Lyn Alden Breaks Down Fiscal Dominance, Inflation, and the End of American Middle Class Prosperity Part 1

What's up, everybody? It's Tom Bilyeu here: If you want my help... STARTING a business:join me here at ZERO TO FOUNDER https://tombilyeu.com/zero-to-founder?utm_campaign=Podcast%20Offer&utm_source=podca[%E2%80%A6]d%20end%20of%20show&utm_content=podcast%20ad%20end%20of%20show: https://tombilyeu.com/zero-to-founder?utm_campaign=Podcast%20Offer&utm_source=podca[%E2%80%A6]d%20end%20of%20show&utm_content=podcast%20ad%20end%20of%20show https://tombilyeu.com/zero-to-founder?utm_campaign=Podcast%20Offer&utm_source=podca[%E2%80%A6]d%20end%20of%20show&utm_content=podcast%20ad%20end%20of%20show SCALING a business:see if you qualify here. https://tombilyeu.com/call: https://tombilyeu.com/call Get my battle-tested strategies and insights delivered weekly to your inbox:sign up here. https://tombilyeu.com/: https://tombilyeu.com/ ********************************************************************** If you're serious about leveling up your life, I urge you to check out my new podcast,Tom Bilyeu’s Mindset Playbook https://open.spotify.com/show/47VE90Cittmo6TGGFqg2xf —a goldmine of my most impactful episodes on mindset, business, and health. Trust me, your future self will thank you. ********************************************************************** FOLLOW TOM: Instagram:https://www.instagram.com/tombilyeu/ Tik Tok:https://www.tiktok.com/@tombilyeu?lang=en Twitter:https://twitter.com/tombilyeu YouTube:https://www.youtube.com/@TomBilyeu In this must-hear episode of Impact Theory, Tom Bilyeu is joined by renowned macroeconomist and financial author Lyn Alden for a hard-hitting look at the structural forces impacting your wallet and America’s future. As someone who has built a reputation for cutting through economic jargon to reveal what actually matters for everyday people, Lyn Alden is here to demystify why government debt, reckless fiscal policy, and the mechanics of inflation are rapidly eroding the power and stability of the middle class. Together, Tom and Lyn explain critical concepts like fiscal dominance vs. monetary dominance, why debt ratios matter, and how budget imbalances fuel asset inflation and wealth inequality. They discuss the long-term trends that have quietly shifted America’s economic landscape, delve into the hidden dangers of modern deficit spending, and set the stage for what’s coming as fiscal policy spins out of control. Get ready to rethink the very nature of money and the risks we all face. SHOWNOTES 00:00 – Tom introduces Lyn Alden and the reality of fiscal dominance 00:17 – Lyn explains monetary vs. fiscal dominance; fiat currency dilution 01:52 – The evisceration of the American middle class through inflation 02:49 – Why fiscal dominance is more dangerous than monetary dominance 04:16 – How the Fed historically controlled inflation—and why that no longer works 07:31 – America’s deficit spiral and interest expenses 09:22 – What’s different now from past debt scares (debt-to-GDP, demographics, end of low rates) 11:18 – Surging deficits outside of crisis times: what’s new and why it matters 13:38 – Why Americans are ignoring the debt danger despite mounting consequences 15:50 – Populism, currency debasement, and consequences for society 18:25 – How debasement fuels wealth inequality and social unrest 20:42 – Trump’s diagnosis of the trade deficit, policy responses, and real solutions 23:36 – Tariffs, tax policy, and political polarization—why it’s so tough to fix 28:38 – How the global reserve currency role both helps and hurts American prosperity FOLLOW LYN ALDEN: Twitter: https://twitter.com/LynAldenContact Website: https://www.lynalden.com Learn more about your ad choices. Visit megaphone.fm/adchoices https://megaphone.fm/adchoices See Privacy Policy at https://art19.com/privacy and California Privacy Notice at https://art19.com/privacy#do-not-sell-my-info.

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:00Tom Bilyeu?

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• 1:30Tom Bilyeu?

  In this environment, if you don't own assets, you are being left behind. And most people don't own a meaningful amount of assets. Today, I'm joined by Lynn Alden, one of the sharpest economic minds around. In this interview, she breaks down how fiscal dominance works, why the middle class is evaporating, and what you can do to protect yourself from being steamrolled by a system that is stealing from you. Without further ado, I bring you Lynn Alden.

• 2:00Tom Bilyeu?

  The government spends so recklessly that the average person is now stuck in a world ruled by something called fiscal dominance. It impacts our lives way more than they realize. Can you explain it, though, in a way that makes people sit up and realize that they need to do something about it?

• 2:17Speaker 01

  I think one way of kind of thinking about it is that if you're in any way involved in a fiat currency system, as we all are, you're being diluted. And it's happening to everyone at different speeds depending on where they live in the world. Obviously, this is going to be mostly, I think, American listeners. We were actually saying right before we started recording that it's a very macro-heavy decade. And so people can kind of ignore finance, but finance won't ignore them. To talk about fiscal dominance, it helps to kind of set the stage for like, what is the contrast, which is monetary dominance? So in most financial history that people are kind of familiar with over the past several decades, it's central bank policy and it's their effects on bank lending that determine

• 3:01Speaker 01

  a lot of the aspects of the business cycle. And what's different about fiscal dominance is that the fiscal deficits are so large and there's such a large existing stock of total debt that the Fed's policies don't work the same way anymore in terms of either trying to accelerate or decelerate inflation. And we get kind of locked into a more persistent type of debasement that you kind of somewhat see in emerging markets. And so we get kind of a version of that, like a lighter version of that in a developed country. And so the reason people have to care about it is because when we're running very large deficits, there are those on the receiving side of them and those who are not. And if you're not on the receiving side of them, it really pays to have some sort of

• 3:43Speaker 01

  protection against it or to be aware of how the mechanics of that are working.

• 3:48Tom Bilyeu?

  Okay, so one thing that I'm always trying to get my audience to understand is that the reason that the middle class has been eviscerated is that inflation is not a law of nature, which, much to my embarrassment, is basically what I thought. It was just sort of the algorithm running in the back of my mind. I didn't realize that we were creating inflation. It's not a law of nature. But it does, when you call it debasement, it reduces the amount of things that you can buy with a dollar. It's a really easy way to think about it. So the way that that eviscerates the middle class is that it basically forces you to own assets to avoid that, the negative effects of that inflation, the debasement.

• 4:30Tom Bilyeu?

  So when we think about shifting into fiscal dominance, why is that so much more troubling than being in monetary dominance where the Fed can remain in control? Like what, you've talked about this as the train has no brakes. So how, what are the brakes historically? And then what have we done that has ripped those brakes off?

• 4:54Speaker 01

  Right, so throughout most of kind of the past several decades, when the central bank perceives that inflation's higher than they'd like it to be. And a lot of this is arbitrary, like even their targets of where they want inflation to be are pretty arbitrary. But in the US and globally, they've decided on certain numbers, currently 2% is their, at least the way they measure it, their target. When it gets too high, they have a variety of tools to try to slow down that inflation. And primarily what they go after is to try to reduce the amount of bank lending. Because in our current fractional reserve banking system built on top of central banking, when a bank lends money, it actually creates money, broad money.

• 5:33Tom Bilyeu?

  Out of thin air.

• 5:34Speaker 01

  Exactly, yes. And so, for example, in the 70s, which were a well-known inflationary decade, there were multiple things that contributed to the inflation, including, for example, oil shortages. But a key background thing was that there was an above-average rate of bank lending happening, and therefore, an above-average rate of money supply growth happening. And that had a lot to do with demographics. The baby boomers who were young at the time were entering their home-buying years, which is kind of the peak period of credit formation. And so that was a more inflationary time. And what central banks typically do when they're experiencing this higher level of inflation is to try to slow that down somewhat. They'd rather have a recession than let it just get completely untethered from expectations.

• 6:19Speaker 01

  And so they raise interest rates.

• 6:20Tom Bilyeu?

  Because bubbles, bubbles like form, like what are they trying to protect against?

• 6:24Speaker 01

  They're trying to protect against people totally losing faith in the currency. Because weakness can get more weakness, kind of like how in nature, if an animal's weak, predators will go after that one. The same thing happens to currencies, especially emerging market currencies, but it can happen to develop ones too, which is if a currency is weak and it's devaluing quickly and the money supply is growing quickly and the interest rates are not sufficiently high, then actually more people will come in and borrow it and buy almost anything else with it. They'll buy another currency, potentially, that yields better, or they'll buy gold, or real estate, or pretty much anything that they perceive as being more scarce and likely to appreciate relative to that currency, and that ironically creates even more of that currency.

• 7:08Speaker 01

  So weakness begets more weakness, and they try to short-circuit that by raising interest rates to try to, one, strengthen that currency relative to some others, and, two, to make it less desirable to borrow it under more circumstances. So some entities are borrowing it, but they're basically increasing the hurdle to make it less desirable to borrow, and that is an attempt to slow down the money supply growth. What's troubling about fiscal dominance is that, so during the 70s, when they raised interest rates like that, it has kind of two effects, but one's bigger than the other. So the bigger effect is that it slows down bank lending, which is what they're trying to do. The negative effect is it actually increases the federal deficit because the government's

• 7:53Speaker 01

  interest expense is now higher. They're paying higher average interest on their existing debt, and so they're actually ironically increasing their deficit, which could be inflationary. But their total bank lending is a much bigger negative effect than that deficit. The problem in fiscal dominance is that's reversed. So in the current era, the US government's average annual fiscal deficit, like how much the difference between our taxes and our spending, that's a bigger amount than net new bank loans in a given year. And it's even bigger than the sum of net new bank loans and net new corporate bond issuance. So basically, yeah, public sector credit formation.

• 8:34Speaker 01

  Is is now bigger than the private sector by you know several ways of measuring it. And the problem is that when you have over 100% debt to GDP on like the 70s where they had 30 something percent debt to GDP. So now you have over 100% when the Fed raises industry rates to try to slow down bank lending and try to harden the currency. They actually blow out the fiscal deficit by an even bigger number than they slow down net new bank loans.

• 9:00Tom Bilyeu?

  And just for sorry for people that aren't super familiar with the word fiscal. Fiscal literally means the government spending. So when we say fiscal here, we're just talking like government debts are getting crazy. And so if you try to rein in the private debt creation by raising interest rates. You're actually raising the amount that the government has to spend to meet the hurdle of the ever increasing debt. Because they're bringing on more the interest payments begin to compound. And so hence the runaway train.

• 9:28Speaker 01

  Yeah, and you get a fiscal spiral and and what the what some people like listeners might be thinking right now is that people have talked about this for decades. Right. They've talked about the debt's going to be a problem one day. And it's always it never really seems to materialize. And one thing I've been kind of emphasizing when I point this out is that some things have materially changed in recent years compared to when that was being said. So that the peak zeitgeist for the public debt being a problem was back in the late 80s and early 90s. That's when the famous like national debt clock went up in New York. That's also when Ross Pro ran like the most successful independent presidential campaign in modern history. And it was largely on on the debt and deficit as a big topic.

• 10:11Speaker 01

  And that was kind of the peak zeitgeist. And if you look at interest expense as a percentage of GDP, like federal interest expense. It was basically peaking back then because we had growing deficits and we also had very high interest rates. And so it was pretty fiscally problematic. But over the next 30 years, we had the end of the Cold War. So the fall of the Soviet Union. We had the opening of China. So we had these pretty big disinflationary forces in the world. We had all this kind of eastern resources and labor, western capital, all these things. We were able to come together is very disinflationary and productive. Interest rates are able to fall for the next 30 years. And if you increase your debt, but you cut your interest rate in half, your interest expense remains manageable.

• 10:56Speaker 01

  And that's basically what happened over and over and over again. And what changed more recently is a couple of main things. One is we we kind of ended a 40 year cycle of ever lower interest rates. We kind of bounced off zero. So even if we just go sideways now, we don't really have that offset the way we used to. So we said, rising debt, falling interest rates. Now we have rising debt and interest rates that are roughly sideways. And so we don't have that offset. And then two, our demographics changed. So now the baby boom generation, which in the 70s and 80s were in kind of the the peak home buying period. Now they're in drawdown of the entitlement systems. So social security, Medicare. And so they're they're they're and that's being spent largely into the economy.

• 11:39Speaker 01

  And so those two really big factors are what changed over the past 30 years or so, compared to when people were warning about this decades ago.

• 11:48Tom Bilyeu?

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• 14:09Tom Bilyeu?

  Thanks for staying tuned. Now let's get back to it. Okay, so how from a like raw numbers perspective? How does it compare back in the 80s and 90s when Ross Perot is making a ton of waves by saying this is a problem? And now?

• 14:24Speaker 01

  So the federal debt bottomed in the in the lower 30% range for debt to GDP. And then throughout the 80s, that was increasing into the early 90s. It was still fairly low back then, and that's when interest rates were high. But starting in the late 90s, that's when the combination of slower industry, like lower industry rates slowed down that interest expense by the government. And then also they did a variety kind of smaller things to actually give us kind of a period of a surplus briefly. That was also peak demographics. So it wasn't just the policy mix that made that possible. That was the combination of obviously the tech boom at the time of, you know, very high level of productivity. And then also the baby boom generation was kind of like their peak earning years.

• 15:08Speaker 01

  So if you look, for example, at labor participation rate, it peaked around like the late 90s, early 2000s in the country, kind of the multi decade peak was right there when we had that surplus. So it's kind of like everything going right together. And in terms of raw numbers, right now, basically, we're running this kind of six to seven percent of GDP deficit, which you normally only see in recessions. So that the biggest ever deficit we had was during World War II. The second biggest was was around the COVID era. And generally speaking, you only hit these kind of higher single digit levels and occasionally double digits during recessions or wars. So the fact that we just have it as a baseline now largely because of interest expense,

• 15:52Speaker 01

  kind of normal military spending and then the entitlement systems. That's where we're kind of entering a territory that's pretty unusual. And another quantification point, of course, is that our interest expense now exceeds military spending, which is generally not a good look for. The history of empires doesn't doesn't look great at that point.

• 16:13Tom Bilyeu?

  Yeah, putting it mildly. So I don't know if you know the exact number, but to orient people, we are now at 122% debt to GDP ratio. There's sort of a red line when you look at historicals of 130. So when countries hit 130% debt to GDP ratio, they tend to move pretty rapidly into internal violence. And the reason being that you're you're just getting into that inflationary spiral. You're doing like what we're doing now where you're hollowing out the middle class. You're getting this insane amount of wealth inequality, which just absolutely drives people nuts from a psychological perspective and they tend to get revolutionary, literally.

• 16:57Tom Bilyeu?

  Where were we like when this was peak zeitgeist and you've got Ross Perot doing his thing? And there's all this popular support behind him screaming about debt to GDP. Were we anywhere near where we're at now?

• 17:08Speaker 01

  I know, that was back in the 40s, 50s, 60% range for debt to GDP.

• 17:13Tom Bilyeu?

  So what is happening now? Like, how have we been bamboozled? Because I feel like I am trying to get people to pay attention to this. And they're not. There's not, you're now in a populist moment where you're getting a Trump, a Trumpian figure that rises up. Instead of somebody who's saying, "We're going to be fiscally responsible and reduce government deficit." He literally tweeted out, "Hey, I know you guys want to cut spending and so do I, but we can't cut too much because we have to be reelected." I was so traumatized by that tweet. So why back then were we able to get people to realize, "Hey, this is an escalating problem." And now, like, I feel like I'm banging the drum as loud as I can. You're far more eloquent than I.

• 17:56Tom Bilyeu?

  But we're not able to get, like, the average person to be, to recognize, I'll say it, and you may not even agree with this, but to recognize that the government is the problem. The policies that we are voting for are the problem. And if we don't unwind the deficit spending, we will never escape this problem.

• 18:17Speaker 01

  So I think, I think the reason why it's harder for people to get it is because it's gone on longer than a lot of people expected. And like I said before, it kind of becomes, if it takes so long to manifest, people say, "Well, maybe those people were overblowing the concern." So back in the, in the late 80s, early 90s, I mean, we were hitting like a trillion dollars in debt for the first time. That was a pretty big psychological number. And then you quickly add the second trillion around that timeframe. And there's just more awareness of it. And what it, what it kind of differed at that point was, you had multiple decades of declining debt to GDP after World War II. And in that kind of like the late 70s, early 80s period, that's when you started to have that trend reversal.

• 19:00Speaker 01

  So that started to concern people. And then, like I mentioned before, the interest expenses percentage of GDP was pretty high, even though the public debt was lower as a percent of GDP. Just because if you're paying 10% interest, it's easier to have a high interest expense than if you're paying an average of 2, 3, or 4%. Interest. And so a lot of people back then were warning that it was going to be a grave issue. And, and, you know, to the, the kind of devil's advocate would say, well, what happened to those people? They were saying, you know, it's, it's a imminent problem in, you know, five, 10 years. And here we are 30, 30 plus years later, depending on what starting point we're, we're looking at. And it's not been a crisis.

• 19:39Speaker 01

  People also point to Japan, which is well over 200% debt to GDP and say, well, if it's, if nothing's catastrophic is happening to them. Why should we worry here? Uh, and what I kind of say to push back on that is it's, it's less about an event. It's less about this one big crisis that happens, that the whole world agrees to sell off US bonds at the same time or something. Instead, it's more of this gradual negative impact. Uh, and so for example, you, you mentioned the rising populism. Uh, I would generally argue that's a, that's a byproduct of some of these, these trends that have gotten in place for quite a while. So the fact that, that, that the deficits are running six to seven percent of GDP every single year like clockwork now. That is already having effects, particularly for example, that, that fuels the basement.

• 20:23Speaker 01

  Meanwhile, the Federal Reserve is trying to keep interest rates tight, which ironically locks, uh, you know, younger families out of the, the home buying market. Uh, because these, actually these consequences do matter. Uh, and so I, as these kind of big, uh, policy gears are switched, there are winners and losers from them. Uh, and you generally get, uh, just that more rising populist aspect. And then you get often less productive at certain things. You get more violence, you get less, um, kind of just unification in the country. Uh, and it's, it's, you know, Japan, for example, I mentioned them that people point to them and say, well, they, they managed to not have a crisis. Uh, despite having higher debt to GDP. And the issue there is that they have a lot of things going for them, uh, that are somewhat different.

• 21:08Speaker 01

  So for example, they have a structural, uh, trade surplus. They kind of offset some of their, uh, debt issues. Uh, they've also got a very homogeneous population, therefore more, more kind of culturally unified, able to get through things. And then too, they, they have had basically not a good economic run for quite a while. So they are suffering ill effects, uh, of their policy. As well. And so basically, I think that as the whole world kind of enters this more fiscally dominant environment, at least the whole kind of developed world, the effects will probably be persistent and here. And it's different than saying, you know, things blow up five years from now. It's saying that the effects are already here. They're already out there. They're already affecting grocery prices. They're already affecting,

• 21:51Speaker 01

  you know, how easy it is to move around society and things like that. And it's that it's probably going to keep happening for quite a while.

• 21:58Tom Bilyeu?

  Yeah, that's a really good point. This is something I don't think people understand about the Japanese in particular. So you'll often hear the stat thrown around that 98% of the countries that have existed in a meaningful period over 130% debt to GDP have ended in revolution. The 2% is Japan. So Japan is like the the one release valve, but then they also stayed behind at the World Cup to clean up the stadium. No other country does that. So to your point about that unification, what what ends up happening in in these countries and the reason that I'm so eager to get my audience to like really take this idea seriously that you cannot evaporate the middle class without massive consequences is I I always thought that the end result

• 22:39Tom Bilyeu?

  of bad fiscal policy was going to be that you go to war with somebody else, that the outside world recognizes your weakness and they attack you. But what actually ends up happening is you attack yourself. And so people begin tearing themselves apart from the inside and they specifically do that because of wealth inequality. And when you look at the mechanism that's happening between why the middle class goes away is it isn't that they all get made poor. It's that part of them understand, like just rough math, half of them understand, oh, I have to own assets, like they get what inflation is. I have to own assets to escape this because the the dollar is going down in value, so I need a thing that holds that value. It could be a house, could be Bitcoin, whatever, but I need an asset that's going to,

• 23:24Tom Bilyeu?

  it it will optically look like it's going up in value, but it's really your dollars going down. But they get that. So they're now going, they're being pulled up into the upper class. And then half of the middle class don't understand that. And the only thing that they get intuitively is own a house. I can live in it. If you could live inside of Bitcoin, this would be very different. But you can't. And so they get a house like just intuitively, you don't have to tell them that it's an asset. They don't have to understand inflation. They just know I want to buy a house. I want to live in it. And so in doing that, when that works, they can stay in the middle class. Once you mentioned this a minute ago, once that house becomes impossible for them to buy. Now all of a sudden they get pulled down into the lower class because inflation is eating away their ability to store wealth.

• 24:07Tom Bilyeu?

  And it's like, man, if we can get people to understand that, okay, that creates this wealth inequality. The wealth inequality makes the have and have nots hate each other. I mean, basically the have nots hate the haves. And then they they end up revolting, literally it becomes bloodshed, the whole nine, like it is absolutely wild. And so heard that it just happens so slowly. This is how you boil a frog. And so now everybody is like, ah, I've heard people screaming about this forever. But it's like, if you're mad, you're mad because it did come to fruition. It came to fruition slowly, but it actually did happen. And so we're now in this moment.

• 24:46Tom Bilyeu?

  And when you look at that, how do you contextualize someone like Trump? So are Trump's policies going to help us out? Are they going to hasten the decline? Like, where do you fall on that?

• 25:03Speaker 01

  I tend to be of the observation that I think he identifies a lot of the issues correctly. In the sense that, you know, for decades, for example, the trade deficit was ignored by politicians of both the right and the left. Running a trade deficit for a period of time is fine for a country to do. There's all sorts of reasons it can happen. But the US has kind of a specific kind of built in mechanism to always run a trade deficit. It's actually kind of tied to our reserve currency status is basically so much external demand for our currency. That the way we ironically get currency out into the world is by running this really persistent trade deficit with the rest of the world. But when you have that for four decades in a row, you basically hollow out certain parts of the country and kind of reinvest it into the cities, basically. So you kind of hollow out like, you know, Michigan.

• 25:48Speaker 01

  And you've reinvested in New York and Silicon Valley and that's kind of where all that wealth winds up. And then same thing happens with the fiscal deficit as well. And so I think he's identifying some of these things like the trade. He kind of elevated the trade deficit as being something that hardly anyone talked about to now kind of front and center in politics. But I also tend to view that the things done don't tend to necessarily address the actual things he's identifying. So in both his first term and his second term, generally the fiscal policies would even further help the, you know, the top couple percent out more so than the.

• 26:24Tom Bilyeu?

  He tax breaks, continued spending. Is that the specific part of the fiscal policy you're talking about?

• 26:31Speaker 01

  Yeah, that tends to be skewed toward the wealthy, either the older or the, or the super high net worths, for example. And then, you know, the tariff policies are tricky because even though I think that addressing the trade deficit is a real thing to do, that we've actually not really seen a lot of politicians interested in. The mechanisms to do it don't seem particularly well thought out. And I think that therefore that the probability that they meaningfully kind of improve things in that sense over the next four years is pretty low. So I think that's the challenge and the problem is that the, when you have this kind of, when you, when you reach this part of the economic cycle. So when you have a very top heavy entitlement system, you have a very top heavy public debt, you have these issues.

• 27:15Speaker 01

  Every kind of year or every kind of congressional presidential cycle we spend still not getting it right. Kind of digs us further into the, into the hole.

• 27:26Tom Bilyeu?

  Okay. So I've heard you talk about the tariffs as like, okay, nothing is going to stop this train. But tariffs at least are effectively attacks that help slow the train down a little bit. Given that you've said that, but you also just said that, and I don't think this guy is really thinking through these policies well.

• 27:45Tom Bilyeu?

  Help us understand your take on tariffs as a tax and whether that's the right way to look at it. And then if that's not quite the right way to do this, or maybe not the right way at all, what would be the right way to use policy to slow the train?

• 27:58Speaker 01

  A big factor in why the deficit is so hard to resolve, not the only fact, but a big factor, is the political polarization that's embedded in it. So there are a lot of things that politicians don't want to cut, and then there's a lot of defenses against raising taxes as well. Terrorists were kind of industrying because with emergency powers from the executive branch, they kind of bypassed that polarization. So instead of Congress voting on this, the president was able to do it. Now, in weeks or months, I mean, it's potential that courts could take that power away. I'm not a legal expert. It's currently kind of being looked at, analyzed, working straight through the court system. But as it were, as it is right now, that's basically a pretty unilateral tax increase. It's able

• 28:40Speaker 01

  to bypass some of the polarization that happens. In terms of quantifying it, I mean, they're currently running about $30 billion a month in tariff revenue, which analyzed gives you $360 billion. Some of the latest tariffs are not really in that figure yet, so we might end up seeing 400-plus billion in annual tariff revenue, but that's up against a $2 trillion annual deficit. So you're talking something like a 20% dent into it. The other factor that's complicated is that it's being marketed as a tax on the foreign sector, but right now, the majority of evidence shows that it's being paid, both in the literal sense, but also even economically paid by Americans in multiple ways. It's sometimes

• 29:22Speaker 01

  in the form of higher prices, other times in the form of businesses taking a margin hit, for example. So far, we've not seen a reduction in import prices to offset the tariffs that are being paid. So this is primarily a new tax on Americans. On average, it will tend to be more felt by those, again, in the lower income spectrum, because if you're wealthy, generally, your consumption's a smaller share compared to your wealth and income, whereas if you're on the lower end of the income spectrum, most of what you earn goes toward consumption, which is now potentially, at least the import portion is more tariffed. And so those potentially minor price increases actually matter a lot more. How I would actually go about addressing it, that's always the hard part, because I, for example, I'm first

• 30:08Speaker 01

  To say like that the central bank gets a lot of criticism. And I'm pretty critical of central banking in general. But for example, I wouldn't necessarily know how to handle it better than the current Fed's doing. Because when they're stuck in fiscal dominance, a lot of their tools are taken away. You cited that statistic before that once you've reached roughly this high debt to GDP. Ninety eight percent of the time, you know, have an issue. And that specific study, what that points out is that ninety eight percent of the time over the next fifteen years. There's some sort of default. It could be a little default, which sometimes you'll see amongst the emerging markets, generally entities that cannot print. The units that their debt is numbed in.

• 30:50Speaker 01

  But if it's if it's the country's own currency, they're more likely to default through debasement. They basically default in terms of purchasing power. And to some extent, we've always started that process. The last five years were like the worst ever period for like bonds. In like modern American history, for example, bonds underperformed practically every other asset. And so I think the first step is actually just being fully aware of what's happening. And I unfortunately don't have good answers for how to resolve it. I think the trade deficit is potentially more resolvable than the fiscal deficit. Which is to say, if they start doing policies that discourage the global capital kind of stuffing itself. Into US capital markets.

• 31:31Speaker 01

  That can alleviate some of the artificial strength on the currency that makes it really hard to, you know, manufacture things here profitably. And so that's a that's an angle that could be tackled. But so far, that's that's not one of the levers that they're pulling. And it's interesting because Trump's Chair of the Council of Economic Advisers. He actually wrote a paper on how you one might go around.

• 31:56Speaker 01

  Reducing the the trade deficit. And he published that in November twenty twenty four. So right when when after Trump was elected. And that's kind of like their steel man approach for how they're going to do this. That's basically the Harvard economist view of, okay, if you want, if you want to try to enact. Trump's goals, how do you go about doing that? And that involves some degree of tariffs, mainly to bring negotiating up with other countries. And then use a variety of other things to dissuade all that capital from being stuffed into US capital markets. But they haven't done that part yet. And I don't, I kind of don't think they will, because that's the part that is also pretty painful. Most.

• 32:32Tom Bilyeu?

  Why would that be painful?

• 32:35Speaker 01

  Because holders of assets generally like the fact that there's a lot of foreign capital coming up and bidding up their assets. And so it's one of those things where there'd be some parties that are benefiting from it, other parties that are hurt by it, and kind of like any other polarized topic, there'd be defenses against that happening. Basically, that they wouldn't perceive that as something they want to probably do.

• 32:59Tom Bilyeu?

  So I get why, as somebody who has, like, gets the asset side of the equation, you got a ton of money in assets, but if the case could be persuasively made that, hey, keep pushing on wealth inequality and the French have a story to tell you about the French Revolution where wealthy people got their heads detached from their bodies, or, hey, compelling argument would be, let me show you how stopping the inflows of capital into the American financial markets actually help the poor and working class, and that lets you keep your head, which is my message. How exactly would pumping the brakes on the amount of money coming into the US financial market actually be pro-middle-class and working-class?

• 33:44Speaker 01

  Yeah, good question. Basically, we can back up and kind of explain the mechanism. So right now, the dollar's the global's of currency, which basically means that the whole world wants it for a variety of purposes. They want to hold it, they want to use it for international contracts, they use it as a basis for most currency trades, so most currencies are actually not very liquid with each other, like say, Egyptian currency and Korean currency, not a very liquid market, but they're all pretty liquid with dollars, so you can always trade one for the dollar, dollar for another one. And international financing, so if an entity in France lends to an entity in Brazil, it'll often be, for example, in dollars. So there's this kind of global demand for dollars. And the mechanism of how they get that is that basically the US runs these really big trade deficits with the rest of the world.

• 34:29Speaker 01

  And that's importantly, something that the US has purposely facilitated. So it both happens organically, but then also the US kind of leaned into that historically. And then the way that works is they basically overvalue the dollar. So most currencies, they They will trade on things like industry rate differentials. They'll trade on things like their current account balance and all that. The US dollar, because it has this extra demand for it, it tends to run this more persistent trade deficit. So we overvalue our currency. We give ourselves a lot of extra import power, but we make our exports less competitive than even our other developed peers, generally speaking. And so we've run these persistent trade deficits for the rest of the world. We kind of spew out dollars into the world.

• 35:13Speaker 01

  And then the rest of the world takes those dollars and then they buy our financial assets with them. So they buy our equities, they buy our real estate, they bid up our asset values. And the problem is that if you live in New York or parts of California, you're probably doing great. It's your assets that are getting bid up by this recycled trade deficit that's coming back into our markets. But if you're anywhere in the Rust Belt, it became the Rust Belt for this reason, basically. If you're anywhere in kind of heartland, your economic prospects have been more impaired. And so it's kind of siphoning from one place, putting into another. And any sort of attempt to reduce capital inflows into stocks, into asset values,

• 35:58Speaker 01

  that's generally going to be pressured against. But by bidding up home prices to very expensive levels, it's good for those that have a home and it's good for those who've been able to lock in a short, like a long-duration, fixture mortgage against it. But it's very bad for those who are trying to enter the home buying market for the first time. This is also generally something you see in countries like Australia or Canada, where they have a policy of kind of trying to keep prices elevated just because so much of the country kind of has their wealth in real estate. But then the losers of that are those that are trying to buy a house, not for investment purposes, but for the actual utility purposes of using it.

• 36:41Speaker 01

  So generally speaking, the trade deficit has kind of been rewarding to those with financial assets at the cost of those who want to work in the Main Street economy, in many ways.

• 36:54Tom Bilyeu?

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• 38:02Tom Bilyeu?

  Thanks for sticking around. Let's get right back into the action. Okay, so I saw how that would play out in the housing market. That obviously to me is a thing that screams from the void to be addressed. Again, going back to that idea, this is what the average person understands intuitively. You don't have to explain to them assets and all that. But if we were stopping things from coming into the financialized side of the economy, how would that alleviate pressure directly on housing? Could we not, through policy, make housing less of a problem? Like for instance, deregulating so it's just easier to build more housing? Would we have to stop things coming in? Stop people from cramming dollars back into the US financial system?

• 38:48Speaker 01

  So a lot of it is that basically the dollar is kind of artificially overvalued because of this demand for it. And that's what kind of directly makes it hard to make things here. So right now with a lot of our policies, we're addressing the symptoms of this structure.

• 39:02Tom Bilyeu?

  So it's really about driving manufacturing back to the US, giving the average person a place to work and like sort of heartland company that makes, this is a terrible example, but steel, brake pads, whatever. And now that's going out to the outside world. So more than it's necessarily influencing just asset prices, it's just making it possible for somebody in the middle class to earn a living, to have that small company that exports that thing. Is that the idea?

• 39:35Speaker 01

  Yeah, basically balances the economy a little bit more. Basically, the US has a lower share of manufacturing relative to GDP than many other countries because that's the part that we've kind of exported. And if you didn't have this capital recycling structure at the scale that we currently have it at, some of that would be able to flow back in. Now, realistically, a lot of that would be automated, but basically you have a more balanced economy at that point. And you're kind of less extracting it from certain states and then kind of reinvesting it into other states. There's also a really big wealth effect that happens that basically that the higher our asset prices go, it kind of fuels consumption from those with assets at kind of the cost of those who don't. So we had these kind of really big mechanisms in place, and some of them seem good on the

• 40:20Speaker 01

  surface, but then there are losers from them. I mean, even for example, the home buying, a lot of times you'll hear about BlackRock buying homes, for example, but a lot of the funds, so that's kind of the one example, but there's a lot of funds and pools of capital buying homes, and some of that is actually foreign capital. Because in addition to buying our equities and buying our private equity, they're also, in many cases, buying our property. So basically, you inflate the property values at the cost of people that want to enter them. So we had this kind of unusual current cycle where home turnover is very low right now. So there's relatively few sellers, relatively few Buyers, there's not a lot of activity happening and yet prices still pretty elevated

• 41:03Speaker 01

  because there's that kind of persistent bid there and that's that's kind of at the it benefits those who have houses, obviously, but it's harmful for the those who want to get them. And so that's why we end up having one of the highest historical ages for, you know, first time buying a home.

• 41:21Tom Bilyeu?

  That's very interesting. That feels a little counterintuitive. Let me make sure that I understand this. So if you had said that the appetite for property has remained high, even though interest rates are high and that's sort of illogical and how could that be? We're hollowing out the middle class who's buying these houses. Oh, PS, this is foreign investors. I would have said, okay, yeah, cool. That makes sense. But if you're saying that activity is actually low, how is the perpetual bid from foreign investors meaningful if nobody's buying and selling?

• 41:51Speaker 01

  Because there is still some buying and a lot of those are able to do cash buys. So right now, the limiter to a lot of changing of homeownership is the fact that the mortgage rates, someone would have to get out of a low interest rate mortgage, they would end up in a higher rate mortgage if they move. And then the buyer has less kind of financial firepower because their monthly payments are so high, but it doesn't really affect too much the cash buyers, those either because they're wealthy or because they're investment funds that are able to come in and just pay the cash value for the house and therefore around the margins still keep those home values pretty high.

• 42:30Tom Bilyeu?

  Okay, so given that one of the things that's really impacting both the ability for somebody to own a home and the government debt, the fiscal debt, is Trump right to call for the lowering of interest rates or is Jerome Powell actually wise to be holding off?

• 42:48Speaker 01

  In fiscal dominance, almost everything the central bank does is wrong. That's the problem is that because if they hold interest rates high. So go back to what kind of what we said earlier. The primary purpose of raising interest rates is to slow down bank lending. The problem is that the whole period of inflation we've had for the past five years was not caused by excessive bank lending. It was caused by those fiscal deficits. Originally, it was intentional stimulus. And now it's just kind of this this background higher deficit. So the Fed in some ways has been trying to raise interest rates to slow down bank lending to offset the real problem, which is the federal deficits. But by doing so, because the debt's over 100% GDP,

• 43:28Speaker 01

  by keeping interest rates high, they're also actually keeping the deficit high because they're keeping federal rates high. And yet, if they if they cut interest rates, while you have stocks at all time highs, gold at all time highs, Bitcoin at all time highs, you know, property values at all time highs, then they're adding fuel to the fire too. And that's why you get to that statistic where 98% of economies, when they reach these debt levels, tend to have some sort of default, which can be through purchasing power, because their own central bank kind of runs out of options. And so I think that, you know, it's probably due for a mild cut just based on the on the deterioration of economic conditions. But I view that as a much like a smaller lever to pull than the fiscal situation.

• 44:13Speaker 01

  Kind of one way of putting it is that when the money's weak, people will monetize other things. And then by doing so, they make those things less available to those who just want to hold them for their actual utility use, not their monetary use. And so by monetizing our equity market, by monetizing our real estate market, because our money's weak, it causes all these more structural imbalances. And therefore, it causes periods of malinvestment. And it causes that kind of, along with other policy decisions, those high levels of wealth concentration.

• 44:46Tom Bilyeu?

  Okay, so if I'm understanding you correctly, the way that Jerome Powell is looking at this, he knows what you know, which is I don't really have any great options. But the one thing that if the real problem is the government is taking on too much debt, that's causing them to print a bunch of money, that's causing the high inflation. Then it seems like I should be trying to pull down the interest rate. Obviously, I need to find a sweet spot, but I should be trying to pull down the interest rate, knowing that I'm going to have a bigger impact on the government, certainly at first, than I would have on the banks then suddenly going crazy. Because I have a bigger problem with the accrual of compounding interest.

• 45:26Tom Bilyeu?

  Because we're adding right now a trillion dollars every 100 days to the government deficit, which is just absolutely insane. So why wouldn't that alone be a signal to like, "Bro, look, there's obviously a breaking point and then you're going to trigger the private market too much, but we've got to bring this public debt interest payment down."

• 45:50Speaker 01

  I think because the optics are so bad. A key part of central banking is that they're supposed to have some degree of kind of optical independence, which is that they're focusing on their mandates, you know, employment levels, inflation, things like that. And they're not really supposed to take into account the fiscal situation of the country. And yet, in practice, of course, you find that they, you know, when the rubber meets the road, they do. So when there's a war, when there's a fiscal crisis, the central banks' options shrink. Because at the end of the day, they have to kind of support that bond market. And so we saw this, you know, in recent years. And basically, from their perspective, they can't say out loud that because the debt's a problem,

• 46:33Speaker 01

  that we have to kind of change how we would otherwise do things. And I think actually, like that, going back to my prior point where I would say, it's hard to criticize the head of the central bank, even though I'm kind of critical of the whole practice of central banking. The one thing I think that it's fair to be critical of is the asymmetric

• 46:50Speaker 01

  talking point they've had around the fiscal deficit. So for example, during COVID, during the depths of it, the federal The head of the Fed called for more fiscal. He basically said, our tools are limited here. Given what's happening, we need more fiscal spending. And they got that. There was, of course, very large stimulus efforts. And now on the other side of that, they won't go out and say that the opposite. They won't say that our ability to control inflation and kind of tweak all this is being hampered by the fiscal side. They basically, our tools are not geared to doing that. And if anything, could make it worse. So they have to kind of show confidence and say, look, we got this. Our tools can fix this. But the problem is that I think it doesn't.

• 47:32Speaker 01

  They basically that their their tools are largely unrelated to what the core issue is. And, and, you know, I think that the first step is basically to say that. And they're not doing that part.

• 47:43Tom Bilyeu?

  That's interesting. So let me give you my layman's counterpoint to this, which would be, I'm the Fed. I'm Jay Powell. I look at this and I know one simple thing. If I jack up interest rates, you're going to have to spend less because you're going to hit a point where it is just absolutely untenable for you to keep spending what you're spending. Is it that Jerome Powell knows, oh, we'll hit a political crisis first. They'll oust me. They'll find some way. They'll oust me before that because other than that, like, this is one of those where he once said something akin to, I want to be in a position where I can raise interest rates because it's essentially breaking the leg of the economy and I know how to heal a broken leg.

• 48:28Tom Bilyeu?

  So he like gets that that's exactly what would happen. So why isn't he doing that? If if he's really trying to control inflation, he has to do that.

• 48:42Speaker 01

  Yeah, I think I think that's what he has been trying to do, which is by holding interest rates high. It makes the dollar fairly strong compared to other currencies. It kind of puts pressure on the rest of the world. It does keep commodity prices in check. For example, you know, oil, generally speaking, it's hard to have out of control inflation if oil prices are pretty low, which they are. So it's having those effects. But then the problem is it's grinding out more and more of this public debt, which is actually ironically spewing more dollars into the market. The problem is that. In kind of no world, if there was like an acute bond crisis, would they kind of blink and just let it happen? Because one of their kind of shadow mandates is financial stability. And that goes at the heart of financial stability.

• 49:24Speaker 01

  A really good example is the Bank of England, which was under similar strain. So back in 2022, inflation there was like 10%. The Bank of England was going to do a speech around balance sheet reduction, so quantitative tightening. And then the gilt crisis happened. So for people that aren't familiar, the UK sovereign bond market kind of broke. It was this kind of this leveraged vicious cycle. So yields were rapidly rising, causing more entities to sell. And ironically, the Bank of England had to cancel their speech on balance sheet reduction, and they had to go and buy the bonds, despite the fact that inflation was 10%.

• 50:04Speaker 01

  So they did something that is normally only done in a low inflation environment. And they basically had to do it out of an emergency to maintain kind of just functioning like sovereign bond markets, because everything would have kind of ground to a halt. And, you know, I think we would see the similar thing in the US, that basically, they can try to pretend as though that by increasing interest rates, that they would maybe change the fiscal trajectory of the country. But I think in practice, the problem is that the fiscal side would pretty much just ignore them, as they have recently. For example, the big beautiful bill doesn't really have deficit reduction as part of it. The only thing that kind of some ways is deficit reduction is the tariffs. But basically, there's been kind of no change during that process.

• 50:48Speaker 01

  And if they actually were to get called out on it with some sort of bond issue, I think we'd see that the Fed pretty much right in there. We also saw this back during the 2023 regional bank crisis. So inflation was still above target back then, even more than it is now. And, you know, if they let banks fail, that does destroy part of the money supply. But they were more worried about the cascading perceptions of bank instability. So they actually went to a period of temporarily balance sheet increases and liquidity provision to put out that fire, despite the fact that inflation was above target. So generally speaking, whenever they actually run into a true crisis, they do generally

• 51:28Speaker 01

  err toward allowing that inflation, keeping things nominally together, and then trying to slow things down in the future.

• 51:36Tom Bilyeu?

  Okay, so if I remember correctly, it was Volcker that raised rates north of 10%. I want to say north of 15%, like it was wild. He was what, able to do that because government debt was so low? Like, why couldn't we run that playbook now?

• 51:53Speaker 01

  Exactly. He was able to do that because total debt levels, both public and private, were low. And in particular, the primary cause of inflation, in addition to the oil shortages, was that elevated rate of bank lending. So he went after the actual kind of root cause, which was the accelerated bank lending. And he made bank borrowing, bank lending, less attractive by raising interest rates. So in addition to solving the oil constraints, that was kind of the one-two punch that helped get that inflation under control. The problem in this environment is excessive bank lending is not the cause of inflation. And both in the private market and the public market, debt's very high. So if you jack up rates super high, you actually blow out the deficit even more.

• 52:38Speaker 01

  And that's, I mean, that's, for example, why Argentina, I mean, they had very high rates for quite a while, and it didn't really slow down their inflation or their deficit because it's not a bank lending issue primarily, it's a fiscal issue. So certain tools work when the problem is coming from certain things. So in this case, the Federal Reserve has tools to deal with bank-driven inflation, but they just don't really have the tools to deal with fiscal-driven inflation. That's mostly a President and Congress thing, and that's, you know, that's the part that has to be addressed, and it's not.

• 53:11Tom Bilyeu?

  So what I'm hearing is that this is where we realize that the Federal Reserve, the central bank, really isn't independent. Because if the government wants to spend, they are going to spend. Because he has, assuming that there was true independence, the Fed could just say, "You guys are $2 trillion a year over budget, and we're going to keep cranking up the interest rate until you balance your budget, and then we will, you know, lower it again." And then the government would be like, "Oh, my God, like, this would be disastrous, so we're going to have to balance our budget." That clearly Doesn't happen. I mean, I'm hearing you. You're being very clear.

• 53:49Tom Bilyeu?

  Minus a political problem that seems like, basically said another way, when it's people, the private sector that's getting out of hand, too much bank lending. Ah, the Fed just slaps them around, raises interest rates until they calm down. But when it's the government doing the same thing, printing too much money, they're like, oh gee, well, we don't have anything that we can do to stop this. Yes, you do. Raise interest rates.

• 54:13Speaker 01

  Yeah, pretty much. If they were willing to let the sovereign default, or have basically illiquid action in its bond market, then that could affect it. But kind of if you just look at-

• 54:24Tom Bilyeu?

  So it's purely that. It's you're, you're going to end up doing a hard default, and that's why we're going to keep going.

• 54:32Tom Bilyeu?

  One, did I understand that correctly? And two, are you like, yes, dummy, that's what they should do?

• 54:40Speaker 01

  I actually don't, because it go, it actually ends up hitting their mandate. But the problem with the default is then it cascades through the whole system. So for example, banks, they hold treasuries. So if the US government defaults, basically banks risk becoming insolvent. So then people's accounts at the banks risk becoming insolvent. Same for their insurers, same for retirees, right? That's generally speaking, why they wouldn't just say, you know what, let's let default happen. They always instead say, look, we can do a gradual default through debasement and inflation. That's almost how they always do it. And the problem is that if, if the, if the, if they start doing that approach, which they almost always do, and they currently are,

• 55:23Speaker 01

  but then the actual things remain unresolved. So we have entitlement form that doesn't happen, or, you know, Pentagon audit and clear out, you know, pork in, in defense spending and make sure that's all right sized. If none of that happens, then it just kind of keeps- Over time accumulating. And so people going back to my earlier point, it's not they have one big debt crisis is they have a bunch of little mini ones all in a row. So everything is but that UK guilt crisis was a debt crisis, even though it wasn't, you know, it wasn't the end of England. It was just a crisis that they put the fire out, they kicked the can down the road, they'll have another one. And the same thing happens generally speaking in the US where it generally comes out in the form of inflation, comes out in the form

• 56:04Speaker 01

  of populism. And then the problem is it just keeps getting worse until there's some sort of pretty radical change. And if you look at public polls, people don't want to cut social security, they don't want to cut Medicare, they don't want to cut a lot of these key things. And so I think we have to probably go through a lot more pain before we potentially come out on the other side of this stronger.

• 56:26Tom Bilyeu?

  Well, please paint that picture for me that we come out the other side stronger because I look at this and it really does seem like it will escalate until there is so much wealth inequality that that there is naked violence in the streets. I don't, especially given what you just walked us through, I don't see how that stops. We're going to soft default. That will increase wealth inequality. And then people will get to the point where they're angry enough to fight. How do we come out the other side stronger without real problems in between?

• 57:02Speaker 01

  Um, well, if I could solve that, um, you know, I think I'd probably not be in the business of analyzing things. It's always, it's always easier to describe problems than to fix the problems. I'm kind of fully aware of that. I think basically, the US can do approaches that kind of facilitate a changing of the whole reserve currency structure. So right now, they both want the benefits of being the reserve currency, but they don't want the cost of being the reserve currency, which kind of comes with these structural trade deficits, and to some extent, these fiscal deficits. They don't really want the costs, but they want the benefits. And I think part of it is kind of

• 57:43Speaker 01

  Backing up skillfully from a position of strength rather than being forced to back up later. And so, one thing I kind of pointed out in my book is that most empires, when they kind of get too big and overstretched, they never think, you know what, maybe we should pull back instead of trying to fight and maintain every single border we already have. And instead, they pick the approach, say, no, we have this, we're going to keep it. And then they get death by a thousand cuts over time. And so, I think basically, if I were to give advice, it would be to kind of acknowledge the problem, which I think is still not being fully, you know, internalized in the country. And basically say that this is unsustainable and that we have to start pulling back, whether

• 58:28Speaker 01

  it's, you know, kind of global actions, whether it's the structure of our entitlement systems. We have the highest per capita healthcare spending in the world, which is a problem when you enter that kind of late-stage demographics. So, you know, going back to Japan as a positive example, even though their population is on average like 10 times older than us, they pay far less per capita on healthcare than the United States. And so, that's actually one of the biggest things to address for multiple factors, because high healthcare, one, it keeps blowing out the fiscal deficit. And then, two, if you're talking about, you know, why can't we make things here, it's partially because every American you hire to make stuff comes with a really big healthcare

• 59:10Speaker 01

  expense burden attached to them compared to even their peers in other developed countries. So, not just emerging markets, but other developed countries like Japan, they have that cost advantage on labor because they don't have that really bloated healthcare system. And so, kind of starting to address these at least one at a time, if not together. So, basically, cleaning up defense spending, making sure that's actually there rather than kind of, you know, for a good reason, rather than pork-related, as it often is the case. And then also, really tackling kind of the root aspects of the healthcare system, as well as kind of the imbalanced entitlement system. So, when social security was constructed and kind of put into place, there were way more workers per retiree.

• 59:53Speaker 01

  than there are now. And so over time, as life expectancy increased more than the retirement age, and as our demographics slowed down, there's, you know, fewer people adding into it than than there used to be relative to those getting out of it. And so we've kind of skewed our things toward kind of directing fiscal deficits ironically toward those that are older and wealthier and not toward those that are younger and, and, you know, middle class or lower middle class.

• 1:00:23Tom Bilyeu?

  Okay, so if I'm projecting this out, well, it seems like what's going to happen is as the baby boomers work their way through the system, that we are going to have to just keep soft defaulting in a really aggressive way to cover all of the expenses that we're going to have to pay for their healthcare, for the fact that they're just not contributing to the system anymore, that the final revelation that this is all a Ponzi scheme makes itself just too obvious to ignore, because neither side has the political desire, while baby boomers are still cognizant enough to vote, to reduce the amount that we put into the

• 1:01:05Tom Bilyeu?

  entitlement programs. Any dissenting statements on that?

• 1:01:10Speaker 01

  Yeah, no, I think basically, we're at the stage where default happens. I would say it already partially happened with the big devaluation of bonds we've seen over the past five years. And then the question becomes, who gets defaulted on and in what ratios? And so, for example, means testing social security is basically a type of default, because people paid into it with a certain rule set, and some of the rules might have to be changed. But if that saves the system compared to, you know, not doing that, that's one of the things that has to be considered. So defaulting on some aspects of social security, defaulting on some aspects of purchasing power, or even actual default of sovereign debt. And then I think that the biggest factors are really entangling the healthcare

• 1:01:55Speaker 01

  system and the corruption and the kind of the lack of price discovery that happens in the US healthcare system, as well as defense spending, which again, you know, the fact that we have this, you know, we're going like, a lot of, for example, the programs in Doge went after these smaller areas, whereas kind of the elephant in the room is entitlement systems and defense. And those are things that they weren't really able to go after. And I think that that's, that's kind of the The big thing for to eventually have to go after and it's gonna be painful.

• 1:02:28Tom Bilyeu?

  Yeah, so watching the Doge thing was for me very eye opening in terms of the general public. Uh, I mean, look, I suppose it just became political, but it there was so much vitriol at the idea of going in and cutting. It did not matter what Doge was trying to cut. It was just automatic. No hard pass like this is stealing from the American people. What was your read on that? Did you just see, ah, it's a populist moment. This is typical political bullshit? Or, um, yeah, how did you read that?

• 1:03:00Speaker 01

  Uh, so on my site, we I parted with Sam Callahan. We published a report, uh, kind of ahead of time. We started working on it in 2024. We had it out, I believe in January 25. And it was kind of explaining why the Doge project would would not be successful in terms of major cuts. So we were looking at these headline numbers that they were saying that they were going to to try to cut by, uh, either either from Musk or or from others kind of giving these numbers. And we kind of just walked through the math of why that was very implausible, which is kind of my earlier point that the vast majority of the deficit spending is in these kind of entitlement structures. Um, whereas they want to go after primarily the other like the 15% of the pie chart,

• 1:03:41Speaker 01

  which again, there is waste there, uh, but it's kind of like, I think we were kind of doing an exercise in as a country, telling ourselves that there's all this waste that if we cut, it won't actually impact the things we we don't want impacted and that we can fix the deficit without pain. And I think that was this kind of this exercise to do that. And we kind of had to show ourselves that that's not really how it works. Uh, that actually these core things that are popular are was at the heart of the deficit and therefore, you know, partial to the heart of inflation. Um, so it kind of showed that easy answers are not really the the way out here. Um, and yeah, those types of things happen. Generally speaking, when you start to get these kind of rising populist uh, movements where there's populism on the right, populism on the left.

• 1:04:25Speaker 01

  Um, we started to get kind of things like that, but a lot of it is more optics.

• 1:04:29Tom Bilyeu?

  Okay, let me paint a picture for you of what I see is gonna happen. You're so deep into the analysis here, I'd love if you see somewhere that I've gone wrong, let me know. The way that I think this is gonna play out, so you'll say we need a lot more pain, I think pain takes on a very specific set of actions. I think the pain looks like this. You you pull some of the middle class up into the upper class, you yank a bunch of the middle class down to the lower class, they have and have nots are staring at each other like monkeys where one is getting cucumbers and the other's getting grapes for the same task. They start going absolutely ballistic because it does not appear to be fair. We are having to soft default to cover the baby boom generation.

• 1:05:13Tom Bilyeu?

  Nobody will vote for a change in the structure of entitlements, which we just absolutely cannot afford. Just mathematically, it is very simple. Given that, they will continue to print more money for reasons that you've made abundantly clear. Fiscal dominance makes it impossible for the Fed to correct this problem. So they're gonna make noise, they're gonna hold meetings, it's just not gonna matter at all. All that will matter is what are the deficits that the government is spending? Year after year, we will get an unrelenting 6% to 7% of GDP debt to GDP ratio growth. And we are going to see wealth inequality hit a point where the refusal to make changes to entitlements will cause America to

• 1:05:56Tom Bilyeu?

  there'll be political assassinations, which for anybody who thinks that sounds crazy, look at what just happened in Minnesota like four months ago, this is already happening. So we're gonna see a rise in political assassinations, we are going to see a rise in violence between the left and the right. We're gonna continue to see people migrate either from red states to blue states, blue states to red states. We will just continue to see this like fracturing, this pulling apart. And ultimately, when we say pain, what we mean is violence. And there will be enough violence that finally people will get fatigued and say, okay, something's gotta give. But I don't think that will happen until a sufficient number of baby boomers have died and can no longer cast a vote.

• 1:06:38Tom Bilyeu?

  I also think, just to really add complexity here, that you're gonna see the Democratic Party continue to break socialist. That's gonna gain in popularity, which will only exacerbate the violence for reasons I'm happy to explain, but

• 1:06:55Tom Bilyeu?

  Violence is the thing that we sort of gently refer to as pain. Does that sound crazy to you? Or what?

• 1:07:03Speaker 01

  No, that's, that's, it's bleak. I think it's realistic. I have the phrase, nothing stops this train, uh, which I, which I, you know, took from Breaking Bad, which is basically that this kind of slower burn default slash debt situation is probably going to last longer than people think. Uh, and so it doesn't blow up right away, but it also is not fixed anytime soon. I think the first real test for that is in the mid 30s, the social security trust fund is estimated to run out. Uh, and at that point they would have to be, it's not to say that like the payments just stop, it's that basically they get a haircut. They'd only be able to pay out what they're currently getting in, uh, from the tax base at that point, rather than all-

• 1:07:44Tom Bilyeu?

  Do you have a sense of how different that is? Like what, what's that delta?

• 1:07:47Speaker 01

  Something like a quarter or, or a third. So it's like if, if, if every check was basically cut by 25% or so. Uh, or if you means tested it and said, look, if you're, you know, if you're, if you make a million dollars or you're a multimillionaire and you're getting social security, then that could be part of the, the part that's cut. It's hard, we'll see how they politically navigate it. Or the other test is they say, well, we're going to print the difference. We're going to keep sending the checks out. Um, and then the, the, the train keeps running even further. Um, and so basically the, the pain is a combination of one, yeah, basically various types of, of literal violence, but then also, uh, defaults on things that people are expecting. Defaults on social security are a type of pain.

• 1:08:31Speaker 01

  Uh, defaults on healthcare promises are a type of pain. Um, the kind of the, the trade situation, kind of right sizing itself, uh, through currency devaluation and other things are a type of pain. I think that, I think like the hopeful takeaway that I kind of try to leave people with is that the numbers themselves are fixable. Basically a combination of right sizing things, you know, kind of the combination of defaults on certain things, um, uh, is able to kind of, and then actually addressing those core things, the healthcare, the defense. Kind of the top heavy and basically national insurance that we do. Those things are fixable to the tune of something like 20, 30% each.

• 1:09:14Speaker 01

  It's not like this big catastrophic change per se. It's just very hard to do. And I think the more dangerous element is when instead of kind of tackling those core things, we all end up hating each other or we pick a country out there that we hate now. And we kind of are focusing on either the symptoms of what's happening rather than the root cause, which is like, at the end of the day, it's things like the, the really bloated healthcare expense, the top heavy entitlement systems, the kind of the antiquated defense spending structure and kind of the, you know, the, the way that Congress is kind of incentivized to keep that going. Those are the actual core things and all the, we, we tend as a people to get distracted by the noise of everything else that's out there.

• 1:09:57Tom Bilyeu?

  That's it for part one of my conversation with Lynn Alden. Tomorrow, we're going to go even deeper. So hit the follow button wherever you're listening to this so that you do not miss it. Seriously, you are going to want to be ahead of the curve on this one, not scrambling to catch up. Till then, my friends, be legendary. Take care. Peace. Let's talk about a pattern that is guaranteed to be killing your progress. You know what you need to do. You need consistent nutrition. We all do. You need vitamins, probiotics, greens. We all know that we should be doing more of it. When your morning gets chaotic, you skip it. When you travel, you skip it. When your routine breaks, everything tends to break and that inconsistency compounds against you every single day.

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