The Podcast of the Lotus Eaters - August 04, 2026


PREVIEW： Brokenomics ｜ Liquidity, War and the Great AI Repricing

Hosted by
Callum Edmunds Carl Benjamin Connor Tomlinson Harry Robinson John Wheatley Joshua Ferme Edward McLaren Elizabeth Heverin
Mentioned
Bitcoin Carl
The Podcast of the Lotus Eaters #1475 The Podcast of the Lotus Eaters #1477

Episode Stats


Length

17 minutes

Words per minute

164.92

Word count

2,854

Sentence count

109


Transcript

Transcript generated with Whisper (turbo).
Hosts, guests, and mentioned names generated with spaCy (en_core_web_sm), reconciled against Wikidata.
00:00:00.000 hello and welcome to brokonomics now in this episode what are you going to do well i always
00:00:28.160 listen to you my patrons and there's some chap in the comment who regularly pops up and says you
00:00:33.920 should do one on georgism so i'm gonna do one on that i've managed to find a guy who can talk well
00:00:39.720 about that so i have that coming up soon there's also a couple of you that have been asking for
00:00:43.380 an update on liquidity asking about ai stocks that kind of stuff recent market moves so fine
00:00:50.660 i've put together an episode that does all of that i am of course as ever your diligent performing
00:00:55.840 monkey. So if you need something, just ask me. I'm not annoyed with you, by the way. I'm not
00:01:01.620 annoyed with any of you. You're lovely, of course. I had to do my taxes today. That always makes me
00:01:06.280 grumpy, even though the amount isn't actually that bad these days because Carl saves me from
00:01:11.800 that by not paying me very much. And all my investments are very tax efficient. So it isn't
00:01:18.560 actually that bad. But nevertheless, the principle of the bloody thing will put me in a bad mood
00:01:24.480 anyway so there is that there was a time in my career when i when i was having to pay 15 grand
00:01:29.940 in tax every month and and i always remember that because at the time i had the occasion to actually
00:01:35.720 visit the nhs and when i asked the doctor for the slightest smallest thing he he wandered off in a
00:01:43.380 in a grump and said in a voice that i was very clearly meant to hear as he was disappearing
00:01:47.760 down the corridor effing freeloaders which was which slightly annoyed me but then I suppose he
00:01:55.200 wasn't to know I was I was the literally the only person in the waiting room that night who was
00:01:59.960 actually making a financial contribution in fact looking around the and this was a London
00:02:04.580 inner city London A&E room and I'm fairly confident I was paying more than the rest of them
00:02:12.060 put together if if the rest of them put together was even a a positive number so there is that
00:02:19.460 but anyway no so so taxes taxes being sorted out today i will try and remain in good cheer
00:02:25.800 as as we go through what we need to talk about today so what was it we we needed to talk about
00:02:30.240 uh liquidity tech stocks that kind of stuff maybe maybe throwing a bit of war in there because that's
00:02:35.600 all sort of relevant to what's going on yes so so what is going on well the market is being really
00:02:40.380 being shaped by sort of two forces that are now sort of colliding with each other. And one of
00:02:45.800 those is a debt-heavy financial system that requires more liquidity. I mean, we've gone
00:02:52.740 through that on a number of occasions. If you're new to brokonomics, you'll have to take my word
00:02:57.100 for it. And a physical investment boom in AI and associated energy, defense even, there's a bit of
00:03:04.960 a boom in that as well. And that is consuming capital faster than the market had perhaps quite
00:03:11.280 appreciated when it got into this. And for years, the market has been rewarding long-term promises
00:03:16.280 because capital was cheap. And therefore, of course, if you can pile on those future returns,
00:03:23.700 the market was happy to reward that. But now we're in a situation where oil is rising and
00:03:28.580 bond yields are rising and well geopolitical risk is going up and that AI capex is exploding
00:03:35.640 and free cash flow from companies is getting squeezed and it's not like the market has
00:03:41.400 concluded that AI is faker and a thing like that it's not it's not like a popping of the bubble
00:03:45.060 which people like to throw up in the comments every now and again but there is definitely a
00:03:49.260 question about when does the cash actually arrive you know and and how much of that cash is going
00:03:54.580 have to be continually reinvested in order to do it. So we talk about all of that. To cap the big
00:04:00.600 ideas, liquidity explains the market environment, but not every individual price. So it only gets
00:04:06.960 you so far. It only kind of gives you the financial weather. And money's easy. It supports
00:04:13.460 leverage, speculative investments, and distant future profits. As money gets tighter, cash flow
00:04:20.820 and balance sheet and immediate earnings become much more significant for what the market is
00:04:27.460 wanting to reward. So debt creates itself an eventual bias towards intervention. Because
00:04:35.080 as we talked about many times, modern governments have to refinance the debt.
00:04:41.080 They're not going to repay it. I mean, they're not anywhere near being able to repay it and probably
00:04:45.100 won't be for a very long time, if ever. So large debt stocks that need refinancing
00:04:51.660 require functioning bond markets and manageable interest rates. And when that tightening
00:04:57.580 threatens the banking system, through whatever mechanism it may get tied,
00:05:03.640 government needs to intervene. But that rescue normally arrives after the financial markets
00:05:08.880 have been damaged. And then it can be quite large, as we've seen in a number of recent cycles. But
00:05:14.120 you know, the COVID one being probably the best example.
00:05:17.060 A huge amount of liquidity just gets thrown at it.
00:05:19.200 Now, what AI has done is it's changed from a liquidity beneficiary
00:05:23.900 into a major consumer of capital.
00:05:27.840 So AI originally looked like it was another technology sector
00:05:31.760 that's going to be supported by cheap money.
00:05:34.320 We're now starting to realize that it requires data centers and chips
00:05:37.740 and its own power stations quite frequently.
00:05:40.360 I mean, a number of these big players,
00:05:41.760 They're spinning up their own nuclear bloody power plants and networks and factories and all the rest of it.
00:05:47.900 And AI is competing as a source of capital with government and defense and everything, really, housing, industry, I mean, the lot, crypto.
00:05:55.740 And so the build out might still be transformational, but it's still producing disappointment in shareholders for a number of participants, which is what's causing the current issues in the market.
00:06:07.340 So the market is moving from a sort of narrative to capital discipline.
00:06:11.760 It's kind of happening in three stages.
00:06:13.340 So, you know, step one, AI is going to change everything, buy AI.
00:06:17.980 And then it's, okay, build out, large capex, proves demand,
00:06:23.140 and everybody connected in that chain.
00:06:26.180 Step three, which we appear to be emerging into at the moment,
00:06:29.400 is the capital discipline phase, which is, okay, well, show me the earnings,
00:06:33.820 show me the cash flow, show me the return on capital
00:06:36.360 for every pound or dollar invested.
00:06:38.760 Liquidity, I think I referred to it a moment ago as financial weather.
00:06:41.760 I mean, it's not simply money printing. Central bank liquidity is going to influence interest
00:06:47.940 rates and, you know, whether in quantitative easing or tightening and, you know, emergency
00:06:53.200 lending facilities and all the rest of it that come along. But fiscal liquidity, as opposed to
00:06:58.100 central bank liquidity, I mean, that's government deficits is the key one. I mean, Elon often talks
00:07:04.500 about inflation as being solely the product of government deficits. I mean, it's a major one,
00:07:08.760 but I wouldn't say it's the only one. It could also apply to tax cuts funded by borrowing,
00:07:13.040 to be fair, transfers and subsidies, all that kind of stuff. Then there's also commercial bank
00:07:18.140 credit, which was a major factor around 2008. It's still a big part of it, which is banks create
00:07:26.980 deposits when they lend. They've been doing that less since 2008, but this is a strong factor
00:07:32.880 going into it. If anything, the US government is trying to get that going again. A whole bunch of
00:07:38.360 mortgage credit will affect housing and corporate credit will incentivize liquidity in the corporate
00:07:44.280 sector and so on. There's market liquidity, the willingness of investors and institutions to hold
00:07:51.160 risk. And so liquidity determines whether the financial environment is permissive or hostile
00:07:57.080 to risk takers. While we're building up the layers of this, let's also think about why debt creates
00:08:01.840 the liquidity cycle. That ought to be explained. So government refinance rather than repay the
00:08:08.200 debt. As I'm sure you know, if you've been watching any of these, the government's nowhere near
00:08:12.280 paying back their debt. All they're able to do is roll the debt as it comes due, the previous debt
00:08:18.080 becomes rolled, while adding to it. And then that debt that they're adding now will get rolled over
00:08:23.100 in the future as well. So the system therefore depends on investors buying corporate bonds and
00:08:29.100 stable collateral, which is the rest of the market, and banks being willing to lend, which
00:08:35.260 post-2008 has been made increasingly difficult for them, and manageable interest rates, which is a
00:08:41.000 struggle when you've got inflation going on, and confidence in the system as a whole. So you've
00:08:45.780 got this refinancing wall. Large quantities of very cheap pandemic-era debt is now rolling over
00:08:53.140 at much higher rates than it was originally taken out on. So the problem is not just the enormous
00:08:59.560 amount of debt itself, it's the refinancing. So debt previously financed, you know, in the COVID
00:09:06.860 era, it would have been basically near zero. That's now getting refinanced. I mean, anything
00:09:12.860 on the sort of five year, which a lot of it would have been, anything on the five years now getting
00:09:18.080 refinanced closer to four or five percent. And obviously it's a pretty significant move when
00:09:21.460 you're going from zero percent to four or five percent. So the interest expenditure rises even
00:09:27.400 without new debt being added. And so the sequence looks something like heavy issuance, which is
00:09:34.020 never not the case really, but COVID was a good example of heavy issuance, leads to higher yield,
00:09:39.740 tighter credit, weaker risk assets, creates financial stress, and that creates a policy
00:09:45.340 response, which is quite often a liquidity injection. And that's the cycle that we get
00:09:49.880 into quite a bit in pro-economics. And obviously higher debt does not prevent crashes. What it does
00:09:55.360 do is it makes prolonged crashes politically difficult, very difficult to tolerate any
00:10:01.940 sort of prolonged crash for the reasons just articulated. You need that collateral in the
00:10:08.580 system to support the market that it does the continual buying of your debt, the rolling of
00:10:13.720 your debt. So the government just, I mean, it can't accept any sort of widespread mortgage
00:10:19.920 defaults, the 2008 problem, but even pension losses, market losses, banking stress, because
00:10:26.840 it all impacts on falling tax revenue, especially in the US where a lot of their tax take is
00:10:32.920 a product of how the market's doing.
00:10:35.900 And the rescue normally comes after the damage has been done.
00:10:38.240 So long-term liquidity, especially injections of, extra injections of long-term liquidity,
00:10:44.660 it can coexist with short-term market pain because the debt burden becomes difficult
00:10:49.260 to service. Governments need those lower real financing costs. So policymakers, they favor
00:10:56.040 inflation to the alternative, which would be some sort of cutting government spending, which of
00:11:00.660 course they're not going to do. So the short run process can be larger refinancing, real yields
00:11:07.100 are going to rise as a result, dollar strengthens, speculative assets will fall, credit will widen,
00:11:13.720 and refinancing becomes harder.
00:11:16.040 But the full cycle is tightening, refinancing pressure,
00:11:21.620 which they don't like, market stress, then the intervention,
00:11:27.100 then liquidity recovers, then you get this asset price boom,
00:11:30.860 the cycle that I tend to operate on because this cycle
00:11:35.860 is so incredibly predictable that you really might as well
00:11:39.360 take advantage of it.
00:11:41.100 And that all then just leads to renewed leverage.
00:11:43.720 excess, animal spirits, all that kind of stuff. So effectively what I'm saying is that the system
00:11:48.120 is structurally biased towards future liquidity arriving. But it can and will, over any short-term
00:11:56.680 period, produce quite nasty downturns before that liquidity injection arrives, because they kind of
00:12:03.000 need to see that stress in the system in order to justify an intervention. So you kind of want to
00:12:08.520 look at, okay, well, what are the indicators here? What are we looking for? And real yields and the
00:12:13.000 dollar are probably the key things i think that's fair to say so real yields the return on government
00:12:19.520 bonds after inflation basically and when these real yields are rising as they are at the moment
00:12:27.000 safe efforts assets become more attractive and that long tail of future incomes for things like
00:12:34.200 tech stocks where that becomes discounted more heavily or less attractive and leverage gets
00:12:40.140 more expensive and speculative assets are going to require a higher expected return to keep up
00:12:46.960 in that environment. And the dollar, a strong dollar, is going to tighten conditions outside
00:12:53.120 the United States. It's going to raise the burden of anybody who's got debts to nominated dollars,
00:12:59.660 which is just about everybody across the world. And it's going to attract capital into the US
00:13:05.420 as a hedge and it will often coincide with weaker risk appetite. So think about the combined signal
00:13:13.340 as a result of that. If you've got rising real yields plus a rising dollar, that should be
00:13:20.380 hostile to Bitcoin, crypto, high multiple technologies, emerging markets, speculative
00:13:26.440 growth. I mean, all that sort of stuff. Any business that's leveraged. Whereas falling real
00:13:30.200 yields and a weaker dollar generally make the opposite risk-taking more well more attractive
00:13:37.400 more easy and the liquidity that we talk about often that enters the system quite unevenly it's
00:13:44.820 not like it raises all prices equally it depends on how it comes in so i mean some of these might
00:13:53.560 seem obvious when i go through them but i mean mortgage credit that's going to rise house prices
00:13:58.340 primarily venture capital funding is going to improve you know technology valuations you know
00:14:03.920 institutional flows is is going to raise equities and bonds that kind of thing you know insurance
00:14:09.840 companies or pension funds buying you know government bonds and well any any sort of bonds
00:14:14.520 any any sort of fixed capital instruments i mean in practice is what we're talking about is the
00:14:18.200 cantillion effect the money creation changes who receives the purchasing power first and then who
00:14:25.860 captures the lion's share of gain as a result. And it's worth stressing that asset inflation
00:14:30.180 is not consumer inflation. Consumer inflation is, we're not directly measuring the cost of
00:14:37.940 buying a house or a business or a portfolio of assets or something like that. A person can become
00:14:42.500 richer relative to the basics, you know, food and clothing, that kind of stuff, whilst becoming
00:14:49.980 poorer to housing stocks business assets stuff like that so really what i'm trying to describe
00:14:58.700 is the ownership becomes the key dividing line between people asset owners and wage earners or
00:15:06.880 non-asset owners whatever category they might be in you know asset owners you're getting the
00:15:11.820 appreciation you're getting the the you know the the collateral from which you can do other
00:15:16.740 borrowing for example and you get those compounding returns whereas if you're a wage
00:15:21.340 earner or you're benefiting from the the flow rather than the stock if you are going to try
00:15:27.300 and save you're having to do it from taxed wages and you'd end up having to hold more cash because
00:15:32.480 you have to because your your medium is wages cash spending as a result maybe some savings on
00:15:40.400 the side and so of course you're left struggling to accumulate any sort of asset base i mean
00:15:45.580 breaking out of it is just a difficult thing to do. I mean, it's still better to start, but no,
00:15:51.900 let's talk about, okay, how the risk assets respond differently if we're going to get into
00:15:56.740 talking about assets. So technology, what is it like? What is it responsive to? And it's responsive
00:16:03.180 to yields and future expectations of what it's got coming down the track, the growth speed and
00:16:10.640 capital availability okay fine property is much more related to you know loan to value mortgage
00:16:19.760 rates the bank's willingness to lend and physical supply itself of course private equity is again a
00:16:26.080 bit different you know leverage refinancing costs exit valuations crypto which responds incredibly
00:16:32.960 well to liquidity and is is is always worth keeping an eye on for what it tells you about
00:16:38.560 the availability of liquidity in the market well i mean liquidity obviously leverage and speculative
00:16:44.080 risk appetite so each of these are going to respond differently to the market as it goes
00:16:52.480 and i am i am building to the recent market moves i just necessarily to go through this
00:16:57.840 a little bit of setup on this if you enjoyed that content and of course you did because you
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