The Bond Market Bailout Just Started

So, the Vice President of the United States, J.D. Vance, has been saying that maybe it's time to end the dollar as the world's reserve currency. I am not sure that I think the reserve currency is actually good for the United States of America. I think there is a good argument that reserve currency status is akin to coal in Appalachia. It's a resource curse, right? Now, the world's reserve currency has been called the world's most exorbitant privilege. And that means a nation that's able to create money that the rest of the world needs for their economy is a huge advantage. It's where the U.S. gets its main source of power from. And it is so important to the U.S. that it's willing to use the ultimate intervention to enforce it. We have many types of intervention. That's one, the ultimate intervention is our military. And if we have to use that, we will. So if having the world's reserve currency is so important, and we'd be willing to invade other countries to defend it, then why would the vice president want to end it? And he wants to end it because he doesn't think it's a privilege and he's not even the only one. There's also the Treasury Secretary, Scott Besant. He's talking about returning to something called Hamiltonian economics. Right now, and maybe we'll talk about it later, is there is clearly a slow motion de-dollarization going on. But could the initial stages be a dollar rally because companies, countries are paying back their dollar debt? So there's a dollar thirst before there's a dollar boycott. Scott Besant told Tucker Carlson that gold can't have a budget deficit and gold can't have a war. Gold can't have a fiscal problem. Gold cannot have a gigantic budget deficit. Gold cannot have a war. There's been a lot of talks about ending this arrangement that the United States has run since 1944, especially from countries like Iran. Quote, we've received numerous messages from neighboring countries about shaping new security arrangements and economic cooperation in the region. The United States put the security of every single one of its allies at such risk through bullying and pure disregard for their interests for the sake of Israel. And now, just recently, the bond market started pricing all of this in. The national debt has crossed $40 trillion and bond investors want to be paid more money for taking on more risk, which is also why Scott Besant made an emergency announcement saying that they were going to step in and start buying long term Treasury bonds to try to lower interest rates. What happened then was yields went down for about 24 hours and then right back up to where they were before. And as a result, gold went up, Bitcoin went up, AI stocks went down, and the dollar went down. So to double down and save the bond market, Scott Besant just announced that he's willing to use up to $950 billion worth of the Treasury general account to do it with. That's roughly the size of Switzerland's economy. That's how important it is to lower those interest rates and save the bond market. So then, if the world's reserve currency is where the US gets its power from, then why would anyone say that maybe it's time to end it? Is JD Vance the Trojan horse and the guy that's put in charge to end the reign of the US empire? I think the explanation is a lot more nuanced. All of these events are connected and in the end, someone will have to pay for this. And I want to explain exactly what's happening to the economy right now. This is going to be super interesting. So with that said, let's get into it. Hi, my name is Andrei Jikh. Hope you're doing well. Come for the finance and stay for what's left of the dollar. So let me start by explaining the resource curse. Then I'll show you how it's going to affect all of us and why it's really hard to fix the problem and what they're planning to do about it. So here is the situation the United States is in right now. The government has $40 trillion worth of debt. Now, debt by itself is not a problem. A lot of countries have debt. The problem is what it costs to carry that debt and who's willing to lend you more money. Because for 80 years, the people that were lending to America was everybody automatically all the time. Because America creates the money the whole world runs on. So the whole world has to hold US dollars. That's the exorbitant privilege. It's a structural bid for bonds that no other country in the world gets. That bid is sort of starting to break. And here's an example of that. The 30-year treasury bond yield just reached the highest rate since 2007. Foreign central banks are lowering their exposure to treasury bonds. And when the US treasury stepped in last week to push rates back down, it was only able to do that for about 24 hours before bond investors were like, I don't think so. Pay me more money. So here's the problem with that. If rates stay high, the government can't afford its own debt. If they force rates down, they have to weaken the dollar to do it. There's no other outcome. Every solution costs the US its currency, its money. And that's why JD Vance is saying what he's saying. When I hear about the history, when I think about and read about the history of Appalachia and the resource curse, I'm struck by the idea that you could make a similar argument about the reserve currency status of the United States dollar. And what he's saying is that the status of being the world's reserve currency is what gave the US its curse. And here's the story that he likes to reference a lot. In the late 1800s, land agents went into the mountains of West Virginia and Kentucky and bought mineral rights from farmers for about a dollar an acre. To a farmer in 1890, that was basically free money because they get to keep their farm. Some company in Pittsburgh paid them cash for rocks they couldn't use anyway. Then the billions of dollars of coal came out of that land. And that coal powered American industry. It helped fight two world wars. It helped run the electric grid for about 100 years. And by the 1980s, researchers found that just a handful of out-of-state corporations owned most of the land and mineral wealth in those counties, but they paid almost nothing in property taxes on it because mineral rights were assessed basically zero. So the coal left, the money left, and the counties where all that wealth and all those resources came from had no tax revenue to build their own schools or roads or anything that would let them make a living after the money ran out. That is why today they're some of the poorest places in America. And that's what they call the resource curse. The value just sort of left. Now if you take that same story and apply it to the US, what we're seeing is nations leaving the thing that the US is making. If the most valuable thing the US makes is capital, money, then after decades and decades of not making anything other than money, its own economy gets hollowed out and it stops having the ability to make real things. There's actually a measurable way to prove this, and the easiest, arguably overly simplified way to show this is to show you how much power a country is producing over time, because power mostly comes from electricity. And unfortunately, the United States has generated no more electricity in 2024 than it did in 2004. We've been flat for 20 years. Now obviously the economy has gotten bigger over that time, it just didn't grow in anything that needs more electricity. It grew in things like finance, software, services, asset prices. These are things that don't necessarily help project power and force to the world. These don't help you win a war, should you ever need to, say, defend important energy trade routes somewhere in the Middle East. This is while China went from having less than half of our grid to more than twice our grid. So that is the story that J.D. Vance compares the United States to today. He's saying that America's most valuable resource cannot be the dollar, because if all these other nations are saying that they don't need our dollars, then what do we do? In the investment world, all of these events start to gradually show up in asset prices. So here's what's happening. Before I explain that, the dollar's losing purchasing power whether we like it or not, but our phone bill doesn't have to help it along, which is why this part of the video is sponsored by Telo Mobile. Telo is a wireless service where plans start at just $5 a month, and Unlimited is just $25. That's it. And it's running on America's largest 5G network with the same coverage at a fraction of the cost. And you build the plan yourself. You pick the data, you pick the minutes, you pay for what you use. There's no contract, so you can change it any month you want. You also get free hotspot and Wi-Fi calling, unlimited texts, international calls to over 60 countries, and eSIM activation so you can switch today from your couch without waiting on a card in the mail. 14,000 reviews on Trustpilot with 4.5 stars, and people like it because it's simple. There's just certain things we can't control, like interest rates, debt, currency debasement, but our phone bill is one of the few things we actually can. So control it, build your own plan at Telo.com with the link in the description down below. Thank you Telo for sponsoring this segment, and now let's get back to it. So here's what's happening. Since 2014, central banks all around the world stopped buying U.S. treasury bonds, and that's the year something called the automatic bid started going away. Countries that basically spent 70 years putting their savings into our most precious resource, aka the dollar, aka treasury bonds, they're now buying something else. They're buying gold instead. Here's why that happened. This is an explanation from Scott Besant himself before he was treasury secretary. This is a rare 2023 interview back to when he was still running his hedge fund and had no reason to be diplomatic and secretive. He was on a podcast where he talked about having a conversation with one of his consultants who told him that it was untenable that the U.S. could extend its foreign policy to the French government via the dollar. Look, I was used to, okay, the U.S. has sanctioned Venezuela, the U.S. has sanctioned Russia, the U.S. has sanctioned Iran, and he said, you know, it is untenable that the U.S. can extend its foreign policy to the French government via the dollar, and just this huge multibillion dollar fine on BNP is going to make a U.S. ally want to think of a new way of doing business. Scott Besant says that that was his wake-up call. That a multibillion dollar fine on a French bank would make a U.S. ally start thinking about a new way of doing business because the dollar became weaponized. So this automatic bid died because the U.S. proved that the dollar could be and will be used as a weapon if needed. Now, that interview, by the way, was Scott Besant from 2023 as a private citizen. And now watch what he says this week. He just announced a new round of sanctions on Iran as a warning. And a reporter was like, why are you warning them? Why don't you just sanction them right now? And here's what he responds with. Why not impose the sanctions today? Well, we are giving everyone the opportunity to remedy bad behavior. Why would I want to blow up the global financial system? He's like, because I don't want to blow up the global markets, you idiot, because then everybody would leave the dollar system. And if people do not want to meet our expectations, then we expect and they should expect that they should will leave the dollar system. And that is why central bank gold purchases are close to their all time highs right now and why gold has overtaken every other reserve asset as the number one. Now, here's how this affects not only our own investments, but our own lives. If you look at something called the Nasdaq 100, for example, this is the top 100 companies in the US. That index is up about 95% over the past five years. That's a really good five years of investment returns. And if you bought it, you made some money. But if we price that same index in gold instead of dollars, what you'll come to see is that it's down 23% over the same five year period. And it's even worse the farther back we look. The S&P 500 index with dividends reinvested in one of the best bull market runs in history. It's also down roughly 30% against gold since the Federal Reserve started increasing interest rates in 2022. Go back to the year 2000, it's down about 50% against gold. So what's interesting is that you could be up huge and feel rich, but also down at the same time. If you measure it in terms of real purchasing power, aka gold, you can now technically buy less stuff. Now almost nobody notices this because when you log into your brokerage and you look at your portfolio, what you see is dollar value goes up. So like, yay, I'm richer now. That's not what's really happening because your brokerage account does not have a measure how I'm really doing against gold. That'd be a cool option though. This is not only a US problem either. Japan's Nikkei, for example, which is their S&P 500, that's up 147% over the past five years. That's a huge increase. This is the best Japanese stock market in a generation. Watch what happens though when you price it in gold. Now you're actually down 31%. What does that mean? It means the stock market isn't necessarily going up. It's going up in what economists call the nominal price, aka the dollar value, but not in real terms when adjusted for inflation. And what's really happening is that the thing we're using to measure it is getting smaller, right? Therefore, everything else around us is getting bigger. It's the shrinkflation of our purchasing power in dollar terms. And you can see the same thing in the bond market, except it's so much worse. Here's how older retirees are getting taken advantage of by the system. This is a very real scenario that happened, by the way. Say you're an older person and you're looking to retire in 2014. You did everything right. You worked hard, you invested all your money into the 401ks, into IRAs, whatever. And now you want to retire and put your money into something safe instead of risking it in the stock market, right? Well, here's what happened to that person's buying power. If they bought long-term U.S. treasuries in 2014 and held them until today, in gold terms, they lost somewhere in the range of 90%, which is just insane, right? Bonds are supposed to be the safest assets in the world that every financial advisor puts in your portfolio to protect you from the volatility of the stock market. Bonds are also what pension funds and insurance companies are legally required to be holding. So these retirees got all the interest payments they were promised from their bonds, but they still lost basically almost everything in terms of what their money is now able to buy them. So what's happening right now is sort of like the biggest transfer of wealth in my lifetime. Central banks have stopped buying our debt. These kinds of transfers of wealth take more than a decade to play out, which is why most people just don't notice this stuff, but they feel it, right? They feel it every time they go to work, and they pay for gas, and they feel it every time they buy groceries, and it's possibly going to get worse, because what's happening right now in the last couple of weeks especially is that this process is now speeding up. Here's what's happening. Here's where the U.S. model sort of breaks. It's when the interest costs become higher than a nation's ability to grow, because once that happens, everything gets faster and faster. The debt starts growing faster than its ability to pay it, which means it has to borrow more, which means more interest, which means it borrows more again, which means more inflation, and economists call this a debt spiral. Now hold on. Can't the U.S. just always print more money to pay for it? It's the world's reserve currency. It can do that, right? Wrong. Remember that story of the resource curse where the buyers leave? See, the treasury has to borrow constantly. It's got $1.4 trillion of net borrowing to do in just the next six months, and it does that by holding what are called auctions. Now an auction is where the government shows up with bonds to sell to people, and they're like, okay, who wants to buy our debt? Give us your money, and we'll pay you interest. And for 80 years, those auctions had guaranteed customers. Those customers were the central banks of the world, which had to buy because that's where they parked their reserves. This includes other nations as well. Those customers, though, are disappearing. So now the government shows up, and the buyers are like, okay, we'll buy your debt, but pay us more money, and the U.S. is like, why? And they're like, because you might start World War III because your debt is growing at an unsustainable rate because I don't trust you because you could freeze my assets like you did to a nuclear nation because reasons, right? Pay me 5%, and then next time, pay me 5.2%. And every time they say that, the U.S. interest bill for the next 30 years gets locked in higher, which makes the next auction worse, which makes the buyers want even more, and that's the debt spiral. And you can actually see this happening in the data. The 30-year Treasury bond is at its highest yield since 2007. The 10-year Treasury yield went from 3.9% to 4.7% in just a couple months. And we're now at a point where the U.S. is spending more than it makes. Really the easiest way to understand this is like this. Let's say you make $100,000 a year, and you just got a raise, but you also have four bills on auto pay, which you can't cancel. Your four bills are your mortgage, your parents' nursing home, your kids' medical care, and the minimum on your credit cards. Those four bills come due, and they come to $105,000. This does not include your groceries, your gas, your car insurance, vacations, right? These four things are what's called the obligations. That's the federal government right now. Social Security, Medicare and Medicaid, veterans' benefits, and interest on the debt. And those four now equal about 105% of every dollar collected in taxes. Now the good news is the receipts are at an all-time high right now because the economy's been good, driven mostly by a strong stock market. But this 105% of spending relative to what the U.S. makes in taxes is before things like highways and air traffic control and national parks and the whole federal workforce, everything left over is paid for with borrowed money. Now the U.S. revenue, or the income, that's growing by about 4% a year, but unfortunately those four bills are growing faster at about 7.5%, right? So basically our bills are growing faster than our income is, and this gap gets bigger and bigger every year. No one's really doing anything to stop it, but they have to. So how do you solve it? Here's what they're thinking of doing. So here's the master plan according to this theory. The plan is to shift or move the debt from something called the long end to something called the short end. That's step number one, aka move the debt from the rate investors set to the rate the Federal Reserve sets, because interest rates are sort of what makes all of this possible. Then step two, build a huge buyer for that short-term debt who will hold your debt at basically 0% interest. Step three, let inflation run above that rate. And then step four, let the bondholders, aka the pension funds, the insurers, and anyone that's invested into a target date retirement fund, basically anyone who moved to safety before retiring, let those people get destroyed. Okay, what does that even mean? So to understand this, I'm going to put you to sleep for a second, but let me show you something about interest rates, because people seem to think that the United States controls its interest rates, but that's not true, because there are two interest rates. They are controlled by two completely different groups of people. The first is short-term interest rates. That is the treasury debt that matures in a few weeks or a few months, and those are essentially controlled by the Federal Reserve. When you hear, the Fed lowers rates, that's that one. It's the short end of the curve, as economists call it. Now the second one is something called long-term rates. That's the 10-year, the 30-year bond. And those interest rates are set by the market, which are things like pension funds, foreign central banks, hedge funds, insurance companies, and things like that. The government has zero say over this. Long-term interest rates are at the mercy of the auction, at whatever price buyers are willing to give it. Right now, that price is going up. There's nothing really that Scott Besant or the United States can do about it, except one thing. They can move the debt out of the long end, where investors set the price, and into the short end, where the Fed controls it. And how we know they're doing this is because it's published. Every three months, the treasury announces how much each kind of debt it plans to sell. And for nine straight quarters now, they have not increased the size of any long-term bond auctions. Not once. But the amount they need to borrow keeps going up, so where are they getting the extra money from? The answer is the four-week treasury bill. In 2016, it averaged about $47 billion per auction, and today it averages $94 billion. It has doubled. This is now the biggest security the United States government sells. It's bigger than the 10-year treasury note, it's almost four times the size of the 30-year bond. That is also why Scott Besant just announced they may fund the buybacks of $950 billion out of the treasury general account as well. So basically what we're doing is we're creating more short-term debt where the Fed can control the interest rate, and less long-term debt where they can't. That is also why, two weeks ago, the treasury announced they were at least doubling their bond buyback program from $2 billion to at least $4 billion. In other words, they are now aggressively buying back even more long-term debt. And when the treasury buys back a long-term bond, it has to pay for that somehow. And the way it pays for it is by issuing more short-term bills. Basically it's like we're saying, we're refinancing by taking a credit card bill that's due ten years from now, and we're using another credit card to pay it. And that bill comes due next month. We've moved the due date sooner. We're going to pay more in interest, but that's okay because in the end, we get to control the short-term interest rate. That's what the buyback is trying to do. And that's exactly what the numbers show. The long-term debt they're buying back has an average interest rate of about 3.4%. The short-term bills replacing it cost around 4%. So they're kind of retiring cheap debt, and they're taking on more expensive debt on purpose. Because the 3.4% is locked, right? It pays for 30 years and nobody can touch it. But the 4% is something the Fed can lower eventually down to 3, and eventually down to 1% or 0 if they want to. And they want to, right? Okay, so then how much debt do they control right now? Well today they control about a fifth of the debt. That is short-term bills where the Fed sets the rate directly. Another fifth is long-term bonds where the market sets it and the government has no say. And there's a huge chunk in the middle that sort of slides between the two depending on how far out they go. So today we're at roughly 22% on the short end, and it's going up. Now if you're going to fund the whole country with short-term debt, you still need somebody to actually buy trillions of dollars of it. So who's the buyer? Here's who that buyer is going to be. So once they've shifted the debt, they will need someone to actually buy trillions and trillions of dollars of short-term treasuries. And ideally, it needs to be a very big buyer that could potentially replace countries that don't want to buy our treasuries anymore. Ideally someone that's not going to negotiate the interest rate with us, right? And this is where a piece of legislation comes in that everybody thinks is about crypto, but it's not. It's about stablecoins, because a stablecoin is a digital dollar that has to be backed by something. And under the rules being written right now, it's backed by short-term treasury debt. And that means somebody that's living in Argentina or Turkey or Nigeria, and if they're shopping around for a dollar stablecoin, they're doing it because their own currency is falling apart. They're not shopping around for interest rates. They don't care about yield. They just want access to dollars. And they will hold them at 0% interest, happily, because 0% in dollars beats whatever's happening to their money. So this is potentially a huge buyer of U.S. debt. And this buyer demands no interest, and no foreign government can order them to sell these instruments. So the new buyers are basically going to be everyone in the world. Now the last step is, who actually pays for all of this? Because once you've moved the debt to the short end, and you've built a buyer that's going to hold at almost no interest, you can basically let inflation run above it. That is the plan. Because if you're holding a bond that's paying you 2%, while inflation's actually 6%, that means you're losing about 4% of your purchasing power per year. You still get every payment that you were promised, but you're getting poorer while it happens. Economists call this a negative real interest rate. And it is the most powerful debt reduction tool that they've ever created. Because there's no need for a crisis to happen. Like nobody's going to get a letter in the mail telling them, hey, your savings are worth less today. The number in our bank accounts will continue to go up, but we'll continue to get poorer. That's what happened to the retiree who bought in 2014, when they bought treasuries and lost roughly 90% of their purchasing power in gold terms. That was designed that way on purpose. And the plan is not to stop this. The plan is to do more of this, faster and with more controlled precision. In fact, they've done this before. After World War II, the U.S. had about the same amount of debt relative to the economy that it has today. By the early 1950s, it was cut in half. Real interest rates went to negative 13% and bondholders lost somewhere between a half to two-thirds of their money in just five years. Now everybody remembers that time period as the Great American Boom, but who paid for it were the bondholders. Remember those are the pension funds, the insurers, the people that invested their money into target date retirement funds, anyone that's trying to retire safely. So let's go back to the beginning with J.D. Vance. Remember we said that the dollar was America's resource curse, that the most valuable thing this country makes is money, and that's what's hollowing out the U.S. economy. His solution is that America should just stop selling money to the world, right, and go back to making real things again. The plan I just explained in this video, though, it's the complete opposite of that. This plan says, no, no, no, let's keep this game going for as long as possible. This might be the last stand of the U.S. dollar and the American empire, because it is the plan to expand access to dollars to the entire world. That's why Scott Besson says, when there's de-dollarization, you see a strong appetite for the dollar. So the dollar gets stronger, it goes up, then it goes down. Is there is clearly a slow motion de-dollarization going on, but could the initial stages be a dollar rally because companies, countries are paying back their dollar debt? So there's a dollar thirst before there's a dollar boycott. So watch the Genius Act very closely because that's part of their main strategy. And if you want to learn more about this and see how I'm personally preparing to protect myself against this, you can find those videos in the premium member section where I talk about my investment philosophy and give you early access to my videos. If that's valuable to you, the link is down below. It allows me to take on fewer sponsors and make more videos like this. Thank you so much for being a premium member and watching this video. Let me know your thoughts. I'd love to see her next time. Take care.