welcome to money is freedom
a podcast
exploring how finance and freedom connect in our lives
created from thoughtful research
and narrated by Notebook LM AI
this series brings you clear
meaningful insights into finance and beyond
in episode 31 of money is freedom podcast
we delve into the concept of fiscal dominance
and its implications for global economies
fiscal dominance occurs when government debt levels
and fiscal policies
significantly influence monetary policy decisions
potentially
leading to higher inflation and interest rates
we explore how governments can proactively manage debt
to maintain market confidence
and ensure economic stability
hey everyone welcome back
we're diving into some pretty intense stuff today
macroeconomics and finance
but don't worry we're gonna break it all down
so you don't have to be a Wall Street wiz
to understand what's going on
sounds good to me it's all about
how government actions are shaping the markets
like in ways we haven't seen in decades
you know definitely
we're talking about big shifts
big changes
our guide for this deep dive is this article
from Crypto Daily
it's called The New Era of Fiscal Dominance
interesting title it really gets into it
like why the Fed hit pause on rate cuts
what's happening to our savings
with all this crazy government borrowing
even how venture capital is being shaken up
so basically
this article is pointing to a major power shift
hmm in the financial world okay
I'm intrigued tell me more
well for a long time
the Federal Reserve hmm
you know the Fed
they've been calling the shots
the monetary policy but now it's different
how so government spending and borrowing
are taking center stage hmm
it's what economists call fiscal dominance
yeah fiscal dominance
that sounds kind of intimidating
it can be it basically means
the government spending and borrowing
are now driving the economic bus
instead of the Fed so
the feds lost control in a way
yeah it's like
imagine the economy is a car
okay I like this analogy
years the feds been the one at the wheel
you know controlling the speed in direction
yeah with interest rate policies
but now what
now the government with its massive spending plans
it's like they're slamming on the gas pedal
and the fence just trying to hold on
exactly and we're already seeing the impact
you know persistent inflation
the feds recent pause on rape cuts right right
it's all evidence of this power shift
this fiscal dominance thing
right and
you know the article actually
compares the situation to the 1970s
uh oh The 1970s
not exactly known for economic stability
not really that decades
saw a lot of inflation and market volatility
because of similar policies
and they say the US fiscal deficit is even worse today
much worse yeah
which means
even if the Fed tries to lower interest rates
those long term rates the ones that affect mortgages
business loans they're probably gonna stay high
most likely
it's like the government's borrowing so much money
that it's creating this upward pressure
on interest rates no matter what the Fed does
exactly wow
okay so that's one piece of the puzzle
what else does this article highlight
well it also dives into this thing called
the reverse repo facility
it's basically a tool that the Fed uses to manage
how much money is circulating in the market
think of like a giant piggy bank
oh a giant piggy bank for who
for financial institutions
they park their extra cash there
got it so what's happening with this piggy bank
we used to be overflowing like over $2.3 trillion
seriously but now it's practically empty
empty wow
okay why does that matter
because it means the US Treasury
now has to go directly to the markets to borrow money
that can pull liquidity away from other places
like the stock market even crypto
oh no
that doesn't sound good
it can lead to higher long term interest rates
and even more instability
so it's like
the government's competing with everyone else
for money you got it wow
and then there's this whole concept of inflationary d
leveraging inflationary d leveraging
that sounds a bit counterintuitive
usually
when you think about getting rid of debt de leveraging
you think prices would fall right
you would but that's not what's happening
the article argues that we're seeing the opposite
so instead of a sale at the store
things are getting more expensive
basically the government is borrowing so much
that it's increasing
the amount of money in circulation
right and when you have more money
chasing the same amount of goods and services
you get inflation okay
I'm starting to see the problem here
so we've got the government driving up interest rates
draining liquidity and potentially fueling inflation
it's a lot what can anyone do about it
well there's this other thing the article points out
the Fed is quietly restructuring its balance sheet
what does that mean
instead of holding a lot of long term bonds
they're switching to more short term t bills
so they're like rearranging things behind the scenes
exactly it's all about giving
the Treasuries some breathing room
to refinance its debt
without officially restarting quantitative easing
quantitative easing that's like printing more money
right pretty much
so they're trying to avoid that
it's a delicate balancing act
yeah and it's making a lot of investors nervous
I bet all right
we've covered a lot already
fiscal dominance disappearing liquidity
inflation on the rise
starting to get a little worried about my own wallet
here I hear you
it's a lot to take in
but that's what this deep dive is for
understanding
the forces that are shaping the financial world
so we can make informed decisions
you know what before we move on to Part 2
where we'll explore how all of this is impacting
venture capital and private equity
any last thoughts for our listener
hmm I think the big takeaway here is
that we're in uncharted territory
this new era of fiscal dominance
it's changing the rules of the game
what worked in the past might not work now
and that's why it's so important
to understand these trends right
okay well said
so folks stay tuned
cause it's only gonna get more interesting from here
okay so
we've established things are getting a little crazy
in the world of macroeconomics
little bit yeah
but what really got me thinking
was this whole 1970s playbook thing
from the article
the idea that we might be repeating some of the same
economic mistakes that happened back then
it's a comparison worse considering for sure
the 1970s were a pretty turbulent time
high inflation sluggish economic growth
not a good mix not at all
and what's worrying is
many of the same ingredients are present today
like what well
the article talked about how back in the 70s
the US government was spending heavily
on things like the Vietnam War
social program right
right and that combined with yeah
loose monetary policy from the Fed exactly
it really fueled inflation yeah and just like back then
we have global events adding fuel to the fire
oh yeah like what
in the 70s it was the oil crisis
sent energy prices through the roof right
make sense today you've got the war in Europe
supply chain disruptions rising commodity prices
like a recipe for disaster
it really is
it's creating this inflationary pressure cooker
that were all stuck in the article mentions that
the Fed made some pretty big blunders back then
oh yeah
cutting interest rates too soon
which just made inflation worse
exactly and then they had to hike rates again
yeah to fight the rebound
it caused a ton of market volatility
it's like they were stuck in this back and forth band
increasing the risks of something called stag inflation
stagflation that's the economic boogeyman
pretty much it's like
the economic equivalent of getting stuck in quicksand
oh that's a good one
you got high inflation
eating away your purchasing power right
slow economic growth making it harder to find jobs
and then high unemployment adding to the misery
yikes okay
so are we doomed are we headed straight for stagflation
well nobody can predict the future
yeah but the article makes this critical point
okay what's that
the US fiscal deficit today
is far worse than it was in the 1970s
oh no really yeah
which means those long term interest rates
they're likely to stay high
even if the Fed tries to intervene
so even if they pump the brakes
the economy might still overheat
that's the worry and those higher interest rates
make it more expensive for businesses
to bar money invest
create jobs right
it impacts everyone exactly
higher interest rates on mortgages
car loans everything becomes more expensive right
you can really put
a damper on spending and slow down the whole economy
it's like we're caught in this loop
the government needs to borrow more money right
but that borrowing pushes up inflation
uh huh which could lead to stag inflation yeah
the Fed is stuck in the middle yeah
trying to manage this whole mess
it's a delicate situation right
but understanding these historical parallels
and these potential risks is crucial
we need to adapt to this new reality
so how do we do that does the article offer any advice
it does it emphasizes holding assets to generate cash
okay diversifying into things like gold and bitcoin
right and basically bracing for more volatility
hmm okay
what else what else should we be talking about
one strategy that's often overlooked is
focusing on companies that have pricing power
pricing power what does that mean
it means in an inflationary environment
the companies that can raise prices
without losing customers right
they're in a much stronger position
they can maintain their profitability
even as costs rise so
I'm guessing we're talking about
companies with strong brands
unique products or services
a really loyal customer base
exactly think about those brands yeah
they're so in green in our lives
we don't even think twice about paying a little extra
okay so that's one strategy
what else well
they're also sectors
that actually benefit from inflation
oh really
yeah for example energy yeah
quantities and real estate
they often perform well when prices are rising
they do think about it
if the price of oil goes up
energy companies make more money right
make sense but how does real estate fit into this
well
as inflation pushes up the cost a building materials
and labor
the value of existing properties tends to rise as well
I see plus
landlords can often adjust rents
to keep pace with inflation
so instead of fearing inflation
some investors actually seek it out
they do
because it benefits certain parts of their portfolio
interesting okay
so we've got companies with pricing power
and sectors that benefit from inflation
anything else and finally
in a world as unpredictable as this one right
being nimble and adaptable is crucial
oh for sure
the economic landscape can change quickly
and you need to be prepared to adjust your portfolio
so don't be afraid to make changes reevaluate
stay informed exactly
don't panic when markets dip right
but don't chase the hype when they surge either right
do your research understand the risks
and remember this is a long game
this has been a wild ride
yeah through the world of physical dominance
and it's potential consequences
it has before we jump to part 3
any final words of wisdom for our listeners
you know in times like these
knowledge really is power
I like that
by understanding the forces at play in the economy
you can make better decisions
about your financial future
okay
good advice and remember
it's okay to question conventional wisdom
challenge assumptions seek diverse perspectives
and don't be afraid to think for yourself
love that we'll be back in Part 3
to explore how this new economic reality
is impacting the world of venture capital
and private equity stay tuned
welcome back so
you've talked about how government spending
and borrowing or shaking things up
creating this whole new economic landscape
but what does it mean for startups and innovation
that's where venture capital and private equity come in
right you got it
this new era of fiscal dominance
it's having a massive impact
on how startups get the funding they need
and how investors are making decisions
you know the article pointed out that venture capital
funding has dropped dramatically
yeah they said it went from 320 billion dollars in 2021
down to just 180 billion in 2024
and private equity similar declines
that's a huge drop I'm guessing
those higher interest rates we talked about
and that crowding out effect
they're playing a big role here
they are it's definitely a tougher environment
for startups to get funding
the days of easy money are over
you know when startups could raise millions
just with a flashy pitch deck
and a promise of future growth
yep those days are gone
investors are being a lot more cautious now like that
they wanna see companies with strong fundamentals
a clear path to profitability
and something that can handle any economic storm
a competitive edge
so it's not just less money going around right
the investors who are still giving money
they're a lot more picky now
it's like
the venture capital landscape is going through its own
version of natural selection huh
I like that and it's forcing both
entrepreneurs and investors to adapt
the article highlighted some trends
showing
who's winning and losing in this new environment
okay well
let's start with the winners
who's doing well in this new fiscal dominator world
sectors like AI deep tech and energy
they're attracting a lot of investment
cause they've got huge
long term growth potential and a certain resilience
it's attractive right now
with all this economic uncertainty
investors are betting on these sectors
yeah to drive innovation and make money
even if the broader economy slows down
AI deep tech energy
those do sound like pretty good bets
AI is transforming so many industries
and deep tech is tackling some of the world's biggest
problems plus
the world always needs energy right
it's like investing in the future
even if the present is a bit shaky
you got it and then there's venture debt
it's actually becoming really popular
because it's a way for startups to access capital
without giving up as much equity
wait so it's like alone but specifically for startup
exactly it's a good strategy when funding is tight
because it helps companies reach profitability
without giving up too much control
plus venture debt often comes with warrants or options
oh
so the lender can also benefit if the company takes off
yep it's a win win
okay so
we've got the sectors that are attracting investment
and this rise in venture debt
what about the other side
who's having a harder time getting funding these days
the article mentioned unprofitable unicorns
consumer startups and leveraged buyouts
they're all facing some big challenges
okay let's break those down
what exactly is an unprofitable unicorn
is that mythical it does
doesn't it haha
basically these are companies
that reached billion dollar valuations
based on fast growth and grabbing market share
but they haven't figured out how to make a profit
investors used to be fine with that though right
they were
back when it was all about growth at all costs
but those days are gone profitability matters now
so the focus has shifted
it's not grow at all costs anymore
it's more like show me the money
exactly and then you've got consumer startups
a lot of them rely on discretionary spending
those purchases we make when we have some extra cash
right but when the economy weakens
and inflation eats into our budgets
those are often the first things to go
so I'm thinking
things like
those subscription boxes
that send you random things every month
trendy clothing brands all those on demand services
we got so used to during the pandemic
you got it those are likely the first to struggle
when people start tightening their belts
and then we have leveraged buyouts albios
Yep where private equity firms use borrowed money
to buy companies right
but higher interest rates
make those deals a lot more expensive
so their potential returns go down
so it really sounds like this new era
this fiscal dominance thing
it's separating the winners from the losers
the companies with strong fundamentals
a clear path to profit and a bit of resilience
they are the ones getting the investment
and those that relied on easy money and hype
they're facing a much harder road
that's a great way to put it
it's all about being able to adapt and being resilient
for both entrepreneurs and investors
you gotta be able to roll with the punches
if funding is getting harder to find and more selective
does that mean innovation will suffer
will we see fewer
groundbreaking ideas and new technologies
cause the money just isn't there
that's a good question and a valid concern
but I think innovation will always find a way
what we're seeing now is a shift in focus
not a decline in innovation itself
investors are now prioritizing companies
that are solving real problems
creating value and building businesses that will last
it's like a reality check for the startup world
instead of chasing the next shiny object right
investors are looking for solutions
that will make a difference
and have a lasting impact
exactly
it's forcing everyone to think more about the long term
and that's not a bad thing
this has been an incredible look into
the world of fiscal dominance
we've covered a lot
the impact on interest rates and inflation
the shifts happening in venture capital
and private equity it's a lot to think about
it is before we wrap up
any final thoughts
you'd like to leave our listeners with
in a world with so much information
it's more important than ever to stay informed
and to question assumptions
don't just accept things at face value
you know dig deeper
ask questions form your own conclusions
knowledge is power especially
when it comes to navigating the financial world
that's great advice thanks for joining us
on this deep dive into fiscal dominance
we hope you found it insightful
and we hope you feel
empowered to make informed
decisions about your financial future
until next time stay curious
keep learning and remember
you have the power to navigate these changes