not the correct call. They should have raised rates earlier. But I think it's understandable if they if they are a little bit late on that, whether or not they're making another policy air that that, I don't know that it's going to be an error, but I'm pretty sure they're going to try to keep rates high um throughout

next year. I think it's useful to think to understand how they're approaching this so um, a little bit of history is helpful. So in the seventies and eighties, uh, as we all know in the US, there was very high inflation, you know, over ten percent. And what the FED did back then in the seventies under Arthur Burns was they would hike rates, and then when inflation looked like he was getting under control, they would start cutting rates.

And then what would happen and then the rates inflation will come growing back again, and then they would hike again. Inflash would come down, they'd cut again, and inflish and go back up. So that kind of stopped go thing that they did back then proved to be not very useful. So they are very keen to avoid that mistake. And Pauwell mentioned this specifically at his last pressor. So he

doesn't want to remake the mistake of the seventies. So instead of just hiking rates and then cutting it at the first sign that inflation is coming down or maybe unemployment is taking up, he's going to hike it till let's say four and a half percent, and he's going to hold it there for the entire year. That's the game plan that he's trying to tell the market, and I don't know if he'll be able to carry it out, but that's what he's very resolute to to tell everyone.

Some other something else that I think it's helpful to understand what Paul was doing. Well. To understand Paul is to think about what happened in December. In December, Powell was also resolute. He told the market that I'm going to be hiking rates in except that the Stockholm market crumbled, and I think maybe February or March they were indicating to the market that they weren't going to high grate it anymore. In fact, they were going to cut them in the coming months. So he did a complete one

eight a pivot. And because he did that in many people in the markets don't believe that Paul was actually be able to carry out his plan to uh be vulker like. So that's why in the markets you see the market pricing and some probability of a bit next year, and that I think is what the market and to Fit are going to try to have to resolve in the coming months. Is the market right the Powell is a pivoter, he will eventually cave and then risk ass

let's go to the moon. Or is Powell right that he is resolute, he is ah some spirit of vulcar and he is going to keep brids high throughout next year. Um, I guess we'll find out in the coming months. I think both of those things can be true. He can be resolute longer than most people think he will, and cause more damage and pain than most people expect. But eventually, as you've already kind of made the case, they'll never

run out as long as they have the printer. So like, UM, I don't understand I don't believe any nation, any sovereign, would go with default when they have the ability to print money. You've already kind of makes so both of those can be true. It's the timing of when those things happen. Yeah, But but back to that just for a second. So Powell came in, you know, he was

fired up. He was gonna make some change. He was gonna he was gonna normalize the system again, right, he started hiking rates and to your point that the market dropped and he was forced to pivot, and it seemed like he pivoted and again correct to me, but it seemed like and maybe even hinted to the fact that it was the stock market crashing that caused him to pivot, whereas this time it doesn't seem like he cares about

the stock market crashing. Is as a matter of fact, he almost wants the stock market to crash because of crushing demand. You're exactly right. So the difference is that we have inflation, and inflation is very high. So back then, you know that the FEDS goal was full employment and price stability. Back then, inflation was low. That's okay, So what they were more concerned about was getting um the

unemployment rates down, So it made sense. Well, you know, if I can cut rates and that will help unemployment and inflation is fine, why don't I just do that? Now today it's completely different. Inflation is very high and unemployment is very low, so we're gonna have to get inflation down. So inflation is basically the Fed's primary mandate for the moment. And how do you get inflation down? Well, the way that I think about it is inflation comes

down when people can no longer afford higher prices. How do they no longer afford higher prices when they have less money? Okay, So there's a couple of ways you can get people to be poor, so to speak. The one is to make asset prices go lower, like you mentioned, making the stock market go lower. That means people have less money in their stock account to go spend and buy stuff if they can't afford higher prices, and inflation

will come down. Now, the other part, which is what I think the FED is emphasizing more now, is if you have lower wages, if you have more wages, then you can't afford stuff less, So so wage gains. According to the FED data, it's growing about about six seven annual rate. Now, if you're in if you're salaries going up six seven percent a year, obviously you can afford

a six seven percent inflation. So in order to get inflation backed down towards two pc, you're gonna need wage gains of about you know, two or three and the only way to get that is to have higher unemployment. So that's what they're trying to do right now, basically

raise the unemployment. It's not a pretty thing to say, but that that is very much the goal, and it's a hard goal to Actually, the labor market is very strong and it seems to be have a shortage of workers, so the Fed is going to have to keep interest rates high until they see the labor market crack. Yeah, so supply and demand. If there's more open jobs, people who have to work for lower. If there's no if there's no available workers, they're going to have to pay

them higher. It's um it's now um I. I tweeted out something similar to that in the past, where it's like, hey, hopefully the people understand the Fed is actively trying to bring their pay down, like that's against the what the will of the people want. Wages have not kept up with inflation over the last thirty four of the years. UM, inflation is raging at whatever you know, whatever you want to believe eight or nine percent of the CPI tells us or more likely. UM. And of course wages aren't

keeping up with that. And to your point, they need to bring wages down. That's a problem. The fact that you're getting paid more is a problem for the FED, and they want to bring that down, which is Uh. I think if most people understand that, and they're not going to be happy with that. But but you're absolutely right. And then the fact of bringing asset prices down the wealth effect. So, UM, I may not be retiring for twenty or thirty years, I don't plan on selling my

house for twenty or thirty years if ever. UM. But the fact that I see the value of my home and my retirement accounts come down, I just feel more poor. I'm gonna not take vacations, I'm not gonna go out to dinner as much, etcetera. Um. But I want to jump back to the unemployment part for a minute. So, uh, the official unemployment number is low, more historically low. If you dig into that data, it doesn't look that good to me because let's say, for one, UM, the amount

of hours has come down, so people are working less hours. Obviously, the job force participation rate is very low, so that's historically low. Um, the amount of hours people are working, the amount of two to three jobs that people are working. Uh. There, the rate that they're getting paid has come down, which

they want that um. And then UM, they had this big adjustment in the employment data based off of jobs created and destroyed from last year's data, which was this crazy anomaly, so they added I forget now three thousand jobs or whatever they added, So the data actually doesn't look good to me. Um. Obviously they have hundreds or thousands of PhDs and analysts looking through this data. I mean I'm just some guy on YouTube here. UM, so

they have to see that, right. But UM, do they just want to run with that headline number because that gives them the cover to run or do they see this and they go, well, actually, we're going to use this number, but we see that it's actually not that good beneath and so our long term planning is taking that into consideration. I think they actually do believe the number. So so these people who work at the FED, their

establishment types there. They're from the system. They spent the entire life in the system, so they have confidence in the things that the system produces. Inflation numbers, unemployment numbers. You know, to doubt those is to doubt themselves. They're part of systems. So I don't I don't think that UM they view that as suspect. Okay, well, and I think that that. So there's that, there's that, But there's also another aspect as well. The way the FED UM

gets information. It's not just numbers, but it's also a lot of discussions that they have with other people. So if you are if you are at the FED, you have connections throughout the business community. So FED officials will talk to ceo s, talk to managers, talk to everyone really, and they'll have this formal surveys but also in formal conversations, and they want to try to get to get a sense of what's happening on the street. And what they

hear is that all they're having trouble hiring people. So when they have that qualitative information that seems to confirm what they see in the data, then I don't think they have any reason to doubt it. Yeah, that's that's that's that's good to know. UM. Now let's jump to the topic we've been pushing, pushing, pushing, So let's talk about the Bank of England. So the Bank of England broke UM. George Soros famously broke the Bank of England before. UM.

Now they broke again. Basically, Uh, they couldn't cover the pensions and they've had to panic and just go all in on the poker table, right, all in unlimited frame frame that up for us a little bit. So at a very high level, it's just supply and demand. You said, it's best framework, much better than any big econometric model. It's just makes everything back to basics. So what's the supply Okay, So two things are happening in the past

couple of weeks. One Bank of England is gauging a QT, but not just simple QUTI like the FED where they'll let something let's say the FED holds the shared Security gets repaid and just let's that money disappear. The UK, the Bank of England wanted to actually sell their portfolio, so that's increasing supply into the market. You're actually selling. UM. The second thing on the supply side is that they

have this very aggressive fiscal budget. So I think we've read in the news that uh, the UK government wants to put a ceiling on power on electricity prices. Well, that money has to come from somewhere, right, so they're going to have to borrow more. And at the same time they're cutting taxes, so they got to borrow even more. So the supply of sovereign debt, which is called a guilt UK sovereign UK. I think it's a two billion

dollar swing. So it's like a fifty billion dollar tax hit by cutting and then it's a hundred fifty billion increase in spending to cover the energy bills. That that sounds like not a lot too to us, to people in the US, but the UK is a smaller country, so that that's a huge amount for them. Um. And that's enormous amount of supply. Okay, So everyone sees that ship there's a lot of supply coming online. Better get out of the way, and so the prices plummet and

that means yields go up significantly. Now, the thing is a lot of people who own those uh guilts. They owned them, uh perhaps on a levered basis, or or at least they have let's say levered instruments that are tied to the interest rates, so they basically got a huge margin call. Now it's like any other speculator. You buy something on leverage or you have leverage exposure to something that's something you know price changes a lot, then

you could be in trouble. If you look at the interest rates in the UK, well those interest rates they shot up a lot rapidly, so they were margin calls. What happens when you have a margin call, you get equid dated by your broker. Okay, so a lot of these investors got liquidated. That means the price goes even lower. That means even more people need to get liquidated. So you had this fire run like, fire cell like dynamic,

similar to what you see in any financial crisis. So what happens now I have a whole bunch of people who are getting liquidated and a lot of people losing money. We have looks like a fire cell going on. The Bank of England then steps in and offers to be basically the buyer of last resort, similar to what the

FED did and during the pandemic. It goes in and it's like we're going to buy as many of these guilts as we need to do, as we need to buy, and once the Bank of England steps in and it's ruling to buy as much as needed, and the Bank of England has unlimited, uh, unlimited amount of money than the market stabilized. And we can see this not just what happening in the guilt market, but in the treasury

market as well. When the Bank of England stepped in those long dated UK guilts, they based the yields just kind of plummeted enormously, like the biggest drop in the history of guilts, and that pulled all the other sovereign bond yields in the world down as well. So you saw the treasury yields I think go down thirty basis points. So, um, it had a global effect of calming the sovereign debt market.

And is that because um they're like, well, shoot, if the Bank of England decided to bail out their market, then everybody else will as well. So that was kind of like that reassurance. I think that that's definitely some aspect to it. If you have, uh, if you have one sovereign So the global bal market is tightly connected

because it's all credit risk free. So that means that so if I'm an investor, now i can get let's say three percent in the UK or four percent in the US, and after hedging currency, I'm gonna go with whatever is higher because they're both credit risk free, and so that that's fine. So they're all connected together. If we see the UK guilts come down, then mechanically everything has to be priced with some um, you know, some

relative value value relative to to the guilts. So that side, and also of course having a central bank come out and being being willing to do quei or put money that always makes the market happy. So and that does increase the probability that maybe the FED or someone else will be doing the same thing in case something became too disorderly. And you know, if you look at the commentary, a lot of people are looking at this and as a potential pivot point, which it definitely is not, but

the market is always hopeful for things like that. Yeah. So, um, now they've pledged I think they pledge unlimited qui to support the bonds up until October, just for like this period. So then we'll wait and see, right if if they've restored enough trust and then they can stabilize the yields and more people want to buy them, they can bring

buyers back in, then maybe they stop. But if no buyers come back in and the yields starts spiking again, they're gonna have to probably jump back in again, exactly exactly. And that's the problem just not with not just the UK, but all the governments in the Western world. Um, they've borrowed so much that the amount of debt is so huge that the market can function anymore. You know, the

supply is just enormous. So in the past the problem was hidden because you had people being the central banks buying it, FED buying it, Bank of England buying it, ECB buying it UM. So you don't really know what the real appetite is for for sovereign debt. And apparently it's not a long at least at these prices. Yeah, we can see that for sure. Now you said, you said the word credit risk free, and we we mentioned that earlier at risk free returns and so credit risk free.

So government bonds specifically, sovereign bonds specifically UM probably Tier

one nation sovereign bonds are considered risk free. I don't know if you would consider, you know, the all Salvador bond or the Turkish bond risk free necessarily right, and and and and well, before you answer that, they're considered risk free because to the point that we're both agreeing, um um no nation would default on their bonds when they can print the money, and so they're considered risk free because they're always going to be able to pay that.

That's exactly right. If you have a printer, you can always have the ability to repay your debt, but you could voluntarily default. And that's the reason why that the US actually does not have a triple A. Reading from the SMP, the SMP saw that the US, during we have a you know, periodic death ceiling episodes where one

party doesn't want to raise the death sailing. Uh. The SMP, SMP Senator Poorts, the reading agencies saw that the US maybe would voluntarily default during a death ceiling episode, and because of that they cannot be triple A. But they have the capacity because they have the printer, but sometimes may they may not have the political willingness as you suggested. Well, and then they run into limitations, and so it's the proverbial rock and a hard place. They can print as

much as they want, just like Zimbabwe. But then you have runaway inflation. If you don't print your default. If you do print, you you have inflation. And so which one is worse? Right? Which one do you have the political will to deal with? Are you okay seeing everybody's pensions wiped out and everybody broke on the street or would you rather people just pay a little bit more money for the things they buy? Yeah? Yeah, yeah, So it's a political it's always it's an inflation in my view,

is always political. So how do you create an inflation? Just give everyone a million dollars everyone. If you everyone has a million dollars on their bank account, you have a lot of inflation. How do you create deflation? Let's say, race taxes to ninety percent, take everyone's money away, hiken interest rate scent, make the soft market go to zero. So it's inflation is ultimately in my view of a

political choice. Now I would imagine other pension funds are doing the same thing that they were doing in the UK. And as we see, so I guess there's three three. I guess maybe the top three cent t banks in the world, the FED, the b o E, and the b o J when looking at you know, currency, you know, liquidity around the world, or amount of payments or whatever. I would imagine all three of them are probably doing the same thing. Uh, the b o J and the

BOE coming under massive pressure in their markets. And so could we see a similar situation arise in the b in in Japan. In Japan, so or they don't want in the pension situation like we do. You're you're you're flattering the Bank of England to the hundred years ago during the British Empire and now it's the e CPS is the second large in the bank thing? Um yeah, b O E, b O E. You' right? I think is the fifth right, Yeah, they used to be important.

They probably wish they still were. Um. So the Japan is different because the chap Japan is doing something called you would curve control, which is basically fixing the price of their sovereign debt. So because the price is fixed, they cannot the pensions are fine, they can't have any suffer the same problem. But in Europe they definitely can, and I think that's the next point of weakness. So so Robin Brooks on on Twitter has a very very good graph of who has been buying Spanish and Italian

sovereign debt over the past few years. It's the CV. The CB has been buying it all. Now, if the ECB steps back, you can have the exact same thing happen, where the yields shoot up very high, and that that creates losses for the people who are invested in those and the people who invest in Spanish and Italian debt that the bank's pension funds and so forth. So you could have something similar happen, which is which is which

is concerning, but likely could also be fixed. The ECB will just go and buy more and that will be negative for the Euro. So that's probably the next weakness weak point as as we see QT unfolded globally. Now we've set up a big problem that seems the only beginning worse. Governments are going to spend more money um than they have deficits. Tax receipts might go down, deficits will probably go up. They'll have to continue to print more money UM. At some point this kind of comes

to a head. We're starting to see some big crack showing up, obviously in Japan and now in in Europe has bigger cracks that we haven't really talked about Europe. But but the ECB has got their problems with the pigs nations down below in Portugal, it ill degree Spain. Obviously, the whole Russia situation. We're seeing it the first crack really with the Bank of England. But it's like that first crack they'll start coming. Um. I want to I want to kind of talk about this in game maybe

you know, hypothetical situations. But before we do, UM, let's jump to another topic, which is um central bank digital currencies. So obviously China rush their central bank digital currency through. They unveiled it at the Olympics that they had there, and in China, the under President Biden through executive order, they've been rushing this CBDC through the FED now released as FED now thing. It looks like this central bank digital currency is rushing through. What are your thoughts on that?

What are you hearing on that? So? I think a CBDC is not not there's really no use case for the US. So CBDC if you look at who's really young hole about the CBDCs in the world, it's like you mentioned, it's China it's these totalitarian states because a CBDC is ultimately a surveillance too. It's a way to control people if the government can see whatever you own, and maybe they can lock your account, maybe they can

make sure that you just do what you're told. So it's it's what totalitarian states really like now here in the US, whether or not we have a CBDC is ultimately a political choice, and you hear different things depending on who you speak with. Um Powell actually seems to be slow walking the CBDC UH reject at the FED. He says that, you know, we need to do more research on this, and we need regulations and so forth, and we need Congress to pass UH legislation showing that

there's a clear intent. So I think that the FED. So Paul Paul wasn't the only FED official who who seems to be not too warm about the CBDC here. Another one would be um uh. It's former governor quarrels very clear that we don't need to CEBDC here, and they're all right, why why, there's really no use case in the US. It seems to be more of a potentially dangerous political tool. So at the moment, the people in charge of the FED don't seem to want to

go down that path. I think there are voices in the FAT that are influential who would be happy to see a CBDC, for example, the Brainer who is also a member of the World Economic Form as as you guys know, you know the countries that are under the influence of the word economic Forum like CBDCs, like the Eurozone, like Canada. So far, and it's a it's it's I think it's very much a So I can't see a

real economic use case for it. So I think if it more as a political tool to have better control over a country's citizens, well what about as an economic tool.

So the problem in the pandemic was they sent all the stemmy out and they were hoping to stimulate the markets, but then people sat on the money, they didn't stimulate the markets, or they put into robin hood as opposed to buying goods and services, and so, um, if if they have a CBDC, which we started seeing that language come out in some of these STEMI bills that came out in UM, maybe it's a tool where they could inject liquidity directly into the market and they could affect

that you know how fast people spend it to make sure it does get spin and even into the right places. So it could be an economic tool. But I mean that's obviously control, but control for economic purposes, Yes, it's control, and it can be exercised in positive ways or in negative ways, and the exact in way. We could say that, hey, you're protesting where you shouldn't be, or maybe you voted for the wrong person. You know what, maybe you shouldn't be spending any money at all. So it's it's an

extra tool. And like any tool, it depends on how much confidence you have in the people who make the rules and well people who actually wild that tool. And it can definitely be used for very positive purposes, um like getting money directly to people, but under the wrong hands, it could also be used to silence, dissent, or punish your enemies. So ultimately it depends on how much confidence you have in the system. Now in the US, we have a tradition where we don't have confidence in the system.

That's why we want the system to be as weak as small as possible, because we know that if you give people, regular people a lot of power, they are tempted to use that for their own benefit. So that's uh so again that that seems to be what history pretends.

So in your guess, in your in your guess, you would think that maybe if I'm if I'm reading you right, um, that maybe we might see it in other nations first, and maybe the US might be one of the last to adopt it because they don't have a big economic need. It's more of a political tool, and the people would probably kind of push back with the checks and balances that we have exactly. I think that's right. Completely depends

on politics. This is completely a political choice. The politics the political leadership we have now at the FED does not appear to be uh think that the CBDC is very important. If maybe have a different FED chair, we got to get a different outcome. So at the moment, it seems like the US will be probably one of the uh not definitely not the first country to have something like this. Okay, so now let's uh, let's let's let's take the situation that we have and let's just

hypothetically kind of game plan this out. So, um, it seems like you know, we're I think you know, you have the you know, whatever the Peter shifts or whatever that I've been calling for this system and the Mike Maloney has been calling for Denver, you know, ten twenty years, and I think they're they're right, I mean factually, like this doesn't work over the long term, but like how long can it go for? Like we don't know? Right, they seem to have more tools up their sleep than

most people had had thought. But we're starting to see serious cracks with the Bank of England and to your point, they're not one of the top banks, they're one of the smaller ones. But Bank of Japan has their big problems. The e c B has got massive problems the dollar. The FED has opened up swap lines with these central banks to basically bring them on their back and provide this liquidity to them. And so kind of Brent Johnson's

dollar milkshake theory. Maybe the dollar just continues to rise, rise, rise stronger as it continues to build these out. But eventually the same constraints are going to hit everybody at different times. Which is one, do we continue to just print this money and rage inflation or do we let

the whole system crash? I mean, it doesn't keep going for a while as right now we're seeing the Lebanons and the and the Turkeys go down, but eventually we see the Bank of England and the Japan's go down, and then the ECB and then finally the dollars the last one standing. But then they're still stuck with the same constraints. Is that kind of how you see this playing out over a period of time. So I think that you know currency and so this is ultimately so

a question of confidence. So what we see right now, what's happening is that globally, people who have the most confidence in the US. And if you have problems in the euro Zone, if you just look at you know, the euro is appreciating a lot. That means a lot of people are moving money from um Europe to here. And similar in Japan and similar to many other countries.

It's it's you go to where you feel it's the safest, and the US here we have positive interest rates, we are secure, food, secure, energy, secure, there's no war and in your nearby so um, if there's unrest in the world, the US is going to be the ultimate beneficiary. I think we see this now, I expect this to continue. So now continue strengthening of a dollar. That that sounds reasonable to me. Um. But as we've been discussing, the US is not has probably has its problems as well.

Ultimately we will not be able to keep printing and spending forever um. But there's a sequence to this. First, the weaker countries, the periphery, UM, they have their problems. They fall, money comes to the US concentrates, but eventually you'll have the money is going to have to go somewhere else as well, because the US has its own problem. So what what it could happen is that it can just go into things like real estate um or you know, commodities,

things like that, things that cannot be printed um. Because if the question is ultimately that the people who manage our currency system, the government, is not doing a good job, then you want to go to items or things where the government cannot mismanage, and that those are more tangible things like real estate and you know gold, maybe even

that maybe crypto as well. Yeah. Yeah. Bloomberg Intelligence put out a piece of work that they said that they think they could see bitcoin transition from a risk onto a risk off asset by end of two So that could be interesting. Um. You know, I've often said that that Wall Street trades bitcoin like a risk on asset, but it's not a risk on asset, and so um,

there's like this mismatching perception of reality. So it's trading like a risk on asset, particularly because of Wall Street, UH, you know, has taken such a big chunk in it and the market small. But we're seeing in about four billion people in the world living under totalitarian regimes with triple digit or double digit inflation. Um, they're using bitcoin to get out of UH, confiscation, high levels of inflation. UM. I covered it yesterday on the radio. Sub Saharan Africa

is the is the largest place of adoption happening. If you look at transactions under a thousand dollars, like eight percent of a we're happening there and so you go where the pain is the highest. And so at some point that reality flip flops, right, UM, So it'll be

interesting to see how that happens. UM. So that sequence that you talk about weaker countries falling first, UM, money moving to the stronger ones to the us D. Than eventually though the USD is gonna have the same problem, and then people will find other outlets for that um and so whether that's the real estate, which has been

a traditional one, or stocks, gold, bitcoin, etcetera. Timing So, uh, you have the Harry dance out there, you know, and plenty of other people Jeremy Grantham, Um, you know we're in a textbook bearer market bounce, we have a fift drop in front of us, um, etcetera. But then there's other people that say, no, the market structures holding up. The FEDS kind of has things going. Money is coming to us because the markets are worse, and maybe we'll just kind of continue and muddle kind of along. Um,

which camp do you find yourself in? Obviously without a first of ball, Yeah, I I don't really so don't think we have a crash in mind? So and I'll tell you why. So, just like the framework that we were discussing, the periphery falls first and money goes to the center. We see the UK falling, right, So they come out with this okay, so their bond market goes crazy and their and their currency depreciates. That means a

lot of people are taking money out. They don't have confidence, well, they don't like the outlook in the UK, or maybe they find the US more attractive, and they're putting money here. Now, I was actually just having this conversation with a foreign based investor. Suppose you are a UK based investor and you invest in the Nazzack. Okay, you're today, you would have lost a lot of money, right the NAZAC went down. However, when you look at it pound terms, you're not really

down that much. Maybe you're even flat because even though the NAZAC is going down. Uh, you you invested in dollars and um, so in local currency. As a dollar appreciates, you're earning that in pounds and the same thing. In Japan, for example, you can see the Japanese currency basically went from a hundred to add hundred forty, right, almost appreciation.

So if you're a Japanese investor and you invest in the US stocks, sure the stock market went down, but the dollar appreciate a lot, so in end terms, your

account looks more or less the same. Now, this is going to happen to a lot of foreign investors, so they're going to want to put money in the US because even if the U s stock market goes down more um, they're going to earn money from the fics appreciation and all it's going to go up, so they're not really going to They're going to be buffered from the losses in the stock market. That kind of puts support in the US. So much foreign money going in and just buying US assets. If that's the case, I

think it's it's hard to have a crash. Um you just have a lot of forere money pouring in and making money off the currency, the dollar appreciation. It's a good point. It's a good point. We talked about money going money, money increasing, and money decreasing and the booms and US and so well, maybe the FED is decreasing the money supply now we were also increasing because we're attracting all this international capital at the same time, it's

kind of instaying and then supply and demand. Are we going to have more capital coming in and then the rate that the FED is decreasing it by um It's it's a it's a similar thing as I was just talking about with bitcoin taking adoption in you know sub Sarain, Africa or Lebanon, where you have to break into the bank to even just get your own they're literally robbing banks to get their own money out and so, um, you're like, well, shoot, I guess I'll just take bitcoin.

I mean, it's down six, but that's better than losing all of it. Um kind of a thing. But to the yeah, lose, I'm sure the bitcoin is like if you in local currency terms, they're not losing anything because they're probably gaining. Yeah. Yeah, um yeah, that's a that's a really good point. Um man. I think that's good. I think we've covered a lot of ground. I appreciate you giving us that last bit of insight. You don't think there's a crash, and you told us why, So

I appreciate that. Um. And you've been a wealth of knowledge. I appreciate that. Um. So. I know you're pretty active on Twitter at fed Guy twelve. We're gonna make sure we link down that below. You also have a website fed guy dot com. Yea, um, anything else that you want to attention to. I know many, very many of their audiences are interested in monetary policy and the financial system. I also have this book it's called Central Banking one

on one. It teaches you about how the FED works, what the international dollar system is like, and um, a lot of a lot of the mechanics of the financial system. So if you guys are interested, check it out. It's on Amazon. It's very well reviewed of Oh yeah, you have four ratings there. Yeah, it's almost five stars. So I think it's something that would be helpful to your

audience if they're interested in the financial system. Yeah. I love that you have the money printer on top and you use the word you use the word money printing, which we all use. It's obviously we all know that's not how it works, but but but that's the common language. I'm gonna make sure we link to that Amazon uh description down below, and I'm gonna buy it as soon as we get off of this call as well. Leave your review on that. With that, Joseph, I guess the

go ahead and ended. Yeah, thanks so much for inviting me. It's a pleasure. Mark, thanks Jovins. All right, that's a rap. Thanks for listening. Hopefully you got as much good information about this conversation as I did. It's always great to get a different viewpoint and more specifically somebody who has intricate knowledge of the inner workings of the financial system and specifically the Federal Reserve, the Central Bank, and so

it was a great conversation. Hopefully enjoyed it. Check out the links in the description, follow him by his book, follow him on Twitter. And that's what I got to your success. I'm out.