About this transcript: This is a full AI-generated transcript of So You Want To Ruin Your Economy... from How Money Works Uncut, published November 1, 2026. The transcript contains 29,716 words with timestamps and was generated using Whisper AI.
"Managing an economy is an extremely difficult task. It requires carefully considered control over thousands of different variables, slow, diligent, methodical planning, and making hard decisions that are often widely unpopular with the people who put you in charge of running the economy in the..."
[00:00:00] Speaker 1: Managing an economy is an extremely difficult task. It requires carefully considered control over thousands of different variables, slow, diligent, methodical planning, and making hard decisions that are often widely unpopular with the people who put you in charge of running the economy in the first place. To make matters worse, just simply making the right decisions at the right times is not enough by itself, unless you can make those decisions while also maintaining credibility around what those decisions will mean in the future. This is all also assuming the numbers we rely on are going to tell you what's actually happening in reality. The worst part is, for all of these reasons, it's often really hard to tell you've made the wrong calls until it's too late to unmake them. So, what exactly would that look like? It's possible that good economic management knows where it is at any given time because it knows where it isn't. So if, for some reason, you wanted to run up inflation, undermine the financial system, misallocate resources, make life unaffordable, massage the numbers when they look bad, and jeopardize the future for short-term gain, how exactly would you do that? So, you know, we can keep on doing the opposite.
[00:01:04] Speaker 2: Mr. President, why did you fire the head of the Bureau of Labor Statistics? Because I think our numbers were wrong. Inflation rose to 4.2% year over year. So the 2.7 is now 3.1. I'm not aware of that. Yeah, it just came out. First-time homebuyers, average age, hit 40 years old. Millions of Americans will see healthcare premiums double, triple. President Trump's controversial new idea to help with housing affordability, a 50-year mortgage.
[00:01:34] Speaker 1: Let's put a few ways to destroy an economy on the board, starting with short-term thinking. Take the reward now and leave somebody else to deal with the consequences. If you ever feel like the world has become incredibly focused on short-term results, that's probably not your imagination. People are living paycheck to paycheck. Companies are being managed earnings report to earnings report. Financial markets are waiting for the next interest rate movement. Political decisions are being made for the next election cycle. Entire industries have been created just to be sold to the next biggest investor. And all of this is being held together by loans that are being written to last just long enough to be bundled up into fixed income assets. Last November, people were losing their minds, because for the first time since it was introduced, the Bureau of Labor Statistics did not publish its monthly jobs report because the household survey data could not be collected during the government shutdown. Now, this may be a sign of bigger issues under the surface, but the most immediate problem right now is that the Fed can't set interest rates without completely up-to-date information. These decisions should be made on long-term strategic plans. Not noisy, and let's be honest, questionable month-to-month data. But a few things have changed, which for a lot of markets means that bad news is good news. A lot of people are actually hoping for more unemployment, because job losses force the Fed to lower interest rates, and lower interest rates means cheaper borrowing, and cheaper borrowing means debt-fueled speculation can go on a little longer. Now, if you think this is all a little bit dumb, that's because it is. But at the center of all of these issues, there is the question of, is our entire economy just surviving quarter-to-quarter? Last October, a report by Goldman Sachs found that more people than ever were living paycheck-to-paycheck. Now, I know that by itself, this is a trend that is not that surprising anymore. But it goes beyond this. More people than ever weren't even making it that far. Living paycheck-to-paycheck is a luxury compared to the new reality of living wage-advanced to credit card bill. It's no secret that prices for everyday goods and services have increased by a lot in the last five years, but prices are a function of supply and demand, and demand itself is a function of what people are willing and able to purchase. Prices have only been able to stay this high because, for now at least, people have been able to afford it. But that ability has increasingly come from new and creative forms of debt. It's also no secret that the hottest new form of consumer debt bridging that gap is buy-now-pay-later services. Now, these loans are technically not counted as official consumer debt for… some reason. So, the exact extent of their lending is hard to get precise data on. However, by all estimates, it's still in the hundreds of billions of dollars within America alone. Now, I am not bringing this up just to rant about inflation, consumers being stretched, or predatory buy-now-pay-later systems. I have done that in plenty of separate videos. This industry is just one example of a bigger trend. The point here is that none of these buy-now-pay-later companies make any money either. Most of them are still burning billions of dollars of investor money every year to gain market share, in a market that hasn't actually made any money yet. So, we have households who can't afford to pay up front for basic purchases being financed by an industry that can't afford to operate beyond the next quarter without being supported by investor dollars. Investor dollars that are primarily coming from venture capital and private equity firms, who themselves are financed by a complicated network of debt and internal dealings, all of which is now showing questionable real returns. Now, bad businesses come and go all the time. That's the nature of capitalism. But what is different today, more than ever before, is that everybody involved in this string of failure is still making life-changing amounts of money. Founders and early employees are cashing out on their stock, private equity managers are making enormous bonuses, investors are enjoying returns that look good on paper, and regular people get to finance their burrito. Along this chain, nobody is actually making any money, but everybody is getting paid. Even if this whole industry implodes tomorrow, most of the insiders could walk away, having made enough money that they will never need to work again. Taking short-term rewards at the expense of long-term objectives is just human nature. Our monkey brains need a lot of discipline to stop us from enjoying a little treat right now, so that we can be in shape for summer six months away. In the past, these trade-offs were true in business as well. Long-term diligent saving, investing, and operating would be rewarded over short-term cash grabs. The problem is that we have allowed our market system to reward some people in the short-term and place long-term consequences somewhere else entirely. Over the last four decades, there have been three distinct changes that have slowly altered economic incentives to favor surviving to the next quarter above all else. The worst thing about all of this, though, is just how easy it would be to change these incentives back. So, it's time to learn how many works to find out if all of this is just the new way business gets done, or if next quarter will eventually arrive. This video is sponsored by Factor. The hard part of eating well is not knowing what to eat. It is 7pm, you are tired, and the easiest option wins. Factor takes that decision off the table. The meals are chef-prepared and dietician-designed, they arrive fresh, never frozen, and they are ready in about two minutes. No prep, no cleanup, no mess. The one I keep going back to is the country herb chicken and potato leaf mash, and it tastes like it took real effort. Every meal is built on real ingredients, lean proteins, healthy fats, whole grains, and always two kinds of fruits or vegetables. With no artificial colors or sweeteners, and no refined seed oils. The menu rotates every week with 100 options and 70-plus add-ons, including high-protein, calorie-smart, and GLP-1 support lines, so you can pick what fits your goals without reading every label. Head to factor75.com or use the link below and use my code HMWUFFB to get 50% off your first box plus a year of free breakfast. One per box with active subscription, free meals applied as discount on first box, new or returning subscribers only, varies by plan, sign up today. Now, maybe you think I have just picked a particularly egregious example of the buy-now-pay-later industry, but this is just one symptom of a much larger and much more important trend. Everybody is just desperately trying to get theirs and get out, and you only need to look at the data to see the first reason why this has become the default business mentality. This is a chart of historic dividend yields from the S&P 500. There have been highs and lows, but for most of the market's history, it paid out roughly 4% to 5% and almost never less than 3%. This meant if you held a million-dollar portfolio with a mix of all of these companies, you could expect to be paid between $40,000 and $50,000 a year in dividends. Today, after a constant decades-long decline, that number is at an all-time low, approaching just 1%. In plain English, what this means is that the only way that people are realistically getting money out of the stock market is by selling their stocks. Now, by itself, there isn't anything wrong with capital gains returns over dividend returns from an investing point of view. Both of my good friends Richard from The Plain Bagel and Ben Felix have done great deep dives on this. What's more is that individually, the tax rate on capital gains are lower than tax rates on earned income-like dividends, so maybe this could just be written off as businesses looking out for their own shareholders. But all of these small incentives have created some… questionable outcomes. Now, I know you are probably already uttering the words stock buybacks under your breath right now. And you would be absolutely right. If a company has made a lot of money at the end of the year, in the past, it only really had two options. The first was to just pay it out to their shareholders through a dividend. The second was to put that money back into the business to improve operations, work on R&D, or maybe even pay their employees a little bit better. Shareholders typically actually liked when companies did this, because theoretically, this reinvestment would grow the business or make it more dominant in its market, making their shares more valuable. But then, in 1982, a law was changed that let companies cut out the middlemen of reinvesting their cash into their business' fundamentals and instead let them just directly invest their cash right into their business' equity. Company management could take company money and use it to buy the company's own stock, which boosted the price. Now, by looking at this chart, you can see where that law was passed right here. Again, this video is not to pick on stock buybacks in particular, but it is instead to show how small rule changes can fundamentally alter how our markets operate. Companies taking their money and buying back stock may not seem any different to companies taking their money and paying out dividends, but it means that to actually get money out of shares, people eventually need to sell them. Now, companies are theoretically only supposed to buy back their own shares when they think that they are undervalued in the market. But company management has figured out this weird trick where they can just always say that their company is undervalued and use these buybacks to boost the share price. And since their compensation is also usually tied to stock performance, it's a win-win. Today, this has created a situation that would be almost funny if it wasn't so concerning. A record number of CEOs are claiming that their company stock is undervalued, so they are doing big share buybacks. But then, at the same time, they are personally cashing out record amount of their own stock at a price that they themselves have claimed is undervalued. For a lot of senior executives with performance-based pay, it simply makes sense to put a few good months on the books and liquidate as quickly as possible, because if they can do that, they will never need to work again. Back when CEO pay was more modest and not as performance-based, the goal was instead to hold onto an executive job for as long as possible. The pay was still really good, but you couldn't live off the bonus that came from one good quarter. So if you wanted to become truly wealthy, you needed to spend at least a decade in the top job, and to do that, you needed to make sure your company would run smoothly for that decade. Today, pay for top executives is so high that after one or two good years, they can cash out their equity holdings and not really need the job anymore. Ironically, when they do sell their shares, the person they are most likely selling to is their own company. Stock buybacks have become so widespread and been driven to such an extreme level that companies buying their own stock now accounts for basically all net buying activity in the market. And then some. According to the Federal Reserve's Z1 financial accounts, since the year 2000, households, foreign investors, and pension funds have on net actually sold about $300 billion more in stock than they have purchased. The inflow in capital has come exclusively from the $5.5 trillion in net purchases made by the corporations themselves. This whole game has starved genuine reinvestment into business activity because it's far more rewarding to just directly influence their own stock price. Now, again, eventually this will cause problems, especially amongst the growing list of companies that have taken on debt to buy their own stock. But most shareholders simply don't care about the long term because they are now holding onto their stock for less than a year on average. This trend has been accelerated a little bit by low-cost brokerages like Robinhood, but those people don't actually own enough of the market to have an influence this significant. The real driver of this is that large stockholders need to liquidate their positions to generate any kind of cash flow. Over the last five years in particular, we have witnessed a strange trend develop from this little game. People aren't making profit by running profitable businesses. They are making a profit by flipping assets that could eventually one day be profitable. A big determinant of how much these businesses are worth is interest rates. Cheap debt means borrowing to invest is easier, and it means that cash flow becomes less important in the short term. What this has done has turned bad news into good news. In the past, something like bad job numbers would spook the market because if people don't have jobs, they can't buy stuff from businesses. And if businesses can't sell their stuff, they won't be profitable. But that way of thinking is very outdated in today's market. Today, bad job numbers means that the Fed might be forced to lower interest rates, which is way better for asset prices than something silly like genuine underlying business demand. Now, it's easy to just point at these companies and their executives and conclude that they are everything wrong with the world, or at the very least, the economy. But that's also not very productive. If we are being really honest with ourselves, if you or I got given a job as a Fortune 500 CEO and we could secure a generational fortune by doing some share buybacks, we would probably do it. I mean, I know I would. Feel free to pretend you are better than me though in the comment section below. The point is that all of this was simply the result of a few changes in rewards and regulations. People at all levels are overwhelmingly going to act in ways that conform to these guidelines. Yes, some groups and industries are really testing the limits of what is legal at the moment. But that's a separate issue. The bigger problem is that everything covered in this video so far is perfectly legal. Yes, we can absolutely do a better job of punishing people who fall outside these regulations when they do happen. But we also should not rely on people for going obvious personal rewards just because it's the right thing to do for society at large. Now it probably doesn't help that the people making regulations and rules are very much at the you got mine stage of their life at the moment. Those incentives also shape how we deal with rising prices. So that leads us to strategy two. Make the inflation figures harder to trust while the money in your pocket buys less. Back in June, the official consumer price index inflation figure rose to 4.2% year over year, the highest annualized rate seen since the post-COVID price surge of 2022. This by itself was not a great result. Even though these official numbers really just confirmed what most people already knew. Things are getting more expensive. But what they didn't capture is what is likely to still be coming down the pipe. In May, the producer price index, which tracks the basket of items that businesses use to provide goods and services to consumers, saw its largest single increase in the last decade with the only exception of a single month at the height of post-pandemic inflation. Now, the reasons are pretty obvious. Fuel prices trickle through to almost everything that needs to be transported, sprinkle in persistent tariff uncertainty, market consolidation, and a lot of resources being redirected towards data center build outs instead of providing service infrastructure to regular people and businesses. Now, eventually, these companies will either be forced to accept lower profit or just pass these higher prices along to consumers, which will ultimately be a decision made for them by how much more those consumers can financially bear. Again, not exactly surprising stuff anymore. And if anything, the cost of living crisis we are currently experiencing is arguably not as bad as wider economic conditions might suggest. For now at least. But the implications of these numbers are worth understanding because they are likely to mean a lot more than just yet even higher prices. This kind of inflation is putting a new fed in a very difficult position. The logical move would be to raise interest rates, but that runs the risks of sweeping out the last leg holding up the economy, which is the stock market, a stock market that is already gearing up to digest three mega IPOs in the next few months. The other options involve either sacrificing the American consumer, the American worker, or the American dollar. The other unfortunate reality worth keeping in mind is that no matter what we do with our financial levers, we can't print more oil. And any price increases from here are going to be on top of a cost of living level that was already forcing a lot of people to go without. Okay, so inflation has clearly been creeping up, and that's on top of levels well above what would be considered optimal. But for now at least, there are, or at least were, a few things that have been shielding us from the full effects of just how unaffordable things have become. The first of those sacrificial shields is that we have been burning through inventories. In early 2025, companies stocked up on anything and everything they could keep in their warehouses, mostly in an attempt to get ahead of tariff disruptions. And where possible, they have just been using their stockpiles to keep prices competitive for as long as they can. In the first quarter of 2025 alone, businesses added around $172 billion worth of inventory, which according to government GDP data, was the largest quarterly inventory buildup outside of the pandemic recovery in records going back to the 1940s. This obviously doesn't apply to perishables that can't be stored indefinitely, but specifically, things like component parts and other goods were piled up in bulk. Local businesses didn't have a warehouse to do this, so mostly this has been a benefit to larger retailers and B2B suppliers. A big box retailer could fill distribution centers with a year's worth of patio furniture before the tariffs landed. The local warehouse buying through a distributor got a few extra weeks stock at best, which was kind of part of the plan. For big companies, this was an opportunity to run anti-competitive pricing without actually running anti-competitive pricing. As in theory, it wasn't their fault that their smaller market rivals didn't order supplies before a 30% tax was slapped on everything. Obviously this isn't great, but for consumers and end producers, it at the very least delayed price increases. When the tariffs hit, Goldman Sachs estimated that companies were only passing along about a fifth of the cost increases to consumers. A year later, their estimates put that figure closer to three quarters, and still rising. Researchers at the Fed went a step further and described what we are seeing now as, uh, full pass-through. So that cushion is mostly spent. There was also a lot of speculation around these rulings, with certain companies buying the rights to tariff refunds before they were confirmed. They would go to businesses and pay them some money to write up a contract that would entitle them to tariff refunds if and when they were ever handed back. One trade attorney at Foley & Lardner reported getting hundreds of emails a day offering to buy his client's refund claims, with offers that started around 20 cents on the dollar. So yeah, apparently this is a whole industry now. A lot of desperate small businesses took those pretty crappy deals just to get some money back to make payroll. The investors themselves have made 400% returns off this desperation within the span of just a few months, which is clearly how the free market ought to be working. Now arguably, these investment firms still accepted the risks that these tariffs may never be paid back, in which case they would lose all the money they paid to these businesses. But it probably didn't help that the actual architect of the tariff plan in the first place also had direct interest in an investment firm betting against the legality of those very same tariffs. Now even outside of particularly egregious examples like that, this financialization of government tools is making it particularly difficult for smaller businesses to compete. But the point here is that once inventories run dry, we will be more directly exposed to the increased prices to actually make or import stuff, which at the moment is climbing about one and a half times as fast as the headline inflation number. Now the reason why this pressure on small businesses is such a big deal is because larger companies aren't going to cover this gap forever. They have accepted tighter margins for now, because they realize that there is only so much consumers can bear. But if smaller businesses are pushed out of these markets, there won't be much competition left stopping major retailers from passing along these input price shocks and then some. So yeah, this inventory drawdown has been softening the inflationary blow for the last 12 months. And that's the first layer of armor that has more or less been used up. But within the last 100 days in particular, there has been one inventory cash that we have been drawing on harder than ever. And that's our Strategic Petroleum Reserve. The Strategic Petroleum Reserve is quite literally a huge pool of oil kept in four separate underground caves which is in theory made for times like this. If we need a stabilized supply, and by extension prices, during unstable times, we can draw down these reserves to put more oil into the market and avoid huge swings. It's pretty simple. But it won't last forever. According to the Department of Energy's own numbers, the reserve held about 411 million barrels at the start of the year. By early June, it was down to around 349 million, sitting at under just half of its theoretical maximum of 711 million barrels, after weeks of the largest drawdowns in its history. The rate at which we have been drawing oil from, it would be fine if the conflict in Iran really did only last a few weeks. But by June, we were more than three months in. And despite recent peace talks, there is still a long way to go before things get back to normal. The US has committed 172 million barrels to the coordinated international release. And completing that commitment would leave the reserve at its lowest level since 1982, directly following the most severe oil crisis in history, which for context took place over two years to get to where we were after just 100 days of this war. Now, another technical but important detail is that we can't draw these reserves down to zero. To maintain the cavern integrity of the locations where we actually keep all of this oil, we need to keep about 150 million barrels in there at an absolute minimum. So in plain English, at our current rate of drawdown, we are about 10 weeks away from hitting a hard limit on this supply cushion. If this runs out, I truly cannot emphasize how we are. Prices will flow through a lot more of the economy than direct costs at the pump. Almost everything in America is moved with diesel engines. According to the American Trucking Associations, trucks alone carried almost three-quarters of all domestic freight tonnage in 2024. Jet fuel used in a 737 and diesel used in a truck or a locomotive are actually surprisingly similar fuels. They are both middle distillates pulled from the same part of the barrel. So the increased cost of shipping yourself to Cancun is roughly analogous to the increased costs of shipping anything else everywhere else. Jet fuel prices have already doubled over the last year according to EIA price data. Regular diesel is up almost 60%. Maersk, the world's second largest shipping company, says the conflict is adding around $500 million a month to its costs, and that one carrier alone moves about 14% of everything you buy. The International Energy Agency has called this the largest supply disruption in the history of the global oil market, with around 14 million barrels a day still shut in. If the strategic reserve here in America and other similar reserves around the world can no longer make up the difference, there is nothing left standing between us and bearing the full force of that disruption. Now technically, America is a net fossil fuel exporter. And the old team at Micro did a great video on why that unfortunately does not really matter by actually tracing every barrel of oil that goes through our country, so I will leave a link to that video in the description. But the most important TLDR is that almost all of our fossil fuels outside of the strategic reserve belong to private companies that are just going to sell to the highest bidder no matter where in the world they are. With global supplies this short, Bloomberg now describes American barrels as the supplier of last resort for everyone else, which keeps our prices pinned to the global crisis price regardless of how much we produce, so fuel costs became everything costs. I know this isn't exactly new news, but transport and energy isn't the only limited resource suppliers are currently contending with. And even if the war in Iran theoretically ends tomorrow in its entirety with no ongoing consequences, which is probably wishful thinking to put it mildly, there are still additional headwinds against prices. At the same time as we are dealing with energy constraints, a lot of skilled tradesmen, energy components, materials, and government attention has been tied up in building data centers. Now we have already spoken endlessly about these projects and their, uh, logical payoff. But the point here is that they are a huge strain on limited components like, well, everything from ram, trucks, ram trucks, tradesmen, concrete, rebar, commercial building equipment, and most crucially, electrical infrastructure with a particular choke point being electrical transformers. These little metal boxes could provide power to local energy grids, or a real factory, both of which would increase the supply of essential services or consumer goods respectively. Or they could sit in a warehouse waiting for data centers to go online, and at the moment, there is just more money supporting the latter option. Now, to play devil's advocate a bit here, if these projects do eventually deliver the productivity miracle they are promising, some of this spending will potentially have a deflationary impact. But that is an optimistic outcome that may not be passed to consumers, won't be for the more essential components of CPI, like, you know, food and energy, and is unlikely to pan out for some time now, if at all. In the meantime, your transformer sitting in a warehouse does nothing for your power build this year. Local utilities, for example, are basically paying RAM prices to do routine maintenance on their grids. Utilities report that transformers, which do need to be replaced as part of ongoing grid maintenance, now cost four to six times what they did before 2022, with waiting lists that can stretch out to four years. And all of that is getting passed along to everybody, even if there are no data centers directly on your grid competing for that precious supply of electrons. The same kind of thing is happening for skilled tradesmen. Data center projects are paying electricians around a 32% premium over traditional construction work, with specialized electricians in Northern Virginia and Texas commanding up to $280,000 a year. Obviously, that is an amazing opportunity for those guys, and nobody is going to begrudge them for cashing in while they can. But the businesses building houses and factories are having to compete on price for the same people, a cost that will eventually need to be passed along through higher housing or goods cost respectively. The country is already short around 300,000 electricians, and in Texas, home builders say competition for them is delaying housing construction by a couple of months. Now, all of this is obviously not great. But, one of the biggest problems with fixing it is that the cure is going to hurt almost as much as the illness. The logical first step would be to end the war in Iran, and at the very least, provide clarity on tariffs. But we have tried that about 30 times now. The most recent second signing of the Treaty of Versailles is certainly the most noteworthy step towards bringing the war to a close, albeit with significant concessions from America. But, it should also be noted that even if this peace deal does stick this time, Hormuz tolls may still continue. They will just be called environmental fees instead of tolls, which, it must be emphasized, is exactly the same thing, although maybe it's better for Iran's ESG credentials. So, in the meantime, while all of that is still getting worked out, this is going to fall on the Fed that really only has two tools at their disposal: sucking money out of circulation or raising the interest rates. But, these have their own problems. If we raise rates, that means investors can get better returns by just parking their money somewhere safe, which might tempt a few more people to cash out on an already very frothy investment market. Why risk being on the wrong side of the bubble when the 30-year treasury will pay you over 5%, effectively guaranteed, more than it has paid at any point since 2007? Maybe the market will offer better returns, but even the most optimistic investors are seeing the warning signs. SpaceX, which listed in June, raised $75 billion at a $1.75 trillion valuation, which made it the largest IPO in history. OpenAI confidentially filed for its own IPO just days before that listing, at a valuation of over $850 billion, and Anthropic has already filed for its own at over $1 trillion. Google has also announced plans to raise up to $80 billion in new equity, which is kind of the thing that mega caps basically never do, but it's been forced into continue funding its data center expansion. These companies are all going to be holding their hand out at the same time as the government is holding its hand out offering better rates than almost any time in the past 20 years for the privilege. If the Fed raises rates or pulls money out of the market, there is going to be even less cash to go around amongst these hungry, hungry hippos. This is why the market reacted so badly to that June inflation announcement. In theory, higher inflation should actually be good for the market because people will naturally want to put their money into real businesses as a hedge against the declining value of the dollar. But, because there is so much demand for cash, any sign that interest rates are going to tempt people to lock that cash up is really scary. Okay, so what if we just let inflation run hot? Well, that has its problems too, even beyond just higher prices. The US dollar is already under stress as the global reserve currency, something that buys us extraordinary privilege in international markets, both for imports and for debt. The dollar share of global foreign exchange reserves has slipped to its lowest level in roughly three decades of IMF records, and the dollar index briefly broke below 97 earlier this year, back to lows it hadn't seen in years before the war sent everything scrambling back into dollars. If our dollar inflates away, we will start to lose that privilege. Now, a cheaper dollar does make American exports more competitive, which is why some people in Washington have openly argued for one. But that math works a lot better when one of our biggest imports isn't suddenly around 40% more expensive than it was a year ago. Also, we are still a massive net importer of goods and services that will get relatively more expensive if our dollar gets weaker, compounding the problem of prices on shelves. In the short term, if wages are adjusted upwards, it may help smooth things over for a little while. But realistically, it will just leave wage earners further behind on already significant cost of living pressures. Long term, it would significantly undermine the easy capital we have been blessed with over the last 80 years. Our debt has always been a burden to carry, and keeping it manageable relies on being able to grow faster than the debt does, while simultaneously doing everything we can to carry the weight responsibly. Right now, that debt is just shy of $40 trillion, and it grew by about $3 trillion over the past year. The economy underneath it managed less than two. The interest alone is costing around $1 trillion a year. At the same time, we are doing a lot of things that are shifting that weight around while simultaneously shooting ourselves in both feet. With that much debt, confidence in the people managing the money matters, which makes undermining the Federal Reserve a particularly effective strategy three. A Fed governor is appointed to 14 years, and once they are in that seat, they are extraordinarily difficult to remove by design, both to keep the Fed independent from political pressure and to stop governors from bowing to whoever happens to be in the White House in that decade. And it is actually the governorship, not the chairmanship, that carries most of the real power. Each governor gets a vote on the Federal Open Market Committee, which is the committee that actually sets interest rates. This committee is made up of seven governors from the Fed in Washington, of which one is the chairman, as well as representatives from five out of the 12 regional Federal Reserve branches to make a total of 12 voting parties. Out of this group, the chairman is more of a first amongst equals kind of role. Responsible for communicating what the Fed is doing, running the meetings, and managing the institutions public face through press conferences. But the actual decisions on rates themselves are made by a vote, between everybody on the committee with everybody getting an equal vote. The first and most immediate problem is raw political pressure. The White House very openly wants interest rates down, because lower rates normally gives the economy a short-term boost, at the long-term cost of higher inflation. Cheaper borrowing will also usually drive up asset markets, which means wealthy investors, like Warsh and a lot of the senior government officials currently pushing for rate cuts, stand to directly profit from looser monetary policy. The obvious problem, putting aside the personal profits over good governance conversation, is that asset markets are already pretty damn juiced at the moment, while at the same time, most regular people are measurably struggling with the cost of living that would only be made worse by further inflation. Asset markets are near an all-time high, while consumer sentiment is near an all-time low, which is not a great sign for statistics that in a normal economy should be highly correlated. In the past, the stock market did well when the businesses listed on that market did well, and the businesses listed on that market did well when consumers were consuming lots of stuff, and consumers only consume lots of stuff when they have confidence that they won't lose their job or be hit with rising costs in every direction. Logically, it makes sense, but according to the data, it's just not the world we live in at the moment. Which brings us to problem number two: the data the Fed is actually looking at might not even be real. The government's statistics around inflation and employment have become increasingly questionable over the last few years. The initial payroll report for March said America added 178,000 jobs, while the labor force in the exact same report shrank by 396,000. Inflation measures have been quietly re-weighted more than once, and that's not to mention the other issues that I have spent three out of the last seven videos on this channel ranting about, because they seem so detached from the economy the rest of us appear to be living in. Which is not a great place for a central bank to be, because the entire triple mandate of the Fed is wrapped up in these numbers. If the data is wrong, there is not much stopping the decisions from being wrong, and if the data is wrong in a way that is politically convenient, the incentive to fix it gets even weaker. None of this would be a crisis on its own, but the third problem is that there are real identifiable supply-side forces pushing prices up, and they are almost all things the Fed has zero ability to actually fix. Tariffs have been layered into almost every major supply chain at least in theory, even if their actual implementation remains genuinely up in the air from one week to the next. Some outside analysts have suggested that inflation could have been more or less completely solved by now if it were not for tariffs keeping import prices elevated on uncertainty. This was also a sticking point for worse during his senate questioning, because he was forced to walk the line between appeasing the administration that was appointing him and the economic reality he would actually have to face once in the job, because cutting rates into a tariff-driven inflation shock is kind of the central banker's equivalent of pouring napalm on a kitchen fire. And this is before you get to the fourth problem, which is the war in Iran. Everything downstream of oil is getting more expensive. And that is basically everything. Shipping, energy, food, fertilizer, plastic parts, even sausage raincoats are going to get more expensive. And while the market has more or less priced in a short temporary spike, a prolonged oil war would drive supply-side inflation into an already inflated economy. Productivity gains from AI could, in theory, lower the cost of providing a lot of services and pass those savings through into lower consumer prices. And this has been a popular narrative amongst groups pushing for lower rates including Warsh himself. In practice though, at least for now, any real productivity gains from AI are currently being more than entirely offset by capital spending and energy costs going to fuel its development. And that is assuming that any downstream productivity advantages get passed along to consumers. However, that doesn't mean that this technology won't justify a rate cut, because inflation is just one of the three mandates that the Fed has to compromise between. AI is also fueling, or at the very least justifying, widespread layoffs. And layoffs reduce employment, which is another variable that the Fed is tasked with controlling. So this may be a point in favor of cutting those rates. And we know this is not speculation, because most of these companies have been more or less openly bragging about it on their quarterly earnings call as the main reason their margins are holding up. So even the one deflationary variable we have is mostly being pointed at wage suppression rather than price suppression. Which brings us to the fifth and by far the biggest problem, and it is the one nobody at the Fed really wants to say out loud. The US government's cost of borrowing through the 10-year treasury is already up around 40 basis points since the start of the war. On a debt stack this large, 40 basis points works out to tens of billions of dollars in additional interest payments, which is real money even by federal budget standards. And that is the market repricing US debt before the Fed has even moved. So if investors lose faith in this institution, rate cuts could ironically send long-term rates even higher, as bond buyers demand a bigger risk premium for holding our money. Now, none of these problems are unfixable, but they are going to require diligent, sensible, long-term planning as well as potentially unpopular decisions from the Fed. That kind of planning needs people who actually know what they're doing. So then strategy four is to simply drive them away. America is losing its smartest people. By the numbers alone, 80% of postdoc researchers now report they are looking for positions outside of the US, the number of US researchers applying for positions in Europe has tripled, and just across the border, applications from American scientists , while Canadian scientists looking for jobs in the US fell by 13%. Federal agencies lost over 10,000 doctor-level STEM and health experts over the past year, hospitals are now running low on skilled practitioners entering the field, and even in purely profit-driven enterprises, people like AI researchers are, rather loudly, finding opportunities abroad. These are also only the positions that we know about. And well, this shouldn't really be happening, right? The United States has always attracted the very best and brightest people to live and work here, and it's done that for a number of logical reasons. We have some of the best research institutions and schools in the world, we have a robust funding system to finance cutting-edge development, and honestly, the not-so-secret reality is that very smart people can normally make a lot more money here than they can anywhere else in the world. Even amongst other high-income economies, startup founders, scientific researchers, academics, and medical practitioners have typically been drawn to America because there are more opportunities to get their work funded, and also to be funded for their work. Now, I know what you were thinking, and yes, obviously a lot of this has to do with things like laxer regulations, over-financialization, and a healthcare system that prioritizes profits over outcomes. And well, yeah, you would have a point. But putting aside the social problems these may cause for a second, American pharmaceutical labs, financial firms, hospitals, startups, big tech, and the venture capital ecosystem all genuinely present amazing financial opportunities to highly skilled people. But the thing is, none of this has really changed. We still have all of the systems, alongside the good and bad that comes with them. What has changed though, is that despite the chance to make a lot more money, smart people from across the world aren't coming in nearly as fast as they once did. And perhaps even more worryingly, the smart people that we do have are moving out. It doesn't sound great, but perhaps this could all mean more opportunities and training for the people who are already here, right? Well, we will get to that. But also this raises the question of, where are these people going? And what are they actually taking with them? Okay, so obviously the most pressing question would be to ask, why is this happening? Or rather, why is it happening now? And well, yeah, while it would be easy to blame everything on the current state of America, it's worth at least acknowledging that most other countries are dealing with their own problems as well. And in the grand scheme of things, we still have it pretty good, especially for people at the top of their respective field. And yet people who theoretically have the qualifications to live and work almost anywhere they want are still reversing a very long standing trend of gravitating to the USA. And they are doing it for two reasons. The first is that despite spending hundreds of billions of dollars on R&D every year, we are very selective with where we actually spend it. And overwhelmingly, it goes to projects with a clear path to return on investment. The private sector now funds about three quarters of all American research and development, and even amongst what's left, federal agencies only fund around 40% of the country's basic research. The problem this creates is that private for-profit companies have no incentive to fund the risky, foundational work that doesn't have a clear path to making, well, a profit. This means something like climate science, which might actually stand in the way of corporate profits, hasn't been well funded compared to opportunities in places like Europe. Last year's White House budget request for the National Ocean and Atmospheric Administration proposed exactly zero dollars for climate research, which would theoretically impact the ocean and the atmosphere. At the same time, for comparison, the EU set aside almost 5 billion euros of its current two-year research budget just for climate work. For the most part, this just simply means that, at least for the next few years, if a climate scientist wants to continue their studies, they are effectively being forced to move. The other thing is that people in these fields are a lot more open to moving because, for better or worse, it's kind of a part of the job. Someone who just finished a PhD in one of these fields is effectively eternally at the whims of research funding. They kind of go where the grants go. And especially, in less profitable fields of science, less and less of that money is in the USA. Now, to play devil's advocate, maybe pursuing science only when it is profitable still means we keep all of the research that will actually contribute to economic development, right? Well, we will get to that assumption, but even if it was completely true, it would still be very short-sighted. A lot of research doesn't seem profitable at first, before it turns out that it really is. Radio astronomy was developed to get more accurate images of the cosmos, before the same tech ended up giving us Wi-Fi. Number theory experiments from the 1970s gave us modern cryptography, which enables end-to-end encryption, secure online payments, and logins. There are also infamous things like GLP-1 drugs, which trace directly back to government-funded researchers studying... Gila monster venom. There are literally hundreds of these examples, because we don't really fully know the applications of frontier research until we have done it. Nobody ever budgets for the lizard-spit economy. Neil deGrasse Tyson may be best known as that famous science guy, but he is also a legitimate physicist who has recently spoken about this trend in his field here on YouTube. His video actually came out as we were writing this one, and he has basically said the same thing, which is probably worth more from someone with one foot still in the door of academia, so I will leave a link to that below. More broadly though, other countries have seen all of this happening, and they are capitalizing on our complacency by setting up grants and systems to make it easier for these smart people to just make the jump in the other direction. Some are even specifically headhunting researchers, offering them comparable salaries, fully funded labs, and stable positions overseas. Canada launched a $1.7 billion Canadian dollar program at the end of last year built to recruit more than a thousand world-leading researchers, complete with money for their labs, their equipment, and their grad students. The EU announced a 500 million euro Choose Europe for Science package aimed at researchers looking for the exit. And applications from US-based researchers from the European Research Council's most prestigious grants went from 23 to 114 in a single cycle. One university in the south of France even set up a program actually called Safe Place for Science, subtle, and got 298 applications from researchers in America, including people at Stanford, Berkeley, and NASA. And of course, above all, China has been aggressively pursuing talent, especially amongst its own nationals who often study in the West and then stay in the West. For at least the last century, the USA has been by far the largest hub of research and development funding anywhere in the world by some margin. But as of two years ago, adjusted for purchasing power parity, China has now overtaken us and they are now channeling more resources into R&D every year than we ever have. Uh, now a quick interlude here is that purchasing power parity accounts for the lower cost of most things in China. A million dollars in China just buys more equipment, man hours, and other resources than it does here in America. Without that adjustment, we are still technically throwing more money at R&D. But in plain English, China is throwing more actual resources at upgrading their tech tree. Anyway, back to it. Today, there is a big push to get a lot of the students that left China to study in places like America to come back to China, along with all of the skills and expertise they have gained from research and work at Western institutions. Often this incentive is as simple as just a big pile of money. But again, more on those in a minute. The point is that if the brain drain trend that has served us for the better part of a century actually reverses, that would be catastrophically bad. Being at the cutting edge of a broad selection of sciences has been instrumental in America's effects outperforming economic growth, and well, our military dominance over the same time period too. Competing in either metric without the foundation of world leading science is kind of like trying to compete in AOE 2 when your opponent is two ages ahead. It's gonna go badly. When scientists fled Germany in the 1930s and landed here, American patenting in the fields they joined jumped around a third, and the effect lasted well into the 1950s and arguably set us up for our dominance over the next 50 years. But while the thing is, to be fair, none of this is new. Countries from across the world have been well aware of brain drain to America for a long time, and they know how much it has helped keep us at the forefront of most fields and how much it has hurt their own development. They have also always done what they can to get their smart people back. Okay, so America has stopped paying for a lot of the science that doesn't pay for itself, but the second reason smart people are leaving is a little bit more personal. It's absolutely true that highly skilled professionals can earn more in the USA than they would typically be able to almost anywhere else in the world, but just because they can doesn't mean that there is a guarantee that they will. And look, the frustrating part about this whole topic is that it is incredibly complicated. Even if we are just looking at their overall net economic impact, a PhD student on a roughly $30,000 stipend might end up contributing more to a country than a headhunted AI researcher being offered a nine-figure signing bonus. In typical research roles, the compensation is not that great. The averages just get pulled up by the outliers that get poached away into private industry often in narrow verticals that just happen to be jazzing investors at that point in time. Even a couple rungs up the ladder, the official NIH pay floor for a postdoc is about $63,500 a year, usually located in a city where that doesn't go very far. The joke of a physicist going to work for Lockheed Martin to pay off their student debt exists for a reason. Physicists in the private sector earn roughly 30% more than the ones who stay in education. The defense and aerospace jobs pay even better still. And that's ignoring the people who just go and take a job as a quant on Wall Street. The problem is that, at these more basic income levels, quality of life in America is statistically worse than in a lot of other countries around the world. Especially when the research mandates living in high cost of living cities like Seattle, Boston, San Francisco, or DC. There is the classic argument that even Mississippi, or state with the lowest GDP per capita, mogs most major European economies on paper. But you can't eat productivity. And for people on average incomes, public transport, walkable cities, public healthcare, and just generally lower living costs mean they can normally afford a more comfortable life while pursuing their academic careers. And since a lot of American academic talent moved to the U.S. in the first place to further their studies and achieve a better quality of life, they are naturally more okay with moving abroad again to continue the work and achieve a better quality of life. This used to literally be our selling point to the best and brightest people around the world. But other countries are just becoming more competitive, especially in the fields we aren't really valuing. So yeah, it's not great. But why is it happening now? Chasing profit and unaffordable cities are not exactly new American phenomena. But they have recently been compounded by a gutting of scientific funding and a general push of anti-intellectualism. Last year's White House budget proposal called for cutting the National Institute of Health by around 40% and the National Science Foundation by more than half. Congress ultimately rejected most of those cuts at the start of this year. But by then, a lot of the damage was already done. Between the hiring freezes, buyout offers, and great terminations, more than 15,000 people left federal science agencies in 2025 alone. According to the American Institute of Physics, the government's physical sciences workforce shrank by 12% in a single year, compared to 8% over the previous 26 years combined. And that's before we even got to the people entering the top of the talent pool. Tightened entry for high-end researchers and students coming from abroad has meant smaller classes and less funding. And ultimately, less manpower actually doing research. Now, international student enrollment fell 17% last fall, with graduate enrollment, which is generally the people that actually staff research labs, falling by 12%. There is also something of a soft power element in all of this as well. Doing research in America, getting an Ivy League education, or building a startup in Silicon Valley was for a long time seen as the goal by ambitious people from across the globe. Immigrant researchers have won about 40% of America's science Nobel prizes since the year 2000. Today, that image still certainly exists. But it has been, uh, tainted. And at the very least, a lot of people are now shopping around for alternatives. But alright, I know what you are saying. So what? A few people are going to do non-economically viable research somewhere else on someone else's dime. Who cares? At least we still have the profitable research, right? Well, in a roundabout way, that profit motive has actually started working against us. Researchers developing technology for dumb reasons like "the good of humanity" have long been drawn to private institutions where they can make much more money. But their work is naturally more closed off and focused more on developing products rather than building a foundation of scientific understanding. This has been a trade-off forever, with graduate students picking between working in industry and working in academia. Someone with their PhD is every bit as susceptible to the cost of living pressures as anybody else, and arguably more so exposed to their student debt. In many instances, it's to the point where the only people that can afford to remain as career academics are people who have rich parents to fund their life. It's not great, but it gets worse. The market opportunities have become so great that even tenured professors at high-end schools are making the jump. The Atlantic reported more than 80 current and former professors at schools like Stanford, Maryland, and UT Austin have left or taken leave to join OpenAI, Anthropic, Meta, and Google DeepMind, including the chair of Berkeley's Electrical Engineering and Computer Science department. As one Arizona State professor put it, "I'm joining Anthropic is the new meme right now," which, um, isn't great, but it gets worse. This is ultimately even more resources going to push this particular new technology forward within these companies. But it also means that their teaching isn't going to become accessible to new students coming through these institutions. Students that may, in turn, have developed something different and potentially even more revolutionary. So even though this particular group hasn't actually left America, they have still kind of taken their brainpower out of the American ecosystem, which means that they won't be around to teach new students who could in turn build up a wider foundation of research. That might be a great short-term deal for these companies, but it's likely coming at the long-term cost of wider progress in their respective fields. Now, I know this all might sound a bit wishy-washy, but developing scientific knowledge kind of depends on a hierarchy of personnel. At the bottom are students learning how a field works, and in the middle is a group that may keep researching or may apply their learnings in industry, and at the very top are the thought leaders at the cutting edge of their particular branch of a discipline. They know their stuff, usually after decades of research, consulting, and advising other people up and down this hierarchy. To date, we are losing a lot of the people entering at the bottom, and pitting away the people at the top into siloed institutions all while pricing out the people in the middle. If we don't maintain it, this can also very easily create a bad feedback loop. Colleges can't offer courses, so top students look abroad, so there is less research getting done, so there is less funding coming in, so more professors start looking for work abroad too, add less money for entire fields on top of this, and it really could get pretty bad. The good news is that so far we are still pretty early on in this process, most people anywhere on earth would still happily take a place at a university like MIT, but the trend is not our friend, and these fields naturally compound on themselves. But this also raises a pretty fair question, is this actually a problem? Sure, we have attracted a lot of talent at every level of this pyramid from overseas for a long time, but we also have a lot of very smart people right here at home. The acceptance rates at top colleges, research firms, grants, and jobs in these fields are legendarily slim, and sometimes the difference between the average smart person and a world leading researcher is just getting the opportunity to do the research in the first place. If countries like China really are investing serious money into taking back top talent, there is a reasonable argument that giving these slots to international students has effectively disenfranchised an almost as good American hopeful, all to train people who may end up furthering the scientific ambitions of an economic and potentially militaristic rival. It's a not unreasonable concern that is made worse by the already existing trend of reversing brain drain. Now it's easy to get a little bit conspiratorial here and assume that they are sending over spies to steal our intellectual property, and well, in certain cases that does happen, but the much larger problem is also much more simple. In the past, the vast majority of purely self-interested STEM graduates from almost all countries in the world would choose to stay and work in America because of, well, the opportunities, the quality of life, and the extra money that I've spent half this video yapping about. This was especially true for students coming from developing countries. But now, fewer are staying. From China in particular, around 90% of their STEM PhD graduates used to still be living and working in America years after finishing their degrees. But today, according to the National Science Foundation's most recent tracking, that is down to just 76%. Now, obviously, that is still a majority, but it also means that the share leaving has jumped by about 140%. On top of all of the self-inflicted headwinds we have put on this trend, China is pouring money into facilitating the reversal. Its flagship recruitment effort, a program it has never officially announced, reportedly offers returning researchers signing bonuses that can reach $700,000 plus help buying a home. So even in the complete absence of any sinister intentions, normal students just following the best available opportunities for themselves could easily end up on this path. And this is genuinely causing some big hits. The founder of Moonshot AI, Yang Zhurlin, got his PhD at Carnegie Mellon. And well, his Kimmy models are kind of moonshotting our domestic AIs at the moment, which even though we may not like it, is a major component of our economy now. It's happening outside of AI too. The mathematician Zhang Yitong, famous for a landmark proof about the gaps between prime numbers, left UC Santa Barbara last year for a university in Guangzhou. Now, I really can't tell you what the right answer is here. And for every argument about furthering a rival science, there is a counterargument about international students over-contributing to the funding of these educational institutions in the first place. They poured about $43 billion into the US economy last year alone. But genuinely, I'd be interested to see your guys' thoughts in the comments. I can't see that going badly. For what it's worth, if this really is an adversarial zero-sum game, then well, we are still taking more smart people from them than they are from us. What's more is that if we really wanted to avoid this dilemma in the first place, we should probably double down on K-12 education for the domestic talent pipeline, but that's a whole different video. The point is, on either side of this debate, we should probably be trying really hard to reduce the exodus of the talent that is already here. This is also, let's be honest, a very emotional argument, where it's all too easy to dismiss one side as racist for raising legitimate concerns, and it's also very easy for actual racist ideas to piggyback on some valid criticism. The unfortunate reality is that companies know this, and they know the emotions of this debate will make for a great get-out-of-jail-free card. Fear of foreign competition makes a convenient excuse for a lot of bad economic decisions. Strategy 5: Turn that suspicion on one of our closest partners, Canada. For the last century, Canada has been one of, if not our single closest security, cultural, and economic partner. We have one of the world's largest bilateral trade relationships, with close to a trillion dollars of goods crisscrossing this border every year, a long shared history of international cooperation, even in our less-considered geopolitical excursions, and well, we also just kind of like one another. Up until recently, Americans reported liking Canada, and spicy Canada, almost as much as they liked America itself. On the other side of the same coin, Canadians had an overwhelmingly favorable opinion of us down here, but clearly, that has changed. Over the last 20 months, we have proposed, imposed, paused, reversed, and re-implemented major tariffs and trade deals 30 separate times and counting, all on top of what was an existing trade deal originally negotiated by this same administration. This is also not including the new tariffs we put on them at the time. Of course, as a little cherry on top, we have also threatened to annex them, cut them off from vital resources, renamed their lake, blocked their companies, and, most egregious of all, we implied that we could beat them on the ice. In a clear sign that things are getting really serious, we have also made moves to block their private jets to prioritize our own private jet manufacturers. Because, well, you know, that's what's truly important in today's economy. All of this raises the obvious question of, why? What possible justification could we have to do this to a close ally? Well, we will get to that. But before we do, it's also important to ask, if we are even going to win this? On paper, Canada is being dragged unwillingly into the ring with an economy 13 times its size. But if push comes to shove, they could fight dirty. And there's a strong argument that we actually need them a lot more than they need us. Okay, so we are kind of doing a lot at the moment, but we should probably break down some of these justifications, however loose they may be. Because even if we assume that these orders won't just get struck down again, and even if we assume tariffs worked as intended in the first place, and even if we assume that Canada has always secretly been some antagonistic trade sheet that nobody has been able to see before now, there are still some major problems with how we are, um, fixing this situation. The first is that we don't live in the middle ages anymore, where mercantilist-style trade was a zero-sum game and the winner was whoever exported the most and hoarded the most gold. We do indeed have a trade deficit with Canada, meaning they sell more to us than we sell to them. But even though the word deficit kind of sounds scary, it's not like Canada is just sending us shipping containers full of finished goods while we sit around slowly bleeding cash to them. A lot of this trade bounces back across the border several times and it overwhelmingly ends up going to American factories rather than American consumers. The Wall Street Journal chased one of these supply chains and found that a single component starts as raw aluminum shipped in from Quebec to Michigan before it goes back up to Ontario to be cast and pre-machined, returns to the US for finishing, travels to Mexico for further processing, Wisconsin for assembly, and ends up back in Michigan for installation into an engine. That engine is then put into a truck, which in many cases is sold back to Canada. The supply chains cross the border multiple times over, which means a blanket tariff on every crossing compounds this cost over and over again, making this kind of manufacturing untenable. Now, maybe there is the argument that this is kind of the point. Maybe we could bring all of these steps, and in turn jobs, back into America if we just made crossing the border financially unviable. But even assuming that was possible for incredibly complex modern supply chains, it would still likely end up being a lot less competitive. A company like Ford doesn't send its engine components on a grand tour of the world for kicks. It does it because certain places have advantages in performing a certain task. Quebec, for example, smelts a lot of aluminum because that is a highly energy intensive operation and they have a lot of relatively cheap hydroelectric energy. Across this border, yes, Canada does send more goods this way than we do to them, but the actual margin compared to the overall volume is very small. We are also a bigger market, and we are still arguably getting the better end of the deal for one simple reason. It might be harder to visualize in a simple mind, but not all international trade is stuff loaded into a shipping container. A good chunk of our bilateral trade with Canada is services. We actually have a large services trade surplus with Canada of roughly 28 billion dollars a year, which in plain English means they pay us a lot more for things like financial work, consulting, technology usage, and intellectual property than we pay to them. This is important because selling these services is normally much more lucrative than selling actual physical items. The margin on manufactured goods has to account for the cost of materials, energy, man hours, tooling, shipping, and wastage, so the actual profit at the end is usually very thin. On the other hand, something like a consulting contract from a firm in New York to a business in Ontario can make $100,000 a month, with the only actual expense being the salary of an overworked junior analyst with a Claude subscription. So, even though the raw numbers of what we are sending across the border may be slightly in their favor, if you look at this purely as a two-way street, the margins on the stuff that we are sending them are far creamier than what they are sending back. So, even with just a surface level breakdown of this relationship, blowing it up over any perceived inequity sounds pretty dumb. But it gets dumber, because so far we have been assuming that the USA and Canada are the only two countries in the world, but after some rigorous research, the team and I have actually discovered that they're not. Okay, so, so far this has all been ignoring the small little fact that just looking at the US-Canada trade relationship in complete isolation of anything else is narrow-minded at best. The manufacturing supply chain hokey-pokey of putting machined components in and taking your finished components out is close to just being a wash in either direction. The bulk of the trade surplus that Canada maintains with us actually comes from the fact that they ship a lot of crude oil from their sands into America through these pipelines. Even before the special military operation in Iran, Canada already accounted for roughly 60% of all US crude oil imports. For Midwest refineries, roughly 73% of their crude comes from Canadian pipelines. That oil gets refined on the Gulf Coast and in the Midwest into diesel, plastics, and gas. And then we go out and sell it at a markup to our domestic market, which, you know, could use reliable oil supplies right now. We also make a lot of money by reselling these refined products internationally, including back to Canada itself. If we take out these oil imports, the USA actually has a trade surplus with Canada. But the bigger issue here is that we are getting a ready supply of raw material that we can then sell at a nice healthy markup. This would kind of be like a supermarket complaining about running a trade deficit with a farmer. Yes, technically we buy more off them than they buy off us. But our business model kind of depends on getting those supplies in the first place. This is also ignoring the small little detail that our strategic petroleum reserve had fallen to around 287 million barrels at the time, the lowest it had been since 1982. So it would probably be prudent to keep our largest supplier happy in the meantime. America is also already the largest oil producer on the planet. So it's not exactly like we could claim that Canadian imports are undercutting our domestic industry. Now, for what it's worth, we have made carve-out exceptions for oil in most of these proposed tariffs because, well, we kind of realized we need it. But the reason why Canada sends so much of its oil to us in the first place is because it's easy and economically viable. They have invested heavily into pipeline infrastructure to effectively hand-feed us cheap energy. Because we are a massive market that is geographically close, but also because for a long time we have long been a reliable purchaser. These trade disruptions mean any new major investments are naturally being rethought. Canada recently expanded its Trans Mountain pipeline from 300,000 to almost 900,000 barrels per day. And since that expansion, non-US Canadian oil exports have more than tripled, with Asia projected to take as much as 70% of the pipeline's capacity going forward. Canadian leaders are also now pushing to develop their own refining capacity so that they can add value to their own supply chain rather than relying on a partner that is, to put it diplomatically, clearly unreliable. In the past, yeah sure, they were kind of putting all of their export eggs into one basket. But the basket was so good, it just didn't make economic sense to diversify into shipping oil across the ocean when it could be piped across the land border. Today, it would be kind of dumb not to make sure there were other options available. It sounds bad, but it gets worse. Even outside of oil, there are a lot of raw materials that we get from Canada that would be really hard to get from anywhere else. Potash has been a big one. Again, this is one of those component materials that should mean nothing to most people. But we are now finding out about it because it turns out it's kind of important. This is a mineral used for agricultural fertilizers, which is then used to grow the food that my food eats. The US currently imports about 93% of the potash it needs, with Canada supplying roughly 80% of that. This is a natural resource that depends on geological conditions, which in plain English means all of the tariffs in the world aren't going to magically create deposits of the same stuff here at home. We are also dependent on them for uranium, where they cover about a third of our civilian nuclear fuel supply, and aluminum, where they supply around 68% of our imports, largely from Quebec, using that cheap hydroelectric power from earlier. Now, once again, potash was specifically exempted from our latest round of tariffs, and a random selection of the other 30 proposals as well. But this alone is kind of a tacit admission that we kind of need these resources to keep flowing. But if we keep antagonizing our main supplier of materials that we cannot produce at home, well, Canada has been fairly restrained so far. But, to use the parlance of international diplomacy, they do have a few cards to play. They've already hit us with over $20 billion worth of retaliatory tariffs, pulled U.S. goods out of their government purchasing, and the import bans on dairy, alcohol, and motorcycles are being met with their own restrictions going the other way. Ontario has slapped a 25% surcharge on electricity exports to Michigan, Minnesota, and New York, power that currently supplies roughly 1.5 million American homes and businesses. And on top of this, if we remember that little ongoing bond crisis, Canadian institutions hold around $460 billion worth of U.S. Treasury securities. Which means, if things got really ugly, they could start dumping those bonds, driving up our borrowing costs beyond the record levels they are already at. Yes, we are a much bigger economy that should, in theory, be able to throw our weight around. But we have kind of shot ourselves in the foot several times before picking this particular fight and stepping in the ring, to an opponent that we are handcuffed to. Alright, now, like most good fairy tales, there is a hint of truth in the fact that, yes, American manufacturing has been hit by increased global pressure, particularly from new competitors in Asia, largely Japan in the 80s and 90s, and China today. It's also not completely unfair to say that a lot of these trade imbalances have come from other countries using some slightly unfair economic tactics, but Canada is really not part of that group. Part of the justification for these most recent attacks on Canada has been that they are manipulating their currency to make their exports artificially more competitive. Again, an accusation that has been leveled against emerging competitors in Asia. Now, ignoring for a second the small fact that Canada has a free-floating currency that hasn't been intervened in since the 1990s, which is arguably more than we can say about our own, even if this was true, this would kind of be a good thing for us. Our real competition for global industry is a country like China. And yes, they do have real competitive advantages like lower wages, government backing, and looser environmental standards. And yes, they do also influence their currency to make their exports more competitive. But the thing is, taking this out on Canada is really only going to make things worse. This would kind of be like if we were running a shop and a bigger, cheaper shop moved into town and started undercutting us. Our reaction right now is, for some reason, to attack our suppliers. What's more, if Canada actually was influencing their currency, which again, they are not, this would kind of be like our supplier giving us a discount on our inputs, which would be a good thing. If this other player really is a long-term threat to our economic business model, the real pro gamer move would actually be to strengthen the relationship we have with our upstream suppliers and downstream customers to squeeze them out. Just ask anybody around this table. This is anti-competitive business 101. You coddle your customers and court your suppliers to make it financially irresponsible for either of them to leave to a competitor. While this is, in theory, illegal for businesses to do within the country, it's much harder to enforce internationally. But instead of using our monopsony power to strengthen our relationships, we are alienating them and, somewhat predictably, pushing them straight towards Beijing. Another variable that's worth keeping in mind during all of this is that most Canadians see all of this as an attack on them whereas most average Americans really don't understand why we are doing this to our northern brothers. This means that, on average, Canadians are going to be willing to put up with a higher degree of economic suffering than the American households who largely don't understand why we are fighting our friends in the first place. Now, I know this might sound a bit wishy-washy, but we are both still democracies and there's a much better chance of them voting to keep this fight going longer than we do. 41% of Canadians now view the United States as an enemy. 73% support their government's retaliatory tariffs against us. And it's not like Americans are particularly excited about this either. 57% of us oppose tariffs on Canada. Normally, this is where I would try to play devil's advocate to somehow justify these actions. Normally, the best way to understand a debate is to try and argue in favor of the side you don't agree with. But in this case, I'm afraid that would kind of just end up same-washing something that really is just logically indefensible. Back in September, in a fairly obvious response to escalating trade tensions on their southern border, Canada announced that it would be accepting an invitation to join the European Union as an associate member, whatever that means. But then, just a day later, it was also proposed that their fellow Commonwealth brothers, Australia and New Zealand, could tag along to this party as well. Now, if these plans do actually go through, they could have massive consequences on global trade, global finance, and the global balance of power. And on top of just being slightly embarrassing to us here in America, it's probably only going to make our own compromise position even more dangerous. But well, there are also a lot of unanswered questions. The European Union was specifically designed to enable free trade and the free movement of labor between countries in Europe. So, on top of their own internal policies, which could make this team up legally difficult, there are also the very real practical questions which need to be answered like: Will Canadians be free to work over in Europe like other members are, and vice versa? Could Canada start using the Euro? And also, how is free trade and free movement going to work between countries on entirely separate continents? With a bit of skepticism, there is the reasonable argument that this might not be much more than a run-of-the-mill trade deal, with just a slightly different star-spangled banner used for marketing. Also, for what it's worth, this is a bigly move which could have ongoing economic consequences for generations, all realistically being spurred along by aggressive trade policy coming from their southern border, and well, that's fair enough. But this is also a very long-term solution to a problem that probably won't be around in two years' time. And reportedly, in their race to get a fancy-sounding headline, these two groups seem to have forgotten to discuss this idea with their own people first. So, well, we will get to that. As well as what this all means for countries like the UK, who already took the exact opposite step just a few years ago. But in the meantime, right here at home, we should probably also ask: "If this move means we have successfully chased away our most loyal allies for good." Okay, so first and foremost, associate member of the European Union was up until recently not actually a real thing. And I mean, if we are being honest, it sounds like the kind of title you give to the CEO's useless child so they feel important without actually giving them any real powers. As it turns out, the European Union is actually for countries in Europe. Article 49 of the Treaty on European Union lays out how a country joins the EU and it starts with one requirement: you have to be a European state. And well, as it says right there on their lake, Canada is in North America. In addition to this slight little hiccup, there is also no treaty article or legal framework or definition anywhere in EU law that describes what an associate member actually is. So they kind of made it the up. But to be fair, without getting too introspective here, all rules are made up. EU law professor Steve Peers has pointed out that this actually gives both sides a lot of flexibility because they can innovate both the procedure and content of whatever this becomes. This is more of a situationship than a real full-blown membership. But again, the title itself doesn't matter nearly as much as what this membership will actually entail. So what is Canada and any other potential new members actually getting out of joining this club? Well, EU membership basically grants or burdens member states depending on who you ask with a few perks and responsibilities. EU members can obviously elect representatives to vote on EU policy. They have a joint defense pact which mandates that member states do everything in their power to aid any other member if they are attacked by an outside military. And they are part of an EU customs union. What this means is that the EU negotiates trade deals as a singular group, which obviously gives them much more negotiating power as one of the largest collective economies on the planet. It also makes practical sense since shipping stuff into and around the European market becomes a lot easier if there is a uniform import tax and documentation standards rather than a different set of rules for each individual country, especially since getting to some of those countries means driving through others. However, on the flip side of this rule, it also means that individual members can't negotiate private deals on the side. So if France, for example, wanted to respond to US tariffs, it would need to do that as part of the entire EU. But above all, perhaps the biggest defining feature of EU membership is the four freedoms: the undestricted movement of goods, services, people, and capital. Basically, people from member countries can live, work, trade, and move their money into and out of other member states as if it were their own home. So then, what rights and obligations would Canada be getting with its EU-lite membership plan? Well, basically none of these. Okay, so, so far, Canada's fancy new special EU membership basically grants it none of the typical defining features of being an EU member. It's not a great start, but there's actually even more to consider here. The first is that even before this big announcement, Canada already had surprisingly close economic and social ties to Europe. One really important existing arrangement is that Canadians and EU members technically already have a system in place to recognize skills and qualifications across their borders. But well, that agreement has existed for 10 years now and in that time only one qualification, architecture, has actually been recognized between these groups. Now, this is a lot different than completely free movement for anybody. But in many ways, if they could actually expand this, it's kind of the best of both worlds, especially for Canada. On one hand, they become a highly desirable destination for skilled workers, where people requiring specific licensing and qualification like doctors, nurses, and engineers can arrive practically ready to work with relatively minimal paperwork. On the other hand, they get to pick and choose who enters their country, which, no matter which side of the fence you sit on, has still clearly become a hot issue for regular EU members. Canada, additionally, already has agreements in place with the EU regarding things like their Joint Defense Fund, which, as a bit of foreshadowing for later, was kind of a way to skirt around an increasingly shaky NATO. Additionally, for a lot of rules like the shared customs union, this is obviously a non-starter for Canada to even consider because it's a large part of the reason why they walked away from the latest round of negotiations with America. The Trump administration argued that North America should also negotiate their outward trade deals collectively as one big group, and for hopefully obvious reasons, Canada did not want to be tied to that. Now, it wouldn't be hard to argue that the European Union's trade policies have been a little bit more consistent than our own. But even still, just geographically, it doesn't really make much sense for them to commit to this. And then on top of all of this, from the EU side, it already has special relationships with countries like Norway, Iceland, and Switzerland, who are not members or even associate members of the EU, but actually have a lot more of these rights than Canada will as a member. So, if Canada's new, super real, totally legit EU membership basically grants it none of the defining characteristics of actually being an EU member, and both sides already had all of these arguably better deals in place, what exactly does this change? Well, it's easy to dismiss this as being a complete nothing burger, as a lot of, um, uh, critics have already pointed out. But the easiest way to tell that this is still worth paying attention to is because the American government is collectively losing its shit over what they are at the same time calling nothing more than a marketing stunt. This is what the current relationships between all the countries involved in this looks like. It's already an overlapping mess of different inclusions and exclusions and technicalities, so drawing another circle really isn't as dumb as it sounds, as long as both parties are actually getting something. So, there are really four things to consider here. The first is that this is a very public commitment to ongoing cooperation. Could the same thing have been achieved with some trade deals on top of their already existing bilateral agreements? Almost certainly. But actually calling Canada a member, even if it may be a name only, is a big deal because in theory it's also going to be very hard to remove that title. Obviously, this makes for good headlines in the wake of aggressive trade negotiations leveled by America on both of these groups. But even outside of these latest shenanigans, on paper, the relationship does just make good economic sense. The EU needs a source of energy and raw materials, and Canada needs someone to sell all of their energy and raw materials too. The EU is beefing with Russia, who they used to buy all of their energy and raw materials from, and Canada is beefing with America, who they used to sell all of their energy and raw materials too. On the surface, this is a pretty sensible little arrangement. A long-term tangible commitment like this, as well as some kind of enhanced communications channels, will make private companies a lot more confident making investments into trade across these two markets. I mentioned it earlier, but depending on variables like the midterms, court rulings, cholesterol levels, or 2028, there's a pretty good chance that the current trade uncertainty with America won't continue. So, on the surface, this does seem like a very extreme long-term move for a problem that could change again with the next shift in American politics. But that's also kind of exactly the point. Companies from both sides of the pond are kind of paralyzed by uncertainty at the moment. They don't want to invest in a trade with the US because, duh. But they also don't want to make significant investments into alternatives in case their southern border just goes back to normal and they get out-competed by businesses who did nothing. In theory, committing to this long-standing EU membership should tell them that if they commit to trade across the Atlantic, the terms will remain consistent and their investments won't be pulled out from under them. So, while this associated membership may just look like a token gesture, it is kind of cementing what is already the best kind of relationship, a relationship of convenience. For example, the second big shake-up is what it's going to mean for the military of both of these groups. There is no requirement for a regular old trading partner to develop intermingled military hardware, but that's exactly what they are doing. While Canada and a good majority of the EU are both part of NATO, the Joint Procurement Fund will act as a big pool of money for this group specifically to buy their hardware out of, which will do a few things. The first is that it will likely exclude American defense contractors who previously sold a lot of their stuff to Canada and the EU. The second is that to replace these American contractors, this fund is and will likely continue to lean much more heavily on suppliers in the EU and now in Canada, and potentially even extending that to Australia and New Zealand, depending on how these memberships go. We tend to think of military hardware from American military manufacturers as basically irreplaceable, but between these countries, they now have a huge selection of very competent manufacturers. Look, I don't want to go full armchair general here, but just from an economic standpoint, if all of these countries start spending their money on military hardware from each other, they can boost their own economies while also cutting off lucrative contracts from American companies, who also conveniently, in turn, just so happen to be some of the most vocal lobbyists in Washington. Additionally, defense procurement is arguably even more important than any technicalities around what a membership does or does not mean on paper. If these countries procure and integrate military hardware into their own respective armed forces, they are effectively bound to the hip for as long as that hardware stays in service, because maintaining and resupplying a lot of this stuff means constant ongoing contracts with the original manufacturer. So, for example, if Canada purchased jets from Dassault, they have committed to a long happy relationship with France if they want to actually keep them in the air. Now, to be fair, we did kind of ask for this. One of the chief complaints and justifications for America questioning the future of NATO as well as pushing these trade relationships was that other member countries weren't pulling their weight financially. In a way, we are kind of getting what we want, but just probably not in the way that we wanted. Again, my insights into actual warfighting capabilities are effectively meaningless. But the economic point is, this is an additional, major, ongoing commitment between an equally major long-term industrial area of both groups. The membership itself might be effectively meaningless, but it does solidify what was already a serious move to, at the very least, have an alternative to America in a number of important fields. So yeah, like a good American, the next most important question is, how does all of this affect me? The simple answer is, it's not great. And it's probably only going to get worse. This really undermines our already sloppy negotiations around the North America free trade deal, because obviously, now it's clear that they have other options. This also undermines our negotiating power with Europe as well, because energy was a big part of the trade with them, which was in turn the largest bilateral trade relationship in the world. Another thing this could do is further push these countries away from the US dollar as a default medium of exchange. The bond market is going through all kinds of struggles at the moment, so it's impossible to say for certain. But at the very least, it's hard to see how this could be a good thing for the old Benjamins. But perhaps the most underappreciated potential outcome of this new membership could actually be… kind of good news. Again, this whole thing began as a proposal rather than a completed agreement, so I don't want to get your hopes up yet. If Canada, and maybe even Australia and New Zealand, become associate members of the EU, that could also come with much closer alignment on their product standards, especially those standards around data privacy, AI usage, and the responsible use of technology. The EU has already one of the strongest forces keeping big tech in line on a lot of these issues. So if these other countries also rolled out enforcement in the same way, it would make it a lot harder for these companies to get around these rules by just treating Europe as its own special little zone. So yeah, despite claiming that we don't really care about all of this, the voices that, let's be honest, actually matter in Washington are big mad about what this could mean to their bottom line. But well, they aren't the only ones. Another group that wasn't actually thrilled by this announcement were a lot of European countries themselves. Reportedly, a lot of them weren't consulted before this invitation was extended, so they were kind of blindsided by it. As we have just seen, being a full EU member comes with a lot of restrictions and trade-offs, so the idea of another country joining the club from the outside without agreeing to a lot of the same terms was a bit of a blow. Now again, this is a new story, so it's hard to say if any of this will matter. And for what it's worth, Canada already has a good relationship with most of the EU countries anyway. And they would have supported this move if they were asked, but the fact that they weren't does mean two things. The first is that the EU is pretty serious about pushing this relationship. The second is that it might not necessarily be off to the best start, and these slighted member countries may push back against this paper gesture anyway just to show they can. Now of course, this probably all could have been avoided if we just left our very productive relationship with Canada alone. Canada is a reminder that changing something isn't the same as improving it. Strategy six then would be to make a problem look smaller today while not solving it, starting with 50-year mortgages and acting like gig economy workers are in stable employment. Last November, the idea of a 50-year mortgage was not so subtly floated to the American public. Now almost everybody immediately called this out for being a really dumb idea. And for a good reason. 50-year mortgages will effectively double the total interest people pay on their homes, they will undermine equity accumulation, it will make the housing market more rigid than it already is, introduce significant structural risks to the financial system. Oh, and this whole thing will just make homes more expensive than they already are. The average first-time home buyer is now 40 years old. Adding on a 50-year mortgage at that age means that statistically, people will still be making their payments 11 years after they are dead. This is not to mention that if we still really thought it was worth trying, other countries have already done that for us, and the results were pretty disastrous. Now you probably already knew all of these issues, but the problems that come with a 50-year mortgage go much much deeper than this, and this raises two important questions. If 50-year mortgages are such a threat to our economic system, then how exactly did we decide that 30 years was the ideal? But perhaps the more important question is, if this is so obviously a dumb idea, who stands to profit the most by making it happen? Okay, so we have to get the obvious stuff out of the way first. And the biggest issue of all is that 50-year mortgages won't make homes more affordable. In fact, they will probably do the opposite. In a perfect world, being able to spread your payments out over an extra 20 years should lower your monthly payment. But even with the optimistic numbers, the difference would not be nearly as large as you might expect. Assuming a very competitive 6% interest rate on a $320,000 loan used to buy a $400,000 house, your monthly payment on a 30-year mortgage would be $1,919. If, however, you could spread that out over 50 years, then your monthly payments would fall to $1,685, a savings of $235 a month, which is not that much for almost doubling the total loan term and the amount of interest you will pay over the life of the loan. Most people have just pointed to this simple arithmetic and written the whole thing off as a big waste of time. But, to play devil's advocate and give this the best possible chance of making some sense, some people will try to make the argument first that, if you take those monthly savings and invest them into the stock market, your returns could be higher than your interest payments letting you profit off the difference and putting you in a better financial situation later in life. Right now, less wealthy households overwhelmingly have their wealth tied up in their home. Of course, poorer households are less likely to own their own home, but they are even less likely to own a significant amount of financial assets. If people actually took these monthly savings and invested them diligently into the stock market, then not only could it theoretically improve the balance of wealth amongst lower income households, it could also make it easier for first-time buyers to get into the market in the first place. $235 a month invested over 50 years could be $3.7 million assuming historic market rates of return, which is over 10 times more than the additional interest a borrower would pay on their 50-year mortgage. However, that is if absolutely everything went perfectly. And I already know what all of you live streamers are saying to your chatters right this very second. Almost nobody taking out a 50-year mortgage is going to have this level of financial discipline. The reason I even bothered with the devil's advocate shtick at all is because if these financial products do come to market, this is exactly how they are going to be sold to people. You aren't signing yourself up for multi-generational debt. You are arbitraging the time value of money. Optimistically, people are just going to take the money that would have gone to repayments and use it to cover other areas of their household budget. Now this is optimistic because at least a bit of extra spending might contribute to economic activity. Realistically, all this is going to do is increase house prices by stimulating demand just like it has every single other time we have tried this. In our video on car financing, we saw how longer and looser auto financing has made cars more expensive. The only reason why college kids with no income can pay for tuition that has outpaced inflation by 400% is because it's become so easy to take out student debt. More recently, everyday items have been allowed to inflate further than they might have otherwise been able to with a little help from all kinds of weird and wonderful consumer credit. And yeah, even 50-year mortgages were introduced in Japan in the 1980s to assist with housing affordability. All it did was make real estate even more expensive, contributing to their record housing bubble. But that's fine because it all ended super well for them and their economy has been thriving ever since. So yeah, we may not like to admit it, but we have probably dug ourselves into the same kind of hole. For now, if we actually genuinely just wanted to make homes more affordable for first-time homebuyers, 15-year mortgages would probably do more good than 50-year mortgages in the long term. But more on that later. As for the benefits to first-time homebuyers, this is also ignoring the other costs that come with owning a home like property taxes, maintenance, and insurance, which means the total month-to-month savings will be even more marginal than even the optimistic estimates would suggest. It's also conveniently ignoring the fact that longer loans will probably attract higher interest rates from lenders, effectively eliminating the month-to-month savings for most people. From the numbers alone, this looks like a bad idea on top of a bad idea on top of a bad idea. And to be fair, most policy makers have acknowledged this and tried to distance themselves from this plan. But there are still two big reasons why we might end up seeing these loans anyway. They are going to make a lot of money for the right people, and we may be out of other options. Alright, so behind most bad ideas is either a profit motive or some level of desperation. And you don't need to tighten the tinfoil hats too tightly to see both of those elements here. The November proposal to introduce 50-year mortgages came from a meeting between the President and the Federal Housing Finance Agency Director Bill Pult. The FHFA was established in 2008 after the global financial crisis to keep a tighter leash on Fannie Mae and Freddie Mac. The semi-government enterprises tasked with buying up mortgages off regular banks provided they meet strict criteria regarding lending standards. Theoretically, you could walk into your local Wells Fargo today and ask for a 50-year mortgage, and as a private business, there is nothing specifically stopping them legally. However, at the moment, these loans are extremely rare for two reasons. The first is that 50-year mortgages do not currently fit within the underwriting criteria of Fannie or Freddie Mac. So, if the bank gives that loan, they can't sell it off to these organizations, and instead, they have to keep it on their books for the next 50 years. Compared to a regular 30-year mortgage which they can make a quick easy profit on overnight, this kind of deal just doesn't make business sense, except for maybe rare instances of extremely large loans to private banking clients. However, if the Federal Housing Finance Agency instructed Fannie and Freddie to start accepting 50-year loans as well, then that would be the first barrier removed. The second reason why private banks don't do this for now is because 50-year terms are outside the bounds of what the Consumer Finance Protection Bureau considers a qualified mortgage. Qualified mortgages just means that banks meet some basic requirements to satisfy the bureau that their lending is not predatory. If they do meet these criteria, they are offered legal safe harbor, which makes the banks harder to sue if the mortgage goes tits up. For now, loan terms beyond 30 years do not meet these criteria. Which means if you get given a 50-year mortgage and end up in financial hardship, you could theoretically take your bank to court for predatory lending and they would have far fewer legal protections. Now, they would still have an army of lawyers, so please don't try it just because someone on the internet said it was theoretically possible. Anyway, this might not matter soon because the government is currently pushing to dismantle the Consumer Finance Protection Bureau anyway by cutting off its funding. This would remove the last barrier to 50-year loan terms and if banks are allowed to write these loans, there is a big incentive to do so. Longer loan terms are more valuable when they are turned into mortgage-backed securities because they pay interest for an additional 20 years. Longer loan terms will most likely also enable slightly larger loans, maximizing bank revenue. Now remember, the Federal Housing Finance Agency backup here was specifically created after the subprime mortgage crisis to try and stop the whole system from getting too crazy again. So then why would they be pushing for riskier loans that are going to make the market more unstable? Well, we may never know. But, on a completely unrelated note, the current director of the FHFA, Bill Pulte, is one of the heirs to the Pulte Group, the third largest real estate development company in America. He is also the founder of Pulte Capital Partners, a separate private equity firm he started in 2011, which according to their website, makes focused investments into construction-focused businesses like roofers, HVAC installers, and drywallers. That means both the family business and the private equity firm are reliant on people buying and selling homes to generate returns. And that's a problem because home sales have cratered since interest rates have risen. New buyers can't afford to break into the market, and existing homeowners don't want to sell their homes after they locked in low interest rates. Now, if 50-year mortgages become commonplace, they would only make our current predicament significantly worse for future generations down the road. If people can lock in good rates for 30 years, that can cause problems, but eventually they build up equity and for the final 15 years of their loan, their nominal interest rate is not as big of a deal. However, if people lock in a 50-year mortgage at a good interest rate, they will build up equity in their home far more slowly, which means that the current rigidity of the market could be extended for the length of an entire generation. However, that will be a problem for a generation that isn't even born yet. And obviously, it should go without saying, screw those guys, we have problems to fix right now. Today, even those households that were lucky enough to lock in low interest rates on normal terms are starting to struggle. The true extent of financial hardship in the housing market has become incredibly hard to track because of a trend that is being dubbed "extend and pretend." Basically, lenders have allowed borrowers to defer or renegotiate their payment schedules quietly behind the scenes without officially noting them down as delinquent payments. They extend their loan terms and pretend everything is okay. Now, for the lenders, it could be argued that some repayments are better than no repayment, but for the financial system as a whole, we truly don't have reliable data on how dire our situation is. For home builders and financiers, this is a real problem. But one way to get things moving again would be to make financing terms even more flexible. A 50-year loan is effectively just officially sanctioned market-wide extend and pretend. This could be sold as helping out new buyers break into the market, but the people who it will help the most are existing investors. One of the biggest problems with real estate around the world is that modern homes have become assets first with a side hustle in accommodating humans as a distant second priority. This is because they are one of, if not the single most effective vessels for finance and tax incentives. You can't borrow money on a government-backed 30-year fixed-interest term to buy stocks, nor can you claim any of the dozens of deferments, incentives, or credits that come with real estate. When it comes to reining in house prices to address affordability concerns, most people can only spend as much as they can borrow. So by restricting how much they can borrow, policy makers can easily influence home prices while also making the financial system more robust. A study on Swedish home prices found that properties become markedly more affordable after their regulators cut back on interest-only loans and introduced strict amortization schedules. A global study by the Bank of International Settlements found a similar trend across countries. If we really wanted to make homes more affordable, 15-year mortgages would do a lot more than 50-year mortgages. But that's kind of the point. Because real estate has become such an institutionalized investment vehicle, one man's affordable home is another man's crippling market crash. On one hand, 50-year mortgages are only going to make things worse by making homes even more attractive as an investment vehicle. But on the opposite side of that same coin, 50-year mortgages could help to keep a fundamentally broken market from collapsing on itself even if only for a few extra months. Over the last five years, institutional investors have drawn a lot of scrutiny for quietly buying up hundreds of billions of dollars in residential real estate across the country, particularly in areas like the Sunbelt. Today, they are quietly trying to back out of those same investments because the markets they went all in on did not continue to attract the same volume of new entrances they were projecting. As I was putting this video together, Atrioc did a fantastic interview with Melody Wright, one of the top housing market experts in America who has effectively been saying the same thing. Now, I will leave a link to that full interview because it's worth a watch. But to summarize, the housing market is shaking, so institutional investors with thousands of properties want to dump their holdings onto Airbnb bros with dozens of properties. But the only way they are going to be able to do that is if it becomes easier to qualify for big loans. And the only way to get those is if big loans are sold as a way to help regular people who just want to buy a single home to live in. Unfortunately, this market has become so large that they are effectively too big to fail. Actually letting homes become affordable too quickly would present a systemic risk to the entire financial system. Unfortunately, one group has to feel the pain, and it's just much easier when that group is the people who aren't yet balancing huge piles of debt and overinflated assets. The gig economy has never exactly been flawless, but some recent trends are throwing off a delicate balancing act between workers and customers that might accidentally be exposing some much deeper underlying problems. On the surface, our unemployment rate looked really good back then. Sure, it is trended up slightly in the wake of a long string of mass layoffs, but by zooming out, we can see it is still hovering around all-time lows. Sounds great, right? Well, it's no secret anymore that jobs data has had some "reliability" problems in recent years, and one of the biggest blind spots is people moving into the gig economy instead of becoming formally unemployed. For a lot of people who have lost their jobs, it's quicker and often easier to register as an Uber driver than it is to register as unemployed, and you only really need to look at the numbers to see this is happening. According to the Bureau of Labor Statistics, over the last five years, the total number of people classified as unemployed has fallen by about 3 million, which sounds good, but over that same time frame, the number of active Uber drivers has increased by roughly 3 million people, according to company financials. Now, to play devil's advocate, even if these "jobs" aren't the best, having readily available and highly flexible work with low barriers to entry could actually be a good thing when the alternative is people going straight onto unemployment, and we will get to that. But the problem right now for the workers entering the gig economy is that there is a rapidly growing roster of drivers looking to show for around a $50 burrito and a shrinking pool of customers that are still willing to pay for it. A lot of the data surrounding gig work and even just regular employment is disjointed, vague, and often downright counterintuitive. Even something as simple as what it means to be employed is probably going to be different for you than it is to the statisticians putting all of these numbers together. On top of that, when you think of gig work, you are probably thinking about people delivering food or driving people around in their fake taxis. But depending on which organization is collecting the data, it can also extend to renting out Airbnb properties or even people like little old me here running a YouTube channel. When a metric becomes a goal, it's no longer a useful measure, because the groups involved will try to influence it in a way that benefits them. The gig platform companies want to report that they have lots of people working for them to show how important they are to their stakeholders. The media wants big changes in job numbers one way or another to make for good headlines, and politicians want to ignore the industry altogether so that they can keep on pretending the job market is great. This just adds additional murkiness to an already very messy collection of numbers which can make it really hard to see what is happening to a majority of the workers in these jobs, which is, let's be honest, mostly people who couldn't find a better job elsewhere. So, to unravel this all, there are really three components that need to be understood. The fundamental platform economics that have facilitated the growth of the gig economy, what these services have covered up in the job market, and what happens when they can't cover it up anymore. Now that first point is really just about a balancing act. A platform like Uber Eats or DoorDash coordinates transactions between a service provider, the delivery driver, a goods provider, the restaurant, and a consumer, which is you poking at pictures of cheeseburgers on your phone at 11 pm. If Uber Eats wants to make more money, it either needs to charge you more, pay their delivery drivers less, take a larger cut from the restaurant making the food, or just do more transactions in total. In the early days of these services, they were almost exclusively focused on that last point: expanding their user base. This meant that on any given transaction, they would actually pay more to the restaurant and delivery driver than they were taking off the customer just to attract as many of these three onto their platform as possible. Back around six years ago, when these businesses were still blitzscaling, customers would get subsidized food that was often cheaper than ordering in person, restaurants would get generous revenue splits, and drivers were paid well above minimum wage even after accounting for their hidden costs. But these good times were all financed by burning venture capital dollars. Now to play devil's advocate again, this is actually not that unusual when building out a marketplace. Customers won't spend money on the app if there are no restaurants to buy from, restaurants won't register on a platform that has no customers, and drivers won't make any money if there is no food to be delivered. So to get things started, the market maker usually does need to sweeten the deal in every direction. Nowadays, their mission has changed from growing the number of transactions to growing how much they make from those transactions, but how much they can push on each participant really depends on how hard they are to replace. All of these groups are still growing, but while total revenue from customers increased by around 35% in the last two years, the total number of active gig workers on the platform increased by around 80% over the same time period. This would mean that even if there were no changes in how this revenue was divided up, there is simply less money per driver even without considering inflation. But the real point here is that drivers have become the easiest group in this triangle to replace, so it's easier for Uber to cut costs from them without destabilizing their market. Now, I know that this is a lot of numbers to confirm what you probably already knew. Pay and conditions for the most common type of gig work is getting worse. But by understanding these numbers, you can see how this can very quickly become a dangerous feedback loop, especially if these customers can no longer justify spending twice as much on their food to have it hand-delivered across town. Now, maybe this could be written off as pure speculation from people who have spent too long looking at company financials, except for the fact that, in a lot of markets, it's already happening. And the results have not been pretty. Okay, so as the gig economy platforms are playing this little game, the perfect outcome for the company in the middle here, trying to maximize their own bottom line, would be a large group of people with a lot of disposable cash who are not very price sensitive and an even bigger group of people over here without much negotiating power who just need whatever money they can get. And oh, would you look at that? It's a statistic you are probably all getting sick of hearing me repeat. The top 10% of households are now doing a record 50% of the spending while the bottom 60% of households are doing a record low of just 20%. This growing divide is not great. But for a company like Uber, it's been a golden opportunity to squeeze more money for a worse service out of customers while simultaneously squeezing more service for less money out of its contractors. Also, let's be honest with ourselves, a lot of that gap is being bridged by pushing for tips harder as well. For the first three years of the company, they didn't even have a direct tipping option because the company itself called the practice tacky. Today, it's the expectation, and it's pushed very hard. First-hand reports from drivers and restaurants have backed up what the big picture numbers are suggesting. A lot of locations are doing record volumes of deliveries, but individual drivers are finding it increasingly hard to find consistent deliveries or rides which means they can spend hours a day just waiting for an opportunity to work. When they do get jobs, it's clear that the platform is taking a larger share of the pie. Like this example of a $64 ride here in LA paying out just $12.43 to the driver. Of course, this is just one example, but it is a pretty damning one. Another factor that has allowed these companies to squeeze harder from every direction is interest rates. For a while, competition was actually quite fierce in the delivery gig workspace as dozens of regional startups tried to take market share away from the primary players. Today, most of them have either become the incumbents, been acquired by the incumbents, or they have gone out of business. The blitzscaling business model of burning billions of investor dollars until cementing market share only really worked in a low-interest rate environment where it didn't cost much to just keep on piling in more cash. If a competitor wanted to enter the market today to offer a better service or pay gig workers more competitively, they would not only need to cover their operating costs while taking market share, they would also need to cover interest payments that would be three times higher than they were back when a lot of today's incumbents were doing the same thing. Now, where this could get really bad is what could happen if job losses continue. If even more people are forced into the gig economy, that would mean that even more people would end up competing for the same gigs, and that's without even considering that if people lose their regular jobs and end up delivering for Uber Eats, they won't have as much money to spend on Uber Eats. Now, this process alone is actually not that unusual. It's basically how every demand-side economic downturn ever happens. Businesses lay off people, so households spend less money, so revenue falls, so businesses lay people off. If anything, it could almost be argued that gig work like this offers an additional layer of protection to people who lose their jobs, which is kind of what is happening right now. The problem is that if this becomes widespread enough, it can cover up the problem for a lot longer than it would otherwise take to realize something might be going wrong. And if things do go very wrong, the gig economy offers far less friction for this loop to spin. Typically, businesses need to fill out a lot of paperwork to lay people off. It makes them look bad to investors, and they will also need to rework internal processes to operate with fewer staff. Yeah, sure, they still do it, but it's not an instantaneous or painless process. This means we at least have time to see something going wrong before it's a full-blown crisis. For gig workers, all of this can happen instantaneously and automatically through the algorithms. If the apps are getting fewer orders, drivers get fewer jobs and less surge pricing. The automated nature of their employment throws a bottle of baby oil into the mix any time the economy loses its footing. Uber, Lyft, DoorDash, and companies like it are now collectively some of the largest employers in America. And if Uber drivers were counted as actual employees, it would individually be the largest employer in the world, easily beating out the largest defense departments and more traditional employers like Walmart. This is also just counting the people working in the largest and most obvious sectors of the gig economy. We have covered the story before, but starting around five years ago, there was a massive increase in the number of new businesses being registered in America. Now, spoiler alert, this was not because people suddenly became more entrepreneurial. It was mostly because people had lost their regular employment and were registering a company to do gig work. Fiverr, Etsy, Amazon Flex, and the naughtier platforms also saw a massive uptick in people selling their services. Even the number of videos uploaded to YouTube expanded significantly at this time, according to research published in the Journal of Quantitative Description, as people were looking for new ways to make money. And yes, this was just counting long-form content, as short-form would have skewed the results. The challenges faced by individuals working at the mercy of the gig economy are now well understood and well documented. But what we may soon figure out is that even for the people who never individually have to experience those conditions, they could still become a big problem for all of us. In fact, it's kind of already happened. China's gig economy might represent a glimpse into our own future, and that future is... bleak. As a result of various factors, like headwinds from the real estate and financial industries, as well as a glut in recent graduates, the youth unemployment rate in China got so bad that the government simply stopped posting that data. Uh, yeah. Two years ago, when they did this, we were actually in a position to judge them for it. But anyway, these young workers, with few other options, have flooded into the gig economy completely oversupplying the system with drivers. Today, according to estimates from The Economist, compiled from available company financials, there are 200 million gig workers in China representing as much as 40 percent of their total urban workforce. This massive number is even scarier when you realize that just 15 years ago, these platforms didn't really exist at all. This has become a real problem in the last three years in particular, as already frugal Chinese households are cutting back on service spending due to faltering economic conditions. The end result is that gig workers have reported spending 10 hours a day waiting to earn as much money as what would have taken them just three hours in the past. Large groups of brightly colored riders waiting outside shopping malls have become a very visible sign of bigger issues impacting average people in an economy that, by the headline numbers, still looks like it's doing very well. Even workers who are active for 10 hours a day, seven days a week, are still not earning enough to afford a dignified lifestyle in the country's major urban centers where most of this work is available. In some cases, competition for work has become so fierce that groups from opposing apps have gotten into altercations with one another on the street, and that is clearly not a sign of things going well. Now, we are still a little ways behind a similar situation in most western countries, but there are not major structural differences that mean we couldn't. The point is that this should be a scary story with a lot of things that sound very familiar, which is not great. But it gets worse. So far, all of this has been ignoring the big push to automate gig work as quickly as possible. Drivers replaced by robotaxis, delivery drivers replaced with little fridges on wheels, and Etsy creatives replaced with an avalanche of AI-generated slop. Unfortunately, as this technology progresses, there is really no way it ends well for the most vulnerable workers depending on these kinds of gigs to pay their bills. If the AI bubble collapses, then it's going to take a lot of the economy down with it, and the first thing that people are going to sacrifice are expensive Uber Eats orders. If the AI bubble doesn't collapse, it will most likely be because the technology gets to a point where it is completely able to replace workers in labor-heavy industries, like food delivery. No matter which way this all goes, it's probably not going to end well for people who are already not doing well. Now, this dismal endgame could easily fill an entire video of its own, so make sure to subscribe for more. But shameless plug aside, the point is that these platforms know the best way to get the most out of this game is to remove this piece entirely and just hope it doesn't take this one out with it. It's a dangerous gambit that might not pay off. And if people complain about it, you employ strategy 7 and just… ignore them. As long as the numbers are going up, they don't matter anyway. Back in September 2025, the US shocked economists with a report that contained results they were not really expecting. The economy had grown at a shocking 3.8% pace in the second quarter, seemingly putting to rest all of the concerns that the naysayers had about a softening job market, trade wars, the cost of living, skyrocketing defaults, declining labor force participation, sector-wide crises, and slowing productivity. Sounds great, right? Well, as you might have already guessed, there is a lot to unpack from these numbers. GDP isn't a flawless measure, even in normal times. And I am sure you have probably noticed there is a lot going on at the moment. But if you do what nobody else wants to do and actually read the data behind these figures, it tells three very interesting stories that challenges a lot of assumptions that we have about how our economy should work. This goes well beyond just simply growing inequality. That's not exactly shocking news anymore. But if you are looking for a sign of just how healthy and balanced the current market is, a new report has revealed that there are now more private equity firms in America than there are McDonalds. And the reason is very simple. If all of these numbers needed a headline, it would probably be, "You don't matter anymore." Economically speaking, of course. So yeah, that wasn't a typo. There are now 19,000 private equity funds in the US and only 14,000 McDonalds locations. The statistic was originally highlighted by Elisa Wood, a partner at one of the biggest private equity firms in the world. Ironies aside though, the reason this is happening is because there is just more opportunity in serving investment products to a few thousand ultra-high net worth individuals and institutions than there is in serving burgers to millions of everyday Americans. As an economic participant, you really only have three jobs as far as these numbers are concerned. You can work, you can invest, and you can consume. So do keep this in mind as we jump into the numbers because there are really three big problems with a lot of our assumptions. The first problem is what this impressive economic growth figure is actually based on. GDP is normally calculated by summing together household consumption, investment, government spending, and exports, and then subtracting total imports. When the Bureau of Economic Analysis says that the economy is growing at 3.8%, they do this calculation for a quarter, compare the difference to last quarter, and then multiply it by four to get an annualized figure. If you are so inclined, they published the individual breakdowns of all of these numbers, and if you did look closely at the most recent report, there is one number buried deep in the data that really puts this promising headline into perspective. In Q1 of this year, imports into America spiked by over 38% from the quarter before. This was mostly because big retailers wanted to stock up on inventory before tariffs took effect so they could remain cost competitive for a few more months. But in Q2, after they had already filled all of their warehouses, they didn't need to bring in more inventory from overseas so imports dropped by over 29%. Now remember, when the economists do their calculations, they subtract imports, so on paper, a crash in import volume is actually good for GDP numbers. In reality though, international trade swinging this wildly over six months in the biggest economy in the world is… not great. But it gets worse. Within the same report, it is noted that this large drop in imports actually bolstered GDP by over 5%. What this means in plain English is that if we ignored the wild swings in import volumes, GDP would have actually shrunk by 1.2% at an annualized rate. Now as a small little side note, two consecutive quarters of negative GDP growth, I'm sure the comments section can tell you what that's an indication of. Now you might think a little glitch in the reporting process still shouldn't have this much of an impact on the performance of the entire economy, right? And you would be absolutely correct. Over two-thirds of the American economy depends on just this part here. Personal consumption now accounts for 68% of all of our economic activity, well above most other advanced economies, which is clearly not ideal, but it has given us two pieces of false confidence. The first is that since so much of the economy relies on consumer spending, we can't let those consumers fall too far, or else there will be nobody left to sell stuff to, right? Wrong. I have mentioned this statistic before, but for those who haven't heard it, 50% of all consumer spending is now done by just the top 10% of households. Now that's a scary statistic by itself, but what it doesn't mention is that the bottom 60% of households now collectively account for less than 20% of the spending, and a growing share of that is being supported by risky consumer debt. The companies that have been performing best over the last five years have been in industries catering to wealthy consumers or to investor hype. Ferrari is now worth twice as much as Honda, and even Walmart is changing its business model to cater to more upmarket shoppers. More than 200 million people could drastically cut their spending tomorrow, and the total drop in economic activity could be covered over by increased spending on things like AI. In fact, it's kind of already happening. Personal consumption contributed less to economic growth than data center construction in the last reported quarter, and a majority of that consumption was done by just 10% of households anyway. Steve Eisman of Big Short fame did an extended interview on this a few days ago, and it goes into depth on a lot of the specifics, so I will leave a link to that down below. But in brief, this is more than just regular old inequality. Today, we have something arguably worse: indifference. The lords of old at least needed their serfs to keep their empire operating. Today, not so much. As far as the economy is concerned, your ability to be a good little consumer is just a rounding error. And that leaves only your ability to work and your ability to invest. One important detail about your relationship with the economy is that, yeah, sure, your success might not mean that much to the economy anymore. But the success of the economy also doesn't mean that much to you anymore. Over the last 40 years, personal productivity has doubled even accounting for inflation. That means the average American is now producing twice as much as they were 40 years ago. And this has given even average people access to comforts, conveniences, and experiences that they just wouldn't have had back then. And yet, when asked, slightly more than half of you that responded still said you would prefer to live back then. So, we are all remembering history through rose-tinted glasses, or has this doubling of economic output actually been totally irrelevant to average people? Well, as you might have guessed, our per capita production doubled, but incomes did not. Adjusted for inflation, median wages have increased by just 20% over the last 40 years, which is not great. But it's still not nothing. The median isn't skewed by the uber-rich like the average is. And that's 20% after inflation, so we should theoretically be 20% better off. And we are, but only in areas that don't really matter. Travel, technology, on-demand services, clothing, furnishes, and even food are all much more accessible today than they were back then, by a pretty wide margin. However, more essential items like housing, education, and healthcare have become far more expensive. So, while you can in theory buy more stuff today with a perfectly middle-of-the-road income, it's not exactly the stuff that you need to build a comfortable life. The things that we wanted became cheaper, but the things that we needed fell out of reach. Which means, for a lot of people, their strongest tangible connection to economic prosperity is the car they are paying off over the next 84 months. But there is one much bigger factor which is a lot harder to capture with these numbers, and it's how people have earned that money. Your consumption may not matter to the overall economy, but the overall economy hasn't made it easy to consume the things you want. But something that has lost its relevance even faster is the work we are doing. Forty years ago, most jobs garnered far more respect from both employers and employees. Most workers in skilled or semi-skilled professions stayed with their employers for a long time, and laying off staff or getting fired was a massive deal. Today, losing your job at some point is the expectation. A lot of young workers treat it almost like a joke to make content out of, although this could be some kind of brain rot coping mechanism that I don't fully understand. Anyway, modern technologies have made a lot of jobs far more productive, but they have also made them far more user-friendly. As an example, a few decades ago, most large offices would have a small army of semi-skilled secretaries to put together presentations and information for reports. Something like making a graph in the prescribed corporate style would take a lot of time, but also take some level of training to learn. Today, the company can just have an excel template, and as long as someone can copy and paste two rows of data, they can do what used to be hours of work. Bank managers used to be highly respected professionals with a deep understanding of business finances, their local economy, and their extensive list of clients. Replacing one of these guys could take a full year of direct mentoring. Today, bank managers are glorified loan salesmen because credit reports and extensive electronic databases have taken the skill out of their jobs. Travel agents, junior analysts, stock brokers, and an array of other jobs all mostly followed the same trend. These people became far more productive, but also far easier to replace. User-friendly and standardized technologies meant most people could get up to speed with a job within a week or two, as long as they knew how to use a suite of software. The promise or threat of AI, depending on who is asking, is that it could render your ability to work completely obsolete. But even if it simply continues this trend of standardizing roles, it will ultimately make workers more of a commodity that could be easily traded around an open market. Again, this raises the argument that if nobody can find a job anymore, then there will be nobody left to buy all of the stuff that companies are making. But once more, this is simply not true. Profit-motivated companies aren't going to hand over their valuable resources for nothing in return. For normal people, what they typically exchange for those goods and services is the hours in their day through something like a job, a contract, or maybe even working in their own business. But if these working hours are no longer valued by the market, then over time, companies are just going to start selling their products to people who can get their money through their investments. Kind of like what is happening right now. In some tragic irony, this trend has gone so far that even multi-millionaires are being pushed out of coveted goods and services by billionaires with more purchasing power. I appreciate that, because people don't think
[02:01:48] Speaker 2: about the millionaires, right? Like, we get lumped in with the billionaires, but the millionaires really
[02:01:53] Speaker 1: have it rough. Why are you guys saying f**k you? Alright, so your consumption and your labor might not matter to the economy. But what about your ability to invest? It sounds like things are pretty sweet for those guys, right? Well, yes. Except for the fact that investments into productive capital, like all of the technology that's making you really easy to replace, is even more consolidated than consumption and income. Increased high-interest consumer debt also makes a lot of investing done by everybody else counterproductive. According to data from the Fed, the top 10% of households own more than 93% of corporate equities in America. But those same households only account for 5.4% of non-mortgage consumer debt. It's great that more people are getting into the market, but if you are paying off a 20% APR car loan and putting $500 a month into Robinhood, you are not an investor. You are just really bad at allocating capital. Now, what all of this means is that most economic participants don't really participate in their own economy. In the past, when average people struggled, the economy struggled, and wealthy people riding on that economy struggled too. Today, we could very well be in a situation where the majority make up such an insignificant share of market activity that even severe problems for them can be effectively drowned out by the party being had by a very small handful of people. Now, as far as social cohesion is concerned, this isn't great. But for the economy, it gets worse. We could see a situation where unemployment rises dramatically, but the economy continues to grow. Because all of those laid off people didn't contribute much to overall consumption or investment. In that case, taking action like lowering interest rates or giving out stimulus to help the unemployed would risk further inflating already overinflated asset markets that didn't feel the pain to begin with, which would only make this problem even worse. Even the Fed essentially admitted that it was increasingly hard to enact policy that would help ordinary workers without helping out wealthy asset owners even more. But it gets worse. Average people might not have that much skin in the stock market game, but the 10% that are doing all of the spending do. The reason they are spending so much and keeping entire industries alive is because they feel wealthy thanks to their booming portfolios. If these asset markets falter, there is not going to be much left to prop everything up, and to use a technical term, we are going to be absolutely fucked. Now, this is normally the point where I would say to put away the tinfoil hat, because this is all the result of broken incentive structures and flaccid regulations, rather than some kind of deeper conspiracy. But the reality is, this all sounds very familiar. In 2006, a series of reports were leaked from Citigroup's asset management team dealing specifically with ultra high net worth clients. In these reports, they described a platonomy, a combination of platocracy and economy where economic growth is powered by and largely consumed by a wealthy few. In a platonomy, there is no such animal as the US consumer or the UK consumer, or indeed the Russian consumer. There are rich consumers, few in number, but disproportionate in the gigantic income and consumption they take. The rest are the non-rich, the multitudinist many, but only accounting for surprisingly small bites of the national pie. Now, the actual intention of this report was to encourage Citigroup's wealthy clientele to invest in companies that catered exclusively to other wealthy clientele, because the analysts predicted that they would eventually be the only ones worth selling stuff to. And remember, this report was published way back in 2005. Now, Citi has tried really hard to scrape this report off the internet, so I am going to go ahead and leave a link to it below. It's a dense investment thesis, but also genuinely very scary. Now, of course, there is still one way that you matter in the economy, and this report covered that as well. Whilst the rich are getting a greater share of the wealth, and the poor a lesser share, political enfranchisement remains as was "one person, one vote". In plain English, the biggest risk to their clients was that votes were somewhat evenly distributed. Fortunately for them, we are really bad at spending them wisely. If you pay any attention to financial news, you have probably heard the same
[02:05:41] Speaker 2: line every time the stock market has a little whoopsy daisy. Yeah, that's right. Every time green
[02:05:58] Speaker 1: line does not go up, we are told some company or the market has lost, destroyed, or wiped out however many billions of dollars. But alright then, where does that money actually go? It might not surprise you to learn that headlines like this are written more for shock and awe than genuine insight, but the simple truth is that the money doesn't actually go anywhere, because it never existed in the first place. Sort of. If you can look beyond the flashy headlines like this and actually understand what they are trying to say, you are going to be much better equipped to make sensible financial decisions when everybody else is busy losing their minds and, if they are lucky enough, maybe even their retirement savings too. This basic understanding has probably actually never been more important than it is right now, because the stock market is breaking new records every single week. Nobody knows if or when the party will stop, but what we do know is that, in this particular case, the money doesn't actually have anywhere else to go. So, there are really three different levels of technical explanation for what happens to money during a crash. The good enough for most people level, the armchair market analyst level, and then the level that considers debt, consumption, and all the different asset markets that are getting kind of weird at the moment. Now, most people don't even get level one right, but I promise none of this is as complicated as the financial bros would like you to think, and actually seeing how these markets work is the only way to understand how messed up they really are at the moment. But alright, most of the time when headlines are talking about billions of dollars being destroyed or whatever, what they are really saying is that the market capitalization of a company or group of companies has been repriced. This is just calculated using the number of outstanding shares multiplied by the price the last share was traded at. So, for example, Nvidia currently has about 24 billion outstanding shares, and right now those shares are trading at a price of about 170 dollars, which gives the company a market cap of 4.1 trillion dollars. If for some reason tomorrow people decided to start trading Nvidia shares at 85 dollars, then it would have the market cap of the company and you would inevitably see headlines about Nvidia losing 2 trillion dollars. But they didn't really lose 2 trillion dollars, they were just revalued using this very crude calculation. Now, technically, this could actually help Nvidia's ongoing business operations. Since the AI boom, the company has been doing a lot of share buybacks, where they will use their profits to buy company stock off of existing shareholders to take it out of circulation. They are only supposed to do this when management thinks the company is undervalued. So, if their stock halves in price, they will get twice as many shares for the same money, which should be a good thing, right? Well, this is assuming, of course, that they aren't just doing stock buybacks to drive up an already hyped up stock. But for now, for level 1, a market crash is just a readjustment in market capitalization. Unless a company is planning to sell its own stock to raise money to fund future projects, its day-to-day market capitalization shouldn't impact its performance. Market capitalization is kind of like GDP. It's a number that we use a lot because it's sort of easy to calculate, and it's good enough as a rough indication of if things are going in the right direction or not. Now, a lot of people, when they learn this, take it to mean that market cap is irrelevant. A $10 banana is no better than a banana that's on clearance for $5. And while that's true, a sudden price drop on anything can be an indication that there is something rotting away beneath the surface. So, for the next level of understanding, you need to do what the journalists writing the headlines aren't willing to do, and actually follow the money. Now, I know I just said that if a stock halves in value, that doesn't necessarily mean that any money has gone anywhere. But in highly liquid markets, such a scenario can only really happen one way. The Nasdaq doesn't get to slap a 50% off clearance label on Nvidia stock like Walmart does on questionable milk. The way the price moves in these kinds of markets is that if there are more sellers than buyers, the price falls, and if there are more buyers than sellers, the price rises. When people are panicked selling stocks, they are still getting money in exchange for their stocks. It may not be as much as they wanted, but what they then do with that money is where things get interesting. Let's say you had some spare money. Yeah, I know. But just pretend with me for a second. With your pile of cash, you have some options. You can invest into the stock market, real estate, bonds, gold, alternatives like cryptocurrency, or you could just hold on to your cash. Alternatively, if you just want to enjoy your life right now, you could spend that money on goods and services like a new car, a bigger house to live in, or a nice vacation. All of these activities that improve your quality of life are generally classified as consumption. Depending on where you, and everybody else who has spare money, puts their cash, it will increase the value of these markets. So if everybody buys gold, its price will increase as demand increases on an asset with limited supply. Now, stocks, bonds, and real estate are kind of unique because they generate their own cash flow to give money back to you. Stocks do this through dividends, bonds through interest, and real estate through rent. Those cash flows come from other people deciding to put their money into the consumption pile, which becomes revenue for these three asset classes. But all of these other assets really only make returns by having more people buy in at a progressively higher price. When the stock market crashes, what is really happening is everybody trying to grab their cash out of that particular asset market. They do this either because they think the market won't generate as much cash flow in the future, or, more often, just to get their cash out before everybody else lowers their price by taking their cash out. Now, if you are lucky enough to get your cash back before everybody else, you have a choice. During a lot of market crashes, people just want to hold onto their cash because they are afraid they will lose their jobs and nothing else is generating cash flow. But eventually, you will need to put your money somewhere. And that predicament is what is creating such a big problem right now. Sure, maybe you think that the stock market might be an AI-fueled bubble. But if you sell your positions, where exactly should you put your money? Gold is at all-time highs. Real estate is risky with today's interest rates, cryptocurrency is highly correlated with the stock market, goods and services are more expensive than ever, and people are even starting to question the long-term safety of the bond market. People are quickly running out of safe platforms to stand on, which has got a few people saying that, "Maybe these markets aren't actually broken. Maybe it's the money that's broken." The way that money flows in and out of these markets can have a big impact on the way that you live your life, even if you don't actually have that much in any one of these respective piles. Increasing housing prices have become a defining financial problem of young generations as people can't afford a place to start their own lives or their own families. House prices have outpaced inflation by a lot, which I know is not exactly shocking to most of you, especially if you have watched any of the dozens of videos we have made about the structural problems and broken incentives in the housing market. But the key here is that when we measure price increases relative to inflation, we are only measuring relative to the consumption pile here with the consumer price index. The problem with this is that it doesn't reflect the changing gaps between these other money piles. Real estate, for example, has grown faster than consumer prices, but relative to fixed assets like gold, it's actually gone backwards. An article published by Jonathan Hobbs, a chartered financial analyst, compiled this data to show that if you were paying for the average American house today in gold, you would be spending about half as much as you would have been back in 1991, and roughly a quarter of what you would have been paying in the early 2000s. Now, the article itself used this data to build a case for just buying gold. But the reality is basically any assets would have had the same effect. If you were paying in S&P 500 indexes, the relative fall in house prices would have been even greater. So, there were two lessons from this. One is that investing is important. I hope you already knew that. But the deeper lesson here is that it's become much easier for people with lots of money in these piles to buy basically anything they want from these piles. There is only so much money that people can spend on consumption, so wealthy people naturally throw the rest into one of these. As they have grown, they have provided more money to people who own them, and since most of them were already maxing out what they could throw into consumption, they put even more back into these piles, creating a feedback loop of wealth generation. A basic look at the historic numbers makes this pretty clear. Market returns over the past 60 years have averaged just over 10%, and inflation has averaged just over 4%. If you include taxes, this generally means if you can consume less than 4% of your invested assets annually, you can live forever without touching your principal. This basic arithmetic is the foundation of things like the financial independence retire early movement. But for extremely wealthy people who can easily afford to live on less than 4% of their net worth, they can compound wealth faster than they can spend it. Now compare this to most people who earn their income by selling their time. Most wage increases are indexed to consumer prices if you are lucky, which has been the slowest growing one of these piles. This has made it harder and harder for the wages to compete when both groups want to put their money into the same area. A lot of what the wealthy are buying is different from what working people are buying, but there are some areas where these cross over. Real estate is just the most obvious and socially destabilizing example of that. The reason this is happening now is that the growth in these asset piles has become unprecedented. We have been paying a lot of attention to what the money printer has done to consumer prices, but these other money piles have soaked up much of the excess cash and it has put non-asset owners further behind. Now the point of this is not that inequality has become worse, you already knew that, but a new problem coming from that is how these increasingly consolidated markets are behaving. According to the Fed, participation in the stock market is approaching all-time highs, which sounds like a good thing. But this has mainly been driven by lots of people investing very small amounts of money through platforms with low fees and low barriers to entry like Robinhood. The real money in these asset markets is more consolidated than it has ever been, with the top 10% of households owning 93% of all equities the last time this data was collected at the end of 2024. In a market panic, the reason why people sell their assets is because they want to make sure they have enough cash on hand to cover their most basic consumption needs if they lose their source of income, which for most people is their job. Unfortunately, job losses and market downturns often go hand in hand. However, as these assets have become more consolidated amongst people who can easily cover their living expenses several times over, there have consistently been more people with lots of spare cash to buy in versus the people that need to sell out to cover themselves in a hard time. Put another way, if unemployment was to hypothetically spike tomorrow for any particular reason, most of the people losing their jobs would not have a meaningful pile of assets to sell to cover themselves while they were looking for a new job. And it's not like we would miss the consumers either. A majority of the consumer spending in the economy now comes from the top 10% of households, and corporate profits are primarily driven by selling stuff to other corporations. Sounds pretty bad, right? Well, it gets worse. Remember those record-setting stock buybacks from earlier? Well, they have outnumbered net household share purchases 6 to 1, adding even more people to the side piling money in. If you add this to the rise of index funds that mindlessly buy and hold a broad selection of shares, it's easy to see how lopsided the market has become. Now, this does not mean that markets can't fall. But what it does mean is that they can stretch far further and stay irrational far longer than they could ever before, and while they do, they are throwing off money like never before for people to buy up every other asset market. Okay, so we've worked through seven ways to do some serious damage to an economy. With all of this in mind, why hasn't it collapsed yet? We are always told that the economy is like a fine piece of clockwork. Everything has to fit perfectly in order. And even one small change can have second- or third-order consequences that could be devastating. Like that time, a small tweak of banking regulations directly led to the biggest economic downturn we have seen since the Great Depression, or that random day a small adjustment in a foreign currency wiped trillions of dollars off the market. These were obviously important disruptions to a delicate system. But, uh, at the same time, in just the last 12 months, we have announced sweeping tariffs and then cancelled them again, then announced and then cancelled them again, announced and then implemented before cancelling them again, implemented them again, then raised them, then lowered them, then organized special deals for certain companies and countries, and then cancelled those deals, and then took the issue to court, resulting in us potentially having to pay back all of those tariffs. And now we are implementing them again on countries that don't want to give us Greenland, and oh yeah, we have threatened our most significant allies and largest trading partners, threatened the chairman of the Fed, threatened individual companies, threatened the basic fundamentals of consumer finance, while also re-implementing debt repayments that people had been pretending to ignore, all at the same time that we shook up healthcare, fired tens of thousands of government workers, and then hired most of them back, and then fired some of them again, and then closed the department that was doing the firing in the first place, while we still accumulated new debt at a record rate because one of the most sweeping tax changes in recent decades, we saw out the single longest government shutdown in american history significantly changed both documented and undocumented immigration in the labor market, and this isn't even to mention the nerdier stuff happening behind the scenes in banking, like the basel 3 end game standstill, which means that banks really don't know how much money they are supposed to have. None of this is even meant to be some kind of partisan attack either, some of these things like student loans eventually needed to be dealt with, but no matter what side of the fence you personally sit on, it should be pretty clear that things are very turbulent right now. If the economy is supposed to run like a fine swiss watch, then we have been adjusting it with a jackhammer, but yet it's still going. Over the same time, the economy still grew, unemployment remained relatively low, incomes went up, and the market, which is supposed to hate instability, is hovering around all-time highs. Now, yes, of course, there is a lot of nuance to these metrics and measures that gloss over some real problems, but that's actually exactly the point. There have been plenty of far less compromised economies that have folded under less pressure. With the sheer volume and severity of shakeups that have been hitting us, it does raise the logical question: why hasn't the economy collapsed… yet? Okay, so the first thing you are probably thinking is the same thing we have covered extensively on this channel over the last year. AI spending is just making the big numbers look good. Yes, there are real structural issues in the economy, but the mountains of cash that tech companies are spending on AI infrastructure development has done a landlord special and painted over all of those cracks. Things are still rotting away out of sight, but on the surface, everything looks… good enough. According to the Bureau of Labor Statistics, our GDP was growing at a rate of 4.3% when annualized in quarter 3 of 2025. Back in January, we were still waiting for the quarter 4 figures, but without some kind of major surprise dragging the entire year down, these numbers looked really good. But, well, yeah. The trillions of dollars going towards data-centered construction and computer chips are now contributing more to this growth than consumer spending. Not a great sign in the biggest consumer market in the world, but you probably already knew this. What might be surprising, though, is that according to the BLS themselves, overall investment in the economy actually decreased ever so slightly in the third quarter, bringing down the net growth figure overall. So, how is it possible that investment is single-handedly keeping the economy alive, while also being practically insignificant in the overall economy? Well, because this is a net figure. AI spending alone would contribute about 2.5%, but that spending is being completely offset by companies slowly selling down their own inventory. When a business or person buys inventory or some kind of other produced asset, it gets counted as a positive investment. But when they sell it, it's subtracted from that same category. This is how statisticians avoid counting the same thing twice if, for example, a machine shop made a part in one quarter, kept it in storage for a little while, and then sold that part to a customer in the next quarter. Only one part has actually been produced, so only the final price should be counted. What businesses had overwhelmingly been doing through 2025 was selling off stuff they filled their warehouses with before all of the tariff shenanigans really got started. A decline in inventory has almost perfectly offset an increase in spending done by AI. So, if that spending suddenly stopped, then things would suddenly look a lot worse than they do right now. However, that's still not the whole story. We will get to consumer spending soon enough, but before that, government spending and our own balance of trade also, almost inexplicably, look really good too. Government spending is up because the net impact of doge cuts was effectively negligible, and we are also spending more on the military. So, that's simple enough. But trade deserves some special attention because the numbers alone are a bit unintuitive. Our reduction in imports is actually good for GDP, and according to the data, we are simultaneously exporting more and importing less at the same time, which raises the uncomfortable question. Are the tariffs actually working? Well, spoiler alert: no. Okay, so yes, we were importing less stuff into America at that point because tariffs had disrupted business spending, and because those same businesses had loaded up on stock earlier in 2025 and were just burning through their supplies. It's not exactly the success story of everybody suddenly deciding to buy American after a tariff got slapped on the imported alternatives because, well, often there is no American alternative. So that's not great, but at least we are exporting more stuff, right? Well, exports have indeed increased, which sounds shocking considering that we have really been testing our trade relationships. But it becomes a little less shocking when you realize what we have been exporting. The fastest growing category by far is precious metals. From October 2024 to October 2025, total exports grew by $26 billion after accounting for inflation. Of that number, $14 billion was just from increased gold exports, a 517% increase from the year before. Now, partially this was because each ounce of gold we sold was worth a lot more, but that price appreciation was largely thanks to everybody trying to diversify away from the US dollar to a reserve asset. So I don't exactly know if we could call that a win. Even adjusting for the price, we have still just exported more gold in total to wealth safe havens like Switzerland and London. On top of this, an additional $4 billion in export growth was from increased silver exports representing year-on-year growth of 2,800%. Meaning that out of a $26 billion increase in exports, $18 billion is just because we are selling more silver and gold and the remaining $8 billion has largely come from military and energy exports. So yeah, our balance of trade looks good because everybody is too scared to stock up on inventory and we are selling off our precious metals. By the numbers alone, our economy looks healthy. But this is kind of like saying that you have improved your household's financial position because you have been living off your supply of canned beans and you sold your car and your kidney. For now, the cash flow looks great, but you can't really keep doing that forever. Now, maybe it's a bit hyperbolic to call this a going-out-of-business sale, but other countries trying to pull fungible stores of wealth out of America as quickly as possible is generally not a great sign. But it gets worse. Strong growth in consumer spending is generally a good sign that things aren't going too badly, because normally people don't spend more money unless they are making more money or are confident that they can stretch their budgets a little bit more. From the data, we can see that even with all of the funny business going on in these four other categories, consumer spending still makes up a majority of the net contributions towards GDP growth. But there are some other caveats. The first is, well, yep, you guessed it. You were probably sick of hearing me say it by now. But a record amount of that spending is being done by just the wealthiest households, meaning that this growth isn't necessarily a sign that all consumers are feeling confident, and is more of a sign that wealthy people have enjoyed highly appreciated assets. But for the sake of this question alone, that actually doesn't matter. If the economy was seriously hurt by any of this turbulence, or even if these households thought the economy would be hurt, we would still normally expect them to reduce their spending as their businesses failed, their bonuses shrunk, or their investments faltered. But they aren't. If anything, they are actually spending too recklessly, resulting in a record number of very high-income households getting themselves into financial difficulty. It might be really dumb for the individuals, but it does mean that businesses have been very comfortable producing lots of goods and services even if they are increasingly catering just to the wealthy. So maybe the rumors of our impending demise were greatly exaggerated after all, right? Well, you probably should have seen it coming at this point. But let's take a look at a good number and explain why it's actually a bad number. Most of the growth in this consumer spending came from healthcare and other non-durable goods, which the BLS notes was primarily made up of pharmaceuticals. It's no secret that insurance and prescription prices have gone up for most households, but these measures are supposed to account for those price increases and just look at the actual services being provided. So there are actually three things that have been driving this extra output from the healthcare industry. The first is simply that we just need more healthcare. An industry report by McKinsey generally summed it up that Americans were on average getting older, fatter, sicker, and less engaged with their health. The second factor was the growth in offerings like GOP-1 drugs that have driven a lot of demand for pharmaceuticals. And the third variable is simply that a lot of people are afraid that they are going to be pushed off of their health insurance plans in the coming months, so they are in a bit of "use it before they lose it" situation. On top of all of this is a massive system of bureaucracy and broken incentives that could easily fill an entire video of its own. But in the short term, all of this activity has contributed to consumer spending because healthcare and pharmaceuticals are really expensive and really hard to say no to if you actually do need it. So hopefully all of this adds some relevant and slightly depressing nuance to an apparently red-hot economy. This economic growth is really good, there is no denying it. But a lot of the factors contributing to that growth are either not sustainable or not discretionary, and that's before we consider the biggest caveat of all. Our economy was growing at an annualized pace of around 4% in late 2025, but the US dollar had fallen by over 10% against some major currencies over that year. Now it's not as simple as saying that this means we are really 6% worse off, but this kind of rapid currency depreciation quietly helps some of these figures look better than they should be right now, while simultaneously indicating some problems in the future. For example, the stock market has grown to record highs, which helps explain why wealthy households are still willing to do a lot of spending. But when denoted in most other currencies, the market has either traded flat or actually gone backwards slightly. This currency depreciation has also made our exports cheaper and imports more expensive, helping to explain the boost from both of these categories. A person that has seen their stock portfolio increase by 10% in a year might be happy to spend a little bit of extra cash, but when an overseas vacation or imported car is 10% more expensive, then some local alternatives suddenly look a lot better. Now, if we were actually a net exporting economy, this might actually help us out a little bit by making our exports more competitive in global markets. But unfortunately, we are the largest net importer on the planet, so what it will actually do is just make most things more expensive. This is also on top of the tariffs, which according to a study conducted by the Kiel Policy Institute, have overwhelmingly been paid for by regular consumers. The report tracked the end price of 25 million transactions and found that foreign exporters were absorbing around 4% of the costs, with the remaining 96% being passed through to households. So yeah, individually we are importing less, while paying more for it. It's not great, but it still is not the collapse that a lot of pundits might have predicted. The reality is that it's just too early to tell. The American economy is not invincible, but it is both very large and very privileged. The size of our consumer and financial markets mean that things are not going to play out as quickly as they would in most other countries that are a lot easier for foreign institutions to move away from when things look risky. We also have some of the most widespread and entrenched agreements, alliances, partnerships, commitments, engagements, and even just good old understandings with almost every major other economy worth mentioning. These have all been tested, clearly. But no matter how hard we try, they won't fall apart overnight. Now in the short term that's good, because it means we have time to see things going wrong. But it also means that things will take a lot longer to get back if other countries, investors, and customers start trying to work around us rather than with us. Now it certainly doesn't help that a lot of these decisions are being made by people who won't be around to see the consequences of them. So go and watch this extended cut video next to find out why the boomers are becoming a bit of an economic problem in their own right. And don't forget to like and subscribe to keep on learning how money works.