← Tom Bilyeu's Impact Theory
Tom Bilyeu's Impact Theory
$39 Trillion Nightmare: The Secret Strategy to Soft Default on America’s Debt | Tom's Deepdive
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So when Roosevelt refused to pay up, he simply transferred wealth from the financially disciplined savers to to the fiscally irresponsible government bondholders lost 40 cents on every dollar and then never got it back. And odds are it's all about to happen again. Kevin Warsh is going to be the next Federal Reserve Chairman, and right now there's a BS story going viral that he has a plan to cancel America's $39 trillion debt. But that's not how debt works. Someone is going to be left holding the bag. As of right now, roughly 14 cents of every dollar the federal government spends goes to paying interest on money the government has already borrowed. And it's the fastest growing expense we have. Our debt to GDP right now is 122%, and the last time we were anywhere near this number was the end of World War II. And if history has taught us anything, it's that you can't wave a wand and make $39 trillion just disappear. The debt is going to be paid, every dollar of it. And it will be paid by the financially illiterate who don't see what is inevitably coming. The playbook Warsh is about to run has been used before. It worked then and it will work now, because most people simply do not understand it. And that's exactly why how those in control want it. Needless to say, Warsh isn't announcing his entire plan. Yes, he's got a PR friendly version, and that version leaves clues. So what I'm going to take you through today is the real plan, the framework that Warsh is walking into that was built long before he arrived, but he's going to be the one that uses it in four parts. I'm going to strip away the political spin and take you through the reality of the plan that Warsh himself detailed and in his confirmation hearing, as well as the part that he was very careful not to discuss. And I'll show you the truth behind the misleading YouTube headlines about clearing the debt. Because it's not what people want you to believe. Welcome to Part one. The Repression Playbook there's exactly one time in modern history where America has gotten out from under a mountain of debt of this magnitude. And we didn't do it through austerity. Wasn't done through growth either. It was done through a trick economists lovingly refer to as financial repression. Now, a more honest name would be theft. Now, financial repression can be tricky to wrap your head around, so let me try and give you a simple, clean definition. Financial repression is when the government deliberately keeps interest rates below the rate of inflation. Boom. That's it. When interest rates are intentionally held below inflation, that's financial repression. When it happens, every dollar in a savings account, a cd, a Treasury bond, or whatever loses purchasing power year after year. The savers lose. The government, the biggest borrower in the country, wins. And they win because the debt that they're holding erodes during financial repression. So savers are losing, but the people with useful debt win. Now be careful, because people with credit card debt are still likely to lose. So don't get too excited. Now, let me show you how this all played out. The last time that we used financial repression, in 1946, America's debt was staggering. We had just come out of World War II, and like today, the debt to GDP ratio hit 122% by 1974. However, the that number had crashed down to 23%. The country had cut its debt burden by more than 80 percentage points in less than three decades. Now, most people will tell you that America grew its way out of the debt. That's certainly the textbook version of the story. It's also a lie. In 2023, two economists working with the IMF published a paper titled did the US really grow out of its World War II debt? The their conclusion was gnarly. They found that without primary surpluses and what they called interest rate distortions, growth alone would have accounted for less than 25% of the actual debt reduction. The rest of the reduction was due to a calculated policy decision that left anyone holding dollars with a decaying asset. The Federal Reserve and and the treasury had worked together to keep interest rates artificially low while letting inflation run hot. The textbook definition of financial repression. From 1945 to 1980, real interest rates in the United States were negative roughly two thirds of the time. That means for 35 years straight, the average American who held cash like a savings bond or a CD watch their money lose purchasing power faster than the interest rate could pay them back. I hope that sounds very familiar for what's happening today. For instance, back then if your savings account was paying you 3% in interest, but inflation was running at 5%, you just lost 2% of your real purchasing power that year. The number on your bank statement was actually getting bigger, but what you could buy with it got smaller. That gap should be considered a tax. It just doesn't have a name or a tax form. Nobody gets to vote on it. And worst of all, nobody can opt out. And if you compound even a 2% annual loss across 35 years, you've lost roughly half of every dollar you've saved. Taxed away by the government. It is not some law of nature that just happens. It is man made. It is the government knowingly taking your money from you. That's what was happening to every saver in America the last time we ran this playbook for 35 years straight. Now look at it from the other side of the ledger. The federal government was loving life. They were the biggest borrower in the country. And every time the dollar got weaker, the real value of the government's debt got weaker with it. The interest payment stayed roughly stable in nominal terms. The principal stayed the same on paper. But the principal in real purchasing power was being eaten away exactly as fast as the savers purchasing power. It's the same phenomenon. The savers lost wealth. The government got richer, but they did it by stealing the from the populace via the invisible tax of inflation without anybody getting to vote on it. That's what financial repression actually is. You don't pay the debt back, but you also don't refuse to pay. Instead you just hold rates artificially low and let inflation do the rest of the work as it eats away at the real value of the dollar. So that over time, the debt that the government owes becomes small relative to a dollar that's now worth less and less. The bond holders take a haircut, the Savers take a haircut. The people who did everything right take the biggest haircut of all. And nobody can quite explain why their money just doesn't go as far as it used to. It's slow for most people, it's invisible, and it allows the government to to just tax people without them realizing it. It is the only proven method for getting out from under a debt of this size without war or a transparent default. But when people are already finding it impossible to make ends meet like they are right now, what happens when the government just keeps taking and taking through this invisible tax? Well, we're about to find out, because Kevin Warsh, the man tasked with fixing the economy, is going to be running this all too familiar playbook once again. He basically just said as much in front of the Senate. But most people simply don't understand the economy well enough to know that that's what he was saying. So welcome to part two, the architecture of Warsh's public PR friendly plan. In 2010, Kevin Warsh wrote that quantitative easing money printing would create what he called misallocations that would linger for years in plain sight until they emerge with force at the most inauspicious of times and do unexpected harm to the economy. That's a direct quote. That was 15 years ago. The misallocations did indeed emerge. The harm did in fact happen. And now the man who predicted it is the one tasked with cleaning it up. He's been waiting for this moment his entire career. Which is exactly what worries me. Because now we've got the guy who spent 15 years warning about Fed overreach, laying out a plan that will require more Fed overreach than anything that has happened in the last 75 years. But at least kudos to him for being specific so we can debate and then watch the outcomes. So let's go through. He's got four moves that he plans to make. Move number one, cut interest rates. Warsh understandably wants the federal funds rate to come down. The interest alone on the federal debt is a staggering $1.2 trillion. Markets right now are pricing in roughly 50 basis points of cuts through the end of 2026. Warsh's signals, he wants even more than that. Saying he just wants a return to neutral, the rate at which monetary policy is neither stimulating the economy nor restraining it. But the reality is that if rates don't come down, we're all going to drown under the weight of the debt. It will just keep eating more and more of the federal budget. Every basis point that Warsh is Able to shave off the cost of borrowing equates to billions of dollars. The treasury doesn't have to find somewhere else. Move 2 Shrink the Federal Reserve's balance sheet. The Fed is currently sitting on roughly $6.6 trillion in assets, mostly Treasuries and mortgage backed securities. Warsh wants that number to come down. He's called the current balance sheet fiscal policy in disguise. He is 100% right about that. The Fed's bond buying programs over the last 15 years have allowed the government to be run by a ship of fools and finance the government's absolutely reckless deficit spending without anyone actually calling a spade a spade. Warsh wants the Fed out of that business. And thank God, Warsh has signaled he wants to rotate the Fed's holdings out of long dated bonds and into short term treasury bills. Uh oh. Deutsche Bank's analysts estimate that under Warsh, T bills could rise from less than 5% of Fed holdings to as much as 55% over the next five to seven years. If that ends up being true, that is a complete rebuild of how the Fed operates. And not in a good way. T bills mature in 12 months or less. Notes and bonds run 2 to 30 years. Now, the longer the maturity, the more stable the cost of borrowing. Lock in a 30 year bond at 4% and you have 30 years of certainty, you know what you're dealing with. You start issuing T bills and you have to refinance the entire stack and every 12 months at whatever the market demands. At that moment, if the Fed rotates into T bills, treasury follows. Because if the Fed is gobbling up the short end of the curve, the path of least resistance is for the treasury to issue more T bills to match the Fed's appetite. That makes sense. Which means more and more of America's $39 trillion debt becomes short term. Which means more and more of it has to be refinanced every single year. And at a Russian roulette style of who knows where the interest rate is going to be, the federal government ends up looking like a homeowner with a $39 trillion adjustable rate mortgage. Every time rates move, the payment moves. And we're all at risk of losing our home if things move in the wrong direction. Stick around. We'll be right back after this.
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all right, let's pick up where we left off. Adjustable rate mortgages were the very thing that took down the entire housing market in 2008, and Warsh is proposing to put the entire federal government into the same structural position. That's pretty weird, given that Warsh's stated reason for wanting the Fed out of the long end of the bonds market is to restore fiscal discipline. He says the Fed shouldn't be propping up government deficits by buying long dated bonds that gets appraised. Jesus hallelujah from me. But in practice, that makes the federal government more fragile, not less. Because the moment rates spike on a debt stack that's mostly short term, somebody is going to have to step in and buy that debt to stop the bleeding. And there's only one entity big enough to do that, the Federal Reserve. So either Warsh is making a strategic error or that the entire economics profession sees coming, or the rotation is not actually about fiscal discipline like he wants us to believe. It would make sense if this is really about setting up for a future intervention that he can admit to in a confirmation hearing. Now hold that thought for a second. We're definitely going to come back to it. Move 3 Warsh wants a New Treasury Fed accord, he said so in 1951, after years of the Federal Reserve being forced to keep interest rates artificially low to help the treasury Finance World War II, the two institutions signed an agreement called the Treasury Fed Accord. That deal severed the link between them. It freed the Fed to fight inflation without permission from the treasury, and it became the founding document of modern central bank independence. That independence is the deal Warsh wants to renegotiate. Warsh has explicitly said he wants to negotiate a new agreement between the Federal Reserve and the Treasury Department. He uses the original 1951 accord as his model, but he wants the Fed chair and the treasury secretary to publicly coordinate on the size of the Fed's balance sheet and the management of the national debt. He's framing it as a return to discipline, as a way of separating fiscal policy from monetary policy. But the historical record suggests it functions as the exact opposite. Coordination is exactly what financial repression looks like. Move 4 Warsh plans to bet on artificial Intelligence to keep inflation under control Now, I'm a big believer in AI, one of the biggest believers. But making something that hasn't happened yet, a core pillar of your strategy is a hopium. Warsh has argued that AI is going to drive a productivity boom large enough to absorb the inflationary pressure that would otherwise come from the first three moves we just walked through. Cut rates, coordinate with treasury, shrink the balance sheet, and then let AI handle the inflation that that mix would normally produce. As an aside, in addition to this being hopium at this stage, it's also proof that that whenever you're looking at the inflation numbers, you need to recognize that the real inflation rate is much, much higher than what you're being told. The reality is that the government eats up all of the inflation led deflation, which should equate to better quality products at lower prices and then plus whatever the stated inflation rate is. If everyone understood that life should be getting cheaper or with every passing year, they would be much angrier about the amount of tax and fraud that is being foisted upon us. Additionally, if AI doesn't come to the rescue, and there is a chance that it will, but it's still a big if if it doesn't come to the rescue, making all of these moves at the same time is likely to break something in the economy. The CNBC Fed survey just polled Wall street on Warsh's AI issue. 81% of respondents said the Fed should not incorporate AI productivity into policy until it actually materializes in the economic data. That seems pretty wise. Said another way, Warsh's central inflation hedge is something the professionals think is premature. He's betting his entire plan on a productivity miracle that hasn't yet arrived. That is if he were telling us that his real plan. Welcome to part three. The architecture of Warsh's actual plan. The thing he's not talking about. There's a question Kevin Warsh has been very careful to avoid. If the Federal Reserve sells off trillions of dollars in long dated bonds, who is going to buy them? Because at the prices Warsh will need. The honest answer is nobody. And if that's the case, somebody will have to be forced to buy them. Now Warsh knows that he is Smart. And he knows the architecture for forcing purchases has already been built. He just has to walk in and use it. Now, the crazy thing is that Warsh has been writing about quantitative easing for 15 years. He's published papers on it, he's given speeches on it. In fact, he resigned from the Fed in 2011 over it. He understands the bond market the way Rory understands golf. So whatever he's cooking up, he knows exactly what's going on. And I think it goes beyond quantitative easing. And that's why my spidey senses are going off. Despite what he's saying, I cannot fathom that he's just blundering forward. I just don't think he's revealing his actual plan. I don't have any insider info, but here's my logic. I think he understands that most people don't understand the economy practically at all. And even the ones that do are blind to huge parts of the regulatory landscape. And that's going to end up working for him. For instance, on April 1st of this year, a banking rule known as the supplementary leverage ratio was changed. The changes relaxed regulations on the eight largest banks in America and by doing so, it freed up tens of billions of dollars in capital that previously had to be held in reserves and can now be put to work in buying assets. Warsh is obviously aware of this change because it was finalized back in 2025. Now, given a host of other regulatory restrictions, this newly freed up capital will almost certainly be corralled into Treasuries. Banks have huge restrictions on what they can buy based on risk scores. And wouldn't you know it, the government gives a score of zero risk to US Treasuries and they count as the highest quality liquid assets. So if you're a regulator and you're looking at the US's absurd debt, and you don't just want to keep printing money to buy it all because that would risk inflation. You look at the SLR and you say, aha. I know if I let the banks take more risk and hold less cash in reserves for emergencies, the natural asset class for them to buy to get a return on their money is good old fashioned US Treasuries. That's part one of the plan that Warsh understands, but certainly is not saying out loud. Part two is the genius act signed by President Trump in 2025. Now, by federal law, every legally compliant stablecoin in America must be backed dollar for dollar by cash, Federal Reserve deposits or short term US treasuries. The stablecoin market is around $200 billion today, but major banks project that it will grow into the trillions over the next decade. Every dollar of that growth is by law a potential buyer of good old fashioned US Treasuries. That's piece two. Piece three is the new Treasury Fed Accord that I mentioned in part two that Warsh wants to get in place where he publicly says he wants to coordinate between the Fed Chair and the Treasury Secretary on the size of the Fed's balance sheet and the schedule of treasury debt issuance. Surprisingly, Warsh is just pushing for this one openly. He's already said that it's a priority. Now you put it all together and a real picture of Warsh's actual strategy snaps into focus. SLR reform creates captive debt demand from banks. The Genius act creates captive demand from stablecoin issuers. And the new accord coordinates Fed selling with treasury issuance so they can manipulate the market and avoid a crash. Now, you're not going to find a press release that says, hey everybody, this is the financial repression architecture that I plan to use as your new Fed chairman. But the effect is going to be the same. And while it will accelerate the death of the middle class, if your goal is to embrace the tragedy of soft defaulting on the US debt, it's all quite brilliant when you think about it. Warsh is building a strategy that leverages what other people have already put into place. He didn't build this. He's not some evil genius. He's just taking advantage of what's there to make sure in his back pocket he's got a card that he can play to make sure that if AI doesn't take off, he's got other options. You're not going to find a single official who designed this whole thing. It's not even Warsh himself. The banking regulators have their own justification for the SLR reform. The Trump administration has its own justification for the Genius Act. And Warsh is appealing to history with the new accord he wants to put in place, even if it's a bit smoke and mirrory. But when you put all the pieces together, they do exactly one thing. They guarantee that when the Fed sells the debt on its balance sheet, somebody is going to be effectively forced to buy them so that the government can continue to spend recklessly and worsen the K shaped economy. The required captive debt buying audience that is needed to make this financial repression work is already well on its way to being built out. Now, I'm sure many of you are asking, why do I think Warsh has a strategy that he's not fully disclosing because Kevin Warsh wrote the playbook on all of this. He spent his entire post Fed career warning about the relationship between the central bank, the treasury and the bond market. He knows exactly what SLR reform does. He knows exactly how the Genius act is going to impact the treasury markets. He understands the architecture better than almost anyone alive. That's what I'm getting at when I say that he was very careful in his confirmation hearing. He was so specific about three of the four moves that he plans to make and so careful about not talking about the fourth. 1, cut rates 2. Shrink the balance sheet 3 strike a new accord. He named those. The piece he didn't bring up is that captive demand that's already been built up. The forced buyers that recent regulations put in place for him or whoever is going to be in that position to take advantage of. And he didn't mention that because that mechanism is what will help the US Government continue to be reckless if need be. Now, I said before, and I really mean it, I don't think Kevin Warsh is evil. My gut is that Warsh's thinking goes something like this. If AI does what I know it can, we're going to grow our way out of the debt problem. But if it doesn't, I can still offload most, if not all of the $6.6 trillion sitting on the Fed's balance sheet to the newly arranged captive U.S. debt buyers. And that way Trump or whoever else is in office because both Republicans and Democrats spend like they are out of their minds. Whoever's in office, I'll be able to help them with this quantitative easing tool. And we can softly default on our debt. Welcome to Part 4. Who suffers when we soft default through inflation? Between 1945 and 1980, financial repression cost American savers an average of 3 to 4% of GDP every year. In modern terms, that's roughly equivalent to the entire US Defense budget being transferred from savings accounts of individual people to the government every year for 35 years straight. If you'd put $10,000 into a savings account in 1946 and held it through 1980, earning interest the entire time, by the end of those 35 years, you would have lost roughly half of your real purchasing power. Even with the interest. That's how much value the dollar lost during that period. And we're about to go through it all again. There's no way to avoid it when you've got $2 trillion in annual deficit spending and you've already racked up $39 trillion in debt and that's obviously growing. So what are we going to do? Odds are we're going to do exactly what we've done historically. The government is going to steal the money through the invisible wealth transfer of inflation. Warsh just happens to be the guy in the driver's seat. And I think he's there partly because he understands the mechanism so well. He's hoping we can avoid it, but if we can't, he certainly knows how to deal with it. Here's how the wealth transfer will work. The government has to weaken the dollar. I hope you see it's already happening and it's just going to accelerate. They need the dollar to lose purchasing power faster. Then the interest on the debt grows because the moment that happens, the real value of the debt shrinks. Unfortunately, when the dollar weakens faster than the debt grows, anyone holding dollars in any fashion, cash, a savings account, a cd, a money market fund, a paycheck, whatever, their dollars will shrink in purchasing power at the exact rate the government makes it easier to pay back their $39 trillion by weakening the dollar. It's two sides of the exact same phenomenon. The transfer will be automatic. It won't require anyone, not Warsh, not anyone to do anything other than embrace policies that cause inflation. It's just math. This mechanistic wealth transfer, which has been ongoing for quite some time, will worsen the K shaped economy, which again is the same phenomenon that we're talking about here. The people who own assets, stocks, real estate, gold, bitcoin, productive assets, etc. They will all see those assets rise with inflation. The people who only own dollars will see the exact opposite. Said another way. The rich will get richer and the poor will get poorer. The top 10% of Americans though, already own 93% of the assets. And after a decade of the kind of financial repression we're talking about about here, that number's not going to go down. It's going to go up. So what do you do? One, get honest about your dollars. Cash beyond six to 12 months as a survival buffer. It's just not safe. It's getting eaten by the government day after day. You're paying an additional tax without even knowing it. 2. Diversify across uncorrelated economic forces. Not 10 different stocks, not three different ETFs. Real diversification means assets that respond differently to the same stressor. Productive businesses, real estate and commodities, hard money like gold and Bitcoin. And your own skill set, by the way, very important. Make sure that you're growing in personal power. 3. Don't try to time the markets. The last financial repression cycle ran for 35 years. So trying to be a clever trader and wait this one out just means getting destroyed by the ravages of inflation. 4. Understand what's happening. Most people will live through the next decade thinking the economy just feels weirdly hard. They won't know why their money doesn't go as far as it used to. They won't know why they can never quite get ahead. And if you're subscribed to this channel, though, you're going to know exactly what's going on. So make sure you hit that subscribe button. Now listen, There is no plan to pay off America's debt. I just can't say that any more clear. There never was. There's only a plan to offload it onto the financially illiterate. It's immoral, but it's the strategy. So you need to plan accordingly. With or without wash. Democrat, Republican, doesn't matter. With or without AI until the budget is balanced, the only plan is to use inflation to make the debt someone else's problem. Your job is to make sure you're not the illiterate person left holding the bag. All right, that's it for today's episode. If you got value out of this, it would mean the world to me if you would go give us a five star rating. It helps more than you know. All right, thank you and until next time, my friends, be legendary. Take care. Peace.
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