Back sometimes that agreement looks like Hey we’re going to restructure this debt so maybe it’ll take me longer to pay you back but you’ll still get everything back and then sometimes it’s going to be somewhere in between but what happens when you take a look at all the debt the
Entire world has accumulated and realize that for a number of factors there is no way for that debt to ever get repaid does the can just keep on getting kicked down the road as the saying goes forever or is there a point where things actually start to break well first let
Me show you why the debt actually cannot be repaid and it starts with the money supply this chart that you’re looking at here is a chart of the total toal money supply inside the US banking system and as you can see right now it is sitting at right around 20 trillion now $20
Trillion is certainly a lot of money and as you can see that is more than it was at prior to the money printing starting in 2020 when the money supply was only around 15 trillion but even that was a lot higher than it always was before as
The money supply just continues to grow and grow throughout history but $20 trillion is actually not that big when you compare it against some other numbers for instance the current national debt the number of dollars the United States government owes to lenders is $ 33.6 trillion that’s right all of the
Dollars are 20 trillion but you look at the number of dollars the government has borrowed and it’s 33 trillion so the amount of money the government owes to lenders is more than all the money in existence but it gets worse this right here is a chart of household debt not
Including mortgages and we can see student loans are about 1.5 trillion credit cards are around a trillion auto loans are around 1.6 trillion and when we include housing debt mortgages as well we’re sitting at a whopping $17 trillion so the amount of money that the government owes back to its lenders is$
33 trillion add on top of that the amount of money that households owe back to lenders and you are now at 50 trillion combined yet the total number of dollars that there are is less than 21 trillion and this does not even include corporate debt but let’s take it
One step further and look outside of the US because dollar debt is a global market not just confined into the United States currently around the world there are $65 trillion in Hidden debt this is dollar debt that is not accounted for through things like off-balance sheet debt in non US Banks and off-balance
Sheet debt for non- us Shadow Banks now certainly there are Global dollars outside of just the money supply that exists in the United States as well this is called the euro dollar system and I’ve made a few videos explaining that in detail but the very existence of
Those Euro dollars is actually debt in and of itself and so no matter which way you slice it there’s far more debt that needs to be repaid than there are dollars to be used to repay it now you’re probably thinking if those dollars don’t even exist in the first
Place then how did all that debt get built up to begin with how’s it possible to borrow money that’s not actually there and the answer is rehypothecation your dollar has gone through one loan to the next to the next to the next but it’s the same dollar
Here’s how that works you take your $1,000 and you deposit it in your checking account at that moment you have $1,000 and you can get that $1,000 at any time you want this number of $2.7 trillion would increase by $1,000 that bank then turns around and takes $900 of
,000 and Loans it to the US government by buying a treasury the government then gets that money cuz that’s them borrowing it they take that $900 and they spend it let’s say this $900 goes to somebody’s Social Security paycheck and then that senior citizen gets that
Deposit of $900 puts it in their bank account but then that bank takes let’s say $800 of that $900 and Loans it out to somebody to buy a house in the form of a mortgage so to you it looks like you still have $1,000 and to the senior
Citizen it looks like they still have $900 but in fact there are multiple loans along the way this is how the modern Fiat money system works is that money is loaned into existence and so the amount of debt grows faster than the actual money supply for every dollar
That exists you can have many times that number of dollars in loans now if you’re tracking at this point you’re probably thinking well if that debt then can be built using the same number of dollars in the system even though there’s more debt than dollars exist then that whole
Process could be Unwound right and you should theoretically be able to pay off all of that debt with the existing number of dollars right well the answer is yes and no theoretically we could see a spike in the velocity of money the velocity of money is simply a measure of
How fast is circulating in an economy and so with the same given number of dollars in a closed loop economy moving around twice as fast my income might go from $100,000 to $200,000 even though it’s the same number of dollars circulating throughout the system they’re just going faster we
Could absolutely have a deleveraging that way but there’s one big problem with the way that it has happened right now that will probably prevent that and that is what interest rates have done for the last 80 years from 1940 all the way through 1980 interest rates were increasing along with inflation they
Both peaked in the late ’70s early 80s and for the 40 years following 1980 through 2020 interest rates fell while inflation fell as well but interest rates can’t go much lower than 0% at least for a sustained period of time and interest rates bottomed in 2020 and we
Have embarked on a new cycle that will mirror the last 40 years in other words going up instead of down and look more similar IL to the prior 40 years from 1940 through 1980 essentially the last 40 Years of interest rates moving lower and lower and lower has made the cost of
Servicing existing debt cheaper this makes sense because if interest rates go from 5% to 22% you could afford to double the amount of debt that you have with the same payment so for the last 40 Years of interest rates have moved lower and lower and lower that has allowed a
Large Levering up look at this from a personal finance standpoint let’s say you have a credit card that you’re able to afford a $10,000 balance because it’s a 20% interest rate but a couple years later they lower your interest rate to 10% so now you’re able to afford to put
$20,000 on the credit card they continue to do this every couple of years lowering your interest rate until you’ve realized one day you look up and you realize you’ve built a balance of $100,000 on this credit card now your rate is only 1% so you’re not worried
About it but the problem is they’re about to start raising your rates so as interest rates are now climbing at an extremely quick Pace they are doing so on one of the largest overleveraged economies we’ve ever had in history which means that many economic actors can barely afford to continue paying for
Just The Debt Service cost just to keep their debt let alone continue to grow more debt in other words we are in a new part of the long-term debt cycle with the last 40 years having ended and the new phase of the cycle having begun this
Is a phase of Del leveraging because it no longer is Affordable to maintain the existing debt low but as we’ve covered before there’s not enough money right now for that debt to get paid off so what are the options well it turns out there are only four potential paths that
This could take we will discuss each one of these paths in isolation as if that is the only path that could be taken although in reality we will most likely see a mix of all four of these paths unfold at the same time but it’s important to talk about them in
Isolation of full understand how each path looks path number one is debt Jubilee the idea of a debt Jubilee goes all the way back to thousands of years ago with the formation of the nation of Israel and in their constitution the instructions given to them on how to run
Their Nation there to have a Year of Jubilee in which all debt is Forgiven there’s no record of this actually happening but the idea of debt forgiveness especially through war or revolution is consistent throughout history especially during times of over leverage and right on Q we have small
Isolated incidents of a debt Jubilee debt forgiveness like Biden Administration looking to cancel and forgive student debt when the debt load for a particular people group becomes so large that it looks like they cannot pay it back and that the ones who have the power to do so look like they could gain
Something whether it’s power or money by orchestrating that forgiveness or that Jubilee you tend to see that pushed more and more now that’s one example of a Jubilee or debt forgiveness that we can look at happening in real time to a specific small group of people but there’s actually another example of this
That may be even larger and could very realistically unfold over the coming years and this is actually the federal government’s debt getting forgiven now you might be asking how in the world could that national debt of $33 trillion get forgiven and it’s actually very simple first we have to understand what
This is this is the Federal Reserves balance sheet which currently sits at around 7.9 trillion although at its peak in 2022 was almost 9 trillion but first a word from today’s sponsor I trust Capital investors today face all sorts of new and unique risks invest in stocks
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It is simply an account that holds assets the assets that the fed’s balance sheet holds are primarily mortgage-backed Securities and United States treasuries these are both debt instruments and in the case of the treasuries it means that the United States government actually owes some of that national debt to the Federal
Reserve because the Federal Reserve has a monopoly on the creation of US dollar when it buys US Government debt that is a way to get cheap debt to the government but it could get even cheaper than most people expect because right now even though the Federal Reserve has
$8 trillion on its balance sheet it’s currently operating at a loss normally it operates with profits meaning it has all of its assets those assets pay it some income and then it uses that income to pay for its expenses the way the Federal Reserve works is that anything
Left over after its expenses goes straight back to the government that’s right the FED actually keeps no profits for itself it pays for all of its employees it pays the dividends to its member banks it pays the interest on the reserves and on the reverse repo balance
If there’s anything left over that all goes back to the government now right now there is actually nothing left over they’re operating at a loss now I’ve explained that chart in the past why it looks so crazy bad but essentially it’s because of an accounting change once that number tips negative it becomes
Cumulative in instead of showing the weekly amount if you show two separ separate charts for the cumulative total and the weekly total this is what it looks like this is a chart from ly Alden where it shows in blue the amount that the Fed was sending to the treasury when
It was profitable and then in blue over here is the amount each week that the Federal Reserve is printing to cover its expenses the Orange Line shows the cumulative total since 2011 that the FED has paid to the government and this dip down recently is the amount that they
Have not paid now there’s a third piece to this puzzle here that we have to look at before we can put them all together to understand how the government could get get its own debt Jubilee and that is the fact that interest rates on government debt have gone from basically
0% up to basically 5% in just the last couple of years this means that anybody who is holding those treasuries who loaned money to the government prior to two years ago is currently sitting on massive losses and in the case of the ETF TLT which holds 20year treasuries
Currently sitting at 50% losses now it’s possible that this causes some forced sellers because as as asset holders become distressed as life gets more expensive as Nations have to sell treasuries in order to be able to defend their currency and as one person selling pushes the price down which causes other
People to sell there are all sorts of situations that it could occur that could cause a selloff in treasuries and if the Federal Reserve were to print money to buy all of these treasuries their balance sheet would explode again let’s just say they were able to orchestrate the ability to buy up the
Entire national debt and the fed’s balance sheet was in excess of $33 trillion well then the entire national debt essentially becomes interest free because yes the government right now has to pay an interest rate on that entire $33 trillion of debt right now all that interest is going all around the world
But if the Federal Reserve buys up all of the national debt then every dollar that the government sends an interest to the FED comes right back to them after paying the Federal Reserves expenses is the entirety of the national debt essentially becomes an interest free loan which basically just means it’s not
A loan anymore if your left pocket owes money to your right pocket does any debt really exist so this is the first path debt Jubilee debt forgiveness we’ll certainly see some of it in the coming years the second path is a deflationary deleveraging and this is the one that
Most people think we cannot see we will not see that policy makers won’t allow which means in my opinion it’s probably one of the biggest black swans to be prepared for just in case a deflationary deleveraging is sometimes also called a death spiral this is a situation where
As some people suck dollars out of circulation in order to pay off their debt that means they’re not reintroducing those dollars back into the economy so that means their income then becomes money that ceases to exist is no longer their expense income which means somebody else’s income goes down
This will certainly Force some people into default because they won’t have enough income to service their debt anymore as debt is a liability for the borrower it is also an asset for the lender which means that lenders who have their loans defaulted on will be distressed and some of them will go
Bankrupt this deflationary death spiral that I’m describing is what most people were very scared of during the financial crisis as debt that is realized to be bad and some people are not paying that means that eventually you get a domino effect where financial institutions start falling over but as we took a look
At the money supply every dollar was already loaned into existence so if One Bank goes under then all the dollars that existed at that bank suddenly cease to exist as well which means that money cannot also be used in order to pay off debt this contributes to a very rapid
Decline in asset prices and prices of goods and services as the money just starts evaporating from existence as money becomes more scarce it becomes more valuable relative to everything else which is another way of saying prices collapse overnight this is what happened during the Great Depression
When people went up to the bank to try and get their money and realized the bank was closed and the money didn’t exist anymore this does result in a deleveraging because the debt ceases to exist mostly through defaults it is an extremely painful economic situation although if you allow it to just unfold
Then typically it’s very short-lived and things recover quickly afterwards a great book on this is the Forgotten depression by James Grant if you’re interested in learning more about a situation in which a deflationary deleveraging was allowed to unfold naturally with no intervention from central banks or Central governments the
Third path which most people view as most likely is the inflationary deleveraging now in order to stop the deflation from occurring anytime there is some sort of default that may happen the Central Bank prints the money in order to cover it this is the situation that occurred with the failure of
Silicon Valley Bank where if that bank would have been allowed to fully fail then all of the money that existed in those accounts would have ceased to exist so instead that money was reprinted so that the money supply would not shrink as we continue to see more and more problems caused by interest
Rates going up on the most overleveraged economy in history many people think we are more likely than not to see more examples of this where money is printed in order to cover up the defaults in order to bail out what is necessary as a result of the money supply expanding
From these small isolated bailouts you still have Del leveraging occurring because debt is getting paid off as a result of the higher debt service cost but because that money is coming into existence through printing there’s more money in circulation which means that prices go up and then finally this is in
My opinion probably the least likely but it is still a potential outcome and that is a productive output boom to understand this we need to look at this from a personal standpoint imagine you spend $5,000 $10,000 in order to go to a computer programming boot camp to learn
A new skill you don’t have any money so you go into debt you’re working a basic job right now let’s say making $40,000 a year you borrow $10,000 to pay for this boot camp and a couple months later now you have a new skill that new skill
Allows you to go get a job that pays $100,000 a year while the cost of servicing that debt of $10,000 still exists your quality of life has actually improved because your income increased by so much that even when you have to subtract some of it to pay off that debt
You’re still in a better position now than you were before without that extra income and without that Debt Service cost this is an example of how debt can sometimes be used especially on an individual level in order to increase productive output this is true both with individuals and companies and Society
For thousands of years we have seen examples of this take place where you have booms in productive output usually centered around a new discovery of a form of energy or a new technology the Agricultural Revolution the Industrial Revolution heck even the last 30 to 40 years with the internet boom we have
Seen massive increases in productive output which have offset the pain of the increased leverage it is possible that we are on the brink of more discoveries and more increases in productive output and new technologies that will continue that and allow us to continue to maintain the debt burden or even
Deleverage without feeling the pain of that but given the size and the cost of the leverage to me that seems less likely now if you’re in a position right now where you’re thinking to yourself I’ve make good money I’ve got a decent sized portfolio but I have no idea how
To play this especially considering we could go one of two ways we might see a inflationary deleveraging we might see a deflationary deleveraging this is exactly what I help members of heresy Financial University do it’s vital that you learn how to construct your portfolio in a way where you’re not
Betting on one or the other where you’re growing your wealth regardless of what the economy does this means hedging against both inflationary outcomes and deflationary outcomes this means understanding real risk management so that you stop losing money on bad trades just hoping it’ll get back up to even so
You can sell at a very small loss hery Financial university has a massive library of training material that will teach you portfolio allocation Advanced options strategies fundamental analysis and a ton more I’m constantly adding new courses to that Library members get access to everything we do monthly live
Stream group coaching calls I’m adding a few new exciting features soon and the best part is once you become a member your pricing getss locked in forever and it’s getting to the point where there’s so much available to members that I’m going to be raising the price pretty
Soon but if you get in now before the price goes up then your price is locked in as long as you’re a member and considering right now it costs less than most people spend on Star Bucks every day and how much more you’re going to be making as a result of implementing
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