00:00:24.760Now, in this episode, I wanted to talk about the fact that the Western financial system
00:00:30.260is running on a set of obsolete assumptions.
00:00:34.840And it is doing what I think that the people in the political realm are doing,
00:00:39.640which is to say they think that if you change the personalities,
00:00:43.360well, that actually changes something.
00:00:46.540But all of the arithmetic beneath it is exactly the same.
00:00:51.320and i wanted to talk um both about the us and the uk in this um because well in the uk well
00:01:00.700in fact across the g7 uh bond bond yields are moving and i did a little video uh on the daily
00:01:07.280channel a couple of days ago explaining um basically what that was i i will cover that again
00:01:12.420in perhaps a little bit more detail here but also the assumptions why everything is wrong
00:01:17.740and what the underlying picture actually is.
00:01:23.160And, you know, you can change the, you know, you can put Besson in,
00:01:27.740you can put Walsh in, you can change Keir Starmer for Andy Burnham.
00:01:34.460They don't really have any more freedom of movement
00:01:36.720than they had before the personalities changed.
00:01:39.840So, I mean, not that I want to discount that something has changed.
00:01:45.880so you know trump has come in with his tariffs and it's a program of you know reshoring and
00:01:51.900industrial capacity and well energy defense it's an explicit break with the old globalist
00:01:59.040consensus and we've got scott besant now and he talks about um parallel prosperity he calls it
00:02:05.900which is to say well wall street has done very well now it's the time of main street to do well
00:02:11.580And we've got Kevin Walsh in as well, of course, the new Fed chair.
00:02:17.300And he's much more sceptical of continuing Fed intervention and forward guidance.
00:02:27.340He's talked about the 2% inflation target being firm, although he's also kind of said, well, actually, it's the left-hand side of the decimal place that I'm interested in.
00:02:38.800basically hinting he might go up to 2.9 at some point rather than two but but nevertheless um you
00:02:45.520know rhetorical uh adherence to the sort of that so there is real ideological change and we can't
00:02:53.060just dismiss it as cosmetic but then you have to look at what is the system already forcing them
00:03:00.880to do and the treasurer announced in order august that it was going to be um at least doubling its
00:03:07.100long-end buybacks meaning that they are buying back debt at the 30-year duration
00:03:16.780and they're going to be converting it into short date short-dated debt so basically they're trying
00:03:22.540to change the shape of the yield curve it's too expensive up there we've got a little bit of room
00:03:27.500back here so we're going to we're going to buy some of those things swap it into those things
00:03:31.340makes long-term money more affordable, beneficial for corporate loans and mortgages and all that
00:03:37.420sort of stuff. And the Treasury's current quarter is already envisaging up to $38 billion of
00:03:47.280liquidity support in these buybacks, plus $25 billion of the short-end cash management buybacks.
00:03:55.740People are arguing that it shouldn't be regarded as money printing in of itself
00:04:01.020but it's money printing effectively it's not quite yield curve control but it is liquidity
00:04:08.480management and you know i i don't doubt that the new administration you know wants prior and
00:04:15.500stronger markets but is also simultaneously becoming involved in keeping the sovereign
00:04:20.700bond markets from basically not imploding so the point is this look they inherited facts
00:04:28.740and you can change the personnel but it's not going to alter 1.9 trillion the federal deficits
00:04:36.740this year which is almost six percent of GDP is not going to change the fact that the debt held
00:04:43.620by the public is 101 percent of GDP it's not going to change that the net interest over there to pay
00:04:49.760out is 3.3% of GDP. And the CDO baseline is of debt reaching 120%, 120% of GDP by 2036.
00:05:03.480Net interest at 4.6. So getting on for 5%. And so we don't need to frame this as, you know,
00:05:11.580Trump and Besant and Walsh are the same as the old regime. You know, they may want to change
00:05:18.300of the regime the problem is is that they inherit all of the liabilities from the old regime so you
00:05:25.600can change the treasury secretary but you can't change the balance sheet which he inherits and
00:05:32.520you know the politics has changed but the underlying arithmetic hasn't and Walsh can promise
00:05:39.660sand money and Besson can promise Main Street and Trump can promise factories but they still
00:05:48.660have to refinance the debt so what has changed underneath them the old system is built around
00:05:54.660assumptions that used to be true and so I mean those assumptions I mean assumption number one
00:06:02.280is that debt is low enough that rates can discipline inflation you know you take 1980
00:06:07.960when debt was 26% of GDP. Bear that to today. Debt is 101% of GDP. And as I've just talked about,
00:06:18.000it will be going a lot higher quite soon. But what that means is that Paul Volcker,
00:06:22.780the legendary Fed chairman who tamed inflation, he could raise rates brutally without simultaneously
00:06:33.400continuously repricing a debt stock equal to the entire economy. And today's higher rates
00:06:40.520eventually feed back into government interest costs, especially as they start to shift more
00:06:46.100debt into the shorter duration. So when you've got 26% debt, rates can fix inflation.
00:06:54.280When debt's at 101%, high rates become part of the problem itself. Assumption number two,
00:07:01.920There will always be plenty of workers.
00:07:06.100And if you look at Social Security beneficiaries,
00:07:10.000in 1960, it was 5.1 workers per somebody taking out the system.