Capital Flight, Trade Policy, and the Fate of the Dollar | Joseph Wang

In Episode 428 https://hiddenforces.io/podcasts/capital-flight-trade-policy-and-the-fate-of-the-dollar-joseph-wang of Hidden Forces, Demetri Kofinas speaks with Joseph Wang, Chief Investment Officer at Monetary Macro and the founder of Fed Guy, an educational media platform that provides financial market analysis to investors and policymakers informed by a deep understanding of monetary mechanics and public policy. Joseph and Demetri spend the first hour of their conversation discussing Joseph's monetary and public policy frameworks, how these frameworks help us make sense of the White House's trade policy, and the downstream consequences for financial markets and the broader economy that stem from these observations. The second hour is devoted to a conversation about the long-term consequences of capital flight for the U. S. government's finances, the strength of its economy, the performance of U. S. asset markets, the value of the dollar, and how all of these variables could influence future policy decisions and the tenor of politics in the country over the next 10 years. Subscribe to our premium content—including our premium feed, episode transcripts, and Intelligence Reports—by visiting HiddenForces.io/subscribe https://hiddenforces.io/subscribe. If you'd like to join the conversation and become a member of the Hidden Forces Genius community—with benefits like Q&A calls with guests, exclusive research and analysis, in-person events, and dinners—you can also sign up on our subscriber page at HiddenForces.io/subscribe https://hiddenforces.io/subscribe. If you enjoyed today's episode of Hidden Forces, please support the show by: Subscribing on Apple Podcasts https://podcasts.apple.com/us/podcast/hidden-forces/id1205359334, YouTube https://www.youtube.com/channel/UC8URhgYos5fjHqFSO4RSIEg, Spotify https://open.spotify.com/show/0TK6u251zGSlMgJKH6cOaP, Stitcher https://www.stitcher.com/podcast/demetri-kofinas/hidden-forces, SoundCloud https://soundcloud.com/hiddenforces, CastBox https://castbox.fm/channel/2629539, or via our RSS Feed http://hiddenforces.libsyn.com/rss Writing us a review on Apple Podcasts https://podcasts.apple.com/us/podcast/hidden-forces/id1205359334 & Spotify https://open.spotify.com/show/0TK6u251zGSlMgJKH6cOaP Joining our mailing list at https://hiddenforces.io/newsletter/ Producer & Host: Demetri Kofinas Editor & Engineer: Stylianos Nicolaou Subscribe and support the podcast at https://hiddenforces.io https://hiddenforces.io/. Join the conversation on Facebook https://www.facebook.com/hiddenforcespod/, Instagram https://www.instagram.com/hiddenforcespod/, and Twitter https://twitter.com/hiddenforcespod at @hiddenforcespod Follow Demetri on Twitter at @Kofinas https://twitter.com/kofinas Episode Recorded on 07/15/2025

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

• 0:00Demetri Kofinas?

  What's up everybody? My name is Demetri Kofinas and you're listening to Hidden Forces, a podcast that inspires investors, entrepreneurs, and everyday citizens to challenge consensus narratives and learn how to think critically about the systems of power shaping our world. My guest in this episode of Hidden Forces is Joseph Wang, Chief Investment Officer at Monetary Macro and the founder of FedGuy, an educational media platform that provides financial market analysis to investors and policymakers informed by a deep understanding of monetary mechanics and public policy. We spend the first hour of this conversation discussing Joseph's monetary and public policy

• 0:42Demetri Kofinas?

  frameworks, how they can help us make sense of the White House's trade policy, and the downstream consequences to financial markets and the economy that stem from these observations. The second hour is devoted to a conversation about the long-term consequences of capital flight on the US government's finances, the strength of its economy, the performance of US asset markets, the value of the dollar, and how all these variables could influence the direction of policy and the tenor of politics in the country over the next 10 years. If you want access to all of this conversation, go to hiddenforces.io/subscribe and join our premium feed, which you can listen to on your mobile device using your favorite podcast app, just like you're listening to this episode right now.

• 1:26Demetri Kofinas?

  If you want to join in on the conversation, become a member of the Hidden Forces Genius Community, which includes Q&A calls with guests, access to special research and analysis, in-person events, and dinners. You can also do that on our subscriber page. And if you still have questions, feel free to send an email to [email protected] and I or someone from our team will get right back to you. Lastly, because this conversation deals with investing, nothing we say on this podcast can or should be viewed as financial advice. All opinions expressed by me and my guests are solely our own opinions and should not be relied upon as the basis for financial decisions.

• 2:09Demetri Kofinas?

  And with that, please enjoy this deeply enlightening and wide-ranging conversation with my guest, Joseph Wang.

• 2:20Demetri Kofinas?

  Joseph Wang, welcome to Hidden Forces.

• 2:24Speaker 01

  Hey, Dmitry. Thanks for inviting me. It's great to be here.

• 2:27Demetri Kofinas?

  You know, so a couple of things, a little context here for the listeners. You should have been on this podcast a long time ago, and I was reflecting on why you weren't. I just think you were, you've been so prolific on other people's podcasts for so many years. I think the reason is, this happens to me sometimes with certain guests who are on a lot of podcasts a lot. I felt like I was hearing everything that you had to say on everyone else's podcast. And I felt like if I had you on this podcast, I would just kind of be repeating everything. So I feel like because you finally took a breather, Joseph, we can actually do this. So it's very exciting to have you here.

• 2:59Speaker 01

  Thanks so much.

• 3:01Demetri Kofinas?

  And actually, what prompted this conversation was we had a chance to spend some time together in Washington DC at a conference recently, I think it was last month. Was it in May?

• 3:09Speaker 01

  Yeah, it was with the monetarium guys there. It was great.

• 3:12Demetri Kofinas?

  Right, it was the monetarium, June. And so we're going to kind of pick up where we left off. But before we do that, just for anyone who doesn't know who you are, give me an idea of your background. How did you become someone who has developed such a strong expertise in markets? And in particular, in the plumbing of the monetary system?

• 3:28Speaker 01

  Yeah, that's kind of a long story. I definitely began my career in an unconventional way. So I graduated from law school in Columbia way back in 2008. And so I graduated right into the financial crises. And at that time, everything anyone ever thought about was about what was happening in the markets. So I was in my office, basically chasing commas, making sure, you know, this clause confirms with another clause and so forth. And it was kind of boring. And what I felt like I was more interested in was just, you know, what was going on in markets? What was driving it? What is this, all this stuff that the Fed is doing mean? So that really poked my curiosity. And so I wanted to move into a different field. The way I went about doing that is going back to school, making a few transitions, first as a credit analyst.

• 4:13Speaker 01

  And eventually I landed myself on the trading desk of the Federal Reserve, the open markets desk. And I was there. In the money markets group and basically studying how the financial system worked. So at the Fed, you have kind of an inside view of how the financial system, you're basically at the center of it, right? So when anything bad happens, they turn to the Fed, who at the end of the day is able to provide unlimited liquidity. The Fed is basically has the money printer. So when you're there, you can talk to a whole range of market participants from central banks, the hedge funds, foreign banks, other government entities, and you get a really good inside view. And of course, you have tremendous amounts of confidential data. So I was there studying the financial system.

• 4:55Speaker 01

  It was fascinating and really good experience, but ultimately, the public sector is not a really good place to grow. And so I felt that I learned all there was to learn there and began to sit out on my own. And so for the past few years, I've been writing my Substack, I'm a registered investment advisor, and of course, a prolific commentator on the markets. And so it's really through that long experience where I kind of built the basics and continue to follow the markets avidly.

• 5:20Demetri Kofinas?

  How would you describe your experience working at the Fed?

• 5:24Speaker 01

  It was a tremendous learning experience, really. So from the outside looking in, there's a lot of things in the financial system, particularly when it comes to plumbing, that's just opaque. One is that there's not a lot of data availability, but also, the truth is, from my experience talking with many market participants, no one really has a good sense of what happens because everyone only sees a segment of it. Only where you're at the Fed, when you can talk to many people at the same time, can you really piece things together. So it was a really good learning experience.

• 5:53Demetri Kofinas?

  So you were under Bernanke, right?

• 5:55Speaker 01

  Yellen.

• 5:56Demetri Kofinas?

  Oh, Yellen, sorry. All right, I have my dates wrong. So did you have any chance to get to know the Chair?

• 6:02Speaker 01

  So I was in New York. I went down to DC to present on one topic to the Chair once. And, well, no, I didn't know him personally. He seemed like a nice guy, but when you're in New York, you deal mostly with the markets and it's a bit removed from what happens in DC.

• 6:17Demetri Kofinas?

  So one more question on background. This is very important for me, and since the very beginning of the show, we've really, I've been very obsessed with understanding frameworks in general and sort of optimizing my own framework and understanding the framework that other people use to understand the world, to apprehend reality, whether we're talking about markets, philosophy, whatever it is. And so I'm curious to understand, what is the prism through which You view the markets.

• 6:44Speaker 01

  That's a really good question because as you've noticed, many people have different ways of looking at the markets and they all have some validity. Some people think of it traditionally, say, valuation, DCF. Other people would look at options positioning. Other prominent people would say just fund flows and things like that. So I look at the markets through the prism of policy and I combine that with my understanding of how the financial system works. And I think this has been a successful way in understanding price action. So when I'm thinking about policy, over the past decade, that's largely been what the Fed does, right? Now we have this cottage industry of Fed watchers pondering upon Fed minutes, pondering upon Fed speeches, wondering what they would do with the balance sheet, things like that. So today, it's a little bit different, but just from that angle alone, it's been very helpful.

• 7:29Speaker 01

  For example, in 2021, 2022, you could have seen that the Fed was going to pretty seriously hike rates and looking at where the financial markets were, that would be very, very negative for financial assets and that proved to be true for both stocks and bonds, which seemed to be a shock to many in the market. Now, moving forward today, the Fed is still a very prominent player in the policy space, but it's expanded a lot more. So what I'm looking at right now is, for example, what the Treasury does and what Congress does. It seems like fiscal spending and also how the Treasury manages its debt is becoming more prominent. Now, being able to understand this and then understanding what that means has been really useful.

• 8:10Speaker 01

  For example, in 2024, in the beginning of the year, S and P was below 5,000. Many people were concerned about recession, but I saw that we had this huge fiscal deficit. And from my understanding, when you have a fiscal deficit, what you're really doing is you're literally printing dollars. Because when you issue Treasuries, a US Treasury is basically just money that pays interest. And if you're doing this to the extent of, say, 2 trillion a year, you know, it's quite difficult to have a recession and it's also very positive for financial markets. So throughout 2024, I was telling everyone, we are going to crash up. And so we did go from below 5,000 on S and P to 6,000, which was my target for that

• 8:51Speaker 01

  Year. So I think understanding the financial system, understanding what policy is doing, in that case, fiscal policy has been very useful and I think will continue to be useful in looking at markets going forward, especially at this moment where, you know, policy, I think is becoming even more influential overall, even if monetary policy a little bit less so.

• 9:12Demetri Kofinas?

  So I have one more question, maybe one more, maybe a few more related to framework, Joseph, before we get into some of the current affairs topics. Traditionally, I've always thought of high interest rates as being contractive and lower interest rates as being stimulative. But I feel like one of the things that we've seen in the last few years is that the higher rates were in some sense also stimulative because people were getting paid for idle cash on deposit. Is that because we have a capital light economy running chronically high fiscal deficits?

• 9:42Speaker 01

  So that's a really good question. I think the dogma, as you noted, is that, you know, if you raise interest rates, that's contractionary, we have slower growth, we're going to have lower inflation. And if you want to stimulate, we just lower the interest rates. Now, I think that is largely true in the past, but today it's a little bit different. There's a lot more nuance to it. Now, first off, just the idea that interest rates could have a big impact on the economy. So that idea seems to have been formulated when the public sector was much smaller than it was today. So when you're thinking about interest rates, it impacts private sector activity for sure, right? So if you're a private company, you're willing to spend or whether you're willing to invest, that is in part related to your cost of capital. That makes a lot of sense.

• 10:27Speaker 01

  But you're not the only actor in the economy. The public sector, for example, spends a lot and they don't care about interest rates at all. It's a political decision. So when Congress gets together and they want to spend a lot of money, they don't look at interest rates at all. And so as the public sector grows and becomes a more prominent part of the economy, that interest rate toggle is just not going to be as strong as it used to be. And like you mentioned, Dimitri, we do have a structural change in how our economy operates. We are a lot more capital light, a lot less manufacturing, which is super capital dependent, a lot more services and. That could be part of the reason why these interest rates that we've seen over the past few years weren't as restrictive as many people thought.

• 11:09Speaker 01

  Now, one other thing that I'll add, and as you alluded to, is that the stock of debt in the economy, of public debt in the economy, is much larger. And so when you raise interest rates, the amount of interest expenditure the public sector has increases. And the flip side of that, of course, is private interest income. So our debt to GDP is about 100%. Now, when you raise interest rates, that means that the private sector gets a lot of interest income. That wasn't true, let's say, a few decades ago, when debt to GDP was a smaller ratio. And so that is one part where you can say raising interest rates stimulates part of the economy. Now, the picture is a little bit more muddied, because it is contractionary on sectors

• 11:52Speaker 01

  that are, you know, interest rate sensitive, like housing, like autos. And right now, we do see the housing sector cooling down, housing starts moving lower, and of course, builders giving all sorts of incentives. So definitely contractionary in some parts of the economy, but that has to be balanced with all the interest income other people get. People like Warren Mauser have been very vocal on this. So I think that dogma about high interest rates, contractionary, and so forth, that's not as true as it used to be, and it merits some rethink on the policymaking community.

• 12:22Demetri Kofinas?

  It's funny, because I used to make fun of Erdogan, the president of Turkey, because he used to think that low interest rates were contractive and high interest rates were stimulative. And I used to make fun of him for that, but it's turned out that, you know, we've adopted more of that framework than I would have expected, you know, five years ago.

• 12:40Speaker 01

  He did fire such a beggar set that didn't agree with his assessment. And to be fair, though, his economy, inflation is quite high and his currency is quite weak, so.

• 12:48Demetri Kofinas?

  It depends. And that's actually an important thing to keep in mind as we continue through this conversation, which is nuance is important. It doesn't necessarily work for creating headlines, but it's important in the analysis. So any current events that we talk about today, Joseph, are almost certainly going to be yesterday's news by the time this episode airs, because this is the speed at which the public conversation is currently shifting, driven largely by the president's tweets and executive orders. Having said that, how much attention do you pay to these sudden shifts in policy? The most recent of which included the latest trade war on Brazil, the 50% tariffs on copper, the new tariffs on Mexico, Canada and the EU. And I don't know if you saw this, or I don't even know if I saw it correctly,

• 13:29Demetri Kofinas?

  but it seems that yesterday President Trump threatened 100% tariffs on Russia, which I don't even know what that would do, really. What kind of trade do we have with Russia? But, and I'd love to understand to what degree do you even comprehend that statement? But like, how much attention do you pay to these sudden shifts in policy? And, and let's talk about some of them.

• 13:48Speaker 01

  Well, honestly, at the beginning of the year, beginning of the Trump term, I used to pay a lot of attention to this, watched literally all the president's press conferences, as well as the conferences of senior leadership. And that was really helpful in anticipating liberation day, which was, I think, kind of a traumatic event for the markets and shocking to trade partners worldwide. Today, I'm paying a bit less attention to what the president says, simply because my sense is that these guys, they say a lot of things and sometimes they backtrack quite frequently, right? So in the markets, there's this-

• 14:20Demetri Kofinas?

  That's the taco trade, the Trump always chickens out trade.

• 14:23Speaker 01

  And to be fair, the taco trade people have been correct, right? The deadline for these tariffs keep getting pushed back and back. And many things that were threatened don't necessarily materialize. So if I perceive that there's more mixed signals, that what the administration says might not necessarily be true, then I have to imagine that many other people are thinking this way as well. So I think the general sense is that there's a lot of confusion in the markets. And there's, I think the executive is losing a bit of the credibility in the eyes of many people, simply because they change their minds so frequently.

• 14:58Demetri Kofinas?

  Yeah, there's like a diminishing return curve on the tweets. The more the president makes outlandish statements, the less effective they are in actually moving the market and moving people's behavior, because they've gotten used to the insanity.

• 15:12Speaker 01

  I agree. So a good example is just these tariff letters that the president has been sending out. Now, the- Offering tariff rates in these letters are comparable to what was unveiled on Liberation Day, and yet the market just kind of probably shrugs them off. I guess the assumption could be that when the deadline comes, they will simply be extended again. So you don't have that same bite. The market isn't as worried. And if the market perceives it that way, perhaps the trading partners do as well.

• 15:40Demetri Kofinas?

  Where do we stand with all the tariffs? So like, all these announcements have happened. What has actually substantively been implemented?

• 15:47Speaker 01

  So the president does have these minimum 10% tariffs as well as sector-related tariffs.

• 15:54Demetri Kofinas?

  The 10% tariffs are across the board, correct?

• 15:55Speaker 01

  Yes.

• 15:56Demetri Kofinas?

  Are there any exemptions for any countries?

• 15:58Speaker 01

  So I think if we have these, so through the USMCA trade partners, for example, that that trade with them is covered under that. And so honestly, these things are changing so much and it's somewhat complicated. I'm not really sure just exactly where we stand right now. Looking at the revenue that the Treasury is getting, there is a material step up in tariff revenue. And it looks like at the moment, we're getting an incremental extra 200 billion a year. That's the pace we're at in collecting tariff revenue. So that is a meaningful step up than it was before. I think there are estimates that suggest that the average tariff rate is right now is somewhere between 10% to 15%. And potentially, it could go higher. There's commentary that the president is thinking that maybe the blanket tariffs should be 15% or 20%.

• 16:43Speaker 01

  So this is a big change in how global trade operates. And it really does seem that the president is pushing towards making tariff revenue one of, at least a bigger source of federal revenue. So it is a change. It's not as big as Liberation Day at the moment, but no, the things are changing.

• 16:59Demetri Kofinas?

  So let's talk about the tariffs on copper. Do we have any indication as to what precipitated this announcement? This 50% tariff on copper? And what are the specifics of the announcement, to the extent that you're familiar with them?

• 17:10Speaker 01

  So the president is using tariffs in a lot of different ways. You could talk about it as, you know, in the Brazilian case, for example, it seems to be to push some kind of political action on their part. It's also-

• 17:22Demetri Kofinas?

  The tariffs on Brazil are also 50%, correct?

• 17:24Speaker 01

  Yes, yes.

• 17:25Demetri Kofinas?

  And supposedly, the publicly stated reason for those tariffs, according to Trump, was because the previous president was being treated very badly.

• 17:32Speaker 01

  Yeah, so again tariffs basically are ending up like this Swiss Army knife that can be used to do anything. The basis for that seems to be AIPA powers, but when you come into the copper tariffs, that is the basis of national security. And I think the way that this is done is that you have to have a study first before you can impose those tariffs. Now, copper seems to be deemed by the administration to be very crucial to national security. After all, it goes into so many things that have military applications. So they're trying to have, become more self-sufficient in copper. My sense is that the thinking is that the US, of course, we're not going to be creating new copper mines and so forth very quickly. That takes a lot of time, but the US does export a lot of scrap copper.

• 18:15Speaker 01

  And so perhaps if we make importing primary copper a bit more expensive, we can develop the capacity to process more of that scrap copper internally and by extension become a bit more self-sufficient. So there's this idea that the US is too dependent upon foreign countries for a lot of key goods and trying to become more self-sufficient, and that makes a lot of sense. We saw that happen during the pandemic where it seems like a lot of the medicine and medical equipment came from China. And we're seeing this right now when, as the administration tries to have an ongoing trade negotiation with China, China seems to have this very powerful trump card, whereas they can just kind of slow-walk rare earth exports that the US can't get from anywhere else in the world, and that gives China a lot of negotiating leverage.

• 19:00Speaker 01

  And you see the administration react by trying to improve rare earth processing and mining with its investment in MP, which is a company that specializes in that. So the whole goal in that sector, copper, rare earths, minerals and so forth, is in part to be more self-sufficient.

• 19:18Demetri Kofinas?

  Well, you actually are leading me to my next question, but one point of clarification. I was under the impression that when it came to the US military, now obviously national security is a broad term, so having enough copper to build out the electrification to power AI facilities and cool people's homes, for example, I think that would fall under national security as well. But let's just focus on the military. I was under the impression that we had the domestic production and refining capacity to actually cover the military. Was that incorrect?

• 19:50Speaker 01

  I'm not sure, but based on that order, they probably feel like it's not sufficient.

• 19:55Demetri Kofinas?

  Okay, so then what additional tariffs or domestic investments in copper and other critical resource production could we see following this announcement, just like we saw with rare earths?

• 20:05Speaker 01

  So what I hear a lot about is that this is a policy by the Trump administration, and they're wanting to court investment in the US, and you have the big, beautiful bill to kind of back that up with tax incentives. However, these are very long-lived projects, take a lot of time, a lot of planning, a lot of capital, and if you have a new administration coming in, let's say in a few years, that could have a different policy priority, maybe all those investments you make today end up being bad investments because you can just resume imports. So I think the industry is in a difficult position in how to react to this. In the short term, maybe we could really just kind of beef up a little bit of our scrap copper processing or other capabilities, but I think the really big projects probably

• 20:50Speaker 01

  require more continuity in policy, and it's hard to get that at the moment when everything's changing so much.

• 20:57Demetri Kofinas?

  Right, I mean, that's the thing, and I feel like a lot of us have been waiting for that continuity, but we may not get to a point in the Trump presidency where companies and countries get enough clarity about the president's tariff policy to feel confident about where they stand vis a vis the United States.

• 21:11Speaker 01

  Well, there are whispers of a third term. I don't know if that will happen.

• 21:15Demetri Kofinas?

  I have heard those, in some cases, not whispers. I think Bannon has been consistently saying something to that effect. I think he has some kind of phrase that he uses, like, when the president is re-elected, I think he says. So let's say we did get more clarity. Much of the damage has already been done. What are the changes to the global trading system that you think are already baked in, but whose effects we won't see for years, and in some cases, maybe even decades to come?

• 21:41Speaker 01

  So like we were discussing, because there's not a lot of clarity, it's probably hard to make those structural investments to make the US self-sufficient that the president would like, and I think we could all agree on would be in the interest of national security. So in the short term, it seems like we're just going to have to live with higher tariffs. And so who pays those higher tariffs? That's a really complicated question. So it can be paid by the exporter, it can be paid by through lower margins importer, and of course, at the end of the day, it could also be paid from the consumer. Who actually pays it is really going to be sector-specific, and it's really hard to know ex ante. So if you look back to what happened in 2018, when Trump made his first trade war with

• 22:23Speaker 01

  China, looking back, I've read studies where people went through and looked at prices of over 100,000 goods that are traded on the internet, and their conclusion was those 2018, 2019 tariffs were largely paid by US companies who just had lower margins. So that is one possibility that it could happen. Fast forward to today, we are in a time where we're consumers are just getting off a bout of high inflation, so maybe companies feel like they can raise prices and have the consumer bear that. And there's a study, well, a survey by the New York Fed that shows that a very large fraction of companies feel that they can pass on those tariff tops to the consumers completely. But you also have other sectors, for example, Japanese automakers, that have been very

• 23:07Speaker 01

  clearly bearing basically the entirety of the auto tariffs. So if you look at auto export prices from Japan to the US on a year-over-year basis, they've declined by 20%, which is coincidentally basically the auto 20-some percent auto tariffs that the US is putting on autos imports globally. So in that instance, the Japanese exporters are eating all of the tariffs. So this is a complicated question. You may have inflation, you may have lower profit margins, or foreigners could just eat it. So how that plays out is something we're going to figure out in the coming months. But in terms of global trade, I think it makes the US a little bit less a reliable trade partner, especially if things are trading so much. So you do see a lot of countries trying to get together and work through alternative

• 23:52Speaker 01

  trading arrangements. Canada, for example, there's a push to try to have closer ties with the EU. And the EU, there are even people there who think, you know, we should not be such close friends with the US, maybe we should be closer friends with China. So you have this strategic movement going on. It's hard, I think, to make that, how durable that is, it's going to depend on US policy, but I think it's really hard to break away from the US, simply because we are the largest consumer market in the world, we are basically the client, and all these other countries there, they all want to sell to other countries rather than buy, so it will be hard for the world to change significantly, but I think the way policy is going here in the US, we are doing everything we can to try to encourage that change.

• 24:37Demetri Kofinas?

  Indeed, that's actually what we are doing, whether we intend to do it or not. So what do you think are some of the longer-term downstream consequences of these changes for the purchasing power of Americans through perhaps persistently higher tariffs, higher input costs to manufactured goods, and I think chiefly a lower dollar?

• 24:56Speaker 01

  I think the upshot is that the Americans overall will have lower living standards, but that, okay, to be clear, there are good things and bad things to it. The way that, I think this is pretty clear, is that the US overall imports about $3 trillion of goods a year, that's just on a gross basis, not the, just the net trade deficit, which also has to take into account US exports. But if you're importing $3 trillion of goods in a year, and now you're having tariffs, basically, we're going to consume less of imported goods. So, again, it's basically like a tax, and so if you consume less, your materials, living standard, will decline. And of course, the way that we pay for a lot of these goods is just basically by giving

• 25:40Speaker 01

  them dollars which we can just print. So I think that is going to be a direct impact. However, you also have to look beyond that and saying, if imports are more expensive, then you're going to have people in the US who are going to be able to expand their market and take market share from foreign imports. And there are stories about that, where small manufacturing businesses are expanding because now they get a lot of people who don't want to pay for those more expensive imports now and are choosing instead to buy domestic. So there's going to be a reshuffling, a rebalancing, and I think it could be good for some sectors of the economy. But overall, this will be, I think, an impact on living standards on aggregate.

• 26:23Demetri Kofinas?

  So the opposite side of a current account deficit is a capital account surplus. And US capital markets in the US have benefited enormously from being at the center of the global financial system, especially during the last 30 years of trade liberalization and hyper-globalization. What do you think are the consequences on US asset markets and US capital markets to a reversal in the flows that we're describing here in terms of trade and a reorganization away from the United States?

• 26:52Speaker 01

  So I think this trade stuff is very obviously going to have an impact on dollar assets. So it's going to have an impact in a couple of ways. So the way that the world is set up right now is that the US buys a lot of goods and services from abroad and pays for them by exporting dollars. Foreigners take those dollars and they go and they buy US assets. They buy all sorts of things, treasuries, obviously, but also corporate debt, equities. And so if you kind of reduce this flow of dollars, you could have less demand by foreigners for dollar assets, and that could put downward pressure on dollar assets. Now, the second thing is that, and we see this from a geopolitical stance already over

• 27:33Speaker 01

  the past few years, is that by having all these changes in trade policy, there's a perception that the US is not as a friendly country as it was before. So this is something that started a few years ago, even during the Biden administration, when during the Russia-Ukraine conflict, the Biden administration basically froze the Russian reserves. You can think of it as a bank basically denying you access to your bank account. And that policy shift made countries, Russia and maybe friends of Russia like China, be a little bit wary of having too much exposure to US capital markets. And so you see right now that the people's bank of China buying a lot of gold. To the extent that stayed there, that was not good.

• 28:18Speaker 01

  But now that we're kind of expanding what we're doing with foreign policy to even closer allies like Canada, like Mexico, like the EU, that I think overall is creating more of a perception that the US may not be the great capital destination that it once was. Now, there was even whispers in the BBB bill that there was something called Section 899 that it was eventually that ultimately a tax on foreign capital. That was negotiated away, so there was market reaction and Secretary Besen took that out. But that kind of shows you that there's kind of a zeitgeist shift in Washington in how foreign capital, foreign investors are perceived. And so I think that all adds up to a climate where the world is maybe a little bit less

• 29:02Speaker 01

  confident in having so much dollar exposure. Now, we've seen the dollar weaken 10% this year, and there are articles going around showing that it's the worst start to the year since 1973. That's in part, I think, driven to buy all this trade tension, but there are other two very big pillars that are driving it as well. And that is, of course, fiscal policy and the potential weakening of monetary policy independence. Now, going back to my framework that I discussed earlier in the session, I think policy is what drives markets, and I think the biggest, biggest macro trend in the coming years is a structural dollar weakness. And I think that's going to have a huge impact on all dollar assets.

• 29:42Demetri Kofinas?

  So you literally precipitated my next question, which is whether the decline in the dollar is cyclical or structural. What are the structural forces that you think are driving the value of the dollar lower and that will continue to force it lower in the in the coming years?

• 29:57Speaker 01

  So if you take a look at about, let's say, the dollar index, it's down about 10% this year, but taking zooming out, it's still, let's say, above recent historical averages. So this decline, well, sudden in a short period of time, the dollar is still relatively strong. So I don't think it's something that we should worry about just yet, but taking a step back and zooming, you can see that it has the potential to decline a lot further, and I think it will. Now, the reason is threefold. First off is our fiscal situation. So like I mentioned before, the way that I look at a fiscal deficit is that we're basically printing dollars, right? If I were to give you a billion dollars in treasury securities, Dimitri, it would be like giving you a billion dollar bill. You'd be able to take that.

• 30:42Speaker 01

  Again, you won't be able to buy lunch with it at your local restaurant, but treasuries are liquid, credit risk free. You can easily sell that for bank deposits and go and spend it. So when the treasury is printing, say, two trillion dollars a year in its fiscal deficit, it's printing a lot of dollars. And if you look at Congress, it doesn't look like that's going to change right now. Heading into this year, I had high hopes that we would actually shrink the fiscal deficit. You had Secretary Besseng give us a 333 plan that suggested a 3% fiscal deficit. You had Elon being a prominent member of the Trump administration in the beginning with his Doge efforts trying to string government. And, you know, that didn't seem to be effective.

• 31:23Speaker 01

  And now the big, beautiful bill shows that Congress is just going to keep spending and spending. I think from my sense, from conversations with people who are close to this, it's just basically there's no forcing mechanism to stop spending, right? So if you are a member of Congress, the way that you get elected, the way that you retain your support is by being able to deliver to your constituents, so giving them stuff both at home and of course, your corporate sponsors as well. So there's this widespread bipartisan effort to just kind of just keep spending because there's no reason not to. And if you look at the breakdown of the US fiscal situation, you can see it's actually quite difficult to stop. There are three big parts of it. One is interest rates.

• 32:05Speaker 01

  Again, the US is not going to default on interest rate payments, so that part can't be touched. And with interest rates right now where they are, it's becoming a larger part of the fiscal deficit. You have Mandatory spending, which is social security, Medicare, stuff like that, that's very, very difficult to cut, just politically impossible. And lastly, you have these discretionary spending, which is stuff like military expenditures, salaries and so forth. And it looks like the world is heating up geopolitically, so that's not going to stop either. So if you can imagine a world where we can just continue to have a 6%, 7% fiscal deficit for the foreseeable future, yeah, that's very obviously dollar negative. And just for frame of reference, there is no country in the world that can do this.

• 32:49Speaker 01

  If any other country had this persistent fiscal deficit, their currency would sell off a lot, their bond yields would be a lot higher. A country that's somewhat close is France, and you already see that French oats yields are going higher. But of course, they're part of the broader European Union, so you don't see a strong currency impact. So what the US is doing is truly exceptional in this fiscal deficit. And it's kind of surprising that we've basically just socialized it, but it is what it is. And that's, I think, very dollar negative, simply because it's forecasted to continue indefinitely. I think the other thing that's super, super negative for the dollar is there is potential for a weakening of monetary policy independence.

• 33:31Speaker 01

  Now, this can be done through the Fed, or it also can be done through the Treasury. Right now, we have all sorts of talks that the president is unhappy with Chair Powell and would like him to be replaced. Now, I'm not sure why the president is unhappy with interest rates where they are right now. Stocks are at all-time highs. It seems like that would make many people happy. But his public commentary suggests he would like a 300-basis-point cut in the Fed funds rate, which is a lot, but the president typically shoots for the moon and settles for something less. So in any case, he wants the Fed to cut rates. Now, there was a lot of commotion earlier in the year where there was threats of maybe him firing Chair Powell, and the market reacted poorly.

• 34:14Speaker 01

  But that misses the bigger picture in that Trump will eventually get his own Fed chair. Chair Powell's term ends next year, and so Trump will get his own Fed guy. So there's a lot of news right now that maybe the people in the administration are finding a reason to try to get rid of Powell. The only way you can get rid of Fed chair is for cause, and there's some people drumming up finding reasons, saying perhaps Chair Powell did not manage the 2.5 billion renovations in And the Fed building properly, and so that's costly to be fired. I don't know if that will actually go through, but it does tell you that, you know, this is different than how the US used to behave, the US for the past few decades. Not always, like before the 1950s, there was no monetary policy independence, but for the past few decades, there largely was. So the US is

• 34:59Speaker 01

  changing in how it conducts monetary policy. And, you know, if you are going to systematically have rates lower than they otherwise would be, that's obviously a dollar negative. You're printing a lot of dollars through treasuries. Usually, you could have the interest rates to encourage people to hold them. But if you also structurally shift interest rates lower, that's going to be less reason for people to hold that. Now, one thing I also note is that, you know, monetary policy is an art, it's not a science. So even though, let's say, the Trump just has his guy, his Fed chair on the Fed board, there's a lot of discretion in how the Fed conducts monetary policy, that you can easily shift rates lower than they otherwise would be. You can think of

• 35:40Speaker 01

  it in a couple ways. So the Fed conducts policy with a view of the future. And sometimes that view is incorrect, but you can always make it defensible. A good example was just recently, right? So the Fed was telling everyone, when inflation was quite high, that inflation is transitory. We don't really need to do anything. That was based on their judgment, based on their perception of the future. You know, that was wrong, but it allowed them to keep rates lower than they otherwise should have been. Going forward, you could easily have a new Fed that says, you know, inflation today is transitory, right? So, you know, we're just going to cut rates or leave rates lower because stuff, it's just going to pass. Tariff inflation is just a one-time increase in the price level. And another way that the Fed has a lot of discretion is

• 36:25Speaker 01

  because the US Fed is a dual mandate central bank. You have price stability and full employment. And how you balance these two mandates gives you a lot of space to adjust rates. You could, for example, have placed a higher weight on full employment and be more willing to tolerate higher inflation. And that, again, can structurally lead to lower interest rates. So I think that having a more political Fed is something that can really shift in the interest rate complex, but that doesn't seem to be in the market at the moment. Now, one last thing that I think is that the administration could impact interest rates is just through the Treasury. And this doesn't require any controversy. Well, it will get controversy, but it doesn't require any congressional support or anything unconventional.

• 37:10Speaker 01

  So if you think about, say, longer dated rates like the 10-year yield, that is in part driven by supply and demand. So the US Treasury controls the composition of US debt. Doesn't control the overall size, that's by Congress. But how much of that debt is issued in bills? How much of it is issued in notes? How much of it is issued in like 30-year bonds? That's up to the US Treasury. And so what we saw under Yellen, for example, was that when the 10-year was pushing over 5%, Yellen basically shortened the maturity structure of the debt, issued a lot more bills rather than longer dated, say, 10-year notes, 30-year bonds, and that put downward pressure on longer dated interest rates. You saw the same thing happen in Japan just a month ago.

• 37:54Speaker 01

  Again, Japanese bond markets also seeming a bit fragile. So you have someone from the Ministry of Finance, they're saying, hey, maybe we'll just issue more JTB bills. Okay, and that calmed the market down a lot. Got 10-year interest rates, longer dated interest rates in Japan down a lot. And Trump has already said something complimentary to that extent, that we could do that. And so going forward, you could easily have a Treasury that kind of freezes coupon auction sizes and just increases the bill share, and that would also structurally put downward pressure on interest rates. All this is adding together to a dollar that can go, I think, much, much lower, you know, 20, 30% lower. And bearing in mind, of course, that historically, it's not that low. And the icing on the cake, of course, is all the stuff we talked about, Dimitri, with trade.

• 38:38Speaker 01

  You're making the US, I think, perceived to be a little bit, not as good a place for foreign investors.

• 38:44Demetri Kofinas?

  Excellent. So there's a lot to unpack there. And I have a number of more questions on the dollar to ask you, including capital flight as well. Just a point of clarification. Are you inclined to believe the arguments that higher interest rates in the last few years, given the structure and nature of the economy and the fiscal expansion, were on net stimulative?

• 39:03Speaker 01

  That's a really hard question. Like we mentioned before, interest rates have an uneven impact on the economy. It is slowing some segments and helping others. So right now, when I look at the economy, I think there's a very noticeable slowdown in housing, for example. And so that's going to eventually bleed into things like construction jobs. There's credit quality and auto seem to be declining a bit, so. I think that when you're looking at the real economy, I think it is having us on net a contractionary impact.

• 39:34Demetri Kofinas?

  So it actually worsens the wealth and income divide as well? By that logic, correct?

• 39:40Speaker 01

  Well, that's kind of the policy trajectory for the past few decades, right? So that's not a surprise.

• 39:45Demetri Kofinas?

  But it also runs counter to the president's stated and implicit objectives.

• 39:49Speaker 01

  So one thing, so when thinking about the people who benefit from this interest income, who are the people who own bonds? I think they tend to be well off. And so if they have more interest income, I mean, they could just consume it in goods and services, but you know what? Maybe they just take that and they reinvest it and buy other risk assets as well. So that's similar to the impact from interest expense. I suspect maybe it gets reinvested in financial markets more than than actually being spent in goods and services, which would have a real economy impact. So, yeah, I think on net interest rates would be contractionary.

• 40:29Speaker 01

  That being said, in the future, we could easily have a world where that interest impact dominates. And with the debt to GDP climbing and climbing, that's something that's almost certainly to happen.

• 40:41Demetri Kofinas?

  So by that logic, does that mean that there's an argument to be made that lower interest rates would actually cause a decrease in the value of assets and an increase in inflation because they'll be net positive for lower income brackets that have a higher propensity to spend? How do we think about the effect that lower, just just a lower Fed funds rate? We're not even talking about balance sheet expansion with a new dovish Fed chair, but just on the interest rate side, what do you think are some of the more probable effects of a more dovish interest rate policy?

• 41:14Speaker 01

  So conventionally, people would think that, you know, the Fed cuts rates, you know, immediately what you could have see happen is treasuries rise. So again, bond market appreciates in value. That generates some sort of wealth effect that can prompt some rebalancing with these funds that have to maintain their allocations, go and buy equities. And so that causes all financial assets to rise. I think that's how the market is conditioned and that's how things have worked in the past. But I suspect that things can actually be a bit different going forward. And that's why that I'm very bearish for financial assets, dollar assets for the coming years. Now, when the Fed actually begins to cut rates, and again, we got all these other things that we're talking about, that will accelerate the decline in the dollar.

• 41:59Speaker 01

  Now, like I mentioned before, I look at the world through policy, but also how it relates to the structure of the financial system. And one thing that I've noticed is that over the past few years, the foreigners have become highly, highly exposed to dollar assets. And that's no surprise. We have really cool stuff in the US, right? We got AI, we got big tech, we got Nvidia, and those things have done super well over the past few years. Not only that, until recently, the dollar has been appreciating. So if you're, say, a Japanese investor and you bought Nvidia a few years ago, well, of course, Nvidia price appreciation. And on top of that, the dollar appreciated, so you're getting a double play, so what's not to like? And people have been pouring money into the US for decades.

• 42:43Speaker 01

  It's like the global piggy bank. It's where everyone keeps their wealth, and that's kind of our expertise, producing capital markets services. But let's say that you are a Japanese investor. You look at things both in price appreciation, so price of stocks, but also through currency. When the Fed begins to cut rates, and maybe it cuts rates a lot because we have a new Fed chair that is under orders to do that, you could be losing a lot on the currency aspect. And that could spur you, on top of concerns about, say, US policy, to just rebalance your exposure a little bit to the US. And so maybe you have, let's say, I think there's BIS data suggesting that about 30%

• 43:27Speaker 01

  of foreigner portfolios are in US assets. Now, that's a lot, and I'm telling you that US investors don't really think about investing abroad all that much. But let's say that you just rebalance it to 25% or 20% of your overall portfolio, simply because you don't want to take losses on your currency and you're already overexposed. That could be a very negative capital flight-like situation. And we've kind of already seen glimpses of that. For example, in April, during the height of the liberation day commotion, we saw dollar sell off, equity sell off, and we also saw treasury sell off as well. And now that we have official data, for that month, there was a net outflow of 50 billion of foreigners selling a net 50 billion in assets.

• 44:11Speaker 01

  And that's the largest it's been for for a couple of years. So we kind of saw a glimpse of that. But I think that as the dollar continues to depreciate, which could be precipitated by, say, a dovish Fed, like you mentioned in your scenario, yeah, I think that would be actually bad this time, and that might be surprising to many.

• 44:30Demetri Kofinas?

  Well, capital flight is the nightmare scenario for dollar holders and dollar asset holders.

• 44:36Speaker 01

  I don't want to be too dramatic. We can just have a rebalancing, right? Everyone is super overrated dollar assets. And then, and then, yeah, you know, just going from super overweight to maybe just

• 44:45Demetri Kofinas?

  Okay. Yeah, so fair enough, fair enough. Let me just restate it and say again, to reiterate a point, that the United States has chronically depended on running a capital account surplus. And so the economy has been structured to depend on those inflows. And a reversal of those inflows would be very negative for the value of US assets and the dollar. And we're gonna, again, capital flight and sort of the potential for a doom loop, where capital flight leads to austerity and a recession, and then we can throw in AI and the possibility of a white collar recession, where we see the service sector and the white collar workforce, and especially younger people, begin to experience a chronic uphill when it comes to employment that the blue collar workers experienced in the 90s is something that I think also

• 45:27Demetri Kofinas?

  is worth discussing, as well as the radicalization of the Democratic Party, along the lines that we've seen with the Republicans. The Republicans had their moment in 2016. I think the Democrats are really set up for a similar type moment in 2028. But again, I don't know to what degree you want to speculate on that, but I'm going to certainly ask you about it. One more question before we go to the second hour, and that has to do with a comment that you just made, which was that the dollar sold off after liberation day. But recently, with the announcement of some of these other tariffs, we've actually seen a strengthening of the dollar. I'm not saying that the reaction is causal, but what would you say to the argument that the dollar has sold off pretty dramatically and it's due for a cyclical rebound? At this time, do you have a view on that at all?

• 46:08Speaker 01

  So I think you make a very good observation. So just this past week, we're recording this in mid-July, President sent out these-

• 46:16Demetri Kofinas?

  July 15th, to be clear for listeners.

• 46:19Speaker 01

  President sent out these tariff letters and the dollar seemed to strengthen a bit. Now, I would just take a step back and say that according to standard economic theory, the dollar should have appreciated, right? A lot of the administration's case that tariffs wouldn't be inflationary was that the dollar would appreciate. So that is the normal baseline. Now, what was really weird was when we saw in April, when tariffs actually led to a weaker dollar. Now, that is kind of the red flag there. So what we're seeing is that markets coming down a bit and maybe reverting a little bit to their normal behavior. I think that's positive on the margins, so what we're doing. But if we're having this big shift in market regimes, we're shifting market regimes that have persisted for a very long time, I wouldn't expect it to be just overnight, you turn

• 47:04Speaker 01

  a switch and everything goes to a new regime. So I would expect two steps forward, one step back and so forth. So I would still wait to see, to see how these things are happening. And to be clear, you still have a lot of things going on that are weighing on the dollar. For example, like I mentioned before, the weakening of monetary policy independence. So I think it takes time for a whole zeitgeist to shift. I wouldn't really just look at this one week and say that, you know, things are back to normal.

• 47:33Demetri Kofinas?

  So I'm going to move into the second hour, Joseph. I think I've already hinted to listeners where I want to take this conversation. I want to have a larger conversation by capital flight, the consequence of that, a lower dollar. As I mentioned, the white collar recession, which is something that we've explored on this podcast in the past, the political ramifications of what we're describing, I think are very important. And especially for someone like you, who puts policy first, I think thinking about how the politics in the country will change is going to be really important for understanding what sort of economy we're going to get. Also, to the extent that you have an opinion, I'd love to talk to you about gold, silver also, which I think you've called the OG meme stock, is that right?

• 48:10Speaker 01

  Yeah, that's what I think of it.

• 48:12Demetri Kofinas?

  I love that. I want to talk about that, too. And also crypto. For anyone new to the program, Hidden Forces is listener supported. We don't accept advertisers or commercial sponsors. The entire show is funded from top to bottom by listeners like you. If you want access to the second hour of today's conversation with Joseph, head over to hiddenforces.io/subscribe and sign up to one of our three content tiers.

• 48:35Demetri Kofinas?

  All subscribers gain access to our premium feed, which you can use to listen to the rest of today's conversation on your mobile device using your favorite podcast app, just like you're listening to this episode right now. Joseph, stick around. We're going to move the rest of our conversation onto the premium feed.

• 48:52Demetri Kofinas?

  If you want to listen in on the rest of today's conversation, head over to hiddenforces.io/subscribe and join our premium feed. If you want to join in on the conversation and become a member of the Hidden Forces Genius community, you can also do that through our subscriber page. Today's episode was produced by me and edited by Stylianos Nicolaou. For more episodes, you can check out our website at hiddenforces.io. You can follow me on Twitter @Kofinas and you can email me at [email protected]. As always, thanks for listening. We'll see you next time.