The 2 Biggest Economies Are Both Breaking — And Both Are Hiding It

Special Thanks To Jeff Snider From Eurodollar University. Check out the video: https://youtu.be/ams5suvGO8I?is=d5vCrI9g0uaRyDOV Welcome back to Impact Theory with Tom Bilyeu. In today’s episode, we break down the growing economic turmoil facing the world’s two largest economies: the United States and China. With both nations experiencing troubling trends—China hit by a historic pullback in lending and government borrowing, and the U. S. seeing a sharp drop in consumer spending—our guest, Jeff Snider of Eurodollar University, helps us unravel the complex interplay between banking systems, government policy, and national psychology. We’ll explore why China’s hidden debt crisis and the CCP’s response could trigger global ripple effects, how low interest rates signal trouble rather than prosperity, and the critical role expectations play in shaping economic outcomes. Drawing vital parallels between China, Japan’s “lost decade,” and the current state of the U. S., we’ll discuss what these shifts mean for the future—and for your own financial strategy in uncertain times. Strap in as we connect the macroeconomic dots and reveal why understanding these currents is essential for anyone aiming to thrive in a volatile world. Cash App: Download Cash App Today: https://capl.onelink.me/vFut/v6nymgjl#CashAppPod *Cash App is a financial services platform, not a bank. Banking services provided by Cash App’s bank partner(s). Prepaid debit cards issued by Sutton Bank, Member FDIC. Cash App Visa® Debit Flex Cards issued by Sutton Bank, Member FDIC, and The Bancorp Bank, N. A., pursuant to a license from Visa U. S. A. Inc. See terms and conditions for the Sutton prepaid card, Sutton debit flex card, and Bancorp debit flex card. Cash App Green features, Savings, Direct deposit, Round ups, Overdraft coverage and Discounts provided by Cash App, a Block, Inc. brand. Visit cash.app/legal/podcast http://cash.app/legal/podcast for full disclosure. Quince: Free shipping and 365-day returns at https://quince.com/impactpod Whatnot: Download the Whatnot app today and get free shipping on your first order. Surfshark: Go to https://surfshark.com/TOMBor use code TOMB at checkout to get 4 extra months of Surfshark! ATT Business: Switch to AT&T Business at business.att.com http://business.att.com Horizon.ai: Go to https://horizon3.ai/IMPACTTHEORY and request your free NodeZero demo. No commitment required. Results in hours, not weeks. Quo: Try for free PLUS get 20% off your first 6 months at https://quo.com/impact Incogni: Take your personal data back with Incogni! Use code IMPACT at the link below and get 60% off an annual plan: https://incogni.com/impact Pique: 20% off at https://piquelife.com/impact Shopify: Sign up for your one-dollar-per-month trial period at https://shopify.com/impact Ketone IQ: Visit https://ketone.com/IMPACT for 30% OFF your subscription order 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/ 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 See Privacy Policy at https://art19.com/privacy and California Privacy Notice at https://art19.com/privacy#do-not-sell-my-info.

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• 2:07Speaker 00

  What we're looking at right now is we have a world where the two biggest economies are both in economic trouble. Both are trying to hide it. Both are hiding it in ways that at least kick off some visible signs. And so, once again, our man Jeff Snider over at Eurodollar University has put together a great video explaining what's going on in China. Because right now, man, China has had a historic pullback in lending. Once you get to the way that the government borrowing works in China, this becomes very unnerving. And while I get it, if you're like me and you want to see America win the war with China, there's a temptation to want China's economy to be weak. But you definitely don't want China to be too weak because then now you've got a problem where nobody's buying anything.

• 2:51Speaker 00

  Because US just had a pullback, and it's just July, so we'll see. But the US just had a pullback in consumer spending. China is having this massive pullback in borrowing, presumably because they've had a pullback in spending. And so, we're going to go through, we're going to see that there's trouble brewing. If you have the two biggest economies, both, both of their economies, by the way, driven largely by spending, and both of them are in trouble, now you start talking global recessions.

• 3:16Speaker 02

  Chinese bank loans just put up a record contraction, record contraction. Just when you think the Chinese situation can't get any worse, they find a way to make it worse. And that's not the only thing. There's a surprise from the Chinese government, especially for wealthy individuals, that has us asking the question, why now? That is in many ways a rhetorical question. But they're going after taxes, which may be possibly a prelude to bigger things and bigger crackdowns. Because like I said, the situation in China somehow gets even worse.

• 3:47Speaker 00

  All right, what's interesting, he's going to take it for granted, so I don't remember him going very deep on this. But it is an important point to note that when a government starts trying to lean on tax, tax, tax, tax, tax, instead, because when you tax something, you get less of it. Okay, please keep that in mind as you evaluate the DSA policies. So if when you tax something, you get less of it, and the Chinese government is now like, yo, if you're hiding somewhere, we're going to go after every dollar loopholes that they've let stand for a very long time. They're going after it. Why? The answer is always the same. They are spending more than they're making. So keep that in mind as you look at the US and compare it to China.

• 4:22Speaker 02

  Macroeconomic data that came along and confirmed everything. But really, the story here is banks and Beijing, banks in Beijing, the crackdown. Record contraction in Chinese total social financing, new RMB loans. So these are loan flows for the month of July. Yes, July is a seasonal low point on the calendar, which really all it does is expose just how badly the situation is for Chinese banks. And Chinese banks, as we know, have been pulling back for several years. And if you haven't seen this yet, just wait till I show you the next chart because it really does illustrate the point that we're making here. Chinese banks are the centerpiece of the Chinese economy. They are the way in which China, first of all, responded to the 2008 crisis and the aftermath. Without the banking sector, you wouldn't have had the real estate bubble.

• 5:07Speaker 02

  But now that they've had the real estate bubble, they didn't actually fix the economic situation. Silent depression, which I'll get to at the end of this video. Silent depression, real estate bubble, they don't have the economy to support the bubble. So the banks have been building up and building up and building up bad loans, not just from real estate, but from local government projects and local government exposures. That's involved in this too, especially the tax scheme. And all it really says is that China has this immense, biggest bubble in human history that is owned and owed to the Chinese banking sector. And what's happening in Chinese banking sector? Well, there's tons of hidden loans. You can't have, you can't have this big of a massive bust without those loans and bad loans piling up somewhere.

• 5:50Speaker 02

  So we know what's going on in the Chinese banking sector, even if we don't have the data that shows it. We have all the data that goes around it. We don't have direct information about just how bad the situation is. But in many ways, we don't necessarily need it. It'd be nice, but we don't necessarily need it because we can tell from the behavior of the Chinese banking sector, what's truly going on over there. Get away from the government spend, set that aside. It's not what, it's not what gets said in China, it's what Chinese banks actually do. And it's not Chinese central banks, it's never any central banks, banks, not central banks. It's what the banking sector is doing. And as you can see, record contraction, even if it's the seasonal low point on the lending calendar. It's, it's consistent with the trend.

• 6:32Speaker 00

  All right, so one of the things to understand about the difference between a central bank and the local banks is when China was trying to come out from under Mao, they were talking to, they talked to the US. I think they talked to Japan as well. And they were like saying, okay, what, what is the key to making all of this work? And the question that they were asked is, how many banks do you have? And they were like, we have one bank. And they were like, bro, that's crazy. You need to have thousands of banks. So you want all of these decisions being made at the local level. You want the local level to look at somebody and say, are you likely to be able to pay me back? And making that decision like that, so it can be very fast paced, that it can be very close to the ground.

• 7:14Speaker 00

  And from that, you're going to see all this economic activity begin to happen. And just as it's important to understand in the US, this is that Steve Keen thing that he's trying, just begging people to understand about the way that liquidity works. So if Raopao is right, and liquidity is the key to everything. If you want to know how the government is doing, you need to look. Or if you want to know how the economy is doing, you need to look at liquidity. Do we have a lot of money sloshing around the system or do we have very little? You need to understand where does the money come from? The money is created out of thin air, but it's created out of thin air by the local banks at a far greater rate than it's created out of thin air by the central banks.

• 7:56Speaker 00

  And so, what the central bank does is give the local charter banks a, the ability to create that money out of thin air. Okay, and so then, at close to the ground level, they decide who's worth loans or not. Now, the fascinating thing about the Chinese story, guys, you, this is the thing you must understand. There is so much political pressure for a local government to hit their revenue thresholds that these guys have been taking on very risky debt. And now they're starting to pull back. So you have a banking sector that has historically had insane risk appetite because they had to.

• 8:39Speaker 00

  Their ability to get promoted, this is part of the problem with the top-down system. Their ability to get promoted is not about impressing voters. It's about impressing the CCP, who's going to determine if you actually keep rising within the party or not. And so, these guys are under tremendous pressure to get these loans. So the banks are under pressure from the governments to accept these loans. I'll talk more about this as we go.

• 9:02Speaker 02

  These are new loan flows from Chinese banks in RMB currency for other months, the first seven months of every single year. So we're apples-to-apples comparisons. And you can see, 2024, which we've been talking about here on this channel since 2024, the situation continues to get worse and worse. There was a little bit of a pickup in early 2025. Is everyone attributed to the bazooka from September 2024? But that was a short-run fluke more than it was any kind of actual turnaround. And the situation in 2026, which this graph shows you very plainly, has somehow gotten even worse, which is consistent with the downturn or really the accelerated downturn that we've been talking about again in this channel since last summer.

• 9:43Speaker 02

  The macroeconomic data shows it, and the banking sector data shows it as well.

• 9:48Speaker 00

  So imagine you're China, you've got this housing boom. The housing boom goes bust, if you guys remember that, kicking off a couple of years ago. They're desperate to try to disguise that anything is happening because they obviously don't want to look weak to the world. They want to make sure that they're able to get investment dollars. They want their own people to keep spending because a huge part of economics is the psychological game. If people psychologically feel like they're better off saving, then everybody pulls back. People don't borrow money. And when they're not borrowing money, less money is getting created and put into the system. Now, if we're right, the liquidity is the thing that drives the good times, if you will. High liquidity, good times, low liquidity, bad times.

• 10:32Speaker 00

  The loans are the thing that creates the liquidity. If Steve Keen is right, and I think he, I mean, he is right, that when you pay back a debt that was money printed out of thin air, that money just ceases to exist. It, it zeroes out in the ledger, right? Because of double-entry accounting. It just is how this works. So the money is brought into existence from nothing, gets paid back, and it goes back to nothing. So now, from a liquidity perspective, you've literally sucked money out of the system. If you're not looking at your screen right now, if you can, look at it. What you see there is liquidity rapidly disappearing out of the Chinese system, which means that the feel-good times in the Chinese system are starting to disappear,

• 11:15Speaker 00

  which means that the local governments are going to find themselves in trouble for a reason we're going to get into in a minute in terms of how these government agencies actually fund the growth.

• 11:25Speaker 02

  And this all fits with interest rates. China is the best example, the best current example of the interest rate fallacy, Milton Friedman's interest rate fallacy. People keep saying, they keep saying, low interest rates are stimulus when it's not the case. Low interest rates are a reflection of weakness in the economy. And in this case, weakness in the economy, therefore, higher risk, but also weakness in the Chinese banking sector. So interest rates are falling consistent with what banks are doing. Go back to 2018, 2019, the landmines, we call it here from late 2018. There was a slowdown in lending because Chinese banks pulled back on their risky behavior and bought a ton of safety government bonds. So government bond rates go down signaling weakness in the economy, weakness in the financial system that is recognized in this case because China is so heavily reliant

• 12:10Speaker 02

  on its banking sector. The banks are doing something. It shows up in the bond market, it shows up in the bank statistics, it shows up in the real economy. It shows up everywhere except mainstream economics and therefore the mainstream media, which keeps saying that lower rates are stimulus when China is the perfect real world experiment, once again verifying the interest rate fallacy. Lower interest rates are a sign of weakness. Again, the last couple of years, look at what, look at what we got here. Big drop in Chinese government bond yields, especially long-term government bond yields, but short run too. But big drop in long-term government bond yields consistent with Chinese banks pulling back. So Chinese bank balance sheets are de-risking in a substantial, I mean, just look at this chart here, way off trend and getting worse. They are de-risking.

• 12:55Speaker 02

  They're pulling back from lending to anything that smacks of a risk, not just in the household sector, but also the corporate sector. They're de-risking. And in de-risking, they buy safety. This is depression economics. It should be very familiar, at least to people who are honest and have been paying attention to our experience here around the Western world in the aftermath of 2008. Now, China did not have a 2008 style blow up, but they have been trying to work to avoid something like that for about a decade now. And during that decade, it has been a 2008, but prolonged and elongated out over a decade period rather than condensed in a couple of years that like we saw here in the Western, Western part of the, uh, part of the world.

• 13:36Speaker 02

  So lower interest rates going sharply lower, consistent with Chinese banks, de-risking consistent with, with depression economics. Tells you everything you need to know about Chinese banks, but also interest rates. Next time you hear somebody say, whether China or outside of China, that lower interest rates are stimulus, think of this chart, as well as the charts I'm going to show you coming up.

• 13:56Speaker 00

  Okay. So one of the things that you have to understand about the way that Chinese banks work is you've got the local governments are basically running this thing, um, called an LGFV, local government financing vehicle. It's like a loophole. So the local governments use state-owned financing vehicles to take on commercial bank loans. Okay. So the government is basically acting like they're a company. So the, um, the CCP was basically saying, all right, listen, we don't want you guys being able to do direct lending. So they stopped direct lending. And as always, if you have pressure in one area, you create an incentive structure.

• 14:37Speaker 00

  The way that the CCP top-down incentive structure works is if you're the head of a local government, you have to hit certain quotas. The reason you have to hit certain quotas is if you want to rise up in the CCP, there's no voter to help you. You've just got to impress the CCP. So they give you an edict, make sure that your region grows by this much. If they tell you, make sure that your region grows by this much, and you know, the only way to grow by that much is to take on loans, but the CCP makes it illegal for you to take on direct loans, then you've got to find a way around that. And so what they end up doing is they created this special vehicle where the governments could basically set up a corporation, borrow through the corporation, and then try to build the infrastructure and things like that.

• 15:21Speaker 00

  It's a very high-risk maneuver for two reasons. One, it's just you don't know if you've got the growth to, uh, pay you back. And then two, you don't know if the CCP is going to come down on you because they can see that you're trying to get around something. So they had all of these very risky loans that had these huge obligations in terms of interest payments. And so the CCP looked at that and was like, oh, we let this get out of control. And so they end up creating this moment where it's like, hey, we know a lot of you guys are doing this. They didn't call it amnesty, but basically we're going to offer amnesty for you guys to use these as like very straightforward, low, it's like 2% yielding loans.

• 16:02Speaker 00

  Let's get you guys back on the actual books, get this debt out of the shadows and bring it into light so we can really see what's going on. And when they did that, what they found was the banks were reticent to do it because it was like, well, I might be getting paid seven to 9% on my, not illicit, but like not fully approved loans over here. Uh, and the local governments were putting a ton of pressure on the banks to make those loans. So it's like, wait, I got pressured into doing this loan. At least it pays me well. Now the CCP is trying to pressure me in the other direction to get me to borrow these really safe loans from the government that have low yields and I don't necessarily want to do that.

• 16:45Speaker 00

  But then the economy got so shaky that the banks started buying up all the government debt that they could, which was a flight to safety. Now, as the banks start trying to fly to safety because they can see the shakiness in the economy post the housing collapse, now all of a sudden, the government's like, wait, wait, wait, you guys are buying too much of our debt and you're driving the interest payments down. So we're hitting pause for a moment, but there's plenty more ahead, so don't go anywhere. There's a reason Quince sells cashmere for $60 and it isn't the cashmere. It's real 100% Mongolian cashmere. It's the same stuff luxury labels charge a fortune for.

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• 20:25Speaker 00

  Thanks for sticking around. Let's get right back into the action.

• 20:29Speaker 00

  Again, Jeff pointing out something that I think is very important to understand. Low rates are not like a sign, let the good times roll. Low rates were a sign something is broken in the economy. And so right now you get everybody flying to safety. Was that a hand raised?

• 20:43Speaker 03

  Yeah, really quick. Is this a mirror or a projection of what we can see happening to America? Like, is there a direct blowback from this similar to Japan? Or is this just an example that economists will use for future like?

• 20:55Speaker 00

  So part of it is that we have a mirrored system here in the US. So we do something similar to a lesser degree. So China has something like $15 trillion. I mean, some absolutely astronomical number in these local government bonds essentially. The sort of pseudo illicit ones, a very specific type. The US runs a very similar thing, but we only have like $160 billion or something. So just the scale is so different. So look out for that. But the reason this is important is China is showing you exactly what the data looks like when things are moving in the wrong direction. So that we can look at what's going on in the US and see a ton of these same parallels. In terms of the US consumer right now is pulling back.

• 21:40Speaker 00

  As US consumers pull back, if that pullback continues, then you're going to see them have to start, they're going to be driving rates down, trying to reignite the economy to make sure that people have jobs. But you just had a record number of people eject out of the job market. Either because I've applied to 300 places, I can't get a job. Or I just see where this is going and this whole game is just nonsensical. Or I'm getting so much free stuff, I just want to keep getting free stuff. So what people need to be looking at are the parallels in the economy that show you we have weakness in the two biggest economies right now. That you can, by looking at some of the parallels, just because they're more visible in the Chinese data. So let's say they're a little bit ahead of us. If you're looking at the parallels in the Chinese data,

• 22:25Speaker 00

  you can see, one, what it looks like when a housing bubble bursts. And you can see what the things are that they try to stimulate. And if we really want to get complicated, now look at Japan as a, what does the future of China look like? Does it mirror what happened in Japan in terms of being the last decade's? In terms of what happens is the psychology. So if I'm in Japan and the housing bubble bursts in 89, then I have touched the stove and I realize, whoa, I just lost everything. I don't ever want to do that again. So now I'm going to be paying down all my debt. I'm going to be very conservative for a very long time. And it completely stalls out their economy.

• 23:09Speaker 00

  But it's a psychological problem. And that creates the zombie corporations and all of this. And so all eyes on China primarily because they're our number one rival. So we certainly want to understand what's happening. But then also understanding what is this likely going to mean in terms of them continuing to move away from the US system? What is it likely to mean in terms of them trying to dump more goods? Because the one part of their economy that's still killing, he's going to get to this in the video. But one part of their economy that's still working is exports. And so now they're going to be even more fiendish as these local governments have all this pressure on them to keep growing, to hit numbers. They're going to put pressure on their businesses to do something with that.

• 23:53Speaker 00

  And if the consumer spending in China is stalling out, which it is, then they're going to go abroad. And so as they flood the rest of the world with these cheap goods, now you hurt those local economies. You further have the tariff in the US to stop them from coming in here. And you start continuing to hollow out the middle class in Europe, which is really like a part of the big play. And so now you've got your historic main ally in Europe becoming increasingly a vassal state of China. Because China, from an economic standpoint, because China is in a desperate position where they've got to do something to overcome their housing crisis.

• 24:38Speaker 00

  Part of that something, though, it, given the amount of their GDP that is from exporting, they're not going to be able to overcome this problem, but they'll try everything, is going to cause this strange knock on effect across Europe. And so now, as the US can either go, okay, if we could get fiscally responsible in this moment, we've got a chance to press the advantage against China. But we're culturally, we're not moving in that direction. Culturally, we're riding late stage empire vibes into oblivion. Instead of going, okay, if in this moment we got fiscally disciplined and we start making sure that we do things to protect consumer spending. So how do we do that?

• 25:20Speaker 00

  By getting jobs back here in the US, making sure that people have jobs. When the middle class has jobs and the middle class is going to spend money, as the middle class is spending money, your economy strengthens in real terms. But if you can't get people jobs, you can't get them spending. Now it's like you get the US and China both sort of racing down at the same time. And then now you're talking global depression. So that's so many things, threads that have to be woven together to understand why this is so important. But did that answer your question?

• 25:52Speaker 03

  Yeah, it just showed us the blowback of what it can potentially look like if all those things happen in the second and third order of consequences.

• 25:57Speaker 00

  Yes, and how intertwined the, this whole thing is in terms of what will happen to the US economy. So it's one of those where, okay, you've got a moment where you can

• 26:14Speaker 00

  ride the reserve currency until the wheels fall off. Or you can look at historic people ejecting out of the labor force, massive pullback in consumer spending in July and go, okay, we now see what the problem is. Consumers losing confidence, workers are losing confidence in the economy. Jobs are getting harder to find. Now we know where to target this in terms of how we're going to pull ourselves back out of it. Now where you put your money becomes a question of what do I actually think the government will do? Not what they ought to do, which is what I just explained. But what are they actually going to do in the face of this? You're going to have weakening. China's no longer going to be buying your debt.

• 26:59Speaker 00

  You're printing new money to take care of Japan. Japan's not going to buy your debt. Europe is about to have their own trouble. You sold their debt to help cover the Japanese thing. They're not going to buy your debt. So you've got a softening in consumer spending. China having trouble. You don't have people buying your debt anymore. At a time where you're going to have to keep debt spending massively. So what is the government actually going to do? They're going to lower rates, they're going to fucking abuse the dollar. And so if you want to protect yourself from that, you're going to have to invest in assets. Like, it's just, the writing is so aggressively on the wall. But people need to see how like all the different pieces connect. All right.

• 27:43Speaker 02

  Couple of years as Chinese banks pull back, the economy gets worse, accelerates to the downside. From the Western media, from economists, from central bankers, what do we hear? Stimulus. And so we go through this cycle in China, these mini cycles in China. Mini cycles, the theme that we keep coming back to here, Eurodial University here in the 2020s. But the mini cycle in China has been related to, oh no, the economy's not performing like we thought it was. Here's some more stimulus. Oh no, the economy's not performing like we thought it was. Here's some more stimulus. Oh no, the economy's not performing like we thought it was. Here's some more stimulus.

• 28:13Speaker 00

  Okay, so speaking directly to America, that's what's going to happen here. We're going to find ourselves in that same spiral where more people fly to safety, partly because the whole world making one big AI bet. Which, by the way, we've never talked about that kid. As everyone can see, I'm so good with names. But there was that kid that got fired from OpenAI, he starts his own fund, ends up, Leopold, thank you. It ends up like absolutely skyrocketing, crashing, all of that. Like, so much of the world is betting on that. We're seeing those first cracks, like with the trouble that Leopold got himself into. And so if people can't fly to safety into AI, what's that ultimately going to mean? So they're going to be pushing into debt.

• 28:58Speaker 00

  The debt then, the interest rates are going to lower because there's so much, so many people are trying to get it, you don't have to raise rates to get them in. So yeah, it's going to get, it's going to get weird.

• 29:07Speaker 02

  Every time the stimulus fails to stimulate, you get economists excited about even more stimulus coming out of the Chinese government that doesn't stimulate a damn thing. Instead, what you get is interest rates that go lower, banks that continue to pull back. And the situation in China that is accelerating toward the downside, which is the theme, the general theme, or the specific thing. The general theme is, you know, interest rate fallacy and depression economics. But the specific theme for this video is, why now? The current situation in China as it accelerates even further?

• 29:38Speaker 02

  So again, just to reinforcing the point, lower interest rates consistent with lower bank loan growth, so the outstanding stock of RMB loans in China, so basically all the local currency loans, this is the vast majority of lending in Chinese banks, continues to hit record low after record low. And look at that, the growth rate accelerated to the downside at the same time that Chinese bond yields began to fall precipitously. And remember 2024, where the PBOC warned the Chinese banks specifically, don't buy government bonds, because when we do our stimulus, now they're going to have a flood of government bond supply hitting the marketplace, it's going to work, and therefore you're not going to want to buy safety. And the Chinese banks said, you guys have no clue what you're talking

• 30:19Speaker 02

  about. And they continued to buy government bonds. And here we are, two years after that, and the banks were absolutely correct. De-risking, lower rates, PBOC stimulus did not work, government supply, this is another parallel to the situation in the United States, government supply does not move the needle. What does is the fundamentals of depression economics, low growth, low inflation expectations that are no longer simply expectations, they are, they are happening in the real economy. So once again, low rates are not stimulus. They tell you when depression economics are taking place.

• 30:55Speaker 00

  Here's the bad news about expectations. Expectations are what actually drive this. The problem with downturns in the economy is people become paranoid, they become super worried that they're not going to be able to make ends meet, and so they start save, save, saving. And now, I know it sounds crazy, but when everybody starts saving and nobody is spending money, you've got no velocity of money, which means people are going to lose their jobs, which means people are not buying money, which means that there's less liquidity, and you keep getting this knock on effect. And so this is the exact kind of thing you have to watch out for here in the US. The numbers just came out, US spending in July went down dramatically. Watch for a pattern. We'll see if we rebound in August, and it was no big deal, or if we continue a downward trend.

• 31:35Speaker 02

  There is some credit growth in the Chinese economy. We look at aggregate financing to the real economy, which is a broad measure of credit creation and flow. In this case, it's more flow than stock. So broad measure of credit flow into the, into the Chinese economy, and you can see it's been rising over the last couple of years, but we just went over how it can't be from Chinese banks, therefore not Chinese bank lending. It is instead government bonds, which further proves the point that I'm making about stimulus. Government actions, government borrowing and spending on the fiscal side, as well as the central bank side, but on the fiscal side is equally a reaction to weakness, not a correction for it, or a solution to it. And you can see that very plainly, when you

• 32:19Speaker 02

  look at the Chinese, Chinese government bond behavior, going back to really, the third quarter of 2018, again, that's the landmine. We've been talking about the landmine at Eurodollar, I have anyway, in various forums, for almost a decade now, going back to the third quarter of 2018, a very serious change. And it's not an accident how it got to be that way, though, that's beyond the scope of this video. The timing was not an accident in 2018, but since 2018, the weaker the Chinese economy has gotten, the more the government steps up to do something. And the more that the government steps up, the less it actually does, which means we go through the same mini cycle. The stimulus fails, the government does even more, the stimulus fails, the government does even more, and pretty soon, government bonds are piling up left and right, all over the place. And these numbers are

• 33:02Speaker 02

  absolutely staggering. Really, since 2024, but even before then, but 2024, the bazooka onward, the Chinese government has borrowed an enormous, a truly enormous amount, and bond rates fell anyway. Fundamentals of growth and inflation expectations matter far more than government supply. In fact, growth and inflation expectations under these depression economic conditions are the only things that matter. So when banks are pulling back, saying we don't want to do anything risky, and the government steps in because they're the only game in town, it's the banks that matter, not the stimulus. And you can see exactly what I'm saying here. It's an inverse correlation, when it should be a direct correlation. Government bonds issuance should go up, and so economic growth should go up. That's what everybody

• 33:46Speaker 02

  says. Here, here's the data, here's the proof. Economic bond issuance, or government bond issuance, economic bond issuance, government bond issuance went way up, and what happened to economic growth in China? It went down. It is exactly what I'm telling you. Low rates are not stimulus, government bonds are not stimulus. As, low rates are first of all from the marketplace, a prediction about growth and inflation, low rates from a policy standpoint, which means central banks are a reaction to what the market was already saying. Central banks follow the market through, given, you know, various lags. And government action and spending and borrowing is also a reaction to weakness, not a response, or

• 34:27Speaker 02

  correction to it. So low rates are not stimulus, and you can see that, next chart two, again, once again.

• 34:34Speaker 00

  This is one of the reasons, so if you guys weren't looking at your screen, it really is stark to see, they try to do all this stimulus, and the more stimulus that they do, the lower the growth is going, because what you're really trying to influence is psychology. This is why Japan stalled out for as long as they did, they just couldn't break that psychology of, I need to be careful, I need to be, you know, very conservative through all of this. And they just could not change the psychology of Japan. It's going to be interesting to see, now that COVID has forced the issue in Japan, and people are realizing, I need to go in, and I need, because inflation exists, I need to get my wages going up. And so now people are negotiating harder, they will very quickly discover that

• 35:15Speaker 00

  promising to work at one place forever, isn't going to cut it, unless that place is going to give you a raise. Once people are getting raises, if some people get different raises than others, you get competition back in the system. Once competition is in the system, now the best and the brightest are going to rise, now the companies that can't compete are going to fail. And you actually need that level of competition back in the system. That's what scares me about the US, is in the US, we have the psychology of people ejecting out of the workforce, at least in part, because they essentially no longer believe in the American experiment, they don't believe in capitalism, they're far more inclined to socialism, they want to lobby to get everything for free. This is one of the reasons that Tracy Rosenthal from the DSA drives me so crazy. This is somebody who's not trying

• 36:00Speaker 00

  to build anything, she's just trying to tear down what's there, or trying to extract, being a taker, instead of somebody who's building something. And when you see that reflected in the numbers, that's where all of this stuff really gets deeply troubling. Because if in the US, if we cannot get psychology positioned so that people want to work hard, they want to innovate, they want to outcompete, they believe in themselves, then we're never going to get the economy moving in the right direction. Part of the reason that America is, has been historically as dominant as it has been, is precisely because of the psychology of the country. We were a place that was unlike anything else. We were the place where people were trying to escape tyranny, they came to the US, they wanted

• 36:45Speaker 00

  a shot at building something, they were not expecting anything for free. And so it was this puritan work ethic of, leave me alone, don't tread on me, give me freedom or give me death, let me like, do my thing, divinity in the individual. And so if I was given the opportunity to build private wealth, to own private property, to have the government protect my freedoms as an individual, the government to protect my private property, that I could go and build the thing that I wanted, and then Hamilton had the vision to supercharge us with a little bit of debt, but to put a self-destruct mechanism on the central bank, so that once we got our feet under us, and the engine was actually turning

• 37:25Speaker 00

  over prosperity, that we didn't keep leaning on that, man, we absolutely take off. And right now, the psychology of people is changing, and it's changing right at a time where the actual economics here in the US are changing. And the thing that I like about this video is Jeff Snider is really trying to beat the drum on the fact that the thing that matters more than anything are expectations. What do people expect to happen? And then what is the knock on effect in the real economy based on those expectations? And if people believe that billionaires are stealing from them, that there's no way to generate a billion

• 38:06Speaker 00

  dollars in value unless you've stolen from people, that the elite class within corporations are taking advantage of their employees and they're exploiting them, if that's the expectation, and then we see in the data that people just aren't, you know, quote unquote, playing the game, now you're going to see the economy really begin to stall out. And I've been saying for a couple of years that I think we're in a stealth recession already, and I think that that is just going to accelerate. Now, I've walked through exactly where I think this ends up going, but keep your eyes, when you're trying to evaluate what to do with your own money, this is where you've got to understand the psychology of what's happening

• 38:47Speaker 00

  to American workers, investors, how people are getting out over their skis with AI, because there's basically nowhere else to hide from what's been happening in the real economy, which is in the real economy, wages aren't going up, at least not at the rate of inflation. So the rest of the video, he goes on to prove the point even further, but I think we've got what we need out of it.

• 39:08Speaker 03

  It seems like there's this, like, macro and micro thing happening at the same time. Because looking at China's history, it's kind of setting us up for failure, because we think we're going to get low rates, we're going to have to stimulate the economy, like you said, jobs are at the all time low, people are ejecting out of the workforce. So Trump's not going to try to make the stock market go down, he's going to try to juice the economy, he's a business guy, he wants it to look good. So it seems like the right next move, quote unquote, on paper, would be to take the China route, but now we're seeing the China route is also broken. So it's kind of like this.

• 39:40Speaker 00

  The right answer was never the China route, not, not when you get into the microscopic of it all.

• 39:45Speaker 03

  Well, I say the lower interest rate, that's what I'm calling the China route.

• 39:47Speaker 00

  To try to be stimulus, you can't avoid it. So the, the rates of anything other than short-term bonds, the treasury doesn't control. You do an auction, people buy what they buy, the banks are going to bid, remember, an individual can't go buy at an auction. So it's the banks that are saying, okay, if you pay me this much, then I'll go hold that paper. And what ends up happening is, the reason I say the China model is broken, is they have tons of government pressure, telling them, no, no, no, you better buy these bonds. And then when they start buying too many, the government's like, wait, wait, wait. So that, that system is doomed to fail from the beginning. If you don't have strength in the real economy, what China's been riding on is they've had strength, they still have

• 40:27Speaker 00

  strength, in the real economy. Right now, manufacturing and exporting is still working. What's not working is they're getting major pullback in spending, and they're certainly getting major pullback in new loans, new borrowing. So people are losing faith in the economy, the housing manufacturer, housing industry leading manufacturing.

• 40:50Speaker 00

  From like the requirement for diesel as one example of the knock on effects. That's been declining and so the real economy is starting to soften minus exporting to the rest of the world. So that trying to control it from the top down, you run into these problems where you've created an incentive structure that's going to cause a spiral to happen. Okay, US doesn't have, we have that thing, but the pressure of it is much, much, much less. The real thing that Americans need to look out for is the psychology right now of what's happening here is the thing that's breaking in a way that I would say is an unprecedented. I don't, I don't want to paint an artificial picture, but this moment in time is very rare.

• 41:33Speaker 00

  It is not often that America goes through the sort of red scare of it all. And historically, when we've gone through the red scare of it all, just saying this person is a communist was enough to like make them persona non grata. Whereas now there's so much energy behind that. So at the time where we can cycle, where the economy can least handle a shift in psychology, we're like racing in that direction. And so that, there's two things really to take away from this. The power of psychology and how much that's going to matter. So where, where are we sort of letting culture take people? And then what is it, what are the signs to look for to understand that there's weakness in the economy?

• 42:16Speaker 00

  And that's going to be when we start getting into lower rates, lower rates, lower rates, we're in trouble. It isn't that it's going to work as a stimulatory measure.

• 42:25Speaker 03

  With the AI quote unquote bubble, stock markets at an all time high, housing at an all time high, crypto at like a low, is there a safe haven? Cause bonds used to be that safe haven and bonds are increasing, but is there a place where the US economy right now is quote unquote, safe from the potential collapse, possible collapse like?

• 42:45Speaker 00

  There's no safety for the ignorant and I put myself in the ignorance. So the only thing you can do is diversify. Warren Buffett has a phenomenal quote and it's that, that diversification is the way you protect yourself from ignorance. And so the reason that I tout that is unless you do this all day, every day, and you've proven that you can weather these different storms and you understand the game well enough, your only bet is to diversify. So even if I have the direction of travel correct, I don't trust myself to understand the timing well enough. Also, I'm not a full-time trader. I run a company. So for me, that's always going to be my primary focus. That's the thing that's going to get my most attention. So I'm always having to hedge my bets against

• 43:30Speaker 00

  my own ignorance. So that would be what I advise people to do. What I'm trying to put on the table are there are big macro signals that you can understand to, to diversify yourself at times where you can see direction of travel. And you don't want to be like, I'm not trying to get to zero exposure to AI, but I'm absolutely limiting my exposure to AI. I'm not trying to be zero exposure to equities, but I am increasing my exposure to short-term US debt. I don't want to be just US debt because what if this drags on for three years? Now you're going to take three years of inflation that you may or may not be hitting,

• 44:13Speaker 00

  you know, par on that. As you build a better and better picture of this stuff, it becomes clear where to be. And even two years ago, I wouldn't have known what it meant to be diversified. Like I wouldn't be able to tell you the specific things to go diversify yourself into. So that's where I'm hoping to get people. I'm not expecting anybody who's listening to me right now to be somebody who's trading daily and it's like, oh, cool. This is going to be that information that helps me make that brilliant day trade. This is going to be about understanding the basic core principles that drive the economy so that you don't get cocky, you don't get caught off guard by thinking this is an only up phenomenon, which it very much is not.

• 44:52Speaker 03

  Got you.

• 44:53Speaker 00

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