WEBVTT - This Is The Only Way Banks Survive | Caitlin Long 0:00:00.160 --> 0:00:03.960 This is the only way that banks will survive. Now, 0:00:04.080 --> 0:00:05.880 unless you've been living under rock, you know that the 0:00:06.040 --> 0:00:08.840 banks have been under amazing stress. As a matter of fact, 0:00:09.080 --> 0:00:12.400 we have seen more banks collapsing at a higher level, 0:00:12.600 --> 0:00:15.360 at a higher dollar value than we saw in two. 0:00:15.120 --> 0:00:15.720 Thousand and eight. 0:00:15.760 --> 0:00:19.200 And while many people think it's getting over, it is not. 0:00:19.320 --> 0:00:20.560 It's only just beginning. 0:00:20.800 --> 0:00:23.080 And so I'm sitting down with a banking expert. I'm 0:00:23.120 --> 0:00:25.520 talking about Caitlin Long, someone who's been in the inner 0:00:25.560 --> 0:00:28.240 workings of the banking and financial industry and is in 0:00:28.360 --> 0:00:31.520 the process of setting up her own bank right now. 0:00:31.600 --> 0:00:33.840 We're going to talk about the problem that's been created, 0:00:33.840 --> 0:00:35.040 but from a whole different level than. 0:00:35.000 --> 0:00:35.560 You've heard before. 0:00:35.560 --> 0:00:38.199 We're talking about the way money is flowing, how the 0:00:38.240 --> 0:00:41.040 Fed is causing this, the only way the banks are 0:00:41.080 --> 0:00:43.960 going to be able to protect themselves from this damage 0:00:43.960 --> 0:00:45.320 and destruction that's coming in the way. We're going to 0:00:45.360 --> 0:00:48.280 talk about the damage that will happen in the economy 0:00:48.280 --> 0:00:51.720 from centralizing the entire banking process. We're going to talk 0:00:51.760 --> 0:00:55.160 about her revolutionary bank and why the Federal Reserve does 0:00:55.200 --> 0:00:56.600 not want to allow it to happen. 0:00:56.720 --> 0:00:57.480 We're going to talk. 0:00:57.360 --> 0:01:01.320 About the FED now system and the new CBDC that 0:01:01.440 --> 0:01:06.120 everybody's afraid of, the UCC Universal Commercial Code filings that 0:01:06.200 --> 0:01:08.800 are making it so you don't own any more money 0:01:08.959 --> 0:01:10.720 than so much more. We cover a lot of ground. 0:01:10.760 --> 0:01:12.320 It was amazing conversation with Kitlin. 0:01:12.400 --> 0:01:12.600 Long. 0:01:12.720 --> 0:01:14.880 Let's go ahead and just jump right into it. Caitlin, 0:01:15.120 --> 0:01:16.840 thanks so much for taking the time to join me today. 0:01:16.840 --> 0:01:19.720 I know you are super busy, so I appreciate it. 0:01:20.120 --> 0:01:22.360 Dealing with all kinds of banking stuff. 0:01:22.560 --> 0:01:27.120 So I want to dig into the banking stuff, past, 0:01:27.240 --> 0:01:30.520 current and potential future where this is going. And so 0:01:30.680 --> 0:01:33.240 you're certainly one of the people that are kind of 0:01:33.240 --> 0:01:35.160 on the forefront that can help with this. But I 0:01:35.319 --> 0:01:38.240 first wanted to start in talking about you know, I 0:01:38.280 --> 0:01:41.440 know you're the founder ce CEO of Custodia Bank, and 0:01:41.480 --> 0:01:43.400 so I want to get into that. But before we 0:01:43.520 --> 0:01:45.440 kind of get into that, I just want to talk 0:01:45.440 --> 0:01:48.720 about like this current banking shuffle that we're in right now, 0:01:48.760 --> 0:01:52.279 this consolidation of banking, and so we're seeing smaller banks 0:01:52.320 --> 0:01:55.920 going down consolidating to bigger banks. At this point, we 0:01:56.040 --> 0:01:59.480 have like eight banks that are probably you know, too 0:01:59.480 --> 0:02:03.360 big to fail, right and We're starting to see kind 0:02:03.360 --> 0:02:05.480 of this flow to these too big defail. 0:02:05.200 --> 0:02:06.080 And it seems like. 0:02:07.720 --> 0:02:12.359 It's almost like the only banks that can survive this 0:02:12.560 --> 0:02:14.440 type of situation the FED has put them in is 0:02:14.480 --> 0:02:19.480 these two big defail banks unless maybe one the FED 0:02:19.520 --> 0:02:22.320 decides to cut rates down below the two to three 0:02:22.320 --> 0:02:26.880 percent range where where the banks can be profitable, you know, 0:02:27.120 --> 0:02:30.480 or they greatly loosen the financial conditions. 0:02:31.120 --> 0:02:31.799 So one or the other. 0:02:32.040 --> 0:02:34.920 And if it's not that, then it seems almost like 0:02:35.040 --> 0:02:36.959 we would need a fully reserved bank. 0:02:37.320 --> 0:02:42.760 Ah wow, okay, yes, well, so I actually tweeted out today. 0:02:42.760 --> 0:02:45.320 We're recording this on the twenty third of May. I 0:02:45.360 --> 0:02:49.119 tweeted out today in response to Jamie diamond saying there's 0:02:49.160 --> 0:02:51.400 going to be more consolidation in banking, And of course 0:02:51.440 --> 0:02:54.640 I suspect he's looking as chops at JP Morgan because 0:02:54.639 --> 0:02:57.000 they are beneficiary. They're one of the eight or so 0:02:57.080 --> 0:03:01.200 banks that you describe as likely too big defail, and 0:03:01.480 --> 0:03:04.600 because they've been subject to Basil three, they've had to 0:03:04.639 --> 0:03:07.800 pay attention to their liquidity in a way that all 0:03:07.840 --> 0:03:10.480 the other banks that are not subject. The vast majority 0:03:10.480 --> 0:03:12.480 of the quantity of banks in the United States are 0:03:12.520 --> 0:03:17.640 not subject to any real liquidity requirements. They'll run some 0:03:17.720 --> 0:03:21.079 stress tests, but they'll assume, you know that thirty five 0:03:21.120 --> 0:03:23.760 percent of their deposits get withdrawn within the span of 0:03:23.919 --> 0:03:26.680 a week as a stress test. Well, we saw in 0:03:26.720 --> 0:03:30.000 Silicon Valley Bank twenty five percent be withdrawn within the 0:03:30.000 --> 0:03:35.200 span of hours. And the small banks in this country 0:03:35.240 --> 0:03:39.680 have about seven cents now of cash on their balance sheets. 0:03:40.160 --> 0:03:43.000 Only seven cents for every dollar on their balance sheet 0:03:43.040 --> 0:03:46.760 is cash. So if twenty five cents gets withdrawn in 0:03:46.800 --> 0:03:49.760 this short period of time, you start to see the problem. 0:03:49.800 --> 0:03:52.119 They need to start to liquid aid assets, and they're 0:03:52.120 --> 0:03:54.560 liquid aiding assets at a loss, which is what took 0:03:54.600 --> 0:03:57.920 Silicon Valley Bank down. Okay, so that's the background. I 0:03:57.920 --> 0:04:00.960 tweeted up today that in ninety four there was a 0:04:01.040 --> 0:04:04.240 huge consolidation wave and it was something I worked on 0:04:04.320 --> 0:04:06.960 at the early stage of my career in the bank world. 0:04:07.000 --> 0:04:09.720 There were more than ten thousand banks back then, and 0:04:09.840 --> 0:04:12.880 what caused that consolidation wave was that they were very 0:04:12.960 --> 0:04:16.680 cost and efficient in spite of the fact that green 0:04:16.760 --> 0:04:19.599 Span at the time had engineered a steep yeal curve. 0:04:20.040 --> 0:04:22.560 So I would go back to the way you asked 0:04:22.560 --> 0:04:25.320 the question. It's not so much rates coming down to 0:04:25.360 --> 0:04:27.559 two or three percent, it's the steepness of a yeld 0:04:27.600 --> 0:04:32.600 curve because those businesses, those banks, traditional banks, make money 0:04:33.400 --> 0:04:37.440 based upon borrowing short term and lending long term, and 0:04:37.480 --> 0:04:41.160 they don't really care in the grand scheme of things, 0:04:41.320 --> 0:04:43.279 with the exception of mark to markets, which will come 0:04:43.320 --> 0:04:46.919 back to in a minute, whether interest rates are you know, 0:04:47.040 --> 0:04:49.279 five percent short term and eight percent long term and 0:04:49.279 --> 0:04:52.200 they capture the three percent spread, or you know, one 0:04:52.240 --> 0:04:54.800 percent short term versus four percent long term and capture 0:04:54.800 --> 0:04:57.240 the three percent spread. It's a three percent spread either way. 0:04:57.600 --> 0:04:59.120 Now that presumes. 0:04:58.800 --> 0:05:01.800 Yeah, except go ahead, I could ask, except for the 0:05:01.839 --> 0:05:04.400 big draw away from the banks is because the FED 0:05:04.480 --> 0:05:07.039 is paying five percent so well, folks are forced to 0:05:07.080 --> 0:05:09.680 compete with that, So if the Fed were to bring 0:05:09.760 --> 0:05:11.640 it down, then it wouldn't be as competitive. 0:05:12.279 --> 0:05:15.359 Well, that's absolutely right in the So that's why you 0:05:15.360 --> 0:05:17.400 can't look at this in a vacuum. First of all, 0:05:17.440 --> 0:05:20.280 I was going to add that the banks may have 0:05:20.320 --> 0:05:23.320 marked to market losses on their balance sheet, which is 0:05:23.360 --> 0:05:26.679 what's killing the regional and community banks right now because 0:05:26.720 --> 0:05:29.880 they during all the COVID era. The way the plumbing works. 0:05:29.920 --> 0:05:32.839 Is all that money that came from all the fiscal 0:05:32.880 --> 0:05:35.520 stimulus had to go through the banking system. So the 0:05:35.560 --> 0:05:38.640 banks suddenly found themselves flush with cash and there was 0:05:38.680 --> 0:05:40.960 no loan demand. And so what did they do. They 0:05:40.960 --> 0:05:44.800 bought treasuries. But because treasuries had no capital charge, they 0:05:45.000 --> 0:05:46.680 rolled the dice and played the yield curve. And this 0:05:46.720 --> 0:05:49.120 is where the management's made the mistake. They didn't have 0:05:49.279 --> 0:05:52.479 to do what they did. They invested in long term treasuries. 0:05:52.800 --> 0:05:55.080 Now those long term treasuries have a big mark to 0:05:55.120 --> 0:05:58.880 market loss. And your point is also very well taken, 0:05:59.320 --> 0:06:02.760 which is their something different now that didn't exist back 0:06:02.760 --> 0:06:05.760 in nineteen ninety four, the last time we came off 0:06:05.800 --> 0:06:09.480 a big rate rising environment. But the FED had engineered 0:06:09.480 --> 0:06:12.279 a steep yield curve, and that is money market funds, 0:06:12.480 --> 0:06:15.680 ding ding ding ding. You can earn right now north 0:06:15.680 --> 0:06:19.839 of five percent in a US government money market fund, 0:06:20.279 --> 0:06:23.360 where you're taking US government credit risk, whereas banks are 0:06:23.360 --> 0:06:26.680 paying little to no interest and you're taking bank credit risk. 0:06:27.040 --> 0:06:29.960 A lot of money is walking with its feet. In fact, 0:06:30.000 --> 0:06:32.320 actually at one point there was an estimate that eight 0:06:32.440 --> 0:06:37.760 hundred and fifty billion of deposits had been had exited 0:06:37.800 --> 0:06:41.520 the traditional banks for the crypto industry back at the 0:06:41.560 --> 0:06:45.280 peak of the crypto craze, and now we're almost at 0:06:45.279 --> 0:06:47.720 that amount of money that's been withdrawn from the banking 0:06:47.720 --> 0:06:52.119 industry to go to the money market funds. It's really 0:06:52.160 --> 0:06:55.720 stunning how much money has moved from the banking industry, 0:06:55.800 --> 0:06:58.040 and traditional banks were just not ready for this. 0:07:00.160 --> 0:07:02.000 So that's one of the things. 0:07:02.080 --> 0:07:04.880 So obviously one the risk that you said bank risk 0:07:04.960 --> 0:07:08.200 versus government risk. So there's the risk that they're dealing with, 0:07:08.960 --> 0:07:11.280 and so that has people on edge. And then there's 0:07:11.360 --> 0:07:14.560 the carrot dangling where like, hey, I can go make 0:07:14.600 --> 0:07:16.680 five percent instead of the two percent or I'm sorry, 0:07:16.720 --> 0:07:17.880 the zero point two five. 0:07:17.960 --> 0:07:18.760 Or whatever it is. 0:07:18.840 --> 0:07:21.080 Yeah, yeah, whatever, And I've got counterparty. 0:07:20.600 --> 0:07:23.240 Credit risk, right, so if you adjust that for the 0:07:23.280 --> 0:07:26.040 counterparty credit risk, it's negative yield. 0:07:26.160 --> 0:07:28.800 Yeah, which, while I was thinking, so, if inflation stays 0:07:28.800 --> 0:07:32.120 where it's at, interest rates and banking regulations remain where 0:07:32.120 --> 0:07:34.320 they're at, it just seems like there's just no way 0:07:34.400 --> 0:07:37.880 these small, too big defail or non two big defail 0:07:37.920 --> 0:07:39.680 banks can stay in business. 0:07:39.680 --> 0:07:41.600 It just seems like they're almost guaranteed. 0:07:41.120 --> 0:07:43.880 To fail, Like I said, unless something were to happen, 0:07:43.880 --> 0:07:45.160 and that's what I was saying. If the FED were 0:07:45.200 --> 0:07:47.720 to bring the rates down, it eases the banks. Also 0:07:47.800 --> 0:07:50.960 takes away that big demand for people to move like 0:07:51.040 --> 0:07:52.840 that'd be one thing that I was thinking. 0:07:54.040 --> 0:07:55.880 But if they're going to recapitalize the banks, they need 0:07:55.920 --> 0:07:58.120 to do what green Span did in the early nineties 0:07:58.120 --> 0:08:01.280 and engineer a steep yield curve, which is what he did, 0:08:01.320 --> 0:08:05.680 and it recapitalized the banks back then. And that's the 0:08:05.760 --> 0:08:08.240 last time we really had rising rates and you had 0:08:08.240 --> 0:08:12.120 a big bank consolidation wave, big banking consolidation wave. We 0:08:12.160 --> 0:08:14.320 didn't have the giant banks back then that we do today. 0:08:15.280 --> 0:08:19.400 But right now there's a balance sheet problem in the 0:08:19.480 --> 0:08:25.520 banking industry. And so long story short, this is the 0:08:25.640 --> 0:08:29.280 type of consolidation wave where profits are going to be 0:08:29.280 --> 0:08:33.040 privatized and losses are going to be socialized, unlike the 0:08:33.280 --> 0:08:36.920 bank consolidation wave I worked on in beginning of nineteen 0:08:36.960 --> 0:08:40.200 ninety four, where it was a win win because you 0:08:40.240 --> 0:08:42.080 had a lot of banks that, in spite of the 0:08:42.080 --> 0:08:45.040 fact that they were earning high spreads, just couldn't keep 0:08:45.120 --> 0:08:47.480 up because they were cost inefficient. So it was a 0:08:47.480 --> 0:08:51.480 win win to consolidate back then. Now this consolidation wave 0:08:51.600 --> 0:08:55.360 is more about balance sheet weakness. And you have seen 0:08:55.840 --> 0:09:00.240 a couple of really strongly performing bank stocks, and as 0:09:00.240 --> 0:09:04.960 who they've been, they've been the winners of the auction processes, 0:09:05.080 --> 0:09:08.840 buying these these defunct banks out of the bank auction 0:09:09.000 --> 0:09:13.959 process and immediately booking again and their stocks go up. Okay, 0:09:14.080 --> 0:09:17.680 that's that's the privatization of profits and socialization of losses 0:09:17.760 --> 0:09:20.319 that everybody should be upset about. 0:09:20.720 --> 0:09:21.520 Yeah, certainly. 0:09:21.920 --> 0:09:24.839 Now, you know, one of the big things with consolidation 0:09:24.920 --> 0:09:28.520 of bank is through the consolidation getting getting rid of 0:09:28.559 --> 0:09:32.000 sort of this like local regional relationship of the banker 0:09:32.679 --> 0:09:35.120 and then potentially pushing more and more like credit decisions 0:09:35.200 --> 0:09:38.880 up to the larger you know, national type corporations and 0:09:38.920 --> 0:09:41.640 things like that. I know, about half of US employment 0:09:42.200 --> 0:09:44.840 is with firms that have less than five hundred employees, 0:09:44.880 --> 0:09:48.120 so about half of that business environment could potentially be affected. 0:09:48.120 --> 0:09:49.720 I mean, these some of the risks that you see 0:09:49.720 --> 0:09:50.480 with consolidation. 0:09:51.280 --> 0:09:54.520 Absolutely, but it's happening anyway. Matt Levine at Bloomberg has 0:09:54.559 --> 0:09:57.680 been correctly pointing out money market funds are basically just 0:09:57.800 --> 0:10:02.920 narrow banks. Okay, so the bank, all the almost six 0:10:03.040 --> 0:10:06.080 hundred billion of deposits that have been withdrawn from the 0:10:06.120 --> 0:10:10.920 banking system and deposited into money market funds, is maybe 0:10:10.960 --> 0:10:14.920 permanently leaving the banking industry. And so all the concern 0:10:16.080 --> 0:10:18.679 about that's implied in your question, which is that that's 0:10:18.720 --> 0:10:22.120 where credit comes from. You got to have regional banks 0:10:22.120 --> 0:10:25.400 that can provide that can make loans, because that's where 0:10:25.440 --> 0:10:28.760 credit to small and medium sized businesses comes from. It 0:10:28.800 --> 0:10:31.120 doesn't come from the large banks. They're not set up 0:10:31.160 --> 0:10:34.640 to do that. And so but yet I look at 0:10:34.679 --> 0:10:37.880 it and say, it's already happening, folks, because people are 0:10:38.000 --> 0:10:41.320 voting with their feet to go to money market funds. 0:10:41.320 --> 0:10:45.640 This is not rocket science. And unfortunately, if we had 0:10:45.640 --> 0:10:49.800 to start all over again, we wouldn't structure the banking 0:10:49.840 --> 0:10:52.440 system the way it's structured today, where you have this 0:10:53.120 --> 0:10:58.280 enormous maturity transformation maturity mismatch in banks borrowing short term, 0:10:58.360 --> 0:11:01.079 lending long term, and trying to capture a three percent spread. 0:11:01.480 --> 0:11:05.280 Why because it's fundamentally unstable. As Matt pointed out, I 0:11:05.280 --> 0:11:10.240 think it was in yesterday's column that the assumption that 0:11:10.360 --> 0:11:15.160 was made for decades is that banking deposits were sticky 0:11:15.640 --> 0:11:18.960 and they might be withdrawn from one bank to go 0:11:19.000 --> 0:11:21.320 to another, but that would that was a zero sum 0:11:21.360 --> 0:11:23.800 game because it all stayed within the banking system. Well, 0:11:23.880 --> 0:11:27.959 now they're not sticky. The banking deposits are leaving. They 0:11:28.120 --> 0:11:30.320 left to go to crypto and now they're leaving to 0:11:30.320 --> 0:11:33.520 go to the money market fund industry, and that is 0:11:33.559 --> 0:11:36.640 outside of the banking industry. And here's the irony. This 0:11:36.800 --> 0:11:40.040 is where those of us who liked to talk plumbing 0:11:40.920 --> 0:11:43.679 of the money markets. Look at what the FED did 0:11:43.720 --> 0:11:48.760 with the RRP facility, the reverse repo facility. That's exactly 0:11:48.840 --> 0:11:53.080 what's allowing the money market fund industry to invest in 0:11:53.200 --> 0:11:59.000 all of these high yielding US government instruments and they 0:11:59.000 --> 0:12:01.720 can invest in repail and pick up even extra yield. 0:12:02.320 --> 0:12:06.440 And the impact of that is if anybody could get 0:12:06.480 --> 0:12:10.520 direct balance sheet exposure to the FED, then there's an 0:12:10.520 --> 0:12:14.240 incentive to there's less credit risk than going through a bank, 0:12:14.600 --> 0:12:19.880 so you're picking up higher yields and you're getting US 0:12:19.960 --> 0:12:25.520 government slash FED counterparty credit risk. It's it's you know, 0:12:25.600 --> 0:12:27.800 this is why money is voting with its feet. And 0:12:27.840 --> 0:12:32.120 so the concern about credit availability in the small and 0:12:32.160 --> 0:12:35.760 medium sized businesses. Boy, the bank regulators should have had 0:12:35.920 --> 0:12:39.280 that concern in mind a long time ago. It's so 0:12:39.360 --> 0:12:42.240 interesting because this is bread and butter stuff for the 0:12:42.280 --> 0:12:45.959 banking industry, and yet it's amazing how many really smart 0:12:46.000 --> 0:12:46.680 people missed it. 0:12:47.120 --> 0:12:47.720 Yeah. 0:12:47.800 --> 0:12:50.920 I think banking is sticky. It's just getting less and 0:12:50.960 --> 0:12:51.480 less sticky. 0:12:51.559 --> 0:12:53.320 Right. Technology has made it easier to move. 0:12:53.880 --> 0:12:56.600 I've been with my same bank since ever I first 0:12:56.600 --> 0:12:59.600 been kind of overopened, and it's like still there because 0:12:59.600 --> 0:13:01.640 it's a pain the butt to go close bank accounts. 0:13:01.679 --> 0:13:04.280 It's really difficult, and so it is pretty sticky. But 0:13:04.360 --> 0:13:06.520 to your point, it's getting much easier and money moves 0:13:06.520 --> 0:13:09.240 a lot faster now than I ever did before. I 0:13:09.280 --> 0:13:11.400 was reading a report from Christopher Whale, and he was 0:13:11.400 --> 0:13:14.640 talking about the FDIC report saying that most of the 0:13:14.679 --> 0:13:19.800 banking system is insolvent already. Yes, they're just not realizing 0:13:19.840 --> 0:13:23.360 the losses correct, right, And so a lot of these 0:13:23.400 --> 0:13:26.560 assets that they have on their books potentially like commercial 0:13:26.559 --> 0:13:30.120 real estate and regular mortgage backed securities, et cetera, underwater, 0:13:30.160 --> 0:13:32.240 you know, mortgage loans, things like that. We can see 0:13:32.559 --> 0:13:35.720 delinquencies are going through the roof cars, credit cards, et cetera. 0:13:35.840 --> 0:13:36.400 Things like that. 0:13:36.760 --> 0:13:39.880 And so we have this, but every time it seems 0:13:39.920 --> 0:13:42.640 like they, you know, FED or the banking systems kind 0:13:42.640 --> 0:13:44.400 of like backs against the wall. It's like another three 0:13:44.480 --> 0:13:46.160 or four letter letter special. 0:13:47.760 --> 0:13:50.160 Yeah, pops up, right. So I mean, I mean, there's 0:13:50.160 --> 0:13:51.160 really nothing stopping them. 0:13:51.160 --> 0:13:52.559 I mean, the FED can just continue to take these 0:13:52.600 --> 0:13:55.480 assets off the books apar, put them off the balance 0:13:55.520 --> 0:13:57.000 sheet in some tucked away. 0:13:56.800 --> 0:14:00.199 Corner, and just kind of keep this going. Right. 0:14:00.920 --> 0:14:03.080 Well, sure, right, but here's the thing, and this is 0:14:03.120 --> 0:14:05.680 where I think those who thought that the expansion of 0:14:05.679 --> 0:14:09.520 the Fed's balance sheet is by definition inflationary, the credit 0:14:09.600 --> 0:14:14.320 creation is what's inflationary. And you know, prior to the 0:14:14.320 --> 0:14:17.120 financial crisis, the fed's balance sheet was eight hundred billion. 0:14:17.160 --> 0:14:20.440 It was you know, it was nothing compared to what 0:14:20.560 --> 0:14:26.120 it's been in the trillions today. And and nonfinancial sector 0:14:26.160 --> 0:14:30.040 debt is ninety five trillion ish last I looked. Okay, 0:14:30.160 --> 0:14:33.960 so there's been ninety five trillion ish of US dollar 0:14:34.040 --> 0:14:38.880 credit issued in the United States, of which nine trillion 0:14:39.040 --> 0:14:42.360 ish has been monetized by the FED. Those are approximate numbers. 0:14:42.360 --> 0:14:45.040 But you see the point where I'm going about ten percent. 0:14:45.520 --> 0:14:48.200 The FED has monetized about ten percent of the credit 0:14:48.240 --> 0:14:51.400 that got issued. Okay, by the time this is all 0:14:51.440 --> 0:14:53.480 said and done, a lot of it's going to end 0:14:53.560 --> 0:14:55.960 up on the fed's balance sheet through the mechanisms you 0:14:56.080 --> 0:14:59.240 just talked about. But what a lot of folks miss 0:14:59.320 --> 0:15:02.800 is that that's not the inflation. The inflation occurred when 0:15:02.840 --> 0:15:05.400 the credit got created in the first place. How did 0:15:05.400 --> 0:15:07.520 it get created. It got created in the banking system, 0:15:07.800 --> 0:15:10.000 and it got created in the shadow banking system, which 0:15:10.040 --> 0:15:14.400 is through securities markets, et cetera. But the credit creation 0:15:14.640 --> 0:15:17.600 was what was inflationary. It wasn't the expansion of the 0:15:17.600 --> 0:15:20.120 fed's balance sheet per se. That's a piece of it, 0:15:20.160 --> 0:15:23.520 but it's not the vast majority of it, even with 0:15:23.560 --> 0:15:26.680 the FED basically backstopping. So what they're doing is basically 0:15:26.680 --> 0:15:30.000 filling a hole. Right when you get into deflationary environments 0:15:30.040 --> 0:15:34.200 where debt is defaulting, the credit outstanding is shrinking, that 0:15:34.320 --> 0:15:38.920 is small d deflation. The FED has expanded its balance 0:15:38.920 --> 0:15:43.160 sheet in order to keep credit inflated. Okay, So they're 0:15:43.240 --> 0:15:46.720 not trying to issue ninety five trillion more of debt. 0:15:46.720 --> 0:15:48.680 What they're trying to do is keep that ninety five 0:15:48.760 --> 0:15:52.280 trillion on its normal trajectory. And here's the interesting thing. 0:15:52.520 --> 0:15:54.360 If you go look at the data. I haven't updated 0:15:54.360 --> 0:15:56.360 this in a little while, but if you look at 0:15:56.360 --> 0:15:59.520 the non financial sector debt in the United States, it's 0:15:59.520 --> 0:16:03.280 pretty much to straight line up and you can't tell 0:16:04.280 --> 0:16:07.400 when Republicans were in charge, which is when Democrats were 0:16:07.400 --> 0:16:10.960 in charge. Okay, so we've had two and a half 0:16:10.960 --> 0:16:14.160 to three trillion dollars of non financial sector debt growth 0:16:14.200 --> 0:16:18.120 in each of the last ten years, and it's you know, 0:16:18.160 --> 0:16:24.360 it's essentially keeping me total economy inflated. Only a small 0:16:24.400 --> 0:16:28.000 percentage of that historically has been the FED itself. The 0:16:28.040 --> 0:16:31.840 real inflation came from the credit that was created in 0:16:32.080 --> 0:16:36.840 both the traditional banking system and in the non traditional 0:16:36.840 --> 0:16:39.520 i either shadow banking system. But it all got created 0:16:39.520 --> 0:16:43.600 in the financial system and then got intermediated out into 0:16:43.680 --> 0:16:48.880 the real economy. And so you know, basically there's a 0:16:48.880 --> 0:16:52.480 big debate over the stability of the US dollar banking system. 0:16:52.480 --> 0:16:54.240 I look at it, and you know, as you said, 0:16:54.240 --> 0:16:57.840 the FDIICE is saying, hey, the banking systems in soolveent. Okay, well, 0:16:57.960 --> 0:17:01.920 it really always has been. This is not new fractional 0:17:01.960 --> 0:17:04.200 reserve banking is not new. Bank runs are not new. 0:17:04.280 --> 0:17:07.080 None of this is new. What's new is that people 0:17:07.160 --> 0:17:10.160 are much more aware of what the issue has been 0:17:10.640 --> 0:17:13.520 all along. But it was always there, bubbling under the surface, 0:17:13.560 --> 0:17:18.240 building up, and fundamentally, this is not a stable system. 0:17:18.600 --> 0:17:22.200 It seems stable because they've been able, as you point out, 0:17:22.280 --> 0:17:24.000 to pull the rabbit out of the hat with the 0:17:24.080 --> 0:17:28.280 latest alphabet soup program. But all that is doing is 0:17:28.359 --> 0:17:34.120 taking defaulted credit off the traditional banking system's balance sheet 0:17:34.119 --> 0:17:36.600 and putting it onto the Fed's balance sheet to try 0:17:36.640 --> 0:17:40.119 to keep the aggregate of total credit inflated. 0:17:41.119 --> 0:17:43.680 And while that doesn't cause the deflation, because the aggregate 0:17:43.720 --> 0:17:45.399 credit is still there, and even though it may be 0:17:45.440 --> 0:17:48.720 tucked away somewhere, it's still a drag on the overall economy, 0:17:48.760 --> 0:17:50.960 and it's still a drag on growth and production because 0:17:50.960 --> 0:17:53.959 whoever owes that debt is still being held down by that, 0:17:54.080 --> 0:17:57.080 right So even though it's kind of like tucked away, hidden, 0:17:57.160 --> 0:17:58.880 you know, out ofside, out of mind, it's still there. 0:17:58.880 --> 0:18:01.679 It's still dragging the situation down. So it never allows 0:18:01.720 --> 0:18:03.840 us to kind of heal and start growing again. 0:18:03.920 --> 0:18:06.280 Absolutely well, and we don't know what real market interest 0:18:06.359 --> 0:18:08.800 rates are We have no idea. The one thing I'm 0:18:08.840 --> 0:18:11.840 pretty confident of, although no one knows for sure, is 0:18:11.880 --> 0:18:15.240 that they would be hired than they are today right 0:18:15.359 --> 0:18:19.199 if free markets really rained. But this is why the 0:18:19.200 --> 0:18:22.120 most important price that needs to be left alone and 0:18:22.160 --> 0:18:24.919 not controlled by the government is the price of borrowing money, 0:18:25.240 --> 0:18:30.360 because it is the traffic light that allocates capital across 0:18:30.400 --> 0:18:34.320 industries and across time. And when that is controlled, which 0:18:34.359 --> 0:18:36.480 it is in every major economy in the world right now, 0:18:36.480 --> 0:18:39.280 because there's something called a central bank, and the central 0:18:39.280 --> 0:18:43.800 banks have desks that literally buy and sell government obligations 0:18:43.840 --> 0:18:46.600 to control those interest rates. And so when they're controlling 0:18:46.600 --> 0:18:49.800 those interest rates to their target levels, you know they're 0:18:49.800 --> 0:18:52.440 not free market interest rates. And so to your point, 0:18:53.560 --> 0:18:56.639 we're not allowing all of the dead weight of the 0:18:56.680 --> 0:19:03.199 economy to burn. And I like a nessin Teleb's analogy 0:19:03.520 --> 0:19:07.600 of forest fires. If you don't allow the underbelly, the 0:19:07.680 --> 0:19:12.560 undergrowth to burn every now and then when the real 0:19:12.640 --> 0:19:15.720 one comes, you get a conflagration, and it might burn 0:19:15.760 --> 0:19:18.680 hot enough that it burns all the bacteria in the soil, 0:19:18.920 --> 0:19:23.200 and nothing grows for decades until you know an elk 0:19:23.320 --> 0:19:25.520 or a moose comes along and takes you know what, 0:19:25.760 --> 0:19:29.960 and then the bacteria regenerates in the soil, but it 0:19:30.000 --> 0:19:34.000 takes decades for that to happen. I'm literally watching that happen. 0:19:34.080 --> 0:19:36.520 There were terrible forest fires not far from where I 0:19:36.560 --> 0:19:39.119 live here in Wyoming a couple of years ago, and 0:19:39.160 --> 0:19:43.040 nothing is growing back because they didn't let it burn 0:19:43.800 --> 0:19:47.840 in the more mild years, and when it finally came, 0:19:48.240 --> 0:19:51.840 everything including the bacteria in the soil, burned. It's really sad. 0:19:53.119 --> 0:19:54.360 I recently went out to Wyoming. 0:19:54.400 --> 0:19:56.879 I was out there earlier this year for the Bitcoinski 0:19:57.000 --> 0:20:00.360 Week and boy was it beautiful. Absolutely, Oh yes, sure 0:20:00.359 --> 0:20:04.320 it is. Yeah, it is wild, big country out there, 0:20:04.400 --> 0:20:04.760 for sure. 0:20:04.840 --> 0:20:05.920 Man, Wow, God blessed. 0:20:05.920 --> 0:20:08.600 Whyom I go? I keep it wild's yeah, that's for sure. 0:20:08.800 --> 0:20:10.560 It made me. It made me think, I mean, this 0:20:10.640 --> 0:20:13.120 is off track. But we went. I went. 0:20:13.240 --> 0:20:15.199 We were there in Jackson Hole, right and then we 0:20:15.280 --> 0:20:17.720 went about to forty five minutes out and did a 0:20:17.720 --> 0:20:19.320 little helly scheme. But I got to kind of drive 0:20:19.359 --> 0:20:21.600 out and see that that rugged country and just get 0:20:21.600 --> 0:20:23.120 to meet some of the people that are out there. 0:20:23.160 --> 0:20:26.240 And I left thinking these people are never going to 0:20:26.320 --> 0:20:29.160 live in fifteen minute cities in metaverse like correct, these 0:20:29.160 --> 0:20:32.879 are the cowboys out here, right, And it made me 0:20:32.880 --> 0:20:33.760 feel a little bit better. 0:20:33.800 --> 0:20:35.760 So I'm just gonna say, Hey, I lived on. 0:20:35.760 --> 0:20:38.359 The East Coast for thirty years in big cities, so 0:20:38.400 --> 0:20:42.400 I can move easily from one environment to the other. 0:20:42.440 --> 0:20:44.840 But I grew up here, and I totally get it. 0:20:44.880 --> 0:20:48.320 I'm much, you know, much more, much more comfortable here, 0:20:48.359 --> 0:20:50.200 and you know, boy, there are a lot of people 0:20:50.240 --> 0:20:52.720 who are moving here who are like that, escaping the 0:20:52.760 --> 0:20:58.520