welcome to money is freedom
a podcast
exploring how finance and freedom connect in our lives
created from thoughtful research
and narrated by notebook lmaai
this series brings you clear
meaningful insights into finance and beyond
in Episode 45
we dive into Lynn Alden's gripping framework of
Nothing Stops This Train
a hard hitting analysis of America's fiscal trajectory
with federal deficits locked in at 6 to 8% annually
Social Security running dry by 2035
and the Fed stuck in a trap
where rate hikes fuel the problem
we're witnessing the rise of fiscal dominance
this isn't just about debt
it's about an economic structure
running on unsustainable momentum
tune in to uncover why
the only way forward may be inflation
currency debasement
and a flight to scarce assets like Bitcoin
okay let's dive in
there's this phrase nothing stops this train
uh it's quite a striking image
it really is
and it comes from one of the sources we looked at
describing the current state of US physical deficits
right so our topic today
America's finances we're talking government spending
deficits the national debt
and we've got these sources
essentially arguing that this spending
these deficits well
they're on an unstoppable path
doesn't matter who's in charge apparently
yeah the argument is it inevitably leads towards
you know inflation or devaluing the currency
that's the core idea
so our mission here is to really unpack those arguments
we wanna understand
why they think this fiscal train can't be stopped
the dynamics involved
and what they see is the consequences
the aim is to help you get a solid
grasp of this specific and let's be honest
pretty concerning viewpoint definitely
and uh
to get their perspective
you have to see what they call a fundamental shift
see historically
US deficits usually ballooned when the economy was weak
right yep
like during recessions high unemployment
tax revenues fall spending goes up
make sense exactly
and then when the economy recovered
unemployment low deficits would shrink
there was this um
predictable correlation but that's changed
that's what the sources argue
a big break starting around 2017 or so
we started seeing really high deficits
like 6 to 8% of GDP even with low unemployment huh
so the link is broken yeah
they call it a decoupling
it's not the old pattern it's a new era
some sources label it fiscal dominance okay
so if the old rules are out
why is this train supposedly unstoppable
what's uh
the first big reason they give
well the first reason is pretty stark
they argue the economy itself has um
become dependent on this constant
high level of government spending
and these deficits dependent how
the idea is if you tried to suddenly pull back
cut spending significantly
the sources argue the shock would be huge
asset prices crashing unemployment soaring
which would hit tax revenues
exactly
tax revenues would collapse and kind of ironically
the deficit might actually get worse
wow so hitting
the brakes doesn't slow things down smoothly
no it triggers a crash
derails the train that's the analogy
yeah it's the opposite of a soft landing
the system as they describe it
needs this fuel just to keep running
cutting it off becomes self defeating
okay so the economy needs the spending
according to this view
but surely we still have the Fed raising interest rates
that's the classic way to cool things down right
that is the traditional playbook
absolutely but uh
the sources argue that even that tool
it doesn't work like it used to
that's the second reason the brakes are well broken
so well
think about the debt level
federal debt is over 100% of GDP now
one source mentioned over 120%
it's massive so when the Fed raises interest rates
yes it might slow down private borrowing a bit
but it massively increases the government's own
interest payments on all that existing debt
ah
so the government's interest Bill goes through the roof
precisely so the irony is tighter monetary policy
higher rates actually makes the federal deficit worse
the interest expense just
it explodes you're kidding
so stepping on the monetary brake pedal
actually feeds the physical engine
more gas it's like backwards
exactly they use terms like
through the looking glass or wonderland
the old rules work in reverse yeah
the very action meant to slow things down
ends up making the government need to borrow even more
it's a feedback loop okay
that's quite a twist so reason 1
economic dependency reason two
broken monetary brakes
what's the third big driver they highlight
sounds like it's more about um demographics
yeah this one feels very concrete
almost mathematical it's demographics and entitlements
the big factor is the baby boomer generation retiring
okay that's been talked about for years right
but it's happening now the sources point specifically
to the Social Security trust fund
about $3 trillion uh huh
it's currently being spent down
the math the actuarial projections cited
suggest it'll be empty around uh
2035 and fixing that is politically difficult extremely
the sources argue it's basically off the table
politically both parties have largely pledged
not to touch Social Security benefits significantly why
because older Americans vote in huge numbers right
so these outflows they're just baked in
they're set to grow regardless of election outcomes
it's presented as pretty much set in stone
driving deficits higher locked in spending
feels very hard to stop that train
okay what about the engine of economic growth itself
has that changed yes
that's their fourth major point
for decades you know
economic growth was largely fueled by
the private sector taking on debt
bank loans corporate bonds
businesses expanding people buying houses
exactly private credit growth was the main engine
but the argument is since the 2008 crisis
that's fundamentally shifted and it's like permanent
how so federal debt
government borrowing
has effectively become the primary engine
driving growth and why the switch
well the reasoning is the private sector households
companies that are already heavily leveraged
capped out you might say
there's just limited capacity for them to borrow
massively more
not on the scale needed
to drive the whole economy forward
like before okay
so if the private sector can't borrow much more
the only player left who can borrow on that scale
is the federal government
that's the argument it becomes the borrower
not just of last resort for crises
but the borrower for basic growth
which leads us into the fifth reason
and this is where the language gets pretty intense
they talk about a Ponzi nature
lack of an off switch what's that about
yeah they argue the system
just how it's built
requires constant growth to even function like a shark
you know it has to keep swimming or it sinks
constant growth of debt essentially yes
they point to the sheer numbers
total debt in the system public and private
over $100 trillion compare that to the monetary base
the actual underlying central bank money
maybe $6 trillion that's huge leverage
like 17 to 1 now and it was even higher before
oh yeah
it peaked here 50 to 1 back in 2008
and when the system buckled then under that strain
the response wasn't really deleveraging
not shrinking the debt it was
as the sources put it acceleration
zero interest rates q E
quantitative easing printing money to buy bonds
and now these huge deficits
total debt
actually only dipped for a tiny moment in 2008
like 1% before they hit the accelerator hard
to prevent a total collapse
by expanding the base
and there's historical data on this right
that debt almost never shrinks
that's a key point they make
in over 110 years of data
total debt has only actually decreased in five years
five years out of 110 yep
four during the absolute worst of the Great Depression
and that one year 2008
they argued this
shows
the system has virtually zero tolerance for shrinking
for actual deleveraging
so the argument is the system can't handle contraction
it has to keep expanding the debt
it can only inflate the debt away
that's the conclusion they draw
the structure things like fractional reserve banking
it just inherently creates debt
that needs more debt to sustain it
the only way out the error correction
as they call it isn't fixing the debt level
it's just creating more money or credit printing
basically okay
so let's put it all together
if you can't pay off the debt
without crashing the economy
and you can't really use
interest rates to slow things down
because that makes the government's own debt problem
worse yeah
what's the only path left according to these sources
well given those constraints
they conclude the only path is inflation
you inflate the debt away
how does that work exactly
it means keeping interest rates relatively low
lower than inflation and lower than what would
be needed to truly stabilize the debt
you let inflation run hotter than interest rates
over time
this erodes the real value of the outstanding debt
the dollars you pay back
are worth less than the dollars you borrowed
so it's a quiet default almost devaluing the currency
that's one way to look at it
they contrast this with the last few decades
where interest rates were generally falling
which helped manage rising debt
but now debt is so high even kind of
moderate rates create a huge interest expense problem
it's a different world they compared it to the 1940s
yeah they draw a parallel
back then you had private debt issues
rates hit zero
and the government took over as the growth engine
during and after the war that massive war
debt was ultimately inflated away
over the following decades
okay so if this is the outlook
ongoing deficits inflationary pressures
a system needing constant fuel
what does this mean for you know
people's investments girl redheads
that's a huge focus
they argue it has profound implications
especially for assets that are scarce
things that can't just be printed or created easily
like gold gold is the classic example
they discuss the historical link between gold and real
interest rates
that's interest rates after accounting for inflation
traditionally if real rates were high
savers got a good return so gold wasn't as attractive
if real rates were low or negative
gold looked better as a store of value
makes sense
but you mentioned something changed recently
around 2022 yes
one source highlights a decoupling since about 2022
Bold has performed really well
even soared at times despite real interest rates rising
so the old relationship broke down
seems like it to them this suggests something else
something bigger is driving things now
and that bigger thing they argue
is this whole fiscal dominance story
the unstoppable train
and this is where Bitcoin comes into their analysis
exactly they really challenged the narrative
that Bitcoin was just a zero interest rate phenomenon
right you know
only valuable when money was free
they point out that recently
the Fed was incredibly aggressive
hawkish raising rates fast
even breaking some banks right
so look on Valley Bank and others
yeah and yet
during that high rate stress period
both gold and bitcoin didn't collapse
they actually soared so
bitcoin doing well when rates were high
suggests it's not just about cheap money
that's their interpretation
they see it as evidence that the underlying
fiscal situation the unstoppable deficits
the need to inflate is a more powerful driver
than just the Fed's interest rate policy
so the rational move
in their view
is to own assets that are outside that system
yeah assets that can't be debased or diluted
when the government needs to create more currency
or credit gold has been that historically
why Bitcoin specifically well
they see gold as having limitations
bitcoin they argue
is potentially better suited for
this digital age it's easily portable
it's programmable and crucially
it has absolute mathematically enforced scarcity
something gold doesn't quite have
said you can always mine more gold
bitcoin supply is fixed and known
so they see it as like
the ultimate hard asset for this environment
the mirror image of the flexible fiat system
that's the framing a system built on a flexible Ledger
where you can always add more units
versus Bitcoin's fixed transparent Ledger
and that's why they think it's thriving now
even with 5% interest rates available elsewhere
it's a bet against the future value of the dollar
driven by these fiscal issues
an embrace of sound money
that seems to be the core argument
yes in a world
where the main currency is expected to lose value
over time due to these unstoppable pressures
something with a truly fixed supply
becomes very attractive to some people
okay so
let's just quickly recap
the main pillars of this unstoppable train argument
from the sources sure
two big categories really
first it's systemic
almost mathematical the sheer size of the debt
the structure of feudal and fractional Reserve Bank
it just requires constant expansion
deleveraging is too painful
so the default is always to create more units
the mass of the system right
and second it's human nature politics
nobody really wants higher taxes
nobody getting government benefits wants cuts
politicians respond to those incentives
making truly deep painful cuts
is rarely a winning strategy in the short term
and the contrast with Bitcoin
again is that Bitcoin is designed differently
absolute scarcity transparency
and a way to handle adjustments like deleveraging
without needing to debase the actual unit
the Bitcoin itself fixed Ledger versus flexible Ledger
and the time frame
they see this playing out over this unstoppable phase
the analysis suggests this path
these kinds of deficits around say
7% of GDP
is likely locked in for at least the next 10 years
hmm it doesn't mean nothing ever changes
but they don't see any force
strong enough on the horizon
to meaningfully alter this trajectory
soon the train keeps rolling
maybe speeds up or slows down a bit
but doesn't stop great
so wrapping up this deep dive
the core message from these sources is stark
the US fiscal path looks like an unstoppable train
driven by uh
the economy needing the deficits
monetary policy breaks not working right
the math of demographics
federal debt becoming the main growth engine
and the basic structure of the financial system itself
and the main outcome predicted from this view
ongoing high deficits
leading inevitably to more inflation
and a devalued currency over time
which leads them straight to the idea that scarce
assets things like gold
and particularly Bitcoin with its digital scarcity
could be really
important hedges in this kind of environment
so understanding this perspective
even if you don't fully agree with it
is pretty valuable as you navigate what's happening and
think about the future it's one distinct view
drawn from the material we reviewed
and it leaves us with a big thought
for you to mull over
if this analysis is even partly right
if the system really struggles with deleveraging
and the path of least resistance is inflation
what does that really mean for how you think about
saving investing and value over the long haul
and maybe more fundamentally
given the roles of math and political incentives
described here is there any realistic
way within our current system
to actually change this trajectory significantly
something to think about