"Why You Can't Afford Anything!" - How The Economy Became One Big Ponzi Scheme | Raoul Pal

We have this constant looping, cycle of debt where we have these boom and bust periods because we are masking that a blow up happened in 2008, which was this devastating moment where we realized, "Okay, the whole system is very fragile because people are disguising the fact that real wages are not going up by taking on more and more debt both at the individual level and at the governmental level. Uh we've also weakened because of the demographic boom, we have we go into this globalization moment where we are driving the cost of goods down by doing labor arbitrage and uh very well predicted that what's going to end up happening is you will begin creating a schism where the rich are getting richer and the poor getting poorer because the the {quote} poor or middle what used to be the middle class, they are the workers. They're building your cars, your widgets, your whatever, but if you use the labor arbitrage and you send that to a foreign country where labor is cheaper, yay, the people that own assets are very excited because the companies that are overseas that the asset is they own a piece of that company just to be very clear. And so, the people that own the assets in these companies that are using labor arbitrage to drive the cost of their goods down, to drive their revenues up, they're loving life, but all the people that used to go to the factory, they're either stagnant, down, or headed towards, you know, the depths of despair route where people are just doing drugs if anybody wants to understand the opioid epidemic in the US. That's going to be a big part of it. Yep. I mean, this is why why this is necessary before we can talk about the everything code. So, Okay. So, that we're in that world where everybody is disguising the problem through debt, but eventually you're going to hit a come to Jesus moment where that just can't keep going up. We had a massive bubble in the housing market that pops, boom, like a series of things, series of dominoes fall. Now, the reason that I say this is where you and I begin to diverge in terms of where we're predicting what goes on in the future is a stat that you'll know better than I, but the number of banks that it took to wipe out what I forget how many billions of dollars in value was like 500 or something during the 2008 collapse. What we've just gone through with the collapse of four banks, we had even more value wiped out. So, we have this consolidation, consolidation, consolidation of all these what used to be, you know, back in the 1920s when 1929 happened, it was like 5,000 banks or more had to collapse before we wiped out as much value as we've wiped out recently in the banking crisis with, again, four banks wiping out not quite as much value as were wiped out in the Great Depression, but it's distressingly close. So, 5,000 banks, now it it only takes four banks to wipe out the same amount of value. And so, it's like I just feel as the system is getting more fragile. It's not like we're just going horizontal. We're getting more fragile with every passing day, every time this boom and bust cycle happens. And again, we're papering over this simply by making money out of nowhere. And I really want people to understand that. We are making money out of nowhere. So, We'll come on to the outcomes in a bit. What we are doing since 2008 is mutualizing the bankruptcy of the system by the debasement of currency, which is the When you say mutualizing, you may mean making it everybody's problem? Yes. You can either raise taxes, which they're trying to do, too, but they're also printing currency by the mechanism called quantitative easing, which is actually debasing the currency, which means that every time they do it, asset prices optically rise. They don't actually rise. Because if you if you look at the central bank balance sheet and divide all assets by it, so you're changing the denominator. It's normally US dollars, but when you use the balance sheet, you say, "Okay, this is the purchasing power of dollars." So, how many dollars are in the economy or excess printed, and what you find is something like the S&P 500 has gone nowhere. Real estate, gold, gone nowhere. And there's only two assets that have actually outperformed, which were crypto and technology. Okay, which is why we all feel like even though stocks are going up and our 401(k) is going up, nobody's getting any richer. Okay? There's a We all know this intuitively that we're not actually getting richer because the stocks I sell doesn't buy me more of a house. So, what the What was the point of buying the stocks? If I the value of my assets aren't going up. But that is a mutualization, which is bad because it mutualizes it amongst people who don't have assets. So, you'll never be able to buy an asset, which is why when you speak to a millennial now, they're like, "We can't afford a house." Why? Because they came in to the labor force after the Fed started monetizing or or um or lowering the value of the denominator. So, property has got more and more expensive for them. It's impossible for them to buy property really unless they're really lucky in the workforce or in entrepreneurship or whatever it is, but generally speaking, it's become impossible. And everything has got more and more expensive, assets have, because of this optical illusion, but wages haven't gone up, remember, right? That's the key thing. Assets are going like this. We were doing this before because of demographics, and it was making people pissed. And now we're doing it from debasement, and there's there's no way around it. So, what debasement does on the other hand, remember, it makes the price of assets look like it's going up. This is why you can't have a banking crisis of the order of magnitude that existed before 2008. The reason being is you just print money the moment you see it and voila, everything goes up. So, the value of your collateral, so if you think about a debt, it's collateral plus the debt and the collateral is what guarantees the debt. If you've got a banking crisis, your collateral is often falling so fast that like commercial real estate, right? We're going to have a problem with that. So, there's a bunch of debt and the and the and the banks have got this commercial real estate as collateral and it's all bloody empty and everybody's going to try and get out of it. So, the answer to that is print money and and essentially magic that collateral higher. Or put it on the central bank balance sheet. Europe has already done this. So, I don't think you can have a systemic collapse because the value of the assets can never go down enough. This is what most people can't get their heads around. Well, so I'm in a But we will get But there is we will play out the future a bit cuz there are ways where it could go even more wrong than this ongoing mutualization amongst the people of the of the costs. It can go even more wrong. Well, this is wrong cuz it's it's insidious. You don't see it, you don't notice it, you just sense it, right? That's what's going on. But it could lead to another outcome. The other outcome could be a total loss of control of the financial system. I don't think that is going to be the case. But there's a possibility. Yes, and so this is getting into I have a growing thesis that is it's beginning to touch everything. I need to find a word for this, but the level of awareness of a problem when it is ubiquitous, you would think that's good because it kills the arbitrage where only the people who are aware of it are able to take advantage of it. That sounds bad and it sounds evil, but as everyone becomes aware of it, the only outcome that I see from that is cynicism. And I I come at it from an entertainment perspective, which may seem very weird for people, but I grew up in the '80s, which I actually want to talk about the '80s and why the '80s felt so awesome living through it. Uh because I think it actually planted a seed for something problematic, but anyway, so the '80s from a film perspective was awesome. Uh you could have a movie where Arnold Schwarzenegger throws a knife and it goes through a guy and it pins him to the the wood beam behind him and he says, "Stick around." And it and it isn't uh you're you're actually laughing in the moment. You're not laughing at how uh many times you've heard a line said like that or oh my god, that's like an Arnie line. It was the first time you'd ever heard or seen anything like that and it was just legitimately funny. And over time though, we become aware of all these patterns to the point where if you grew up watching movies and you grew up in a world where '80s movies were a thing and they've been mimicked so many times and done to death, everything happens with a wink. And once everything happens with a wink, everybody lives in this ironic world where being more cynical than the next person, meaning something faster than the next person becomes the thing. And so, one of the things and and I feel a moral obligation to get the information out about what the world of finance really is as fast as I can. And yet I know that as everybody becomes aware of the trick, the trick won't work anymore. So, I'm in this weird spot of like wanting to tell people, "Hey, when they print money, quantitative easing, they are counterfeiting money. It is destroying your buying power, and but it is the only way that we glide. So, it's like But you're keeping the the monkeys happy by lowering the cost of TV sets and other stuff, right? That's the other weird thing. Consumable goods are cheap. But now we're we're really getting in cuz now that we have to talk about metaverse and how if you you want to pacify people, that's a totally different thing. No, but we we have pacified them with cheap TVs, cheap beer, cheap cheap everything. But they're still derailing, man. They are still derailing. Cuz the asset, which is your future self it's your future consumption has gone up so much that nobody can afford them. So, you've kept them happy with dopamine and sugar hits of crap. You've kept them numb. I won't say you've kept them happy. You've kept them numb. Okay. Yeah, happy's the wrong word, but you're right. But look, this is I went down this journey that you're going down now in 2012. And that journey led me to crypto. I saw it and I knew that this was the answer. And that's why I first bought Bitcoin in 2013. Was exactly this. Is once you see what has happened, we know the system now regardless of how it ends, whether ends in slow ongoing death of of economic vibrancy or a spectacular blowup. The answer is you need to transition to what I call the Bitcoin life raft or the parallel financial system. It's there, and you can participate with $1 or a billion dollars. Okay, we're going to we're going to get to crypto, but we have to get to your um everything code. Uh I think this is this is crazy important. So, um I went in, and listen, I I must have listened to it Oh, god, you're going to think I'm kidding, 30 times, to write it down verbatim. You you delivered I had never heard you do it so succinctly. Um and so I I wrote it down verbatim. And what I want to do is I'm going to go through your everything code. But we're going to stop in a couple key areas to make sure that people really understand this. So I'm going to read a section and then give you a chance to if you think there's something that you can say even more concisely or whatever, but I you just delivered this so well. So here it goes. So Raoul has a a a theory that everything is related to one phenomena, and once you understand it, things get a lot easier to predict. So here we go. It's a quote from Raoul. What I had suddenly stumbled across in the everything code was the fact that the global central banks had probably agreed together sometime around 2012 after Europe blew up, that with governments at 100% of GDP in debt, they were going to crowd out all of the private sector, and we were going to just keep having financial crises. Okay, so you mentioned earlier this idea of 100% debt uh 100% of GDP in debt, so I don't think we have to go over that again. But the part in the section that I don't understand is uh this concept of the government competing with private sector. So the This is the bit we talked about, right? So the economy grows at 2%. The government needs that to pay its interest, cuz it's 2% use that to pay its interest? Well, basically it comes in just taking more in taxes? Exactly, right? There's a there's a level of economic growth that needs to service the interest payments. But if everybody's interest payments are too high, the the answer is firstly to have the interest rate as low as possible, Mhm. which is why the um which is why the Japanese have a much lower natural rate of interest than everybody else, cuz they're 260% of GDP in debt. But their companies are less in debt. they've trapped themselves. They have so much debt they can't let the interest rate rise. Nobody can. This is why we're going to have a recession we're going to cut rates back down to zero. It doesn't It's impossible to work. So this is the thing is once all of these governments hit 100% then they either blow up the private sector, the banking sector, corporates or the government sector, you choose. How how how Because there's not enough income to service that level of debt cuz GDP growth keeps declining. Okay, so let me see if I understand this. So when you say private sector, you mean private banking? No, I mean all private sector, households. So how do you how does the average person service that the interest? It's again from economic activity, the activity that they have. So the same with corporations and the banking system is involved intricately within that whole system. So economic activity is what pays the interest. If you don't have a job, you can't service your mortgage or your credit card, right? Fact. And if your growth if your debt growth keeps going up you need to keep your wages going up to pay your debts. That's that's the GDP side of the equation. But what we're finding is that all debt that is in excess of GDP at government level is ending up on the balance sheet 3 and 1/2 years later. Okay, how? Quantitative easing. And they and I did the maths on this and I think I was the first person to really figure I don't think anybody's really figured this out yet. I went and looked at this and I realized that what they were monetizing was the interest payments on the debt 3 and 1/2 years later. Okay, why 3 and 1/2 years? In 2008, all interest rates went to zero. Everybody, every government refinanced itself at zero. And most of the debt for all governments is in the 3 to 5 year sector. So, somewhere between 3 to 5 years, 3 and 1/2 4 years. And what happens is every time you service the debt, you need to get the interest rates back down again. You end up having a recession. You get this very cyclical phenomena. Because they they are they deferring the need to pay for 3 to 5 years? Nobody pays back debt. No nobody. Nobody is paying back any debt anywhere. So, what they're doing is every time it comes to pay to service the next amount of debt, it ends up on the Fed balance sheet. Now, actually happens because there's an economic slowdown driven by the debt, but that's what happens. And the there is a marginal difference in the size This is sorry, this is true of the US, the UK, the EU, Japan, they're all the same. And the difference of the balance sheet is slightly bigger, and the difference is every time they say direct financial crisis, they have to put direct money in. So, we you know, we're already just seeing a little bit of that in the US. Okay, so the difference difference would be buying the Federal Bank buying assets versus just stimmy checks? Is that what you mean by direct money? So, stimmy checks is that's coming in onto the bank balance sheet because that is government debt that ended up will end up getting monetized 3 and 1/2 years later, which happens to be end of this year into next year, which is why I think we've got a lot of quantitative easing coming cuz we've got to monetize all of the bloody interest payments from the pandemic. And when we say monetize, we mean print money. Print money and put it on the Fed balance sheet. I just print money. Expand the balance sheet of the Federal Reserve. To match what is owed, we will create money. Correct. And that that's using a credit card to pay off your other credit card essentially, right? Print or printing what you mean by nobody is servicing debt? Is just everybody is printing more money? Correct. Because surely we are actually paying the debt. debt payments. No No debt is getting paid off. You're just rolling the interest payment. So, it keeps getting bigger every year. If we owe China money, there's no way China is just like, "Oh, we're It's all good. Push it off." So, surely we are at a minimum printing money in order to pay those government debts. But what that comes up for No, after 4 years you just issue new debt. But you issue new debt to yourself so that you can then pay off whoever you owe money to shortly. No, cuz the government is borrowing the money here, right? So, what that They just pay off They don't pay pay off the debt. They just do it again. So, it's like your mortgage comes up at the end and imagine you just had interest payments. You just roll it again and say, "I'm just going to pay interest for another 30 years." Nobody ever pays off the actual loan. And nobody cares as long as you get the interest. Which is weird. Now, if you pay off the loan, you optically do it, but you issue a new one again. So, it's like I'm going to pay off my credit card with my brand new credit card I've got. And so, look, I've got rid of my Capital One credit card. Yeah, that's what I'm saying is when they're printing the money, they are paying off the debt. They're just creating new debt in the equal amount or more, but they they are technically paying that debt off. Otherwise, I can't fathom how anybody would do it. Okay. So, debt is growing in all of these countries at GDP plus the interest payments. And that interest payment component is going on the balance sheet. And that's happening everywhere, including Japan. So, they're all doing exactly the same thing. Which is interesting. Cuz that doesn't happen by accident. The there is an understanding that the world is too much in debt and there's no way of dealing this without us all going back into caveman times. So, this is the answer. Yeah. I think this is this is where we have to look at Ray Dalio's thesis. And I think this is what has really painted my thinking. So, Ray is like, "Look backwards, last 500 years of history. Every time Every time you've gotten to this point where you're gliding, uh it it always ends with either economic war or actual hot weaponry war. And you need this level of trauma so that people will finally go, "Fine. Uh Everything that I owe I'm I'm just going to let go of it. Whatever. It is what it is. I just want peace." And so, you get this complete upending of everything. We reset. We go back to zero. But we do it in the most grueling, brutal, sacrificial way possible. And and and I hear this a lot from people like, "Ah, it's all rebalancing in 100 years." Sure, but that is cold comfort to millennials who could never buy a house, right? Like So, Yes. But this is where the fourth turning comes to me, right? I think we are at economic warfare. Everybody needs an enemy. So, we've decided that China, Russia, and whoever we want to be our enemy is our enemy. So, we are economic warfare for the share of the pie. But the world is not it's not actually a fixed pie. There's an abundance, and that abundance is the other economic warfare, which is technology. Right, that's happening at a massive scale, and it's going into space, it's going everywhere. So, we've got physical kind of warfare, economic warfare over technology, which is what Taiwan is all about. You know, they own the secret code, which is the ability to produce um computer chips uh in ways that nobody else can replicate. So, there's that. And then, we are at war with each other as the population is split and wants to blame each other for what has happened, when in fact, it was actually the baby boomers that actually caused the problem in the first place. The people caused the problems, so the people In fairness, it was the greatest generation that had all the sex that gave birth to the baby boomers that created the problem. And this is where it gets tricky because God bless the greatest generation for fighting the wars, et cetera, et cetera. Okay, before we keep going down that road because I I want to keep this all in the construct of your everything code cuz this was very enlightening. Okay, so you just walked us through that first part about why we're going to keep having these financial crises, and the only way out of that is to print money, basically. Uh okay, next section. And the only way Here we go. And the only way of solving this is putting it on the central bank balance sheet because there's not enough GDP to pay the interest, is what you were just talking about. So, if you think about GDP growth, let's call it 2%, and let's assume that interest rates are 2%, which is roughly where they've been since 2008. So, if the government is 100% GDP in debt, and GDP grows at 2%, but interest payments are also at 2%, that's all of GDP growth just to pay the interest on the US government debt. But, the private sector, excluding the financial sector, so households and corporations, are another 120% of GDP in debt. Uh well, that will give you negative growth every year of 2% and it just com- compounds. So, what happens is those interest payments go to the Fed balance sheet and they monetize it. Again, this is what we were just talking about. So, then the private sector is not competing with the government and that was provable across all major economies. It's like they all decided that they're they're too far in debt and the only way to solve this is quantitative easing. And then, I started thinking, well, if I know this to be true and I know that the central bank balance sheets are 97% correlated with the asset prices, well, all I need to do is use forward-looking indicators to predict the central bank balance sheets and or interest payments. Dude, talk to me about this 97% correlated with assets. That that seems like having a crystal ball. So, it doesn't actually reflects today. So, you could basically as I explained before, the thing that's actually driving the S&P 500 is the Fed balance sheet. It's not companies getting more balance you mean driving the price. Correct. So, it's an optical illusion. It's a money illusion. So, the price simply rises to meet the level of inflation caused by printing money. Correct. You're re-adjusting the price. So, that is what's going on. And so then when you understand that and it's 97%, you understand that nothing matters apart from this liquidity, which is what I've been trying to tell people is sorry, all your economic models are wrong. Yes, you need to forecast the business cycle to know where you are in the probability of printing money cycle, but that's all that matters and it drives assets. And that's why people right now are getting very angry cuz the stock market's going up and they're like, "Yeah, but don't you know there's a recession?" Yeah, I know that the answer to a recession is more cowbell, printing of more money. Which is why this explains to people This this is what I'm talking about with as people become aware of these issues, as you zoom out and you see the gigantic crater, you begin to realize, "Oh, we're in a recession. That means they're going to print money. So, in a recession, prices are going up." And people are like, "Yeah, I know where this goes." So, that's crazy and that it it'll be very interesting to see what the knock-on effects are of the um everybody becoming aware of these patterns. And I've heard you say that uh it's almost always the path of most pain is the the path that ends up actually happening. And so, as we begin to predict, "Oh, this is what's going to happen." the fact that we can predict will have some very sort of painful consequences. The important point being here is I know what drives liquidity. It's driven by the business cycle. And there are certain cycles that are forward-looking. The Chinese credit cycle happens to lead by about 18 months or 2 years. that don't know what the business cycle is, can you give a quick primer? The business cycle is the ebb and flow in economic activity that occurs and that's a boom and bust, a recession, expansion. Is it caused by interest rates? We don't really know what causes the business cycle. It's caused partly by interest rates. It's caused by excess production, excess inventories, too limited inventories, too There's many things that can can drive a business cycle, but it's observable and has been observable for millennia. And one of the things we do is when the business cycle is too hot and inflation starts rising, central banks tend to rise raise interest rates. That tends to bring down economic activity. I think even without a central bank, interest rates would rise naturally um cuz I think the free market can set interest rates without a central bank. And then the economy slows down again and we see this this endless cycle. So, what I think my hypothesis is is that okay, this is very observable. I think it's going to last this relationship between an assets and the central bank balance sheet because of the mechanism of debasement of currency. And I can forecast out what the business cycle looks like. And I also know the amount of interest payments that need to be made because they happened three and a half years ago and I can see how far the balance sheet's going to expand. So, the balance sheet right now is what, six and a half trillion dollars and it looks like it will get to seven trillion dollars or so. And it looks like it will get to 12 to 14 trillion dollars by the end of 2025. So, that puts and there's a number of other ways I've proven this out in this whole thing and I I'll send you the whole piece uh myself cuz I've not really gone public with all all of the whole thing of how it works, but in the end that puts asset prices massively higher than here. Hugely higher. Um so, we're looking at more than a doubling of the Nasdaq from here. We're looking at another gigantic crypto run. That's into 2025. So, we're seeing huge moves that just come from the debasement. And I've gone through in the everything code article that I wrote for Global Macro Investor, which is my kind of premium research service, in that I've gone through various ways of proving this all out. Um so, that's what I think I can do. But your observation, I think is really important. Okay, when people I mean, I've sent this to a quite a few people and obviously the subscribers of Global Macro Investor are kind of like the world's most famous hedge fund managers, um asset managers and I think it it really shocked people and resonated with people. They're like, "Oh my god, everything makes sense now." And so once you see it, it all makes sense. Um now, as it becomes more public as a thesis and Mike Howell at CrossBorder Capital has been talking some elements of this liquidity, you can see liquidity becoming part of the the conversation on financial Twitter and stuff now. What I think we'll probably do is create boom-bust cycles. Again, you can't have the bust cycle going below the level of central bank liquidity because optically they make it rise. This is what people don't yet understand. But of course, stock market should go down 90%. Can't happen. Literally can't happen because of the debasement. It's a money illusion. But what I think we'll do is see, "Hey, off we go to the races." That's what happened in 2018. 2018, uh sorry, 19 uh early 20, we actually diverged from the central bank balance sheet uh massively because people started to figure out this game, which is the moment the Fed stopped tightening cycle, markets take off. Because they know that the probability of more cowbell, more more central bank printing of money, more interest rate cuts is coming. And so therefore, we get boom-bust cycles. So the boom times are too big and then you get a bust. And we People know that from crypto as well. The long-term trend remains intact, but we we keep getting these huge booms, collapse, boom, collapse, but the trend is still up. I think that's what we'll see. We'll be more like the crypto cycle, which is pretty much what we've just seen as well. We had a big collapse last year and now we're straight back into the boom as we're starting to forecast this. If you like that clip, check out the full powerful episode here, and I'll see you there.