← Tom Bilyeu's Impact Theory
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- [00:00]
David Pakman
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Tom Bilyeu
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Tom Bilyeu
Hey, we all have our reasons.
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David Pakman
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- [01:00]
Tom Bilyeu
I'm Tom Bilyeu and this is Impact Theory. Let's dive right back in to part two with David Pakman. Does the amount of debt that we have here in the US strike you as problematic?
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David Pakman
Oh man, that's a very loaded way to ask the question because there's so much inbuilt, you know, debt. First of all, I guess I don't know exactly your view on this issue, but are we on the same page that national debt and household debt are not good analogies for figuring out how to run a country? Would you generally agree that to say, hey, you know what, if you're spending $200 more each month than what you earn, that's a problem. That analogy doesn't necessarily translate.
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Tom Bilyeu
I have a feeling that we will agree, but for violently different reasons. And so under the hood we probably still really disagree. But I don't know. I actually don't know your economic take.
- [02:01]
David Pakman
Well, I guess I'll take a different approach. My general view about national debt is there are stimulative and unstimulative instances of deficit spending. There are ways for the government to deficit spend that have an economic multiplier that make it logical to do so. Food stamps, for example, of the absolute highest economic multiplier effects of any way that that governments can spend. By the way, you don't have to deficit spend to pay for food stamps, but under the assumption that we have a deficit and there is deficit spending, food stamps have a massive economic Multiplier, Very unlikely that any food stamp money is going to sort of like be left on the shelf or in the bank, so to speak, because the people receiving that money need it. It's spent in local communities, grocery stores which then hire people. It's demand side stimulus because the grocery then have money to go out and spend it at a restaurant. And ok, so. So like I think that that makes a lot more sense than a less stimulative way of, of deficit spending. Like for example, just saying let's just cut taxes for the rich. Very low marginal propensity to consume the money will mostly just sit in savings. Yes. With fractional lending, a portion of that will then be lent out, but it's a lower multiplier than the food stamp. So first of all, I think what your deficit spending on matters. Secondly, I do think you always want to be comparing debt to GDP in the same way that if your household income is 100k versus a million, a thousand dollars in debt nominally means something very different. I think we also want to compare the rate of the debt changing to the rate that the size of the economy is changing on a cumulative basis and also to interest rate because there's this other aspect where depending on what the interest rate is on the debt versus what you can do in terms of innovation and economic growth with the deficit spending that's also important. It's sort of like if you can get a 2% mortgage versus a 7% mortgage, your choice as to whether you say I'll keep my cash in the market and get the 2% mortgage. It's a form of arbitrage that also makes a difference. So like where when I zoom out, I think the conversation has to be a little more nuanced. You know, some huge percentage of Americans don't even know the difference between the national debt and the national deficit. That's like terrifying. And they have opinions as to what should happen. They don't know the difference between the debt and the deficit. That's terrifying. And also I do think that it's not the sky is falling problem that some have been arguing for 70 years. We where we're always two years from, that's it, it's over, the economy's done. And then we have 100 new stock market highs with low unemployment, reasonable inflation and pretty good GDP growth. And it's like how many years were we from that? And by the way, I would say the same thing if we're at some point going to talk about global warming. Those who 10 years ago said 10 years from now it's going to be over. Miami, Boston and L A will be underwater. Like I also am resistant to that kind of hyperbole.
- [05:21]
Tom Bilyeu
Yeah, I think that that is very wise. Is exactly how you end up finding where the truth lies. So here is why I think that debt is a screaming problem. Not that collapse is imminent, but that collapse does come if you're not very thoughtful. So what I look at is what are the interest rate payments? So the interest rates for sure matter a which is why this has been on everybody's mind so much right now. Totally understand why you're drawing a distinction between the debt and the deficit. I think that's very wise. But if you look at what's happening right now, we're adding roughly a trillion dollars to our debt every 100 days and hopefully that will slow down a little bit now that we just had the 50 basis points rate cut from the Fed. I'll be very curious to see if the, if inflation actually remains in check, which by the way we have to talk about infl that will be interesting to bounce our takes off each other. So the reason that I think ultimately the debt ends up consuming people is the same reason that empires end up collapsing. Because what you do is you build this empire gets bigger and bigger. It ends up becoming this huge economic drag. In the beginning it seems like it's just spoils everywhere. Everything's flowing in. You're getting tax revenue, you're getting goods from everywhere and then all of a sudden you're having to build militaries and protect and deal with uprisings and all that stuff and it ends up getting insanely bloated. It drags you and they all fall. So they, they have just fallen one after another. All throughout human history, not a single one has ever lasted. So now the last for a long time. So while things are going woo wee, it can be a lot of fun. And I'm not saying America is going to collapse in the next two years, but will it collapse in the next 50? It might. So that's where now will it be a controlled demolition? Will it be one where there, there's blood in the streets? These are all great questions. History says statistically it's more likely that there will be blood in the streets than not. But as you get in these debt cycles where the debt is just accumulating and you're spending more and more of your, your gdp, your, all the tax money that you're bringing in is just going to the interest payments, that's where you begin to not be able to fund the things you want to fund, whether it's a military, social programs, whatever. So it's like you said something early in the interview that I agree with wildly, which is, hey, I don't necessarily love the way the government is spending money, but I also want social programs. I want social programs. I am not a libertarian. I'm not here saying we don't want government, but what I am saying is government is wildly, wildly inefficient at spending the money and because we have the world's reserve currency. And this is why I was saying, I agree with you. There's not a one to one between balancing a household budget and a government spending deficit because they can print money. But I believe that the government has, has a moral obligation, a moral obligation to not print money. And so when they solve all these problems by printing money, they turn everyone into gamblers. And that I think is a huge reason why especially young people feel so much like they can't get ahead because prices have gone crazy. When you're printing money, people pour into assets and anybody that doesn't have assets gets left behind. The wider that gap gets, the harder it gets to cross the chasm between being not necessarily outright poor, but on the lower end of the spectrum, getting into middle class or even upper middle class or rich. And so that deficit spending, racking up a massive debt, having huge outlays into interest, and now playing this weird game of chicken with inflation, you create the situation that we have now, which I think is a very substantive part of the push towards populism.
- [09:34]
David Pakman
So let me, let me play devil's advocate a little bit. Why do you think that the countries with the lowest debt to GDP ratios aren't particularly dynamic economies or places where we would look at and say, oh, that seems interesting. I mean, you know, some of the places that have staved off having a high, higher debt to GDP ratio, for example, you know, Afghanistan, Turkmenistan, Russia's one, the Democratic Republic of Congo is one. You would love these debt numbers, right? I mean, you would look at this and say, oh my goodness, fiscal restraint and conservatism. But why do you think that those countries aren't doing well if the, the higher debt to GDP ratio is so problematic? And it can, it can be a rhetorical question or not. I don't know if you want to answer it, but like, I have some
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Tom Bilyeu
idea, I'm happy to answer it. Yeah. And I'm sure yours are more well thought out with those specific nations. But knowing what I know about the physics of economics, it's going to be something along the lines of either things are so regulated that innovation just doesn't happen and people have no desire, will or even ability to get things moving. It could also be that there's a sweet spot, which I think you'd probably agree with, where if you're too fiscally conservative, then there's no money getting into the system. There's no way for loans to get out into people's hands and therefore they might even be a brilliant entrepreneur. But if they cannot get any startup capital, they're just sitting literally in a dirt hut. I just had somebody on my show, I'm going to punch myself in the mouth for not remembering who said this. It was just recently, but they were saying that you want to give money to people with literally no thought of getting anything back. It is not a micro loan. That the best way to do humanitarian aid is just go into a village and be like, here's $9,000 equivalent. I think it was in real cash, like $900. But you're giving them the spending power of $9,000 to the individual person just being like do whatever you want and that that actually yields these better outcomes. Now what I take that to mean is there's either so much corruption in the country or their whole thing was even with good intentions. The NGO that's trying to distribute that money ends up burning so much of it, trying to make regulations and how do we give this money out and checking to see if they do the right things and all of that stuff, that it eats 90% of the money, literally 90% of the money. And so that's like, it's just a different type of economic mismanagement that doesn't reveal itself in that number of debt to gdp.
- [12:15]
David Pakman
There are definitely pieces of that that make sense and that I agree with. I mean, I think the sweet spot idea is an interesting one to me. I don't know if you and I would like it land on exactly the same place necessarily, but the truth is that debt is investment in growth. And, and when you see that there are extremely low debt to GDP ratios, often it's because it's the missed opportunities that you're talking about. There are ideas here that with access to debt could actually flourish and generate growth. And there's no access to debt and therefore they don't. And there's like a dynamism and, and debt sort of being responsive to demand that often is seen by there being more debt at the national level. There's this other Thing also that I think is interesting to consider, which is that sometimes you get these external shocks, economic shocks to a country that can really damage the economy for pretty significant periods of time. And sometimes being able to say, well, we're going to borrow to kind of weather this shock over a 10 or 20 year period. The that that shock was weathered has a, it's hard to like link it up dollar for dollar. Especially when like a crisis prevented is always less interesting than oh, we had a crisis and, and we got out of it. But there's also something to be said for the effect of the ability of debt to kind of dampen what would otherwise be a pretty significant economic shock. And countries with these super low debt to GDP ratios just don't even have that ability. And so when there is an economic shock that things don't go well. So yeah, I mean, I think we're kind of getting to a similar explanation for why the super low debt to GDP ratio, which might sound appealing to a deficit hawk, usually is associated with countries with pretty poor economies.
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Tom Bilyeu
Yeah, I'd make one change what you said and I'm curious to see if we agree on this. You said debt is investment into growth. I would change that to debt can be.
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David Pakman
And no, that's right, growth. I agree with that.
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Tom Bilyeu
Yeah. Because I, I think a big problem is that a lot of times the money just is not spent in an intelligent fashion. The, the base assumption that I think all of this rests on and the reason that no one can ever escape this debt cycle and that it, it always hits this point where you either go to war or some other traumatic thing happens that causes what is known as a debt jubilee. And it sounds wonderful, but it's actually horrific when people live through it. But the reason that I think that, that, that just keeps happening is it has the base assumption that things will always grow. And that, that certainly seemed true for about 50 years after World War II. And so like you could forgive anybody that was just like, oh my God, like this works so well. Like just keep doing deficit spending. We're really igniting the economy. This is amazing. Look at us industrializing rapidly. This is incredible. And it, it really was somewhere in about the 70s though, something started to break in terms of that. And this is what I think young people today can feel is that, hold on a second, wages are not going up, so we're getting a lot of cool new stuff. I have an iPhone and that's dope. And I have the Internet and that's amazing. However, my wages aren't Going up. And boomers, not even my parents boomers had more money in their 20s than I have now. And so I feel trapped, unable to get onto the property ladder for, for other reasons as well. There are other things that are going on that have made asset prices way too expensive. Largely, they're printing money, but so that's where that indebted growth obligation becomes. If it works. Like, for instance, right now, everybody is like, yo, bro, I hope AI comes in and robotics. And they're basically just infinite humans because that is effectively how they could work inside of the economy. But if they don't, man, I don't see anything on the horizon that's going to allow our GDP to outpace our debt.
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David Pakman
So a couple different things there, a couple of different things there. Over the last several years, wage growth has outpaced inflation. So I think it's important because, you know, you said there's no wage growth. There have been periods of stagnant wage growth, that's true. But over, over the recent few years, actually wage growth has outpaced inflation. That doesn't mean things have gotten cheaper because inflation is still more than zero. And we'll, we'll get to inflation in a little bit. Your example about the 70s, I think is really interest. Again, I would point people to the book why Nations Fail. You kind of described exactly what's described in this comparison of dividing countries into those with extractive versus inclusive institutions. The Soviet Union example of initial growth, you said, oh, it sort of looked like things were just going to grow indefinitely. And then the 70s happened. That's what's described as happening under extractive government institutions, like what the Soviet Union has, which is initially you can sort of make the allocation of resources more efficient because the government just says, here is what, what industry is going to do. So initially there's this very positive shock. Wow, look like we're, we're either industrializing in the case of the Soviet Union in the early 20th, late 19th century, or for whatever reason, you shock the system in a way, and all of a sudden GDP starts going up. But because the institutions are extractive, eventually it stops. Because what one example would be, oh, there's a new technology that would make us even more efficient. O would actually take power away from the institution to keep people working. In some of these industries, we will lose control of the economy. So often these extractive institutions will resist creative destruction. When a new technology would increase efficiency even more, the growth stops. Which is what you saw in the 70s. Exactly. As you're describing, there was one other thing I wanted to touch on, which now escapes me. But maybe we'll come back to it.
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- [18:54]
Tom Bilyeu
I'm Jake Stauch, co founder and CEO of Serval. We built Serval to automate the IT work that slows companies down. Onboarding password resets, access to applications. My laptop stopped working. While employees wait for help, their real work is put on hold. It desperately wants to automate this work, and that's why they need Serval. You just tell Servil what you want to automate in plain English and it's built. No drag and drop workflows, no expensive consultants. Employees get unblocked and IT teams go from drowning in tickets to building what actually matters. With Cervel, it becomes the AI engine powering the entire company. This is a new way to run it. We guarantee you'll automate 50% of all tickets and we'll prove it to you in a free four week pilot. Go to cerval.com tickets. That's S E-R-V A L.com tickets. Okay, so one thing I want to say to what you just said is as an entrepreneur, this is what it felt like. I don't have the data to be able to say for sure. I know this definitively, but Covid changed everything for a hot minute. And all of a sudden I had employees that were like, everyone's going to let me work from home. I'm getting stimulus checks from the government, so I'm going to go do what I want. And it caused us a massive bump in what we had to pay. Now, I'm sure everybody thought, oh, this is amazing, but it actually put the company in a far more difficult position. It hemmed our growth in substantially because now all of a sudden, our capital outlays just to run the business went up dramatically. And so that was just. We were forced by market conditions to do that. I mean, some of the market conditions were a little false, but like, I don't mind that the. The market's going to do what the market's going to do. I'm not mad at it. I don't expect anybody to bail me out, but I don't expect that trend to continue. Again, this is gut instinct and maybe I'm totally wrong, but as an entrepreneur, we've now started making bigger demands in terms of, hey, at first it was you could work from home exclusively and then it was like three days, then four and we will eventually get back to five days a week in the office for sure. And it I can feel the tide changing in terms of there are way more people now looking for jobs, especially for us because we're in the entertainment space, we make video games as a part of what we do. And there's just been a bloodbath in that industry. And so now all of a sudden there's the exact opposite pressure on wages. I'm not going to have to pay as much because there is a glut of available people into the market. And so while, yes, there's no doubt that was and obviously beneficial to workers, I don't think it came with a corresponding increase in output and productivity and therefore actual GDP and dollars and cents that all of us as a society can reap the benefits of. So I would again, gut instinct, I'm going to expect that to stagnate. I don't necessarily expect it to go back down, but I don't think that growth is going to continue. And so you're still going to have that same sense of fancy word time on we that people have that like, ah, things are just not working out for me, I don't know how to crack in, which means that they're pulling back even more, they're not pushing as hard, we're not getting the full weight of the talent and intelligence of this next generation. And so it's going to leave you in the situation of like, how do you shock the economy again to get it running? And so far the only thing both Trump and Biden have done, so I assume Harris will run the same playbook, which is to print money.
- [22:25]
David Pakman
And you'd say a little bit more about. So first of all, you're making a very progressive argument. I mean, one of the, one of the reliable left wing economic arguments is growth will not continue forever. How do we know that? Because the planet only has such a carrying capacity, we may be very far from getting to that. Different people come away with different opinions about how far we are with any particular resource or space for people or whatever. And either the planet will no longer support more growth at a physical level, or the declining birth rates will lead to declining populations and that's also going to put downward pressure on gdp. But interestingly, you're actually very much in line with some of the most progressive economists on this issue. I don't know if that surprises you as far as that I care only
- [23:16]
Tom Bilyeu
about what is true. So I don't consider myself left or right. My thing is you should be pushing towards a known metric. I'm trying to do this and to achieve that metric, I'm going to run some experiments and then I need to look at and see if they work. So if, I mean, if communism led to the most human flourishing, then I would be a communist. But looking at it, that doesn't seem to be true. So now will we all agree on what human flourishing is? No, but I've literally dedicated my life to my definition of what human flourishing is. So, yeah, that doesn't land weird for me in the slightest. But what I want to look at is what works, what doesn't. And if something doesn't work, even if it sounds good, I'm not going to do it. And so I love the Thomas Sowell quote, which will certainly throw people's perception of me to the right. But his idea that we have, I think he said in the last 30 years, but this is like 20 years ago. The last 30 years have been marked by exchanging what works for what sounds good. And so my thing is, yeah, I don't care what sounds good. I want to know what actually works. And if what works happens to be progressive, left, right, up, down, that I don't care about. I just want to make sure that things actually work.
- [24:34]
David Pakman
So here's a question, because you talked about shocking, you know, a shock to the economy to get it going again. Which metrics do you look at right now and you say, here's the data that tells me the economy is having a problem right now.
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Commercial Announcer
Now.
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Tom Bilyeu
So debt, interest rates, inflation, gdp, those are both nominal GDP and ppp. I suppose the nominal is just because I'm competitive and I want to see how we stack up in the world. But yeah, those, that is the basket and then the less easily tracked. But something along the lines of what you're talking about with, with an HDI like thing that measures whether people feel good or bad. Like even if young people have it better today than ever before, by every metric, they're unhappy, they are attempting suicide more frequently, they are succeeding in suicide more frequently. Death of despair among men in certain age groups has gone up so much that it's actually lowered the entire generation's life expectancy. That that is terrifying. Something is off. So all of these things are proxies, but they're the closest basket of things that I can see to say are we okay or not?
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David Pakman
That's interesting. I think the latter ones you mentioned, there are a kind of in a different basket because there's a more cultural dynamic to it. And we can talk about them too. The first ones, you know, debt, we already talked about. So I think we don't have to like go back to debt. But you know, you've kind of stated your view. I've stated my view. When I look at the inflation and the GDP numbers, they really seem pretty ok. I mean, you know, you don't want deflation because we know that a deflationary spiral brings with it a number of different issues. Japan side, other places have seen it. We now have inflation at the arguably desirable 2 to 3%. The GDP growth. The numbers seem pretty okay to me. GDP growth is exceeding inflation. So I just struggle to find like an alarm in those metrics right now.
- [26:45]
Tom Bilyeu
Okay, so this is where we're going to get into beliefs and values. So I think that we have a major problem with inflation at 2 to 3%. And that is because if you think of inflation as rising prices, then what I'm about to say won't make any sense. But rising prices is the symptom of what inflation actually is, which is putting enough, what I'll call fake money into the system such that it overwhelms the natural improvements in output. So you can actually put fake money into the system. And as long as the output of the country, meaning the goods and services that they put out that people are willing to pay for, as long as that's more than the fake money that you put into the system, you can get away with it. And I think the government literally counts on that. So I'll give you just fake math. This is totally fake. But imagine that we have, through innovation, new companies coming online, all that we increase GDP by 5% and you put fake money into the system at 3%. Now you've still, you're 2% positive, so you're moving in the right direction. Things would feel nominally better. So what ends up happening though is that we are putting so much money in the system at times that we exceed the natural advantages we should have gotten from the innovation. The deflation in costs. Right, that, that a phone should cost a lot less, a TV should cost a lot less, all that stuff. You, the government ends up printing enough money to try to gobble up a lot of that stuff. And so the reason they do that, I have a very simple explanation for why I believe the government does this. They are able to spend money that they don't have without having to ask anybody for it. So they just say, hey, we want to fund a war, we can do that. We don't have to ask. We can literally just deflate the currency by printing more money. We did not have to get the electorate's approval to do so. But. And for anybody that doesn't understand why I think inflation is immoral, I view inflation as theft. Because what ends up happening is, yes, the government, let's say I have a hundred dollars in my bank account, the government left all $100 in my bank account, but they put so much more money into the system without creating additional outputs, that now those hundred dollars that we all have are fighting for the same goods, which means that the cost of the goods is going very simple, supply and demand. So now maybe my hundred dollars buys me $95 worth of stuff. And if you're doing that year after year after year, even at 3%, it's something like in 15 years you've lost some ungodly percentage of your wealth. So because of that, we have this economic system where you have to become an investor. You cannot save your money. You have to invest it in something that will beat inflation. Now, going back to my initial thing that these things are very complicated. Even I, I run businesses. Sold a company for a billion dollars. Like I know my way around money, but even I don't like to invest money that like, it's a whole another game. I just want to be able to save my money. I would live my life very differently if I knew that in my bank, $100 now will buy me a hundred dollars worth of stuff in 10 years, 20 years. I would never even think about investing money because I wouldn't need to. I could just squirrel away enough money for me to live on. But you can't, because the cost of living changes so radically. And I used to think that was a fundamental law of nature. It is not. That is money manipulation on behalf of the Fed and the government. And if they didn't do it, then it wouldn't change. It would be a hundred dollars, would be a hundred dollars. Now you could, any one person could get obliterated. And that's obviously what they're trying to protect against by manipulating it. They're hoping that they can sort of balance things out. Nobody peaks too high. Nobo falls too low.
- [30:36]
David Pakman
All right, I'm going to Be totally honest. And I say this with peace and love. There was a lot of word salad in there. And it may just be that I don't. I may, I may not have the cognitive capacity to understand all of it. Let me see if we can break down a couple of things. There's a few things you said just are not making any sense to me. Okay, so let me. If, if you can answer this one with just a number and then I can just to frame my answer, that would be good. What level of inflation would you like to see?
- [31:03]
Tom Bilyeu
0.
- [31:04]
David Pakman
0. Not negative, but not positive.
- [31:06]
Tom Bilyeu
Correct.
- [31:07]
David Pakman
Okay. I think there's a couple problems with what you're talking about. So first of all, in a sense, if there's growth, there's going to be inflation. And what I mean by that is in an economy that's not a communist economy, which you and I are on the same page, like we've gotten this big obstacle, we've gotten past a big obstacle, which is neither one of us thinks a communist economy is, is the, a way to set things up. Unless you're in a communist economy or institute price controls or whatever the case may be. If your population grows and there's more demand for goods and services because of a growing population, you that is going to put some upward pressure on pricing due to market forces. The odds that that leaves you at zero in this perfectly calibrated seems essentially impossible Historically in capitalist countries, like when there is growth and when there is a growing population and when there is demand for stuff that puts upward pressure
- [32:17]
Tom Bilyeu
again, do we agree with that? We don't. So what we're disagreeing about, and this is why I started with if you believe that inflation is the rising of prices, everything I'm going to say won't make any sense. Inflation is not rising prices. Inflation literally ask what's inflating? What's inflating is the money supply. So as you put more money into the system, that's what I want at zero. I'm not saying prices won't go up and prices won't go down. In fact, over time, typically prices tend to go down. What I'm saying is don't inflate the money supply. So if you have $20 trillion, whatever the M2 money supply is, lock it. That's it. That's all you've got. Spend it wisely because you can't make more of it.
- [32:57]
David Pakman
But under that, would you not expect that, that if what you are arguing has happened as a result of the money supply increase, if, if it has happened, wouldn't we expect people to decline in the United States? In other words, you said that in an ideal system, the hundred dollars now buys you the same amount as 100 in the future. Your concern, if I understood it correctly, is that when you increase the money supply, the hundred now will only buy you $95 in the future. But PPP has gone up over time despite the increase to the money supply, despite inflation, because of all of the other things that have gone on in the economy that do make sense has gone up consistently in the United States. It's the opposite of what your view would predict. If I understand you correctly, if the
- [33:46]
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- [34:45]
Tom Bilyeu
So not quite so what, what, what's happening certainly right now is that everybody is printing money. And if you think of it as a game of musical chairs, it works until the music stops. And so this is why these debt cycles end up bursting. So Ray Dalios mapped this out really well. There's six stages of debt. So the rough thing is, in the beginning, nobody has any debt because a very bad thing just happened. So if you think of the end of World War II as the beginning of this most recent, recent large debt cycle, World War II just wiped the board. It changed everything. It made the US Dollar, the reserve currency. The British pound lost its status. So it was just an absolute bloodbath for all of Europe, for England in particular, their empire literally collapsed. So now you get a new start, though, and so there aren't all these. The U.S. anyway, as the new empire does not have all these debts. In fact, they've got a lot of people that owe Them money. So you get like a really awesome period where everything is going well, but to fuel growth you begin to start taking on debt. You let that debt then begin to ratchet up, ratchet up, ratchet up. All the while you're a lot of it. To your earlier point, you're actually fueling the economy. So you're taking on debt, but the economy is continuing to grow. When you're spending it in a stimulative fashion and it's working out, everything's great. And then like we said, you hit the 70s and something starts to get wonky. That's when we break the association with gold. So the dollar is no longer backed by the gold. So now we have a literal fiat currency. And so gold is tricky because it does technically inflate by 2% per year. But if you think of that as a non inflationary monetary system where you can't spend a dollar that doesn't exist in gold, then it's like you have a break. But once you get to a fiat system where you can just make more of it, more of it, more of it, now all of a sudden you're at risk. So how long will things go up and PPP keeps going up? It could be for a long time, man. And this is the high risk of somebody with. My worldview is that you call two of the last 24 or you call 24 of the last two recessions right. It just, you're always like the sky is falling, like it's going to be bad tomorrow. It may not. It may go on for a very long time. But once you look backwards at history, you realize at about the 150 to 200 year mark, empires collapse. And so depending on where you start that clock, the US is either I think 75 years or 100 plus years into this and so will we lose the dollar reserve status. And suddenly all of these things that we're working and PPP is going up and everybody's happy and fat and loving it and it just comes crashing down. That's the question. So can we get out of the debt cycle if we don't get out of a fiat system? That, that is the question.
- [37:40]
David Pakman
Yeah, I think, I think we just disagree on the facts. You know, I think we may not be able to get that much further with this because I think if I understand correctly you're sort of saying, you know David, you are actually right about the data you're presenting. What I'm saying is external to the data, based on what I expect to happen, which is totally fine. It's just hard to make a counterfactual. A couple things I will say is I really, I like a lot of Ray Dalio's writing, but his long term debt cycle idea is contradicted and very much undercut in a number of different ways. One, he doesn't really account for the fact that technological disruption and innovation on a, on a semi permanent basis can completely disaggregate the booms and busts in the kind of next 50 or 75 or 100 years as you're talking about from just like looking at debt. And the other thing I think that's important to consider is that we have seen booms and busts that do not in any way correlate with significant increases in debt. Like for example, if you look@the90s.com boom, it was driven by technology, there was a bust. Neither the boom nor the bust was connected to debt. And like, that's a really good example of where like the debt was really secondary, tertiary or not even particularly relevant to that cycle. And there's a lot of other really good economic theories that I think more accurately maps onto the booms and busts that we've seen. Like I get that you're saying, well what you're saying is in the future and it may or may not happen, fine, but we actually do have data about prior booms and busts and they were totally decoupled from, from the debt. So I'm skeptical of the argument, I'm
- [39:25]
Tom Bilyeu
skeptical of that argument, but with appropriate amounts of humility as I haven't gone back and studied the specific.com bust in that sense. But I will tell you how businesses go out of business. You don't go out of business if you're not in debt and then suddenly finding yourself unable to pay that debt. So I'm gonna guess just knowing how this stuff works, that these guys got way out over their skis in terms of they went public, people gobbled up a ton of their shares, they were raising against their shares. They were carrying a ton of debt on the books. And when the, the equity in their shares plummeted, then the banks called their loans and they weren't able to pay them back because they were riding on the debt. And so this is why my advice to people, if you're going to invest, never do it on margin. You do not want to be in a situation where the value of your collateral ends up dropping. It gets called and pulled and that's how you end up with nothing. That's why so many companies went bust. They weren't actually making money. They just raised a ton of debt and they were wildly unprofitable. And so that's where this all gets cleaned out. This is why a company like Amazon can go through that. And yes, their stock price fell to virtually nothing, but they had so much revenue coming in that they survived. And you get on the other side of this, and this is, you know, you actually talked about creative destruction earlier. This is why you don't want the Fed coming in and doing all of this manipulation. Yes, you protect people from a stock market crash like that, but everything remains fake, which is why there are very, I think, very educated people right now calling this the everything bubble that we're in in this moment, because we're not letting anything fail. Everything is too big to fail. And so whether it's your regional bank, they'll let one or two go down and then they scramble in to make sure that nobody loses their money. Obviously, what happened in 2008, they had to come in and pick up all the pieces and start putting things in place to make sure that the whole world just didn't fall off a cliff. And I understand why they want to do it, but part of the reason that people were able to get into that situation in the first place is because they were able to take on absolutely irresponsible levels of debt. And so, so when and if you look at Ray Dalio, just, I mean, a fun statement, I guess nobody has one bigger betting on their beliefs about global movements than Ray Dalio. So he's somebody who very much puts his money where his mouth is in terms of the outcomes of being able to predict. Not just that, that's certainly not the only thing that he looks at, but taking that historical view is, according to him, what allows him to be so prescient in the moves that he makes.
- [42:00]
David Pakman
Yeah, I think a lot of what this comes down to is really about demand side, and that's kind of where I fall. And that's, I think, something that reinforces my view about whether a debt is.
- [42:14]
Tom Bilyeu
Sorry, what do you mean by demand side?
- [42:17]
David Pakman
Oh, I'm going to explain in a moment. When we talk about debt in proportion to something, when it comes to a company, ultimately its survival long term is going to depend on demand for the product or service that they are offering. And so, like, for example, during the pandemic, my business experienced a significant expansion because people were home and there was more demand for stuff to fill time that I used to be doing something different and Now I'm at home, I'm going to listen to stuff, I'm going to watch David or something like that. I could weather a certain amount of debt. Debt if the demand for my product or service is such that it proportionally makes the debt something that I can tolerate. If I get out over my skis and something impacts the demand side, then all of a sudden some nominal amount of debt that would be tolerable in one business scenario is no longer tolerable. I guess the point I'm making is when it comes to your critique or your analysis of some of the dot com busts it came exactly to, there was no revenue, there wasn't actually demand built there. And the amount of debt that can be toler dramatically different based on what sort of a demand environment we're talking in. So my economic perspective, and I think that of social democracy, is that by ensuring that people don't end up going into a medical bankruptcy, for example, I'm giving them the dollars with which to demand stuff products and services from me as an entrepreneur or from you or from whoever else. It's that demand side approach that to me rings far more true than the kind of austerity measure supply side, let's cut government spending side, which I don't think history shows is a way that you can get to prosperity.
- [44:02]
Tom Bilyeu
So interesting. So here's why I have beef with that.
- [44:05]
David Pakman
Okay?
- [44:08]
Tom Bilyeu
If you were doing it in a balanced budget way and you were saying, hey, we're going to marginally increase taxes on the wealthy, this is how we're going to pay for everything. And I had a transparent budget that I could look at and I understood that you expect to take in this much in revenue from taxation and you're going to spend this much and there's either a surplus or we're very close to breaking even, but we're certainly not overspending, then I'd be like, word man, like we've got this much coming in in tax, like what are we going to do with it? Let's make sure it's awesome. Let's make sure that we're not falling prey to the. We're spending so much on all the government departments that, you know, 40 cents of every dollar collected in taxes is all that makes it to the actual people people. But like, hey, if we can distribute this well and everybody agrees these are the programs that we want to fund, I think it's awesome where we get into trouble. And this is going back to your. You're exactly correct in the analysis of how it works. But you and I differ in terms of what we think could happen. So if you don't have debt and you do have revenue, then you're in a way better position. You can even lose a fair amount of revenue before you potentially go negative. But when you have revenue, a massive amount of debt, and your revenue drops, you can still get in trouble even though you have millions of dollars in revenue. And that's what I'm saying is a very fragile place to be in. And that mimics what we're doing here. And by the way, to cover any losses that we have to operate at a deficit, what we do. I'm going to use language you're not going to be comfortable with, but it will help you understand my frame of reference. The government literally just steals the buying power from the people. They do not ask. They just take that money in form of inflation and then they pay for whatever they want. And that creates this wildly undisciplined thing that, to your point, it works for a while, but then it will, in my view, from looking back at history, it does 100% of the time eventually fail.
- [46:04]
David Pakman
Well, it can't be 100% of the time because it hasn't failed yet here. I mean, in other words, okay, you're assuming it will. You can't. That's a predictive statement.
- [46:13]
Tom Bilyeu
You just don't know that's fair. Up up to America, it has 100% of the time. Every economy that has tried this has ended up, every empire that has tried this has ended up failing. So when you, it's also though a
- [46:25]
David Pakman
failure bias, you have to admit, because there are lots of countries that are doing okay right now with a high debt to GDP ratio. And so what you're kind of saying is they will all eventually fail. Maybe they will. But a bunch of them seem to be doing okay. I mean, Australia has a high debt to GDP ratio. But I don't, you know, I don't follow Australian politics closely. There's probably people there predicting the impending demise of the Australian economy. But I think that there are a bunch of economies right now that are doing okay with relatively high debt to GDP ratios similar to that of the United States. And none of they haven't failed yet. So I think that it's hard to say that. So unilateral early.
- [47:10]
Tom Bilyeu
Well, so let me be very clear about what I am saying. So I agree that you can operate at a, you can have a debt compared to your gdp and as long as at some interval you end up catching up with that before meaning you then have a surplus so that you can actually pay the debt. And the reason it became so scary in this exact moment is because interest rates were rising and getting to the point where the government was going to have to spend all of its money, money just paying off the interest rate. So obviously that's why that gets troubling. But the operating at a debt to GDP level that sustainable obviously works and works all over the world. But it does require that you eventually have these moments of catch up or that you're at a point where you can constantly be making the payments on your debt and as long as nothing goes wrong with the interest rates, you're good. Good. But again, we all just live through whether it's over or not is another question. But we just live through a high, er, it's not high by historical standards, but a higher interest rate environment. And whoo. It made those interest rate payments pretty nasty. And that was money, just outgoing that could have otherwise been going to projects. And I think the programs. Excuse me. And I think the right way to think about it is when you are running with those kind of interest levels, you are robbing from your children's future because that money will have to be paid back.
- [48:33]
David Pakman
Well, you're not robbing from your children's future if the debt is being used to improve the country in which your children will live. And I think that that gets to
- [48:43]
Tom Bilyeu
one of the fundamentals and that it has an economic return. But that's very fair. Let me say your position. So you know, I understand, okay. And still am banging my drum, okay. That if you're using the debt as a stimulative format to get the economy turning and the economy, because of that debt investment actually outputs more than it required to get it going. You actually made more gdp. You made everybody's lives better by investing that debt. Yeah, yeah. So I'm saying even understanding all of that.
- [49:16]
David Pakman
Yeah.
- [49:17]
Tom Bilyeu
There's still other gotchas coming.
- [49:19]
David Pakman
Yeah, that, that may be. I think one of the things I would be curious to hear from you is. Okay, listen, hey, you're. Even though we've not been able to see examples of cutting our way to prosperity in any western developed nation before we're going to give you the keys and you're allowed to start cutting, I mean, I, I assume the way you would balance would be by cutting government spending. Is that right? Or I don't want to assume if that's not how you would do it.
- [49:44]
Tom Bilyeu
You only have two levers. You cut and you hope that you make more. So I'd be doing everything I could to stimulate the economy, to get the best and the brightest to come here to America to make incredible things that the whole world wants. And yes, I would cut.
- [49:56]
David Pakman
I guess my question is, when you start cutting, when you reduce government spending, there's going to be less money for education, infrastructure projects, public services, health care, transit systems, hiring a private company to build the new subway cars which employ so many people. So when you cut that money, there's fewer jobs because. Right. This is demand side. Some of those companies now, they lay people off because that next project isn't coming. The fact that fewer people are working is going to reduce GDP because GDP has been reduced. Entrepreneurs will say, I don't know that I'm doing this startup because there's fewer people who can even afford the product or service that I'm selling. In other words, you're cutting not to prosperity, you're cutting to the opposite. So I'm curious about that. How do you, how would you do that? How do you cut to prosperity?
- [50:55]
Tom Bilyeu
So I think the right way to look at it is to understand that you don't want to keep everything alive. So some things really do need to die. Some things need to really have pressure on them to get more efficient. And so looking at the, the frame that you put on it is, hey, you're going to be taking money out of all these programs and that's just less money that you have to spend. That's already true. Right. So we're not capturing 100% of the economy and putting it into programs. So we're already accepting that there are limit limitations. What I'm saying is you want to do a very difficult game. This is going to be hard as hell. And it will require people to say, okay, what is the outcome that we want? We're testing cutting this or bringing on sectors here, deregulating this to up regulate the economy. And then we're going to take in the money that we got from those wins and apply them to these programs. And either you get that outcome that you desire or you don't. But the, it may be the core difference that I'm saying let the market decide in terms of what is valuable, what's not, what programs are worth keeping, what programs aren't. But if you operate from the base assumption that if I inflate the money supply, it deranges the whole system. The simplest one is it forces everybody to become a gambler. They have to invest in order to outpace inflation. Inflation. Now, if inflation were a law of nature, fine, but it's not. It's literally the government and the Fed putting extra money into the system. So yes, you have to tighten the belt. Yes, you want to be extremely careful about what you cut, how you regulate versus deregulate to make sure that the economy is growing and there's no way around having to try to figure out that dance. But my base assumption is the way that you're presenting it is guaranteed. Looking backwards at history is guaranteed to cause the collapse of the reserve currency because ultimately you inflate it so much that other governments stop using it. And it's, we're already seeing it happen now. And once people lose faith in that, you lose the ability to print that money anyway because you're effectively borrowing from the people. So it, it has historically broken every time it's been tried by a reserve currency. Currency.
- [53:16]
David Pakman
You acknowledge though, other than all of the times that it seems to be going okay enough right now, other than
- [53:23]
Tom Bilyeu
the snapshot that we're living in that this is the thing that scares me about the debt cycle is that everything seems fine until it shatters and there's a world war or there's a revolution, but the number of times it's more than 50% of the time it ends up in open bloodshed in the streets is the only way to reregulate the debt.
- [53:48]
David Pakman
I'm. It sounds like we're kind of getting to the natural end on this topic. But one, just one other question on this is do you have any examples of a country that cut its way to economic prosperity? In other words, things were bad. They cut government spending and all of a sudden standard of living increases by however, however you want to measure standard of living living.
- [54:13]
Tom Bilyeu
So I think it's the wrong question, so I'll just say no, let's say that that's never existed ever in human history and it's never going to happen.
- [54:20]
David Pakman
Okay.
- [54:20]
Tom Bilyeu
The reason I still think it's the wrong question is that what, what I'm saying may be just as simple as the jig is up and you're not going to be able to deficit fund any more growth because we're already in shaky territory. And so now it is. How do we manage the, the decline of the US Dollar as the reserve currency? That, that may be the punchline of what I'm saying. Again, whatever's true is true. I'm, I'm not worried about that. What I'm focused on is okay, if I know that I can't deficit spend forever, which I understand you don't agree with. But from my worldview, you can't deficit spend forever for reasons of just looking at history and seeing this happen over and over and over. And I know I'll just take your assumption that I cannot cut my way to prosperity, but what I know I can do is I can cut my way to a balanced book. And so now I may not be growing as fast as I was. And for sure people are going to be very pissed off because nobody likes to live under austerity. And it may be. In fact, here's, here's what I think is actually going to happen. It is so politically unpalatable to live under austerity. This is going to end in war. That's what I think is actually going to happen. I just engage with people in the hopes that somebody sees a way out of that. This. But boy oh boy, I don't have the answer. Fair.
- [55:42]
David Pakman
All right, well, I guess let's give it a 100 years and see if
- [55:46]
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