A Great Depression Worse Than 2008 - Survive & Thrive During The New Economic Reset | Arthur Hayes

Added: Oct 4, 2023

Hayes explains that the current economic situation is a result of the global adoption of Keynesian economics, which advocates for government intervention and money printing during times of economic trouble. This has led to a situation where central banks have destroyed the free pricing mechanism in almost every sector of the financial economy, except for the government bond markets. As a result, global debt has skyrocketed to 360% of GDP, and governments and central banks are continuously printing money to sustain the system.

One of the main factors contributing to the impending crisis is the declining population in the rich world, including China, Russia, and Brazil. With fewer people being born, there are fewer individuals to support the growing debt burden. To ensure the solvency of the system, governments and central banks are forced to print more money. However, this approach is not sustainable and will eventually lead to a collapse.

Hayes argues that the current geopolitical tensions, particularly between the West and Russia, are exacerbating the economic situation. He believes that a divided Eurasia threatens the hegemony of Western powers, leading to conflicts and proxy wars. This geopolitical instability further contributes to inflation and financial crises.

The podcast also highlights the importance of energy in the global economy. Hayes argues that human civilization is built on the extraction and use of hydrocarbons, such as oil. However, the world is not finding new sources of energy at the same rate as in the past, leading to a flattish energy production. This, combined with the money printing and geopolitical tensions, will result in energy inflation and higher prices for goods.

Hayes predicts that a major market disturbance will occur in the next three to six months, possibly in the US Treasury or other large global bond markets. To save the market, governments and central banks will resort to printing even more money, leading to a temporary bull market in stocks, real estate, and cryptocurrencies. However, this will eventually result in a generational collapse and potentially a major global conflict.

The podcast also discusses the impact of promises made to the Baby Boomer generation, particularly in terms of healthcare and defense spending. These promises, combined with the declining population and the need for money printing, create a significant liability for governments. Hayes argues that the current political system prevents any meaningful reform, leading to unsustainable levels of debt.

In addition to these factors, Hayes highlights the decline in traditional buyers of US debt, such as China, Japan, and oil-exporting nations. The US banking system is also functionally insolvent and cannot afford to buy more debt. This creates a situation where the US Treasury has to issue new debt and roll over existing debt, but there are limited buyers available. This breakdown in relationships and the inability to sell debt will contribute to the impending crisis.

Hayes points out that the US economy is currently growing at a rapid pace, with a nominal GDP running at around 9% and a 10-year bond yield of 4.34%. This means that bondholders are not receiving the full benefit of the economic growth and are getting shortchanged. As a result, investors may start to realize that they can earn better returns by investing in other assets such as stocks, gold, or cryptocurrencies.

The conversation then shifts to the impact of rising interest rates on bondholders. When interest rates rise, the price of bonds decreases, leading to capital losses for bondholders. Hayes explains that owning long-term bonds in a rising interest rate environment can be detrimental to investors, as they can experience significant losses. This has been particularly evident in the banking system, where banks that held long-term bonds have suffered losses.

Hayes also discusses the Bank Term Funding Program (BTFP), which was implemented to support banks during the economic crisis. However, the BTFP only covers certain types of securities, such as US Treasury bonds and mortgage-backed securities, leaving out other assets like commercial real estate. This creates a problem for regional banks that heavily rely on commercial real estate lending, as they may face losses if the market declines.

The conversation then delves into the potential for a banking crisis and the choices that regulators and governments will have to make. Hayes explains that if regional banks fail, it could lead to a run on these banks and a sell-off of long-term bonds, resulting in losses for investors. The government would then have to decide whether to let these banks fail or bail them out, potentially leading to more money printing and inflation.

Hayes emphasizes that the current situation is different from previous crises because there is no longer a country like China that can degrade itself to provide cheap labor and resources to the rest of the world. Additionally, he points out that the United States has a different financial situation than Japan, as it relies on foreign buyers to fund its deficits.

In terms of timing, Hayes suggests that financial crises often occur in the fall and winter, and he expects a crisis to happen within the next few months. However, he acknowledges that it is difficult to predict the exact trigger for the crisis.

Hayes emphasizes the importance of understanding the concept of volatility and why it should be seen as a feature rather than a bug. He explains that volatility provides opportunities for investors to buy low and sell high, contrary to what most people tend to do. He advises investors to focus on assets they understand and are comfortable with, whether it's cryptocurrencies, tech stocks, or other high-growth sectors.

Hayes, who manages his own money, shares that he is currently up in his lifetime investments, indicating that his strategy has been successful in the past. He acknowledges that investing can be challenging and advises against active trading, as it often leads to losses. Instead, he suggests picking a diversified bundle of assets, such as the S&P 500 or AI-driven growth stocks, based on one's level of knowledge and risk tolerance.

The discussion then shifts to the concept of euphoria in the market. Hayes describes the euphoric phase as a time when investors become overly optimistic and invest in speculative assets without considering the underlying fundamentals. He expects the upcoming euphoria to be centered around artificial intelligence (AI) and believes that AI-related stocks and cryptocurrencies will experience significant growth during this period.

However, Hayes cautions against getting caught up in the hype and investing in illiquid assets that cannot be easily sold. He advises investors to focus on liquid assets that can be bought and sold quickly, especially when the market sentiment starts to change. He suggests being patient and waiting for clear signals from central banks and governments, as they will communicate their actions and intentions to the public.

Hayes also discusses the potential risks and challenges in the current economic landscape. He highlights the high global debt-to-GDP ratio and the possibility of a financial crash triggered by factors such as rising oil prices or escalating healthcare costs. He believes that such events could lead to social unrest and conflicts between nations.

Regarding the threat of dollarization, Hayes argues that it would primarily impact the financial elite rather than the average American. He suggests that the current fiat financial system benefits certain regions and industries, such as finance and technology, but does not necessarily benefit the average American. He believes that dollarization is not a significant concern for the average person, as it primarily affects those tied to the fiat financial system.

Hayes also expresses concerns about Europe, citing its lack of energy and food security as potential sources of conflict. He suggests that Europe's reliance on external sources for energy and food could lead to internal conflicts and a breakdown of the eurozone.

In terms of the future, Hayes emphasizes the importance of how people treat each other and the presence of the rule of law. He believes that cryptocurrencies, particularly Bitcoin, offer a way to protect financial wealth outside of the government-controlled fiat system. He highlights the advantages of cryptocurrencies, such as privacy, security, and the ability to store wealth independently.

Hayes emphasizes the importance of achieving financial freedom in order to navigate the upcoming economic challenges. He suggests that individuals should strive to obtain financial independence and be prepared for potential disruptions in the financial system. He advises people to invest in cryptocurrencies, particularly Bitcoin, as a means of protecting their wealth from inflation and government interference.

Hayes acknowledges that there are risks and uncertainties associated with cryptocurrencies, but he believes that they offer a viable alternative to traditional financial systems. He argues that Bitcoin, with its finite supply and decentralized nature, provides a hedge against inflation and government control. He encourages individuals to educate themselves about the technology and the potential benefits it offers.

Hayes also discusses the role of speculation in the cryptocurrency market. He acknowledges that speculation can be risky and lead to poor financial decisions, particularly for those who are financially vulnerable. However, he believes that speculation is a natural response to the current economic climate, where traditional avenues for wealth creation are limited. He advises individuals to be cautious and only invest what they can afford to lose.

The conversation then shifts to the topic of regulation and government control. Hayes argues that financial regulation does not necessarily prevent bad actors or financial crises. He points to the example of the 2008 recession, where highly regulated banks still engaged in risky behavior and required government bailouts. He suggests that the focus should be on empowering individuals to take control of their finances rather than relying on government intervention.

Hayes also discusses the situation in China and Hong Kong regarding cryptocurrencies. He explains that while China has cracked down on cryptocurrency trading and mining, they still recognize the potential of the technology. He suggests that the Chinese government is using Hong Kong as a testbed for cryptocurrency experimentation and regulation. He believes that this approach allows the government to maintain control while still benefiting from the technology's potential.

In terms of the future of cryptocurrencies, Hayes predicts that Bitcoin will continue to rise in value. He suggests that Bitcoin could reach levels of $750,000 to $1 million in the coming years. However, he also acknowledges that the market is unpredictable and that there are many factors that could impact the price of cryptocurrencies.

Hayes continues by emphasizing the importance of understanding the current financial landscape. He believes that the problems in the financial system go all the way to the bedrock, with treasuries becoming the new toxic waste. He predicts that the upcoming crisis will be at least as bad as the 2008 recession, if not worse.

One of the key issues Hayes highlights is the excessive debt burden faced by governments and corporations. He argues that this debt has reached unsustainable levels and poses a significant risk to the global economy. Hayes suggests that the current economic system is built on a foundation of debt, and this debt bubble is bound to burst.

Another concern Hayes raises is the role of central banks in the financial system. He believes that central banks have been artificially propping up the economy through quantitative easing and low interest rates. However, he argues that these measures have only delayed the inevitable and created a false sense of stability. Hayes predicts that when the next crisis hits, central banks will have limited tools to combat it, leading to a severe economic downturn.

Hayes also discusses the impact of technology on the financial system. He believes that advancements in technology, particularly blockchain and cryptocurrencies, will disrupt traditional financial institutions. He suggests that these technologies have the potential to create a more decentralized and efficient financial system, but they also come with their own risks and challenges.

In terms of surviving and thriving during the new economic reset, Hayes offers some insights. He advises individuals to diversify their investments and not rely solely on traditional assets like stocks and bonds. He suggests considering alternative investments such as cryptocurrencies, real estate, and precious metals. Hayes also emphasizes the importance of financial education and staying informed about the changing economic landscape.