UGO12: Why the Next Financial Crisis Could Change America Forever ft. Danielle DiMartino Booth

Welcome back to another episode of you Got Options from the CBO floor, brought to you by CHI Media and Top Traders Unplugged. Today we meet with Danielle DiMartino Booth, the ex advisor to the Dallas Fed and author of Fed Up. I can't think of a better time to be talking to our warsh. Becoming the new Fed president. Where will he go? What will the new mandate potentially be of the Federal Reserve? Is it still inflation or are we talking about backstopping the treasury and the debt?

Lastly, what is the final end game here? How will we get out of this multifaceted tectonic plate mess? I believe we're going towards a place where the US Equity market gets backstopped by the Treasury. At the end here, we'll see what Danielle thinks. (Music) (Music) Welcome to U Got Options, an exciting series right here on Top Traders Unplugged, hosted by none other than Cem Karsan, one of the sharpest minds when it comes to understanding what's really driving market moves beneath the surface.

In this series, Cem brings his deep expertise and unique perspective, honed from years of experience on the trading floor, to candid conversations with some of the brightest minds in the industry. Together, they unpack the shifting tides and underlying forces that move markets and the opportunities they create. A quick reminder before we dive in, U Got Options is for informational and educational purposes only. None of the discussions you're about to hear should be considered investment advice.

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And with that, it's time to hear from those who live and breathe this complex corner of the markets. Here is your host, Cem Karsan.

Welcome back to another episode of you Got Options. Today, I got none other than Danielle DiMartino Booth. Such a pleasure to have her. I couldn't think of a better time. With war just getting started, an incredibly Important kind of fork in the road for the Fed in a lot of ways. Absolutely. So excited to get into it. I know we have some different opinions, which always makes for a great conversation. And excited to kind of dive into some of these topics today. Let's do it.

Yeah. So first of all, I kind of want to start with the big picture. What is your view of Marsh and where the Fed currently sits? So I think Warsh is walking into a hornet's nest of dissent. I don't think he's got very many friends on that committee. I think they're making that pretty clear in what they're saying publicly. Ironically, Powell might be one of his greatest advocates.

He was very deferential in his last press conference in saying that he would step aside and make way for Warsh to be able to kind of create a consensus or at least try and wash his. Faced with the inflation that Americans are living, which we call that the headline inflation rate. And Worsh is younger. He's more in tune with the fact that we live headline. We don't live cork and fertilizer prices are starting to fall into food prices. We're seeing increases there.

We've come back down to $90 a barrel on West Texas Intermediate, but That's still way north. $25 a barrel. North of 65 barrels before Iran. So American families right now are having an extraordinarily hard time. I don't think that Warsh is going to be naive or stodgy enough to rely on the labor market indicators that are lying to Americans. I think he'll look for more real time ways of gauging the labor market. He'll get a lot of pushback from the staff though. There's nothing easy here.

And he could be facing a liquidity crisis. The hits don't stop coming if it's private equity or private credit or private anything. And we have to bear in mind as of 2024 the non banking global financial system was 258 trillion. That's 51% of global assets. Now does Warsh. Will he be faced with a liquidity crisis even if it's in a sector that's non regulated that the Fed technically doesn't have any purview of her? Yes he will.

Because so many of these non bank players are now too big to fail just like the big banks were too big to fail in 2007, 2008.

Yeah. And I think the one thing you didn't mention, I agree with everything you said, is that the national debt is to an Incredible level. Well, I mean that's a constant, it's a constant problem when it's a constant. Unsustainable at the higher interest rates. Right. So it's sure it's interacting. So I really think of it as like five major pressures right now. One, the market has just gotten, everything has become so financialized. The market is everything.

Now we get, we cannot let markets collapse or go down because the, the amount of leverage in the system is so big. Two, we have an incredible national debt that's growing and a major, major problem. Two, we have an inflationary problem which you highlighted, which is not just a recent problem, it's a problem that we've been facing that's been now consistent for six years.

Okay. On top of that we have populist pressures underneath the hood, which are part of what's driving that inflationary pressure. But that populism itself is only getting worse, worse as markets go higher and higher. And a lot of these things are in contradiction to each other and are causing major, major pressures.

Lastly, we have a confrontation with China which is leading to not only proxy wars which also increase inflation, but supply chain potential problems which could be inflationary, a lot of other structural problems. This is a bitch's brew of problems underneath the hood. And Warsh is coming right into this moment.

The big question, and I think what was highlighted by Hank Paulson just about four weeks or five weeks ago when he came out to Bloomberg, which I don't think is a coincidence, him coming out and speaking about this is how do we sustain our debt in the face of inflation, a rising 10 year bond which is driven by populism and competition, China.

And the big question is really is Warsh going to be willing, right, to stand in the way of what is ultimately, I think the only way out of this mess, which is inflationary monetization of the debt, some form of getting rid of debt over time or all at once in some form or another. And that means the Fed has to be fiscally prudent to do it or you know, improve it with monetary policy. What are your thoughts?

Is he going to just to stand in the way of what's, I think ultimately inevitable in terms of some type of monetization of the debt, or is he going to be the first one to kind of step in and begin that process?

Well, see, you have to look back at when and why Kevin Warsh stepped down from his governor position on the Federal Reserve Board. And that was in direct protest of qe and he did not believe in the efficacy of the zero bound and was not being heard, or at least one voice of dissent was not sufficient. And so he left. And in subsequent interviews he said QE was Robin Hood for the rich and that he wanted no part of it.

So I think if there is a solution that it's going to take on a form of nothing that we could sit here today and anticipate under worse, under somebody else. I think the possibilities are unlimited, but it's not. Unless Warsh wants to destroy his credibility forever, then I don't think you could say monetize the debt and his name in the same sentence. So I hear you on his history and whatnot.

But the simple fact remains that if he does not do QE right, at some point, the debt is spiraling out of control. Correct. And if you also raise rates in the face of inflation or do something along the lines to manage the inflation, you know, the Fed's in a box. And if they do that, ultimately that leads to a market problem. Right. And the market problem, as we just talked about, is itself a major problem for the economy. 50% of all consumption comes from the top 10%, as we know.

And again, the amount of leverage in the system, as you highlighted, is tremendous. So, so the Fed's in an unenviable position and washes without a doubt position. So, so how does he navigate this? How does he create, you know, discipline, back up some type of inflationary prudence. Right. Price stability prudence, while not threatening the whole system?

You know, that's a, that's a great question. I have no answer for that. Sure. You know, blackrock came out over the weekend. Blackrock was like, we think that there's sufficient evidence on the labor mandate side that the Fed's first rule should be a rate cut. They really went against all of the conventional thinking right now in the markets.

I think that, I think Warsh is wise enough to know that because Powell has been kind of trapped in this political quagmire with having criminal charges against him, that he probably understands why nothing, why the labor mandate has been ignored. But I think he does try and get a few plain vanilla interest rate cuts off in 2026. I don't know that he's going to. Again, he is at risk.

There are very few people, whether you're talking about a Federal Reserve District bank president or anybody on the Federal Reserve Board. I mean, doves have become oxen drag. They're actually speaking publicly against their own grain just to make a political statement. So if he's walking into a situation where they view him purely as a political patsy. He's going to have a hell of a hard time getting anything done but. Cutting rates ultimately in this inflationary environment.

First of all that's in complete disagreement with what the market's pricing. Right, you would agree. But importantly doing that will be seen as being a bit of a patsy to the presidency and you could argue could lead to the exact opposite, which is if we're in an inflationary environment, last thing you want to be doing is cutting stock. We're actually at all time highs valuation bubble obviously by lots of metrics, if not all. You have to bear in mind again, heaven washes younger.

It's not a ph economics this hearing. Things like food companies came out in the Dallas Fed survey today and they're like we're seeing unit declines for Saint Perfect decorations. We are having our margins squeezed to kingdom. We cannot raise prices and a lot of them are just closing. Small business bankruptcies are off rails right now. Bankruptcy cycle is in full house of steam.

So somebody's being harmed by the current policy because they don't have pricing power because essentials inflation is completely off. The rest services inflation. We're seeing disinflation wages. We're seeing disinflation in wages. In fact last month for the first time we had your average American worker. This is a good Financial Times article over the weekend. Is now on an inflation adjusted basis losing money. Yeah, but lowering interest, lowering interest rates is a supply side response.

At the end of the day those people who are hurting are not the one borrowing money. Lowering interest rates for the bottom 50% of America does not borrow money. They cannot. So with the real people that are. Hurt, businesses can't, small business can. But that's, that's supply. Right. Small businesses are creating and this is the whole trickle down economics model. Right. We see where that's gone. That's what's led to the inequality is the massive supply side response.

So you know, for him, for him to sit there and say, well the people are hurting, economy is slowing, at least at the bottom end, by the way, we have a bifurcation. Clearly the high end is doing incredibly well. And in response to try and help the bottom end of the distribution, lowering interest rates doesn't work. Right. That's, that's where the fiscal.

But we have to bear in mind that Americans were told while they had this massive run up in inflation for four years under the prior administration that they were imagining inflation. They were kind of cuckoo even though they were feeling it. But the Gaslighting was unreal. And now in the current administration, they're being told that the 69% of Americans who are being pulled by University of Michigan very close to where we are here today, that would think that the unemployment rate is rising.

They're being told that they're cuckoo too. So the gaslighting goes on. I think that Worsh could establish very much, much, much needed credibility with some honesty. So instead of getting up at the podium and saying the labor market is solid, as Powell's been doing for years, simply being honest and saying, you know what, this is not going to help you, but it might help the small business that's going to employ you. And by the way, we're not going back to the zero bound.

I'm not here to do a repeat of Robinhood for the rich because the, the rules of the road at the Fed are the Bernanke doctrine that was created in the summer of 2007 at Jackson Hole by Bernanke illegally, by the way, not a full quorum of Fed leaders gathered in a conference room and said that you must take the Fed funds rate to zero before you can engage in qe. I don't think Kevin Warsh is your man for the zero interest rate policy. That must predate the launch of QE in any form.

I don't think he's going to the zero bound. I don't think he believes it. I think differentiating so dramatically between lower interest rates and qe, yes, they're different and they act in different ways. I hear you. But at the end of the day, it's a, it's a matter of small, relatively small percentages. They both act generally in the same way through the monetary zero bound out. Exactly very differently than zero bound.

If he was to come out and say, choose the new zero, that would get a lot of respect on Wall Street. But we're far from the zero bound right now. Right? We're far from the zero bound, but we were far from the zero bound. When the pandemic we can talk about. We got there in a heartbeat. I think it's a. I agree with you. It's a different conversation where when we're at the zero bound, I think right now with interest rates at, you know, 4 and a 5%. Right. They operate in the same channel. Right.

They're both essentially providing liquidity to corporations and wealthy individuals. I would say, yes, interest rates probably work a little bit more towards not maybe not the 1%.1%, but more towards the 10%. Sure. We don't I mean we know that's the case. Yeah. Because small businesses, as you mentioned, real estate, etc. Right. That channel that of course is not the top decile. All businesses, real estate. Well, we're talking concentration, talking about as.

Kind of the second decile which nobody ever talks about. Sure. We can draw that line. I don't want to get too pedantic on. I think we agree on the major point there. Right. That there is interest rate. They're both supply side measures. By definition of monetary policy is supply side. The purse strings in theory are fully governed by, you know, Congress and fiscal policy, etc. We can, that's changing. But like you know, Treasury's more and more involved there.

But, but I want to be clear, like that is not the Fed's domain in theory. The problem increasingly though is if you do interest rates and you're not thinking about, you know, lowering interest rates and you're not thinking about the inflationary aspects as much and you're willing to let inflation run to, to, to bolster the economy and you're saying you're doing it primarily to help the poor, which is kind of.

Or that arguing at least that the inequality problem, you have a bifurcated economy and people are hurting. The problem with that is you're using the wrong tool to do that. At the end of the day, interest rates themselves are not the thing that's going to help. It's going to help markets more than it's going to help individuals on the bottom. We've seen that

historically. I mean this is the old Arthur Burns. We disagree there. I think a zero bound would help markets at the margin, but I don't think that a few interest rate cuts are going to help what. What the private market needs. What the private market needs, which again is bigger than the regulated. The non banking system. The non banking system does not want an interest rate cut or 2.

The non banking system wants somebody to feel get zero interest rate policy, reinstate it so that they can keep on with all of the financial games that they've been playing for decades that have made them bigger than the regulated financial system. And they want QA to be relaunched. They won it yesterday. As an ex member of the Fed, I'm sure you've read Arthur Burns treaties in the 70s talking about in the 70s. Remember that in the 70s we had aggregate levels of employment increasing.

We had aggregate levels of income increasing. The inflation sucked, the stagflation. We're not in the 70s yet. But, but we had. Yes, but we had Rising. We're in the late 60s I think or early 70s but, but we're heading. But the point is aggregate income was rising. Right now we have aggregate income falling. So you cannot use an Arthur Burns type of playbook because right now there is less money to be spent by households.

And that's a huge differentiating, differentiating factor which is why we're seeing services disinflation and wage disinflation. Arthur Burns after being at the helm of the Fed for long as he was basically his final conclusion was in these environments the Fed is useless. The Fed cannot, does not have the tools or the ability to affect inequality to manage inflation when it's secular right and driven by structural forces.

The populism of the period which we which started with Great Society program was affected by the Vietnam War was exacerbated by the OPEC crisis. A lot of things that rhyme with today. We're driven by the same forces that are driving this structural inflation today, easily. Drive us into structural inflation tomorrow. What you're talking about it already is,. It already has been. We're not at structural inflation right now. We're in the middle of being above trend.

The Fed has been unable to affect that for years. So if we don't agree on that. At this point that has been a thorn in the side of the of President, excuse me, a former Fed chair Powell. But they're also not gauging inflation. Now we have two months in a row of falling home prices. We have falling rents outside of AI affected cities. That is the large with a bifurcated economy. It's very uneven.

So we agree that like not all inflation and who, whose inflation we're talking about is very important as well. Right now the wealthy are kind of freaked out about falling prices. They're unhappy about that. So as long as the stock market hangs in if we continue to see the trend growing because mortgage rates are, mortgage rates are prohibitively high right now. But most people who want to engage in the house but, but the bottom. 50% are not able to engage.

And so, but they do benefit as home prices fall because rents continue to fall on the back end of that. And that is a good thing. Bottom 50% is that housing disinflation, that housing deflation is. That assumes lowering interest rates won't increase asset prices of that good which they always do particularly if you're lowering interest rates into an inflationary environment. But that brings Kevin Warsh back.

I think he's going to continue to roll mortgage backed securities off of the Fed's balance sheet and given his druthers, if there is some kind of a cataclysmic event, I don't think he's buying more mortgage backed securities. I think he's going to continue to roll them off and that, that he won't go there. And, and you can say that that's more likely based on his character. Yeah. And you can want that. That's all. That's all. You know that that adds a level. I agree.

From a principle like from a Fed principled independence perspective, I can understand why you'd want that and why that is more sound long term policy. We agree on that and just stay in treasuries. But that's sound long term policy.

And in order to get from where we are to sound long term policy there is a problem because you cannot go the path that you've gone for 40 years and then try and reverse with the level of financialization that we have and not crater the economy, crater the markets, crater Huge risks. Yeah. I mean more than huge risk. It's almost one to one at this point. There's no way this market can handle a 30 to 40% decline that last multi year or anything along those lines without a major risk.

Not just recessionary depressionary crisis and in order. What Warsh is up against is he's being asked essentially do you what's more important the independence of the Fed? The independence of, of managing the current situation that you're in or saving and smoothing the business cycle which is the whole reason the Fed creates and is created in the long run. Right. If we, if he goes this route, what. What does Warsh do Now let's look. That's the first act.

If he takes that step and then the market craters. Right. Ultimately on

right average or inflation on. Average an 11% drawdown in the first three months. This is post World War II. On average the average Fed chair has seen an average 11% decline in the stock market in the first three months of their tenure. But then what comes after that? Right. That then you have to respond with qe. Then you have to respond. So why do you know that's the path? Why would you wait for the.

If your goal is to smooth the business cycle, why would you do that first step which then leads to a market route which then ultimately leads to your QE afterwards You're ultimately just. I mean hope it's not a strategy. But we can all hope that he is not faced with what Powell was faced with in 2018. At the end of the day, I think what you're arguing for is noble. It is also, you know, theoretic. The theoretical concept of the Fed, the independence of the Fed largely depends on it.

So we agree on all those things. I believe in some level of people respond to incentives and at the, at the end of the day the structural, the five things that I mentioned at the top of this. Right. Are all pressuring. They're like, you know, plates, tectonic plates and the amount of pressure in the system, it may seem calm, but the amount of pressure in the system is so dramatic I think that a single shift is going to create massive earthquake level reaction.

So he has to see that, he has to know that and he has to be walking through the process right now trying to manage that outcome at the end of the day and in putting in front of that reality, that pragmatism, a level of theoretical what they should do to maintain independence, etc. I think is, is unlikely because the incentives and the pressure in the system are so big. It doesn't wash a bad person though. Besson could, could easily launch a massive buyback.

Yeah. At the long end of the curve it could easily shock the market and go that direction and take some of these. It would, it would not please some of the largest traders of off the run bonds, one of whom used to be headquartered here in Chicago. But Besant could announce a massive buyback. Right. So this is the point. Warshaw does not act independently like he has to operate within the administration. The treasury can buy back Treasuries on its own. Yeah, no, I can't.

The treasury and Vesson can do that independent of any Fed and that would actually really help Worth. True. If it's the same thing. It's not the same thing. If Bessant's doing it versus Warsh doing it. It's not the same thing. Well, in terms of the market outcome, it's the same. Right. But in terms of impinging upon Fed. Independence, what's number right from the focus of Fed independence. I agree with you but the point is I think it's whether it's worse or Besant.

This in my opinion is inevitable and importantly and I already kind of mentioned it briefly but, but we, you know, just four or five weeks ago, I think this is the one thing that way too few people are talking about.

I think it in this news cycle nowadays, like you pass by things so quickly, the most important thing by far that's happened last four or five weeks is Hank Paulson coming out to Bloomberg and telling the world multiple times that we have a Treasury crisis coming and that we have to prepare for that crisis and that we need to backstop the treasury market. So who would you rather have at the helm right now at Treasury, Paulson financial crisis, Aaron or Scott Best? Curious.

Well, listen, as a practitioner, as a hedge fund manager, as somebody who understands markets, I think the market having been so financialized, demands, I mean I want to make this point, I've made it before but $300 trillion of equity exposure in the world, if you count private equity account, private businesses internationally, mark goes up 20%, you create $60 trillion, give or take of new collateral, dwarfs the Fed's balance sheet and dwarfs and dwarfs the fiscal response.

Who do you think is a better market practitioner? Hank Paulson. What I'm saying is Hank Paulson Basana has to be because. Yeah. And that's why he's in that role. No doubt about that. That doesn't mean Hank Paulson, I want to be clear. I don't think Hank Paulson went on Bloomberg and said this without he's a very thoughtful person. Without talking broadly to treasury and wanting this message to be out there that I see as a major trial balloon that hasn't been discussed broadly publicly.

And what that's telling you for the first time out loud that it's coming. What we've known for a long time that the only way out of this debt mess and backstopping essentially the debt issue with inflation the way it is is ultimately to monetize the debt.

Now whether that's the Fed or the treasury or the federal treasury working in concert together, would a massive, would a. Massive treasury buyback not bring back, not bring down rates the long end allow the Fed, the Treasury to replenish some of those? Sure. But at the end of the day we have lower on government. We have to understand. But would it be nice to fund government at lower long term interest rates and quite issuing so many bills?

Well, the second they start to, to come in lower interest rates, it'll keep raising those interest rates. I mean there's a point here where at some point we need to create more dollars. Right. Like you can't, you can't. The, the treasury doesn't borrow money. How does the government spend? No, no, I, I completely understand the working everyday dynamics. I'm just saying that that besent has other tools that in the by for. At some point they have to keep borrowing money.

At some point that money has to come from somewhere and that's where the Fed has to come in. But they could be borrowing at the long run. Yeah, I think that that all assumes. That a friend of mine sold him. And lower interest rates enough to then borrow at those lower interest rates without pushing them back up. And I don't think any of that's possible ultimately.

Like mathematically it just doesn't make make sense unless you have the Federal Reserve able to hit the print button on the other side. But, but the big idea here is that debt problem is given the other pressures, it only has one way out ultimately. Right. And the fiscal, you know, this train doesn't stop. We had, you know, that stuff is still very true. And that

spending is only increasing. It's not going, I think that spending could go parabolic in 2028. I think, I think voters could vote in a Gavin Newsom. I think that's entirely possible. It's likely. It's not, it's not even possible. We're seeing it. And when it's been likely for a decade and we've, and it's going to continue. We agree. And if that happens, then you have a structural inflation problem. It's already, it's already there though. It's in the structural inflation problem.

It's just as it's, it's growing. It's not structural yet. Right now it's being driven by many different forces. But because the layoff cycle is where it is and because the need for money to spend today is what it is, if you were to have a Newsom as president and implement the policies theoretically, they would mirror image what was implemented after Covid and you would be paying people to not work.

And this is the third class of 2026 that's just crossed college stages all across the nation with no jobs. So if you're going to satisfy that populace and you're going to pay them to not work and that will be, it'll be structural, but it won't be where it is today. It'll be three times that level. You'll have double digit inflation as far as the eye can see. Yes, it'll get dramatically worse. And that's the, but that's the trajectory we're already on is my point.

It's not like we're not on that trajectory. It'll be a flip on. I think the thing that people miss, policymakers in general miss the broad public misses and they attribute like populism to just the fiscal spending part. What most people don't realize, if you put up tariffs, which ultimately protectionism is the cousin of populism. You can't have populism. Without some level of protection. That's why we're having immigration policy, that's why we have tariffs.

All those things are deeply tied into populism at its core. If you, and once you do that, that creates global conflict. That creates a commodity crisis. Because now you have multiple countries bidding over, you know, commodities that are, that are centralized in certain places. This is why the OPEC crisis happened in the 70s. It's not a coincidence. Is why we're seeing the same stuff again. It's why Vietnam happened at the time, why the Cold War expanded during the time.

All those things are tied to populism. People don't. That people don't see them independently, but they're all incredibly linked. I couldn't say more. So that's driving the structural yield on. The ten year treasury people. Yeah, people just do not connect the dots. The Yield on the 10 year treasury on February 27th, that Friday closed at 3.96%. Yeah. There was a serious risk that the private risk illiquidity bomb was about to be detonated. And lo and behold, that night missiles flew.

Yeah. And we had a supply shock overnight. So rather than have the tenure under 4.4percent, which Bassett understood how critical it is. Yeah. Because illiquidity is the Fed policy has squat to do. You can debate inflation and labor markets all day long. No, no, they can't. But in a, in a, in an illiquidity crisis, the, the Fed is completely cut off at the knees and they are prompted to print money. Yeah. Overnight. I promise the same thing.

Which is, which is those incentives are all there under the structural realities, under the forces I just laid out. There's no other way out. It's all about incentives. Then monetizing the debt and whether it's the Fed or the treasury to ultimately inflating your way out of this mess. Because it was a deflationary shock. It caused that tenure to close at 3.96%. And they cannot, they cannot, they cannot have a deflationary cycle.

Deflationary shock has been, has been, has accompanied every single launch of the. Yeah. So we're on the same page. The question is if you have this and all the incentives pushed to deflating away, inflating away the debt, that creates a major problem for the debt. Right. Because in the short term you have interest rates go higher. So you have to somehow try and manage in the short term that debt.

And this is why I believe that war will be forced whether he likes it or not, regardless of his character, regardless of anything else. We feel he'll be forced much. You know Arthur Burns, Ben Bernanke was forced to launch qe. Yeah, I want to say Arthur Burns gets talked about like lampooned about cutting rates as inflation was going higher. But the reality is he fought that impulse initially. He wasn't the lackey everybody makes him out to be. Early on he eventually, you can argue.

Worse, Nike didn't fight. He willingly went to the zero bound. He willingly launched qe. And at the same time, in the same breath he set the Fed's 2% inflation target. Couldn't hit it though. Yeah,. Because of the transmission mechanism of monetary policy. And that's why in the decade or so after Bernanke imposed the 2% inflation target, he hit it 11 separate months. I mean the QE was flowing into the system, it was benefiting, it was widening decay, it was going straight to the wealthy.

Zero interest rate policy was blowing up the financialization. But it's been the case for 40 years. But it didn't go to the people. What happened after? The reason we got inflation taking off like hell in a handbasket was because what happened after Covid destroyed the transmission mechanism of monetary policy. You no longer had to go to a bank to get the money. The government just handed it out directly deposited into individuals bank accounts.

The money was there, your orders, with the highest propensity to spend, spent it overnight. And we had double digit inflation. You're absolutely 100% correct. What monetization of the debt does. It hands money directly to the people, bypasses the banking system. Correct. You have to drive money to people, directly to people. Directly people. Agree. Two people broadly. You can create inflation through fiscal spending like we did. Only because we destroyed the transmission maintenance.

We took banks out of the, out of the process. Which Bernanke either never figured out or was never prompted to do. Yeah, the, the, the reason we were able to drive a structurally deflationary process is because we 440 years have been responding to every crisis with a monetary response with supply side economics. Post Covid was the only time we gave the money directly to the people. And then we got inflate because.

And I think we agree on this because quite frankly inequality got to a point that populism has gotten so big that now when there is a crisis you can't just print more money. You have to get money to people. That's why people are angrier today than they were back then. Because all it did was create inflation and then the stimulus went away. Well, they're actually the actual.

Despite the inflation, the actual inequality was normalizing a bit before we flip back now to a supply side response, which is what we started doing now in the last year and a half. The anger is because actually we're now moving back away from that fiscal response. Real wages are falling. So people's wages are not covering the rise in inflation. They're cutting back on essentials. They're shortening their, their summer vacations. They're dying with gas, gas, gas prices where they are.

They're spending actually. CPI for food printed at 0.0% two months ago. People are buying less food. You don't anger people more than when they're telling their family, sorry, I'm going to be able to take a vacation this year because we just don't have money for discretionary spending. There's nothing that angers people more. And by the way, now you have to pay back your student loans and your parents have to answer me this.

2028, let's say it's not just the 52.5% of Americans who are Gen Z and Millennial. What if Gen Xers? What if their parents my age joined them because they've got kids living at home? We have data back to 1900. We're writing about this. Never had this many multigenerational households in the history of mankind. You've got class of 2024, the class of 2025, class of 2026, under unemployment rates, 50% among these moving back in with their parents in Groves. Their parents are pissed.

What happens if Gen X joins Gen Z and Millennials

at the polls in 2028? Yeah, it's going to happen. It's already happening. It's just an addition, yet it is in the process of happening. It's clear where this is going. Baby boomers are dying. They're the ones that support a more supply side policy. They own those stocks. Millennials are coming to political dominance and everybody below them is just joining to that wave. That's clear. And that peaks in 35, 36, 37. We 100% agree with a limited time. We have about 10, 15 minutes here.

I want to posit the idea here that ultimately, based on what we're saying, that the Fed's mandate, which is essentially managing inflation relative to maximum employment. Right Then. They're inherently in conflict. They're inherently in conflict. If anything, they're in a box now and they have, you know, in this Arthur Burns moment where they really can't do much. They're at a level of last.

Yeah, but they can't do what they've essentially done for 40 years because they have an inflationary problem which is structural and secular. But, but given that all the pressures in the system, the one thing that is front center above that is the debt of the United States. The debt of the United States is to a point where with increased structural increasing inflation, it's just unsustainable. The numbers go to infinity. Right.

And, and at the end of the day my opinion is that the largest, the most important mandate of the Fed. It's unspoken now and I know it's you, you probably won't agree with this, but it's going to start shifting and people can refer back to this in four years and eight years they're going to start shifting to prioritizing the debt of the United States over even inflation. They are going to ultimately say let inflation go at the cost for the benefit of managing the US debt and monetizing the debt.

I think that is the one part we have never seen in the United States. And it's something that changes dramatically the whole way the structure works in fact. I mean it destroys the Republic along the way very quickly potentially. And it destroys the risk free status of the US treasury and it destroys the reserve currency status of the US Dollar. I agree, but it's the only way out. It's the only way out. The only way out. And it may not. It's the only way out of the debt problem.

It's the only way to preserve in a sense the actual fundamental structure of the Republic. It may, you know, destroy the heart of the Republic along the way. It may. It will definitely shift the structural what is allowed, what's not the rule of law in certain different ways. It'll change, it'll move the goalposts. But that happened in Japan already. It already happened. Japan never had reserve for. Yeah, yeah.

I mean well, they were backed by the U.S. the U.S. backed them in terms of the reserve. Is why my. I have three sons, I have one daughter. The one daughter is the only one who stuck with it. They all learned Mandarins age of four. Yes. Slow it now. Yeah. I mean everything you describe is, is why I had her learn Mandarin. Yeah, it's. You have to have. You've always got to have a backup plan. I agree. Not as good backup plan. If what happens in 2028 happens.

I don't think though and I think that's an important part. The confrontation with China is critically important because the one lever that the United States has, you just mentioned it is the exorbitant privilege of the US Dollar still so at this point we could. Argue well China doesn't want reserve currency status at all. Not at this point. Not at this point. Not in the position and on the position to. But that that is the trump card, no pun intended.

At the end of the day if you have the exorbitant privilege of the dollar in theory you can print and print. Right. And you can, you can now fund a lot, you can monetize your debt that we know. Right. And then you can ultimately also in theory and I think this is the second big point.

Not only is do I think that we're shifting focus from inflation versus unemployment but I think we're shifting the role of treasury and Fed towards more of a China like model but with the exorbitant privilege of the US dollar to help fund infrastructure, build out competition with China, et cetera. I, I think in other people's. Yeah, those are good things you just mentioned. Yeah, two good things. Yeah, yeah. I mean good or bad, that's Eisenhower level stuff.

We have like our infrastructure is third world compared. But the difference is we're doing it through printing. We're doing it through which is very. Different than what the private sector. I mean what Norway's doing great. You know, you could argue like they have their own sovereign wealth fund they're creating. This is again if you're the U.S. it's, it's a, you should use the resources you have and if you have the German privilege of the dollar, it's the greatest asset of the United States.

It's the greatest lever vis a vis China. It's the only way actually I, when I look again at those five things that were pressured against it's the only way actually out. And so I'm going to say it right here. I think there is a move towards not just the creation of a, we know there's a creation of a sovereign wealth fund but I think the size and scale of the essential money printing that will essentially go into buying US companies and a build out essentially that will.

Which will rival anything we've ever seen in terms of the Republic. We could argue that that's a, that's definitely a risk. I mean I don't want to speak in absolutes. What I can tell you is if we don't do something like this we will lose to China. The west broadly will. It's on that path and if they don't do it as well the debt problem is, is unavoidable and the financialization and the size of the equity market is also unsustainable. Without

it. So this is what do we do with. What do we do with the population? The population. Well, this is another. Solving this can solve the only way you can solve the populist problem without pricking the equity bubble as well, because. You do with the non working people. Yeah. So this is what I'm actually saying. So you're Instead of giving UBI instead of, which is a form of UBI 7 instead of giving people ultimately just dollars, you're giving them equity.

You're buying them in to the equity markets, which supports the equity markets invest in the industrial capacity and the businesses of the United States. You're also helping tax the rich by ultimately taking equity. But they could sell the stocks. Yes, they can sell the stock. Right. They have assets then they don't have assets. They would sell the stocks if they didn't have food on the table. Absolutely, absolutely. Or you know, something that looks along those lines.

But, but at the end of the day this will drive hyperinflation, which is what we can, we can agree if they do this, any form of printing money, especially going into equity markets will drive a incredible amount of more asset inflation even than we've ever seen in these environments. Usually in these environments like 62 to 82, what you actually end up seeing is equity markets do very poorly. Right. As particularly in real terms.

But under this type of a model where you are instead not buying just Treasuries but vis a vis the treasury buying equities themselves. That is what every solution. I mean that also resides all the. Things have a discussion. A few years ago I was at Camp Kotak fishing with my buddies and everybody I spoke to, everybody I spoke to said inevitably the Fed just buys. Yeah. And Japan's already done it. So there's a precedent. Right. National banks done it enough. Right.

So I think that's the one thing that everybody is underpricing or maybe part of why markets are doing what they're doing in the face of all of these concerns ultimately is I think there's. Some structural forces behind merrell. There are 100. I'm just saying if there's any argument for a forward looking efficient market, which I don't fully with it is this reality that ultimately the response to this is to buy the equity market itself because there's no other way out.

It's the only elegant solution for all these problems. Kevin Wirsch would be the person at the helm. I think Bessant will be the person at the helm. I think it's going to happen in the next two and a half years. I think the sense already launched a sovereign wealth fund. They're already talking about. I think the Fed is forced they don't have a choice. No no, no to ultimately what you're describing is the Fed going away. Right.

Merle Merrill Eccles stayed at the Ford and stayed at the Fed in 1948 because Truman wanted him out because he wanted for the treasury to take over the Fed and he stayed. And then There was the 1951 accord that separated the treasury from the Fed. And since then there's not been

a merger. What you're suggesting is there there is. Going to be a force merger. And I'll ask you I'll tell you why I think that I don't think Kevin Morse well, let me ask you a question then again I'm all about incentives not not his character or anything else because those things ultimately get you know people with character also been under incredible pressure to do what they have. How believe in QE when he started this.

So I want to make sure we're not talking just about his character but about his incentives. If we actually if Warsh is faced with a situation where let's say Bessant this is very hypothetical. Okay. But this is going to sound extreme but I want to paint a picture. Let's say Besant et al create a sovereign wealth fund, fund it with a couple trillion dollars. They already have 1 trillion or so dedicated from Fannie Mae and Freddie.

But let's say they take other extraordinary measures and start the sovereign wealth fund in the process of that. They then say we're going to borrow against the assets that we have and also borrow another $3 trillion to fund and make this a $5 trillion sovereign wealth fund. This let's say this happens in the next year and a half. Okay. Just painting a picture. This is awesome. No sounds crazy to most. We'll come back to the tape in four years and see how crazy it was.

I have a history of saying crazy things that seem to be that seem to come true way more often than people realize. But let's say it happens in the next two and a half, three years. Okay. What then with the another three four trillion dollars of debt. Right. Is you mean three, four trillion additional in addition to what's being created every. Three every three months anyway. Right.

We're creating a even bigger debt problem which then ultimately is unsustainable which leads to even more borrowing. Because everything you describe let's be more. Specific than collapse of the Republic. No, I don't I don't think we can. What are the steps. What are the steps that lead to the collapse of the republic? At that point Warsh is then forced to make a decision. He. The Fed has to respond at some point too. And we're a banana republic. If the Fed is.

Is absorbed in US treasury, there are no. Well, I mean we weren't a banana republic before the Fed. So the arguing that is also not necessarily true as well. Right. I think we could let the market go back to 70 and taking ourself. Off the gold standard and doing what we did in 71 also. It's a crazy stuff. Yeah. It doesn't. That hasn't taken us off the gold standard people argued would make us a banana. The dissolution of the. You could argue we're already a banana. The end of the Republic is.

We know it as we know it. That's the key. Right. We know it. That's the key. People actually want to be born here and, and grow up here as opposed to leaving for another country. My point to you is that I think war will not have a choice and if he doesn't want to do it that he will leave. All right, but, but. And that's possible to shake his hand.

But my guess is he has thought through the things that we are talking about and that he ultimately realizes that if he's put in a situation he will do what he has to do. He has given the signal that ultimately I'm going to be fiscally disciplined. I'm going to try and keep the independence of the Fed. I'm going to do the xyz. But ultimately my role is to smooth the business cycle and be here to manage the business cycle and make these.

Hard down in history as being the person who dissolved the fact. He will be Arthur Burns in history. Yeah. That would be. Not necessarily because he's a bad. That would make. That would make the evolution of worse end times worse than the evolution. Yeah. Yeah. And he's. Why he would. Why he would choose that I don't know. And he certainly is not sounding like that now. So it will be the biggest pivot in the history of mankind. There are structural problems. The last thing we'll touch on.

I'll be very quick here. I know we're limited on time here, but there are structural problems that we don't think about with the Federal Reserve when we created the Federal Reserve. I know you agree that the Federal Reserve is broken in the way it operates currently. Right. But I would actually argue one step further that the Fed and Its core and its creation is a series of contradictions.

Our founding fathers would be probably rolling in their grave if they said, if they realized that we were creating something that would ultimately smooth the business cycle. Because the

whole foundations of America, they. Have been spinning in their graves since the Fed was giving the employment. Yeah, I think it starts well before because corrupted because the problem is at its core, if you smooth the business cycle, if you respond with one tool, with one limited set of mandates to a very complicated problem again and again, again, ultimately, that smoothing of the business cycle, it disrupts the fabric of what America is. And then I wrote a whole book about that.

Yeah, I wrote a whole book about Greenspan creating the Fed put. And the distortions that. That introduced into US Markets and the idea that the Fed will always back. But that's core to the Fed's mandate of smoothing the business cycle. Right. Of controlling markets. If you, at the end of the day, if you stop crisis from happening or try and limit crisis at the core, America ability to pass longer America. No, no, actually. Yeah. Well, that's true, yes.

Because at the end of the day, the unanimity that's needed by Congress to pass laws, to make amendments, to make real structural changes depends on crisis itself coming. I would argue the coming crisis that we are highly likely to see at some point, in one form or other, massively inflationary or deflationary, is ultimately going to drive a crisis which is needed. It is the only way to reinvigorate the system and ultimately create an outcome that will refresh and allow America

to continue for the next hundred years. That suggests bad players and financialization being eviscerated, which would not be a bad thing. We go back to being a capitalist. We agree on that. I think the Fed, though, at its core is structured at a very distance in a way that has good intentions to smooth the business cycle, to create a better outcome for people over the short term. We don't. But ultimately breaks the whole. We disagree there. I think Greenspan wrote that. A spirited debate.

Wonderful having you. Thank you so much for coming and I think this will be a great one. Everybody else, great danger, I found. Absolutely. Thanks for listening to Top Traders Unplugged. If you feel you learned something of value from today's episode, the best way to stay updated is to go on over to your favorite podcast platform and follow the show so that you'll be sure to get all the new episodes as they're released. We have some amazing guests lined up for you.

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