Economists Uncut

Debt, Deficits, and The Road to a New Monetary Order (Uncut) 01-21-2025

Mel Mattison: Debt, Deficits, and The Road to a New Monetary Order

Welcome to Palisades Gold Radio. I’m your host, Tom Bojovic. Joining me today is Mel Madison, writer, founder, investor, and fintech executive.

 

Thanks for joining me again, Mel. Well, thanks for having me, I really am glad to be here. It’s a pleasure to speak with you again, and I’m really looking forward to this conversation because you and I, going back and forth here before we hit record today, there’s so many different places that there are so many secondary and tertiary effects of this new administration, of the debt load, of assets, of rates right now, that we need to go over to understand.

 

I think you do a great job of putting all of these things together. Why don’t we start by asking you where you think we currently are in the markets, in the economy, and what you see unfolding here over this next year, being the first year of Trump’s 2.0 term? I think right now, we have a strong economy, at least by any read of traditional macro numbers. As you’re aware, I’m skeptical of government release data, I’m skeptical especially of inflation data, which I believe is regularly kept low because it affects COLA adjustments to Social Security, it affects changes in marginal tax brackets.

 

I think if you look at any basket of real goods that people buy, you can tell that those CPI numbers are pretty much junk. It was funny, I had done a little side note here, I’d done a little search of what was the average price of a home in San Francisco in 1971 using Google AI. It told me it was 16,000, and then it said adjusted for inflation, that would be 180,000 in today’s dollars.

 

Of course, they’re using CPI, and so they’re basically saying a home in San Francisco, based on CPI numbers, would be $180,000 for a single family home. We know it’s at least 10 times that. The CPI numbers, when it comes to major purchases, whether it’s cars, homes, if you look at a certain basket of goods that they put in there, and also if you look at some food items, some basic items like clothing and food, the things that people actually need to live, maybe those CPI numbers are generally in the ballpark, but once you start going into what are the big expenditures, education, healthcare, home, cars, they’re all multiples of what the actual CPI numbers are.

 

I say that just so that if I reference like, oh, I don’t think we’re heading into a recession because of fiscal stimulus, that people understand if we had real CPI numbers, we probably would have been listed as in a recession for most of the last couple of years, but we don’t. Using government numbers, we have a strong economy. I think on the one hand, we have positive GDP prints ahead of us, just like we have in the past.

 

I was saying this last year, even in the summertime when people were worried, and a lot of it really is the fiscal juice in the economy. It’s the trillions of dollars that are being pumped in every quarter just to keep the engine roaring. We just yesterday, we recorded this on the 15th yesterday, the Treasury released complete numbers for the first fiscal quarter of 2025, which runs from October 1st until December 31st.

 

The deficit is already in three months, $711 billion, whereas last year, that number was 510 billion. That’s a 39.4% increase, a 40% increase in the deficit in the first quarter. If you do an annualized run rate, you’re approaching a $3 trillion deficit.

 

That’s where we’re sitting right now. We’ve got an economy that as I said, with real CPI numbers, and no government massive deficit spending would be in a major recession right now. Then we have an administration coming in, who is talking about reducing the deficit and we can get into that and what that would mean, and if I think that will be successful or not.

 

We also have a president who loves to measure himself against the stock market. We have this uncertainty, we have competing goals between stock market economy going well, getting the deficit under control because it’s really starting to get out of hand, well over $100 billion or almost, I forget the exact number, but let’s just if I say something like 300 or 400 billion of that first quarter spending was simply to pay interest on the debt. We’re getting into this situation where the debt situation is coming to a head.

 

We have a Treasury Secretary coming in who himself has stated he thinks a global reset is going to be necessary in the next four years. We have this huge mix of things going on. It’s not surprising to me to see risk markets be a little nervous right now about what all this means, yields climbing, dollar climbing.

 

It’s really, on the one hand, it’s an exciting time. It is presenting opportunities, big market swings, but on the other hand, it’s also a time where I think some really big decisions are going to need to be made and they’re going to change the financial landscape as we know it. I’d like to just linger on that detail a little bit more, Mel, about basically the rolling over of this debt and what it ends up costing.

 

Obviously, when the interest rates started to go up and the market drove interest rates up on the longer end as well, that doesn’t all just come to a head every single year. How much of the US debt actually needs to be refinanced and rolled over this year? Does that represent a big jump in that interest expense as well? A lot of the holders of the debt, they do tend to, if they’re holding to maturity, whether it’s an insurance company, definitely certain banks that need it for their balance sheets, they will tend to reinvest that. When you have maturing debt, that does just pure issuance coming out of the market, it does affect price.

 

We have roughly seven to eight trillion that’s going to be issued this year. Most of that, of course, reissuance rolled over. That is a large number because, as I’m sure most of your listeners are aware, Yellen started moving more and more of treasury issuance to the short end to bill issuance.

 

We did not issue in the last couple of years the normal amount of five and 10-year and 20-year and 30-year paper that we normally would. We’ve got all the deficit spending that’s going to need to be covered. We’ve got the refinancing of two, five notes and bonds that just happened to be expiring this year, but then we also have all this bill issuance that’s just continuous rollover every single year.

 

All of this is starting to spook a little bit the treasury market, make them a little nervous, who’s going to be buying all this? We’re seeing the yields rise. One of the main things that I think drives something like the 10-year yield is really like expectations of nominal GDP. And so the key thing with nominal GDP is who knows what the real inflation numbers are, but even if you had, let’s say, 1% real growth, and you had a CPI print that’s telling you there’s 2.5% inflation, but we really know it’s closer to 3.5%, you have 3.5% inflation, you have 1% of real growth, you’re already at 4.5%. And so right now, we’re at about 4.7% on the 10-year.

 

That’s not really pricing in massive inflation. To me, that’s pricing in 2.5% CPI prints. So I actually think the potential for yields were inflation to truly start to spike up, and a lot of things are indicating that it is.

 

The commodity complex has been on fire, whether you’re talking about oil, natural gas, copper, gold right now is sitting, last I checked, 27.20 an ounce on futures, which is the very upper level of this wedge that’s been forming for a number of weeks now. It looks like it’s ready to break out if it can get a daily close above 37.20 here soon. And so all of these things are just kind of screaming at you, inflation is going to be coming.

 

And I think once we really start to see the whites of inflation’s eyes, and you start saying, OK, we’re going to have 3% or 3.5% CPI prints, which are really going to be 4.5%, 5% end of inflation, and then we get 1% or 2% in real growth, you’re going to get to 7% as a fair value of nominal GDP over the long run. And that’s where the 10-year should be. I think basically the 10-year should probably be at 7% anyways, but it’s not because of all this manipulation with bill issuance and different forced buyers of treasuries.

 

And I think if you look at mortgage-backed securities, which are more or less government guaranteed, they’re trading at $7.25. And I think that big spread between mortgages and 10-year is primarily due to the fact that the Treasury yield is already being manipulated, and that the actual risk-free rate on a 10-year is probably closer to what the mortgage is indicating, which is around $7.25. And the 30-year mortgage, remember, because of prepayment, it actually has a similar duration to a 10-year Treasury bond. So even though it’s a 30-year piece of paper, because of prepayment risk, the duration, it’s closer to a 10-year. And so basically, the market is telling you 7% nominal GDP potential.

 

And that’s not priced in the market at all. And if that begins to be recognized or realized or consensus, and we start saying, say, blow past 5% at some point in the coming months, people might start worrying that 6% and 7% are on the way. And this is not 1980, when the government has 30% debt to GDP.

 

It has 120% debt to GDP. And so the interest expense is unsustainable at that level. So Mel, the last time we had debt-to-GDP levels really this extreme was kind of after the Second World War.

 

So was the US able to actually grow its way out of that at that time? And is there anything productivity miracle or energy miracle-wise that gives any type of hope for that at this point? Yeah, so there’s been a lot of recent academic research taking a look at that particular period, because the parallels are very similar. We had, in this case, a global financial crisis followed on by the COVID pandemic that just skyrocketed the debt-to-GDP to around 120%, which is about the level that it got to during World War II. And what most of the academic research has found is that there was no real growth.

 

There was growth that helped, but the real reduction came from a combination of surprise inflation, so inflation that investors weren’t able to see coming and price around it into bond markets and so on, as well as basically yield curve control, what the literature usually calls it as interest rate distortions, in other words, interest rate manipulation, that were done primarily by the Federal Reserve at the orders of the behest of the Treasury. So there was not this level of independence that we think of with the Federal Reserve and the Treasury during the 1940s. Essentially, FDR and his administration told the Fed what to do.

 

Eventually, they did come to a different understanding. It became known as the Fed-Treasury Accords of 1951, where the Fed regained some sort of level of independence after the war footing was no longer needed. But it was totally controlled by the Treasury.

 

Interest rates were capped, the 10-year at 2.5%. The Fed intervened in the markets to keep it there. And on the short end, they capped it at 3.8, so basically a Zerk policy on the short end. And it created a nicely sloping yield curve.

 

People understood that these were the rates to operate in. And the other thing that happened was during the war, they used price controls to keep inflation down, which, as you could imagine, when you’re manipulating interest rates like this, you’re going to get inflation. And then once the war ended, they took off those price controls.

 

And we had 15%, 17%, close to 20% inflation for a couple of years after World War II. So if you go back and look at the data in 1946, 1947, we had combined over 30% of deflation in like a 24-month period. So essentially, a revaluation of the dollar.

 

Another way to think about inflation is a revaluation of the dollar. Just like in 1933, when FDR revalued gold versus the dollar from $20 an ounce to $35 an ounce, we had another dollar revaluation post-World War II, an immediate 30% decline thanks to inflation. And I think what we saw after COVID was we saw a 20%, 25% revaluation.

 

But that wasn’t enough. And it was not combined with a reduction in deficit spending the way we did reduce it after World War II. So you need the inflation to get the levels down.

 

You need the growth. But you also need to rein in the deficit spending. And as we talked about, not only are we not reining it in, we’re growing to levels we’ve never seen before outside of wartime or pandemic at $711 billion in deficits in just the first three months of this fiscal year.

 

Well, Mel, we’ve seen from Trump’s team that they have this idea that they’re going to cut $2 trillion through the Doge agency or whatever you want to call it. How reasonable do you think that is to actually expect to be able to achieve? Yeah, I don’t think it’s reasonable at all. If you’re talking about a $2 trillion reduction in the deficit, I don’t think that that’s possible.

 

And I also think, frankly, speaking about it in terms of dollars is not the right way to think about it, because we are going to need to have nominal GDP growth. And we’re going to need to reduce the deficit in terms of GDP. I think that’s the way to look at it.

 

And that’s someone who’s obviously a more sophisticated market person, Scott Besant. He has this three arrows policy of 3 million barrels of oil, 3% real growth. And a 3% deficit by the time he would leave the Treasury.

 

So by the end of Trump’s term. So if you look at that as something, I still think that’s a bit of a stretch. But even if you look at what his goal is, it’s to get it down to 3% of GDP by 2028.

 

And so that would be, if we’re at 6% or 7% now, that would be closer to a $1.5 trillion deficit, assuming some levels of nominal GDP growth. And we’re not running much different than that right now. We’re at like 1.7, I think, last year.

 

So what I would see as reasonable would be to try to keep deficits in the dollar ballpark that we’re running them at over the next four years. But through growth initiatives, as well as some continued and re-sparked inflation, getting nominal GDP to grow. And therefore, getting deficit to GDPs back to around 3% to 4%, which makes sense as a target because you want to have the deficit to GDP less than the nominal growth rate of the economy.

 

And then it’s technically sustainable. When you have what we have right now, 6%, 7% deficit to GDP, and let’s say 4% or 5% nominal growth, you’re obviously in a snowball effect situation where it’s only a matter of time before the interest on the debt just starts eating up all of the tax receipts and causing a debt spiral. So I think the other issue with Doge and cutting that is that I don’t think Vivek and Elon completely understand what they call a fiscal impulse, the fiscal impulse that contributes to GDP and the economy.

 

So it sounds great to say we’re going to get rid of some of these ridiculous defense programs that send $100 billion to Raytheon. But when you automatically pull that $100 billion out of Raytheon, Raytheon’s paying corporate taxes, so some of that comes back. Raytheon’s then paying their employees.

 

And their employees are paying taxes, so then you’re going to lose those taxes. Then their employees, now they need to go find jobs and take another job in the private sector, or they need to spend some time on unemployment, or they need to get severance packages from Raytheon, which then reduces the profits of Raytheon, which further reduces Raytheon’s taxes. And so you cut $100 billion in spending.

 

And in the long run, cutting all this fiscal impulse from the government is a good thing. I’m a free market guy. But in the short run, there is a price to be paid for it.

 

And so if you did something like, let’s just say half of it, like a trillion dollar cut, that multiplier effect of the government spending through the economy gets yanked out right away. And then you reduce the tax receipts. And so you wind up not actually reducing the deficit.

 

You might actually grow the deficit if you cut spending too much too quickly. And so Trump does not want to get into this type of a situation, because the stock market obviously is not going to look favorably on that. And so I think people have to trim their expectations.

 

I think if we could get some sort of a plan, like a 10-year plan to reduce the deficit by $2 trillion over 10 years, or by Besson’s goal of getting the deficit down to 3% of deficit to GDP, I think that’s realistic and in the long run will be good. But thinking that they’re going to be able to come in and flash. And the last thing I’ll add on that is you have to look at what really won’t Trump touch.

 

And he’s already said Social Security and Medicare. You don’t want to default on the debt. And then veterans benefits have been the largest growing department since 9-11.

 

As one would imagine, it’s grown over five times in the last 10 years, I think. And so veteran benefits are a pretty good part of it. And Trump’s not going to want to cut those.

 

And so what are you left with? And then there’s defense. OK, so maybe you can close some bases overseas or reduce some spending in NATO. But really, we’ve talked about rebuilding America’s military.

 

So I think strong defense cuts are probably not in the cards either. And if you add all those things up, Social Security, Medicare, interest, veterans, defense, you’re at over 82% of the budget, which does not even leave you $2 trillion to cut. So if you leave those five things intact and you literally eliminate 100% transportation, agriculture, interior, education, homeland security, I mean, we can’t get rid of those departments.

 

I mean, so that $2 trillion number, when you really look at the monthly Treasury statement and where the spending is, you realize that it’s ridiculous and it’s not going to happen. You mentioned this incoming Treasury Secretary, Scott Bisson, and you and I were speaking before we hit record here today about some of the changes and ideas that he has talked about on interviews that he has done. Now, what do you think the possibility is or fill us in on how he thinks about the need for a debt reset? And you had mentioned kind of at the top of the show here, a reset of some kind.

 

What does that mean? I think it might be helpful to take one second and just step a little back too from the Trump administration and those ramifications and look at not just what his goals are, but look at how the world has changed in, I would say, the last seven to 10 years. And I think international relations experts, people like maybe Dr. John Mearsheimer, will talk about this shift that happened around the 2017 time frame, where we went from this unipolar moment where the United States was essentially the only world superpower, and we didn’t really have any peer competitors, to all of a sudden the recognition that China, this country that we thought we could help China rise peacefully, we could integrate them into the world economy, they’d become part of the world trade, and that everybody was going to get along and everything was going to be hunky-dory and kubaya, I think people have started to realize that that was a fantasy. And the other global power and why we’ve gone from this unipolar to multipolar moment again is Russia.

 

And so we have Russia, China, more broadly, BRICS nations, we have the United States. And I think what we really have is a security competition that we haven’t had or seen since the Cold War. And when you’re in that type of a situation, those concerns will trump even economic concerns.

 

And this is why we cannot allow, for example, bond market vigilantes to come in and take 10-year rates to 8% and bankrupt the government and throw us into a depression. We are in the middle of a multipolar, multinational security conflict that I honestly believe had nuclear, if nuclear weapons did not exist, we would pretty much be in a war with China and over Taiwan right now. We’re almost in a hot war with Russia.

 

We’re literally sending them attack on missiles and having US personnel target mainland Russia. I think the only thing that’s keeping the reins on all of these global conflicts is the fact that we’ve got all these nuclear powers involved. And so I think one way to look at it is we’re in a global economic World War III.

 

And that is the overriding concern. And that’s the reason why I think, again, the parallels with the 1940s are so important. And I think Besson, as an economic historian, sees that.

 

And he says, look, we cannot have a military supply chain dependent on China. We cannot have our health care necessities, whether it’s masks or certain medications, be dependent on someone who is now clearly an adversary. And so without coming out and saying that and stoking fears, nobody wants to do that.

 

Behind the scenes, the defense complex, the people at the Treasury, they understand we’re in this global economic war. We need to get on a war economic footing, even though we’re not sending tanks to China. Because if we want to be strong, if we want to be able to back up our threats about if you invade Taiwan, we’re going to step in, or if you’re going to threaten the Monroe Doctrine and U.S. dominance in the Western Hemisphere and try to influence the Panama Canal or whatever it may be.

 

And again, this is exactly why Trump is interested in Greenland, because the Arctic ice, whether it’s man-made or just a natural solar cycle, it is melting. I mean, ice has been melting for the last 10,000 years since the last ice age. So as that process continues, the Arctic, its resources, the fact that by going over the poles, Canada, Greenland, these are neighbors of Russia, right? And so all of these concerns tell me that behind the scenes, and I will never say this publicly, they’re putting us on a war footing.

 

And if they’re putting us on a war footing economically, then this is a period where the state, I believe rightfully, has the authority and even the duty to go in and tell people like Powell at the Federal Reserve, who think that they’re vulgar and they’re going to cut inflation by raising rates, but we’ve got 120% GDP and a global economic security competition going on, that you’re nuts and put them in their place. And I think that if Powell gets out of hand, then you will see them do a shadow fed or even just outright fire Powell and say, we’re taking this to the Supreme Court. And at the very least, we’re going to get somebody in there in the spring of 2026 when Trump gets to put somebody in there who is going to play ball with all of these ideas that I’m talking about.

 

At least this is my supposition. No one has the crystal ball, but this is my thesis, that we are going to have develop over this year between the administration, Besson and Treasury, eventually a handpicked Federal Reserve chairman or woman. We’re going to have all these pieces come together so that Besson can oversee, as he said in that Manhattan Institute interview about five or six months ago, that he wants to be a part of a global economic reordering, he called it, a bread and woods 2.0. And so those are his terms.

 

He wants to be a part of this grand reordering. And I think that is going to involve essentially a massive revaluation of the dollar, because a weaker dollar is necessary to all of this. And it’s the only way to get us out of this debt and deficit to GDP spiral that we’re in.

 

And we’re going to have to do some other things, too. We’re going to have to play some hardball with certain industries that have been dominated by lobbyists, like health care, because we can’t print needles and hip replacements and all those types of things. And so we’re going to need to go in there, and we’re going to need to reshuffle things in a way that I think we haven’t seen in eight years since 1944 in the original bread and woods.

 

As we talk about some of these ideas for this revaluation, something that came up was this idea of revaluing the gold coupons, as you called them, or the gold certificates from $42 an ounce to something more appropriate. So how does that all work? And why are they held at $42 an ounce now, or still held? So essentially, the United States let the Federal Reserve take custody of our gold. So you could think of it as going from the Treasury to the Federal Reserve.

 

And at the time, that was the price, $42 an ounce. And when that change in custody occurred, in return from accepting the physical gold, the Federal Reserve issued these what are known as gold certificates to the Treasury. And the 261 roughly million ounces that is alleged to be held by the Federal Reserve on behalf of the American people, roughly a market value of around a half a trillion dollars, 8,000 metric tons, those are valued at $42 an ounce.

 

So these certificates, and this has been proposed by Wyoming Senator Loomis in her Bitcoin strategic reserve bill, she wants those certificates revalued by an amount set by Treasury. And then she wants to demand that the Federal Reserve banks, the 12 banks that hold them, the number one holder being the New York Fed, to remit to the Treasury the difference between $42 an ounce and whatever number they’re revalued at. She does not state that in that bill, by the way, that for the Fed to do that, they need to sell the gold.

 

She just states they need to remit the difference between 42 and whatever the new amount is in US dollars to the Treasury. And obviously, we know the Fed has a printing press. And so I believe this could be a kind of a backdoor QE without creating additional debt of the United States government.

 

So a way to essentially print money without even going through the charade that we did during the pandemic, where the US issues Treasuries, the Fed buys the Treasuries, then the Treasury sends interest payments to the Fed, and then the Fed sends the interest that it’s received back to the Treasury, which is what has been happening. That we just straight up print money and revalue these gold certificates and submit it to the Treasury, that obviously would send a spike in gold. It would essentially start to accelerate the monetization, remonetization of gold.

 

And I think that there is potential that given the people that Trump has in his orbit, that Bitcoin also plays a role in this. And so we could start to see some sort of a move globally to the use of gold and perhaps also Bitcoin as neutral reserve assets. And I think it could be very, very bullish, not just like 10, 30, 50% increases.

 

I’m talking about 2, 3, 4, 5x increases in gold and Bitcoin in the coming years, I think are a possible scenario. Well, Mel, I read that you think that this will be the year that Bitcoin breaks its correlation with risk on assets and the QQQ. So is that part of why you think that? Yes, it is.

 

And I think, I mean, look, I don’t know. I mean, who knows if this is all dreamed up by the CIA 15 years ago, and they created Bitcoin. I mean, we don’t know.

 

But what I do know is, you know, we see the talk. You know, I watched live Trump at the Bitcoin conference in Nashville, you know, say we’re going to become the crypto center of the world, that all you Bitcoiners are going to become even richer. You know, and the thing with Trump that people like to say, you know, take him seriously, not literally.

 

But, you know, so when he’s saying things like there’s usually something behind it. You had Eric Trump travel recently to the United Arab Emirates for Bitcoin MENA, Bitcoin Middle East, North Africa. So you’ve got a lot of these influential people there.

 

You also have the big money players, the Larry Thinks of the World at BlackRock. I mean, you’ve got the power players, you’ve got the Davos crew now getting behind Bitcoin in a way that you just didn’t see. You know, two, three years ago.

 

And so I think that the advantage with Bitcoin is that gold is something that actually I believe other nations have more of than we do. For example, India, if you look at the official central bank numbers for India, they hold less gold than the United States. But with over a billion people in that country, which has a cultural history of individuals holding their wealth in gold and silver so that you have a poor family in Mumbai and they’ve got a family heirloom of a silver tea set from the days of the British Empire, or they’ve got a gold necklace.

 

I’ve seen some estimates that the Indian people hold over 25,000 metric tons of gold. So when you look at the U.S. stockpile of 8,000 metric tons, you realize that if we come back fully to a gold standard, we may not be as dominant as we think we are simply because of what our central bank holdings are listed at. There’s also some people who don’t believe that we still hold this gold.

 

And then you’ve got China, which is a huge gold producer. They’ve actually passed South Africa. They’ve been buying gold.

 

And so their official statistics are they claim to hold 2,000 metric tons. But I believe that they probably hold closer to 30,000 metric tons, and especially if you include the population. And so there might be a little bit of hesitancy to really go back to essentially a de facto gold standard.

 

That doesn’t mean gold’s not going to be a part of it and skyrocket in price eventually, but that I also believe Bitcoin could be a part of it. And it has that added advantage to the globalist crew of essentially a public triple ledger system where every single transaction is available to be seen on the blockchain. And so when you look at these forces, whether they’re pro-freedom forces or they’re globalist forces, when those people’s interests start to align, then you start to think maybe this is actually going to happen because everybody’s kind of getting on the same side of the fence.

 

And it’s not just the United States, by the way. It’s also every Western democracy, Germany, France. They’re all in the same debt problem, debt spiral loop that we are.

 

I mean, look at Italy, look at Greece, look at Spain, look at France, look at the UK. Even China has huge amounts of debt, especially in their local and provinces system. So the whole world is awash in too much debt.

 

And I think when you get a situation where everybody can agree we need to do something, it starts to increase the likelihood that it actually happened. So that’s kind of that idea of maybe a Bretton Woods 2.0 kind of on the horizon. Exactly.

 

To come to the table and say, we have a global sovereign debt crisis that is brewing. And if we don’t attack it now and do something about it within a number of months, or at least two or three years to maybe even months, it’s going to get out of control. For example, in the United States in 2028 or around that time frame, we’re going to start running out of money in the Social Security Trust Fund.

 

And that’s immediately going to cause a massive issue. And so we can either wait until the crisis is upon us and we’re heading into a depression type scenario, or we can come back. There will be pain.

 

Most of that pain will be felt by bondholders. A revaluation through gold, Bitcoin, some combination thereof to a neutral reserve asset, which was actually the original idea. And I’m not a Keynesian guy, and Keynes, before he passed away, he had almost a deathbed conversion where he began to regret a lot of his economic, the things that he espoused economically throughout his life.

 

But one idea he did have, he was the UK representative at the 44 Bretton Woods conference, was to use a neutral asset based around gold that he called the Bancor as the world’s neutral reserve asset. And it was going to be tied to trade deficits because he knew of Triffin’s dilemma even before Triffin wrote about it, which was if you had one currency of one nation be the reserve currency, you’re eventually going to create deficits in that country because of demand for the currency in the global marketplace that’s going to become unsustainable. And so I think what this opportunity is, is it’s an opportunity to reset the global monetary system through a massive revaluation and devaluation of fiat currencies around the globe.

 

And then it needs to be coupled with some sort of a program to also give markets some confidence that we’re just not going to immediately revalue and then go back to 9%, 8% deficit to GDP spending. And that’s where my whole other argument comes in about we’re maybe going to need to play some hardball with the health care industry, reform tort laws so that malpractice insurance isn’t so high, or tell these pharma companies, we know you’re going to argue that your innovation is going to end, but you know what? We can’t pay what you’re demanding for these drugs. We’re going to negotiate and you’re going to take it whether you like it or not.

 

And these are things that I think, again, in a normal situation, we might not be willing to do. But when you look at it from that broader strategic perspective of a global security conflict, then you realize that if you’re in that fight for survival and for global balance of power politics, then you’re willing to do things that you might not have been willing to do in, say, 2003. Well, I think another one of the areas that I’ve heard that saying applied to of taking Trump seriously, but not literally, is in the sense of tariffs.

 

Where do you think that tariffs make sense in a free market sense? Well, the godfather of free markets, Adam Smith’s Wealth of Nations, he has a whole kind of subchapter about tariffs. And why he thinks they make sense in certain circumstances. And I think it’s pretty clear.

 

So he gives two particular circumstances, really kind of three. One of them is in national defense. And he uses the example of Great Britain would be foolish since their entire position in the world is dependent upon their amazing Navy at the time he was writing to outsource their shipbuilding.

 

So that even if the British Navy could get cheaper ships from France, you don’t do that. So national security. So that gives a lot of reasons to put tariffs on a lot of things, things that maybe are specifically for military use, but also things that would essentially cripple us, things like semiconductors, for example, like without them, the economy shuts down.

 

And so for national security interest, tariffs make sense, even to an Adam Smith. The other instance he gives is when there’s a tax on the production of something in your country that the other country isn’t paying that tax. And I think we have that situation in the United States for pretty much all of our goods when you compare us to China.

 

And the tax that I’m referring to is not an explicit tax, but it’s a tax on labor because we actually don’t treat our labor like slaves. It’s a tax. It’s an environmental tax because we don’t just make our companies if they want to produce steel, just dump all the byproducts into the nearest river.

 

And so to produce things in this country, there’s essentially a tax. There’s also a tax on US labor simply by virtue of being the reserve currency. So the reserve currency makes the dollar stronger than it otherwise would be, which means we can buy goods around the world at a discount.

 

But it also means that US labor is more expensive than it otherwise would be on an hourly basis. And so this is the other reason. And so for all these reasons, I think we’ve gotten ourselves into a situation, whether it’s national security or because of these hidden taxes that we’re paying for the production of goods in the United States with regulation and environmental concerns and cost of living relative to countries like Vietnam or China, that if you adjust for those to kind of true up those, which is what Adam Smith says, then you actually get a free market because now everybody’s on a playing field.

 

And so the deep insight Adam Smith had was not terrorists are always bad. It was that terrorists are actually good if they’re used to make an even playing field. And so I think there’s going to be use of tariffs as a negotiation tool.

 

But there’s also going to be the imposition of tariffs to really make it an even playing field so that the American corporation and the American worker can compete in industries that heretofore we’ve been content to just outsource. So let’s talk a little bit, Mel, about where the rubber meets the road here. What do you see as the path forward for inflation? And how does that relate to the oil price? Yeah, so oil has been very interesting in a multi-year downtrend essentially since it peaked out around 120 right after Russia invaded Ukraine.

 

And it’s been peaking a tad above that dead downtrend. And we’ve seen copper reemerge from its slump. As you said, gold price coming back strong.

 

We’ve seen other key minerals also go higher. And whether you’re talking about even food stuff such as coffee or cocoa or different things. So we’re seeing the commodity complex.

 

I think the Goldman Sachs Commodity Index is up something like 30% to 35% in the last few months. So we’ve really seen that start to take off. And I think these latest numbers that just came out today on CPI were a little bit cooler.

 

But we know that what tends to happen, and even though they’re adjusted for seasonal effects, the end of year numbers tend to be a little bit cooler than the numbers that you get in the beginning of the year. And so even though it’s January, these were December numbers. And so the next set of prints we get in February for January, I suspect will not be as forgiving.

 

And so I think what we’re going to start to see, and it’s going to occur in labor, and we all know also that immigration should drive up wages, and rightfully so. I think the main reason why real wages did not keep pace with the inflation we had after the pandemic was because of the immigration flow that was allowed to come into the country. And so by closing the border and having all of these administrative goals that I believe are economic wartime goals of reindustrialization, tariffs, what have you, that basically these are setting the stage for this inflationary impulse to return.

 

And so what I think they’re going to try to do ultimately is try to control it. They’re going to try to get us comfortable with a 3%, maybe even a 4% print on CBI. But that’s really going to be a 5%, 6% annual inflation rate for at least a few years.

 

And if you get an actual 6% or 7%, let’s call it, inflation rate for four years, cumulatively that’s something around a 40% revaluation. And that could get the debt to GDP from 120 down to something closer to the 70s or 80s. It would also produce a weaker dollar, which we want.

 

And what would happen is we can start to force people to hold debt, financial repression. And I think that the Federal Reserve has been in talks with the banking industry about essentially making treasuries held on the balance sheet, not count at all against their strategic leverage ratios. So in other words, banks could start becoming these warehouses to hold debt, even though the interest rates, which are being controlled by the Federal Reserve and kept lower, whether it’s through QE or whether it’s through regulatory changes which force the bank to hold a lot of treasuries, but not count it against their reserve ratios, that we can essentially find a home for all of this debt.

 

We can also do the gold certificate thing for a one time and maybe even revisit it in two years, maybe a two-time revaluation of gold to help with non-debt issued money printing. And then, on the other hand, we can have this promotion of stablecoin, not just in the United States, but stablecoins around the world, which hold treasury bills. And so I think this whole crypto embrace, we talked about it from the neutral reserve asset side of things.

 

I think it also, on the stablecoin front, which for any listeners that don’t know stablecoins, there are things like Tether and Circle, where basically you get a digital asset, money is paid $100, Circle takes that $100 and goes out and buys treasury bills. In the case of Tether, the people that do that is Cantor Fitzgerald, which is Letnik’s firm. And so I think he’s nominated the chair of Trump’s Council of Economic Advisors.

 

So you start to see how all of this is tying together. And I say this without political judgment. I mean, I’m a right-leaning guy.

 

I voted for Trump. But at the same time, I have to call balls and strikes. And when I see these people in the administration, I’m not going to be like the left-wing mainstream media and say, Joe Biden is sharp as a tack.

 

I’m not going to say, oh, Trump doesn’t have any globalist billionaires in his circle. No, he does. He does.

 

And he might feel like that’s what he needs in order to accomplish what he wants to accomplish. And so I’m going to reserve judgment of condemnation of the man until I see what the fruits of labor are. And so what I’m hoping is that he’s going to be able to corral this incredibly diverse group of people, whether you’re talking about everybody from Marco Rubio to Elon Musk to Howard Lucknick.

 

Now he’s got Bezos coming. I mean, Mark Zuckerberg, he’s basically pulling in the power players. And I think he’s saying to them, there’s a new sheriff in town, and I’m calling the shot, not Elon, not Vivek.

 

I am, and this is what I want. And I think what he wants, I think ultimately what Trump wants is he loves attention and he loves to be loved. And so he wants to leave as, he wants to be someone that’s like, hey, this is someone we want to see as another face on Mount Rushmore.

 

And that’s, I think, really what drives him as a person. I think that’s why he’s always craved the public spotlight. Obviously, he was a rich real estate developer, and there’s tons of those.

 

They don’t all go on tabloid shows and Donahue and the things he’s done for decade after decade. So I think he’s really someone that just wants that to happen. And I think he’s also courageous enough to not really care about short-term blowback.

 

And in some sense, I think he also feeds off of that. And he feeds on being audacious. And so to really remake the global financial system, that’s pretty audacious.

 

And I think very few political leaders would ever even begin to talk the way that I’ve just been speaking with you for the last hour or so, because I just would think it’s just out of the realm of possibility. A Bretton Woods 2.0, a massive revaluation of the dollar, yield curve control, all of the things that we’ve been talking about, I think those would just be a bridge too far for any ordinary run-of-the-mill Bill Clinton, Barack Obama, George W. Bush type character. But when you’re dealing with Trump, I think you cannot underestimate, people think they’ve seen everything, that he’s surprised everybody.

 

I think he might be willing to be more audacious and more of a risk taker and more bold than anybody is even imagining right now. And I think that’s why a lot of the stuff, JP Morgan economist is going to laugh probably at all the stuff I’m proposing here. But I would say that a year ago, I was saying the fiscal impulse is strong.

 

We’re going to see S&P 6,000 by the end of 2024. And the JP Morgan strategists were saying, oh, the job numbers are weak. So a lot of those people talk their books.

 

They talk what they say. They can’t take the risk. Even if they understand all this, they can’t take the risk at JP Morgan when they’re managing this and they’re running a bank to go out there and forecast all the stuff that I’m forecasting.

 

So it’s not that I’m some genius. It’s that I’m not shackled the way that a guy at Morgan Stanley or JP Morgan is that has to look out for his job and for the interests of JP Morgan and Morgan Stanley. And so I think that all these things, as wild and crazy as they sound, are actually within the realm of possibility, if not a probability.

 

So that being said, now, where do you think the S&P ends up, let’s say, by the end of Trump’s term? Do we have this kind of, I don’t know if you want to call it an inflationary melt up in the stock market in a lot of these assets? Well, I do think that what would be helpful, and I don’t know if it will be orchestrated or if it’s just going to happen, I do think that some sort of a crisis is necessary to spur on the most dramatic of these changes that I’ve discussed. And I think we have the rumblings of that getting started right now. So as we speak, the market’s having a good day on the CPI prints.

 

But if you look at, say, a longer term chart of the S&P 500, it peaked out in December and it’s been on a six or seven week downtrend. And even a rally to the 6,000 level on the S&P or more, it keeps that downtrend intact. We’ve also seen bond yields.

 

They cooled off after the PPI trend yesterday. And then by the end of the day, they were pretty much back to where they started. And so I think it might not happen overnight.

 

We might even get a bunch of amazing news next week with the inauguration and the market tries to take another run at new all time highs. But when you look under the surface, the number of stocks that are trading above their 200 day moving average is just really sinking. The same thing for 20 day.

 

That might change a little bit today. But basically, the market internals, the levels of valuation, all the things that we’re seeing, we’re ripe for a pullback. And then you have this concern over the dollar and yields.

 

And the concern on yields, it ties into all of this with deficits and interest because it’s not 1980. We can’t have 7%, 8% yield. We’ll be paying trillions of dollars in interest expense.

 

And we’ll literally be bankrupt. And it won’t work. So basically, we have to control the interest rate.

 

But the natural inclination, especially with these policies, people are going to see them as inflationary. And they’re going to see them as pro-growth, the deregulation. And I talked about the two main components of where I think the 10-year ends up.

 

It’s a function of nominal GDP, which is a function of growth and inflation. And so if we’re going to have more inflation and more growth, the yields really should be a lot higher than where they’re at. And that’s going to cause a banking crisis if they’re not checked.

 

So once people start realizing this type of stuff is coming, I think before it actually gets too far, this is when moves are going to be made to set some of these things in motion that I talked about. And when does it get too far? I’ve said since December. So in December, I started saying this, when the markets were near high, that I thought in the first year of the Trump presidency, probably in the first six months, we were going to see a minimum 10, but probably closer to a 20% pullback in equity markets, potentially even greater to a 30% or even a 40% pullback.

 

And a 40% pullback would take us right to the 2022 lows. And a 20% pullback, which is kind of my base case, doesn’t take us back anything than 12 months, right? 12 months ago in January, we were 20% below all-time highs. And so basically, I think we’re going to see those gains get wiped out.

 

And we’re going to then see an intervention. We’re going to see some of these balls still being put in motion. And we’re going to see a V-shaped recovery.

 

And we’re actually going to end the year higher. Probably around 7,000 S&P. So I’m kind of consensus with a lot of the big names that are seeing S&P around 7,000 by the end of the year.

 

But what I’m adding in there is, I think, a very deep drawdown of base case 20%, but 10% to 30% drawdown. As this crisis, as yields and inflation start to pick back up, especially around the January print that comes out in February and the February print in March. And so I feel like this downtrend that started in December is probably going to continue with volatility and strong, unbelievable up move days.

 

But that in the long run, it’s going to worsen. It’s going to create this crisis period. That’s going to be the impetus to begin to affect some of these changes.

 

That’s where the real discord is going to become clear between Trump and Powell. And in the Fed-Treasury relations begin to perhaps deteriorate a little bit. And that’s how all of this massive change begins to get set in motion.

 

Yeah, it’s such a complex puzzle to try to figure out how all of these things kind of lead to one another. But I think I have a hard time disagreeing with you if we do get some type of a crisis moment like that, that the recognition of the debt, and not only US debt, but global debt, doesn’t need to be addressed in that scenario. Well, I was just going to say, I mean, even like, let’s take a look at somebody like Jeffrey Gundlach.

 

So if your viewers don’t know him, he’s known as kind of a bond king, manages probably hundreds of billions of dollars of bonds at his firm, Double Line Capital. He’s someone who owns his own firm and speaks his own mind a lot more than you’ll hear from a JP Morgan or a Morgan Stanley guy or gal. I’ve seen podcasts of him talking about when he’s buying bonds, he’s thinking about, obviously, bonds trade at a discount if their interest rate is low.

 

He’s been thinking about when he wants to buy a 10-year, looking for 10 years that are for sale at like 70, 80% on the dollar because the coupon on them is 1%, because he thinks it’s within the realm of possibility that the United States says, we’re going to cap coupon payments at, say, two, two and a half percent. When you have someone who runs hundreds of billions of dollars of bonds saying in their mind, they’re envisioning a scenario where the United States government is going to come out and cap yields again, like they did in the 1940s. Is it really outside of the realm of expectation? Would you really expect somebody at the Federal Reserve or the Treasury or JP Morgan to put these ideas out there in public and create some sort of a panic? Of course not.

 

You have a situation where the only people who can actually speak freely on this subject are independent guys like me, guys that own their own companies like Jeffrey Gundlach. And if you turn on the CNBC News or the Fox Business, what you’re going to hear is you’re going to hear the party line, the corporate line. And so I think a lot of these things are really not, it’s not that they’re that crazy.

 

It’s just that the establishment cannot speak of them ahead of time because to do so ahead of time would essentially cause a panic and just economic chaos. Excellent, Mel. Is there anything else that’s on your mind that we maybe didn’t touch on today? I think we sure covered a lot.

 

And I know we hit a lot of places and there’s a lot of moving parts in all of this. And I think the only thing I would say is like, you know, trying to time these things out or when is this going to happen? Could there be a mini crisis and then a mini Band-Aid put on it and then this gets revisited in 26? Like, I think all of these things are possible. But I also think because Trump’s political capital is at a high and because who knows what Congress is going to look like after the 2026 midterm, there is almost a sense of urgency that if these things are going to really happen, kind of getting ready to get the ball in motion on them sooner rather than later is a good idea.

 

And so I think that there is a good chance that we see these things play out in 2025 as I’ve discussed is kind of my base case. But I also think there’s a possibility that it’s a little bumpier than that and there’s Band-Aid solutions put on things and things get drawn out a little bit. But I think at the end of the day, like the math is the math.

 

And you just can’t keep running the deficits at these levels. We’ve talked about why you can’t massively cut them without crippling the US economy. And as interest expense gets to be more and more percentage of tax receipts last year overtaking defense, it just really does get untenable.

 

And so this needs to be addressed and there’s no easy way to address it with just saying we’re going to cut a little bit here, we’re going to get more efficient, we’re going to close a couple of bases in Germany and now all of a sudden it’s sick. It needs a massive change. And even Scott Besson, the Secretary of the Treasury nominee has said as much in that Manhattan Institute interview that we need a global economic ordering and he thinks we need it in the next four years.

 

Well, Mel, I look forward to discussing the picture of all of this as it plays out again with you pretty soon. Of course, for anybody that wants to read more of Mel’s work, that’s all available at melmadison, with two Ts, M-A-T-T-I-S-O-N.com and of course on Twitter as well, at melmadison1. Mel, thank you so much for your time today.

 

Really interesting conversation. Thanks, Tom. This podcast is for general informational purposes only.

 

Nothing on this podcast should be taken as investment advice. Guests on this show are not compensated for their appearance. Listeners are urged to educate themselves and make their own decisions.

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