The Podcast of the Lotus Eaters - April 07, 2026


PREVIEW： Brokenomics ｜ Breaking points


Episode Stats

Length

20 minutes

Words per Minute

162.42879

Word Count

3,326

Sentence Count

83


Summary

Summaries generated with gmurro/bart-large-finetuned-filtered-spotify-podcast-summ .

Transcript

Transcript generated with Whisper (turbo).
00:00:00.000 Hello and welcome to Brokonomics. Now, this episode I thought I might call Breaking Points,
00:00:28.260 which i think is an excellent name for a podcast actually i don't know if anyone's got that already
00:00:32.120 um but what i wanted to do is i was um i'm gonna go on um ferrari's channel soon and because he
00:00:39.880 came on mine and i talked about you know what are the what are the sort of breaking conditions
00:00:44.300 in the whole iran situation from a geopolitical point of view on the various actors in it and
00:00:48.660 that's going to be what you should have seen that episode by now and he said well why don't you go
00:00:52.720 and mine and talk about the economic side of things as well so i've been putting together
00:00:55.620 some notes and i ended up getting quite into it so i i managed to find 12 numbers that i think
00:01:02.340 are pretty crucial to the world operating in a sort of functional way any and it's well i'll go
00:01:08.760 i'll go through it but what it's all dependent on is that you see systems such as that we are in
00:01:15.840 they don't fail at extremes you can't just say okay well there's a you know there's a there's
00:01:22.100 a threshold and you get beyond that and you'll see that all the time on twitter you'll say you
00:01:25.540 know if if if if rates go to whatever it is six percent everything collapses it doesn't it doesn't
00:01:30.500 quite work like that but there are thresholds where behavior is is forced to be changed and
00:01:36.600 what i wanted to do is identify where those thresholds are and as long as we recognize that
00:01:43.220 it's sort of gradual stress um leading to sort of instability then we can we can sort of see well
00:01:50.920 okay, well, that's going to lead then to constraints and forced actions and cascades.
00:01:55.880 Because you have to remember, right, modern economies, they're not really free systems
00:01:59.860 in the way that they might promote themselves as. They are basically range-bound control systems.
00:02:05.760 And they're built on a whole number of assumptions about cost of capital being within certain bounds
00:02:11.460 and energy availability being a good thing and currency stability and social tolerance.
00:02:18.460 tolerance we don't mean that's fraying at the edges but really um most actors within this system
00:02:24.280 they're not they're not really trying to well they would like to optimize but what they're
00:02:29.100 really trying to do is is manage the set of constraints that they've got to work with
00:02:33.100 so government debt has got to be enrolled we talked about that a lot on brokernomics
00:02:37.180 central banks have to manage expectations um not really the reality but expectations
00:02:42.940 it matters more um you know corporate price um we you know around benchmarks that they don't
00:02:50.440 control you know and households react late unfortunately in all of this so essentially
00:02:55.960 what i'm saying is stability is is an illusion and and it's an illusion created by suppressing
00:03:02.340 volatilities and political backstops um lagging indicators and all of this sort of creates a sort
00:03:09.160 stored fragility, which at a moment of crisis can be a problem. So I'm not going to talk about
00:03:14.980 these breaking points as a, well, I will talk about them as a single number, but I'm not trying
00:03:21.220 to frame them as a sort of crisis headline. What I'm really saying is this is the point
00:03:25.320 where key people in the economy basically lose optionality and are bound in by a set of
00:03:31.480 constraints that will lead them to worse constraints. And that's why I'm describing
00:03:34.800 them as breaking points you know these systems aren't going to break everywhere at once it will
00:03:39.060 break asymmetrically it'll be weak balance sheets i mean we're already there it's going to be
00:03:44.180 leveraged institutions and then it's going to be sovereignty and in fact a version of that is what
00:03:49.460 we'll what we've already had i mean the weak balance sheets break first that was that was
00:03:55.800 the sort of dot-com bubble wasn't it leveraged institutions failing that was 2008 and the next
00:04:03.200 time we get a proper proper crash situation it's going to be the sovereigns these numbers that i
00:04:09.220 picked the thresholds for them are more or less known i don't think i'm going to be controversial
00:04:14.540 in anything i say and they're watched closely but all of them are politically denied you'll hear
00:04:20.460 commentators talking about them and you often see threads or people pop up on the news talking about
00:04:26.240 them but i wanted to kind of pull them all together and talk about the set of conditions
00:04:31.980 around them if any one of these goes it's going to cause a bit of a crisis somewhere
00:04:37.300 if they all go the system is going to be replaced by something else something perhaps radically
00:04:43.800 different they all force market uh you know they in all cases the markets will force policy
00:04:50.360 and then that policy will distort the markets and then those distortions will create further
00:04:55.680 stresses what have i got for you i'm going to talk about cost of capital and uh for that i've picked
00:05:02.740 the u.s 10-year treasury the uk 10-year guilt the japanese um um the japanese 10-year and the u.s
00:05:14.520 interest expense that governs at least in my world the price of basically all assets you know
00:05:23.260 government solvency is really based on rolling debts not repaying them and the whole system
00:05:33.060 kind of assumes that these rates are going to be below nominal growth and if it's not
00:05:39.740 then the debt is compounding faster than the economy is growing then i want to get into energy
00:05:45.020 price of oil brent i've picked um european gas feed into everything i mean it's not this is not
00:05:54.240 just like a cost as as the other things were cost of capital it's a throughput of capacity through
00:05:58.560 the whole thing and you go above a certain threshold on these prices and you're not just
00:06:03.940 repricing you're actively destroying capacity then i want to do a bit on liquidity of course
00:06:08.440 We talk a lot about liquidity on Brokonomics.
00:06:13.160 The DXY, I mean, I'll get into it more,
00:06:16.240 but the basket of goods compared against the dollar.
00:06:18.980 It's a dollar strength, basically.
00:06:20.580 What happens when that goes too high?
00:06:24.120 And then let's talk about the real economy side of things.
00:06:28.380 You know, US unemployment, S&P 500,
00:06:33.100 and the Baltic Dry Index, Shipping Index.
00:06:36.620 You get a typical break path for this stuff.
00:06:39.320 Either a dollar shock or an energy shock feeds into liquidity,
00:06:46.400 causes inflation, forces rates to adjust,
00:06:51.240 hits assets at an employment level,
00:06:54.240 and then that triggers a policy intervention,
00:06:56.800 which then feeds back into greater difficulties.
00:07:01.120 Let's start with cost capital then.
00:07:03.000 So if you want to really boil it down, it's pricing time, time plus risk for the state.
00:07:12.080 And it anchors all asset pricing because why would I invest in something that has risk
00:07:18.960 if I can invest in something which is perceived as being a riskless asset?
00:07:24.060 And it probably is to the extent that at least you get your nominal back
00:07:27.340 because the government will do anything to pay its bonds back.
00:07:31.040 It will just print more money if it has to.
00:07:33.000 so every other asset is going to be that plus the risk premium for given for however risky the thing
00:07:40.920 is so if you can get large yields from that so it is the basis of which all assets are priced
00:07:47.000 if it breaks everything else reprices you know yields go up deficits go up yields go up deficits
00:07:54.260 go up you get the pattern the issue with the us 10 year i i think my break point for this is going
00:08:01.360 be 5%. And this one is a bit bigger than just the risk-free rate for the US. It's effectively
00:08:08.700 the global benchmark for discount rates. If I can get 5% here, why would I invest in anything else
00:08:16.260 that's going to give me anything you wouldn't? Anything offering, say, 8% returns must be worth
00:08:23.260 at least 5% plus with 3% risk. Now, above 5%, most of the equity housing and private equity
00:08:34.620 models kind of break. And it would force a Fed versus Treasury slowdown. I mean, it would be a
00:08:42.140 conflict between the two. One is going for, I need to roll out more debt in order to keep things
00:08:49.280 ticking. And the other one is going to be, there is a fundamental threat to the system. You need
00:08:54.300 to stop spending so much. And a lot of investors would be trapped, especially in leveraged assets.
00:09:00.620 It's a real problem. UK gilts, 6%. Now that's not because the UK is a stronger system and
00:09:09.780 therefore we can tolerate six where the US can only tolerate five. It's actually because they
00:09:14.280 they have less ability to generate cheap capital and therefore the system has not become dependent
00:09:20.800 on rates that's still quite so low but i mean it's still low you go over six percent and i mean you
00:09:27.260 saw a bit of this with the list of trust thing pensions um the pension assumptions break which
00:09:35.760 is a huge investor in the uk you get currency pressure and it kind of effectively forces a
00:09:40.900 bank of england's intervention but that can only go so far so you then get into um spending less
00:09:47.860 fiscal tightening uh the government's hands will be forced it'll be that or i mean we literally
00:09:53.340 can't pay we can't afford to borrow as much money at this rate but we've still got the outgoings
00:09:59.960 and we can't get the money in and we can't raise tax revenues we have to start cutting something
00:10:05.520 something is getting turned off um i mean they try taxes first of course and it won't work
00:10:10.820 because they're at the upper ends of how much they can raise in revenue.
00:10:14.140 They can try printing it, but then you get a currency pressure
00:10:17.180 that the US is more insulated from.
00:10:20.620 So you get forced into spending cuts.
00:10:22.120 It would be incredibly difficult for the UK.
00:10:24.000 Japanese government bonds.
00:10:26.040 Again, pick 10 years on that.
00:10:28.420 10-year bonds.
00:10:29.500 Their break rate, their break point is probably only 2%.
00:10:33.060 Again, because they have structured on the assumption of extremely low rates.
00:10:37.820 you go above two percent and the bank of japan basically has to cap at that level
00:10:44.840 or allow major currency disorder so they have to choose between
00:10:50.740 going back to a harder form of yield curve control which will just end up transferring
00:10:57.780 even more debt onto the japanese system where it's absurd that it's surviving anyway or you
00:11:06.500 get a currency collapse so they are trapped u.s interest expense that's got to stay below 25
00:11:13.620 you go beyond that you're getting into a sort of fiscal event horizon because at that point
00:11:19.940 debt servicing costs are crowding out core spending and by core spending i mean i mean the real core
00:11:26.840 is um medicare medicaid military all the infrastructure stuff that's getting pushed
00:11:34.160 out if you go over by 25 25 of your expense is just interest and it's heading towards that you
00:11:41.220 have to print which they probably would and they probably got the flexibility to do it but then
00:11:46.920 you get into the problems we talked about the currency they've got to cut or find some other
00:11:51.480 mechanism for debasement and they're trapped because actually so much of u.s spending is not
00:11:57.000 discretionary it's been written into law you know the welfare commitments of various kinds
00:12:01.520 i don't believe the military stuff has been written into law but if you start cutting on
00:12:08.000 that then you you can't do the hegemony project projection core mechanism i'm trying to describe
00:12:13.780 yields go up debt servicing goes up deficits go up means you have to issue more because you're
00:12:20.300 running at a deficit and you're crowding stuff out yields then go up debt servicing goes up
00:12:26.620 repeat and repeat repeat and it's not exactly a linear process you get you get feedbacks once
00:12:32.900 you cross a certain threshold which i picked at five percent which sounds about right and we are
00:12:38.140 already at the point of structural instability with this stuff because the debt stock whatever
00:12:42.580 it is 32 33 trillion at this point it's it's too large for the market clearing rates
00:12:48.440 so a small moving yield is going to have pretty outsized fiscal impact at this point
00:12:57.780 to be fair i should also mention the duration matters on this right in the uk a lot of our
00:13:04.920 debt is short dated and also a lot of it is index linked so that means that the pain hits fairly
00:13:12.580 fast. With the U.S. and Japan, a lot of their stuff is quite long duration, which means that
00:13:21.820 the impact hits them slower, but when it does, they're more locked into it if they have to roll
00:13:28.700 over debt on very unfavorable rates, rates that the U.S. government and Japan can't withstand.
00:13:35.220 So the policy trap is essentially, if you let yields rise, you can restore market pricing,
00:13:42.800 but you'll blow out the deficit, you'll be forced into basically austerity and very limited
00:13:52.180 room to move and over on all that, or you get into default risk, which they can never
00:13:56.200 tolerate.
00:13:57.540 So that would crash asset prices.
00:13:59.760 I want to circle back to that when we get to the S&P.
00:14:02.360 you can cap yields you can do your yield curve control or maybe even a form of qe
00:14:09.140 to mitigate this to an extent but then you're going to get currency weakness you're going to
00:14:14.560 get inflation risk which is a political nightmare or capital just for japan and the uk capital
00:14:21.400 flees in the us capital stops arriving and then model is built on capital arriving three you could
00:14:28.280 try and inflate the debt away but it that really does require negative real rates which gets more
00:14:33.200 difficult as the rates are going up and up and up you're going to destroy people's savings and
00:14:40.480 you know the boomer generation they do vote and they would feel this hardest because a lot of
00:14:48.180 them are now on savings income so it's hugely politically destabilizing so essentially what
00:14:55.480 i'm saying is there is no there's there's no clear path of any of this stuff it's merely a question
00:15:02.320 of what combination do you do and how do you distribute the pain that's the pain where this
00:15:06.840 kind of break actually occurs is it's not at yields get too high it's at the point where the
00:15:14.860 markets stop passively funding the rollover of the debts at your five percent your six percent
00:15:21.380 and the central bank is kind of forced into the position of being the marginal buyer
00:15:25.660 and at that point the regime has shifted it it becomes appreciated that this is not a market
00:15:32.460 operation anymore this is a it's a state system that is operating unsustainably and artificially
00:15:40.720 at which point you kind of destroy belief so who's forced to act first well the treasury
00:15:46.600 because they've got checks to write,
00:15:51.020 be it to welfare checks, military pay, military equipment,
00:15:56.780 maybe even the occasional road.
00:15:58.580 So they've got an issue regardless.
00:16:01.040 And so they're going to be putting enormous pressure on the Fed
00:16:03.100 in order to keep rates low.
00:16:06.100 The Fed, however, they've got to try and protect the system as a whole
00:16:10.640 and don't want to get into runaway inflation.
00:16:14.820 I mean, that's a clear failure point for them.
00:16:16.600 you know they will show up in initially in extreme speculative volatility well
00:16:22.920 in the past few weeks um with the middle east situation you've certainly been seeing that
00:16:26.840 they'll start pivoting towards shorter term capital in the hope that it's going to turn
00:16:30.120 around in the future and you're going to get your your main inflation channel coming initially
00:16:37.560 through the sort of commodity exporters pension funds are trapped in this because they've got
00:16:43.000 such a duration mismatch i'll come back and talk about that more governments because they've got
00:16:47.120 their fixed spending commitments are trapped and households because they're tied to an asset price
00:16:53.500 their home their equities i mean some people are going to be perhaps income rich and asset poor
00:17:01.240 and they do relatively well out of this um but a lot of people don't especially the the the older
00:17:08.040 and higher voting population will really suffer from it.
00:17:12.100 And in, say, in the UK, you'll get the break,
00:17:16.240 assuming this is a UK-only phenomenon,
00:17:18.460 these don't all happen at once.
00:17:20.660 You'll get the break, you've got the need for that external funding,
00:17:23.820 and your currency will respond to an extent.
00:17:26.620 And Japan can delay because they can absorb some of this domestically,
00:17:31.940 but for them it's a bit more binary.
00:17:34.600 The yield curve control either breaks or it holds.
00:17:37.440 And the US will almost certainly be the last to break.
00:17:40.760 But when it does, you're looking at global repricing
00:17:43.400 because there's no external anchor to the dollar.
00:17:45.960 I'm not saying this will happen.
00:17:47.080 I'm just saying, what are the break points if it comes to it?
00:17:50.240 If things start to get back, if there is a global loss of confidence,
00:17:53.320 if things like these thresholds start getting crossed,
00:17:57.560 what does it look like?
00:17:58.640 Well, it's going to be asset repricing.
00:18:00.500 I mean, equities would have to come down considerably.
00:18:04.900 properties either wouldn't sell or would come down be severely depressed the fiscal situation
00:18:10.980 would get crowded out very difficult for the americans to do because they've written so much
00:18:14.860 into law and the policy shifts from any pretense of having a growth policy to just outright survival
00:18:22.760 policy and the other thing to think about okay let's say these thresholds are crossed what about
00:18:27.780 the duration i mean if if it lasts weeks to months and you get a volatility spike and liquidity will
00:18:35.460 deteriorate you'll get some um auctions of debt fail but that that's survivable if it goes on i
00:18:43.160 don't know six months plus you're gonna get forced into a situation where either that spending has
00:18:48.120 to be cut or they do what is probably more likely which is the printer has come quantitative easing
00:18:53.800 or whatever they decide to call it this time.
00:18:56.260 So you get a policy response.
00:18:58.140 If it goes over a year, though,
00:19:00.380 we're probably into the realm of financial repression.
00:19:04.780 You will be forced, if you have assets, to invest in bonds.
00:19:10.180 Your pension will be mandated to start buying.
00:19:13.480 Well, I mean, they already are, but they'll be mandated.
00:19:15.680 You've just got to buy more bonds.
00:19:17.420 If you've got any tax-free savings account,
00:19:19.360 you'll be mandated to buy bonds.
00:19:21.060 um corporates will be mandated to buy bonds they will force you into the system by threat
00:19:27.380 basically beating up and jailing you if you don't you know the system does not
00:19:31.620 you know merely tolerate these sort of neutral rates it basically has it is got into a situation
00:19:38.880 where it requires rates that are low relative to the debt load and actually the real breaking
00:19:45.800 point is when that illusion has failed. Those, I would say, the hard constraints from a purely
00:19:51.620 economic point of view, how do we get there? What are the real constraints that lead into that?
00:20:01.320 Well, that's why I want to talk about energy, right? Because energy isn't just filling up the
00:20:07.420 tank. You can think of it as the physical throughput of the entire economy. If you enjoyed
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