China's $15 Trillion Time Bomb: The Biggest Bubble in Human History

Key Takeaway

Build a simple diversification review today: list every investment and income source, identify where you are concentrated, and set personal limits on any one theme, asset, or employer. The episode’s practical message is not to predict every macroeconomic turn perfectly; it is to protect yourself from being wrong on timing or direction. Keep learning the signals—credit growth, lending behavior, consumer spending, and confidence—without making an all-or-nothing bet.

Episode Overview

This episode examines China’s sharp lending slowdown, real-estate fallout, local-government debt, and banks’ move toward safer government bonds. The speakers argue that low interest rates and government stimulus can signal underlying weakness rather than recovery, then draw potential parallels with consumer confidence, labor-market participation, debt, and asset allocation in the United States.

Full Transcript

Transcript of China's $15 Trillion Time Bomb: The Biggest Bubble in Human History from Impact Theory. Auto-generated from episode audio; may contain minor errors.

We are currently witnessing a world in which the two largest economies are in dire straits. Both are trying to hide it. Both hide it in ways that at least cause some visible signs. So, our colleague Jeff Snyder from Eurodollar University has again produced a great video explaining the situation in China, because China is currently experiencing a historic lending slump. When you start to understand how government borrowing works in China, it becomes very disturbing. And while I understand that if you, like me, want America to win a war with China, it is tempting to wish for a weak Chinese economy.

But you definitely don't want China to be too weak, because then you have a problem: nobody is buying anything because the US just went into recession. It's only July, so we'll see, but there has just been a contraction in consumer spending in the US. China is seeing a massive decline in borrowing, likely due to spending cuts. So, we'll figure it out and see what problems are brewing. If you have two of the largest economies, both of which, by the way , are heavily dependent on spending, and both of them are in trouble, then you start talking about a global recession.

Chinese bank loans just showed a record decline. Record reduction. Just when you think the situation in China can't get any worse, they find a way to make it even worse. And that's not the only thing. There is a surprise from the Chinese government , especially for the wealthy, that makes us ask: why now? This is largely a rhetorical question, but they are taking on taxes, which could be a prelude to bigger events and tougher measures, because, as I said, the situation in China is somehow getting worse.

Okay, the interesting thing is that he takes it for granted, so I don't recall him going into it, but it's important to note that when the government starts imposing taxes, taxes, taxes, taxes, taxes, instead of promoting growth, because when you tax something, you get less of it, you know? Please keep this in mind when evaluating DSA policies. So if you tax something, you get less of it, and the Chinese government is now saying, "Hey, if you're hiding somewhere, we'll get to every dollar." The loopholes they left open for a long time are now being closed.

Why? The answer is always the same. They spend more than they earn. So keep that in mind when you look at the US and compare it to China. Macroeconomic data confirmed everything, but the main story here is banks and Beijing. Banks and Beijing, strict control measures. Record reduction in new yuan loans in China's overall social financing. So, these are the credit flows for July. Yes, July is a seasonal low on the calendar, which only shows how dire the situation is for Chinese banks. And Chinese banks, as we know, have been winding down for several years now , and if you have n't seen it yet, wait until I show you the next chart, because it illustrates our point perfectly.

Chinese banks are the foundation of China's economy. It was through them that China primarily responded to the 2008 crisis and its consequences. Without the banking sector, there would be no real estate bubble. But now that the bubble has burst, they haven't fixed the economic situation—the "silent depression," which I'll talk about at the end of this video. Silent depression, real estate bubble—they don't have the economy to support this bubble, so banks piled up and piled up problem loans, not just from real estate but also from local government projects.

This is also related to the tax system. This only means that China has a huge, largest bubble in human history, owned and owed to the banking sector. And what is happening in the Chinese banking sector ? Well, there are a lot of hidden credits there. You can't have such a large-scale collapse that these loans and debts don't accumulate somewhere. So we know what's happening in the Chinese banking sector , even if we don't have direct data. We have all the data around this. We don't have direct information about how bad things are, but in many ways we don't necessarily need it.

It would be nice, but not necessary, because we can understand what is happening there by the behavior of the Chinese banking sector . Forget about government spending, put that aside. What matters is not what they say in China, but what Chinese banks actually do. And that's not what central banks do, central banks never do. Banks, not central banks. What matters is what the banking sector does, and as you can see, this is a record reduction. Even if this is a seasonal low in the lending calendar, it is in line with the general trend.

So, one of the things I understand about the difference between the central bank and local banks is that when China was trying to get out of Mao's grip, they were talking to the United States. I think they also communicated with Japan. And they asked, "Okay, what's the key to making this all work?" And the question they were asked was, " How many banks do you have?" And they replied: " We have one bank." They said, "Man, this is crazy. You need to have thousands of banks.

So you want all these decisions to be made at the local level. You want someone at the local level to look at you and say, 'Can you pay me back?'" " And they made that decision on the fly, so that it was quick and as close to reality as possible. And because of that, you see all this economic activity start to boil over. And how important it is to understand this in the United States, this is the same thing that Steve Keane is saying, where he's just begging people to understand how liquidity works.

So if Raul Pal is right, liquidity is the key to everything. If you want to know how the government works, or if you want to know how the economy works, you have to look at liquidity. Is there a lot of money circulating in the system, or is there very little? You have to understand where the money comes from? Money is created out of thin air, but it's created out of thin air by local banks much faster than by central banks . And so the central bank gives local commercial banks the ability to create this money out of thin air.

Okay, and then at the grassroots level they decide who deserves credit and who doesn't. And now the most interesting thing about the history of China, guys , is this, you have to understand. There's such a strong political pressure on local governments pressure to meet revenue targets, that they're taking on very risky debt. And now they're starting to back down . So you have a banking sector that historically has had a huge appetite for risk because they've been forced to do so. Their ability to get promoted is part of the problem with a top- down system: your ability to move up the ladder is not about impressing voters, it's about impressing the CCP, which is the party that decides whether you're going to move up the party ladder.

And so there's a lot of pressure on these people to get these loans. So governments are putting pressure on the banks to agree to these loans. I'll talk more about that later. This is the flow of new loans from Chinese banks in yuan in the first seven months of each year. So we're comparing apples to apples. And you see 2024, which we've been talking about on this channel since 2024: things are getting worse. At the beginning There was a small uptick in 2025 that everyone attributed to the bazooka since September 2024, but that was a short-term windfall , not a real turning point.

And the situation in 2026, which this chart clearly shows, is even worse, which is consistent with the recession, or rather, the accelerated recession, that we've been talking about again on this channel since last summer. Both the macroeconomic data and the banking sector data show this . So imagine you're China. You had a housing boom. That housing boom is going to crash. If you remember how it started a couple of years ago, they're desperately trying to hide that something's going on, because of course they don't want to look weak in the eyes of the world.

They want to make sure they can attract investment dollars. They want their own people to keep spending money, because a lot of the economy is a psychological game. If people psychologically feel that it's better save, then everyone starts spending less. People don't borrow money, and when they don't borrow, there's less newly created money coming into the system . Now, if we're right that liquidity is what creates prosperity, so to speak. High liquidity is good times. Low liquidity is bad times. Credit is what creates liquidity, if Steve Keane is right, and I think he's right—I mean, he's right— that when you pay back debt that was money printed out of thin air, that money just ceases to exist.

It just cancels out of the ledger , right? Because of double-entry bookkeeping. That's just how it works. So money is created out of nothing, comes back, and goes back into nothing again. So now, from a liquidity perspective, you've literally sucked money out of the system. If you're not looking at the screen right now, if you get a chance, look. There you are you see the liquidity is rapidly disappearing from the Chinese system , which means that the good times in the Chinese system are starting to end, and the local governments are going to be in a difficult position for reasons that we'll talk about shortly, in terms of how these governments are actually financing growth.

And all of this is consistent with interest rates. China is the best example, the best current example of the interest rate fallacy, the Milton Friedman interest rate fallacy. People keep saying, they keep saying that low interest rates are stimulus, when they're not. Low interest rates are a reflection of the weakness of the economy, and in this case, the weakness of the economy, therefore the higher risk, and also the weakness of the Chinese banking sector. So interest rates are falling in line with what the banks are doing.

Let 's go back to 2018-2019, the "mine," as we call it here, from the end of 2018 year. There's been a slowdown in lending because Chinese banks have turned away from their risky behavior and bought up a bunch of safe government bonds. So government bond yields are falling, signaling a weakness in the economy, a weakness in the financial system, which in this case is recognized because China is so heavily reliant on its banking sector , the banks are doing something, it shows up in the bond market, it shows up in the banking statistics.

It shows up in the real economy. It shows up everywhere except in mainstream economics, and therefore in the mainstream media, which keeps saying that lower rates are a stimulus, whereas China is the perfect real-world experiment that proves interest rates wrong again. Lower interest rates are a sign of weakness. Again, the last couple of years, look at that, look at what we have here. The big drop in Chinese government bond yields, especially long-term ones, but and short-term ones too. But the big drop in long-term government bond yields is consistent with Chinese banks retreating.

So Chinese bank balance sheets are very much deleveraging, I mean, just look at this graph, it's way off trend and getting worse. They're deleveraging. They're stopping lending to anything that smells even slightly risky, not just to households but to the corporate sector as well. They're deleveraging. And by deleveraging, they're buying safety. This is a depression economy. This should be very familiar, at least to those who are honest and have been paying attention to our experience here in the Western world since 2008. China didn't have a 2008-style crash , but they've been trying to avoid something like that for about a decade.

And during this decade, it was the same 2008, but stretched out over a ten-year period, not compressed into a few years like we've seen here in the West. So, The sharp decline in interest rates, consistent with the process of de- risking in Chinese banks and the depressed economy, tells you everything you need to know about Chinese banks and about rates. The next time you hear someone—in China or abroad—say that low interest rates are a stimulus, think of this chart, and the ones I'm going to show you next.

So one of the things you need to understand about how Chinese banks work is that local governments actually run a structure called LGFV, the local government financing facility. It's like a loophole. So local governments use state-owned financial facilities to get loans from commercial banks. So the government is effectively acting as if it were a company. The Chinese Communist Party is saying, "Okay, listen, we don't want you to do direct lending." So they banned direct lending, and as always, if there's pressure in one area, you create an incentive system.

The Chinese Communist Party's incentive system works from the top down: if you're the head of a local government, you have to meet certain quotas. The reason you have to meet these quotas is that if you want to advance in the party, there are no voters who can help you . You just have to impress the Communist Party. So they give you an edict: " Make sure your region grows by this much ." If they tell you: "Make sure your region grows by this much," and you know that the only way to do that is to take out loans, and the Party forbids direct loans, you have to find a way around it.

So they create a special mechanism where the government can set up a corporation , borrow money through it , and then build infrastructure and other things. This is a very risky maneuver for two reasons. First, you don't know if you're going to have the growth to pay back the debt, and second, you don't know if the Party will punish you because they see that you're trying to get around something. So they had a lot of these very risky loans. with huge interest obligations , and the Chinese Communist Party looked at it and said, "Oh my, we've let this get out of hand ." And eventually they created a point where it was like, " Hey, we know a lot of you are doing this." They didn't call it amnesty, but they were actually going to offer you to refinance it as very simple low-interest loans, yielding about 2%.

Let's get you back on track, bring this debt out of the shadows and shine a light on it so we can really see what's going on. And when they did, it turned out that the banks were reluctant to do it because they were like, "Why should I get 7 or 9% on my not-so- illegal but not- quite-approved loans here?" And the local government put a lot of pressure on the banks to make these loans. So it's like, "Wait, I was forced to make this loan." At least it's making me a good income.

Now the Communist Party is trying to push me in the other direction, forcing me to take out these very safe, low- yield government loans, which I don't necessarily want to do. But then the economy got so shaky that the banks started buying up all the government debt they could, which was a flight to safety. Now, when the banks are trying to flee to safety because they see the instability in the economy after the housing market crash, the government suddenly says, " Hold on, hold on, hold on." You're buying up too much of our debt and lowering the interest payments.

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We’ll get back to the show in a moment, but first, let’s talk about the things your business simply can’t survive without. I’m going live 3 days a week at 7:00 AM. And every morning, you incredible people show up. You're here, you're ready. And if my connection goes down in the middle of a live broadcast, that moment is lost forever. You don't get a second take when it comes to live broadcasts. And I know many of you are in the same situation, whether you're hosting live events, processing transactions, or managing a remote team.

Your business depends on being connected. Not sometimes, but always. That's why I trust AT&T Business. They're built for business owners who can't afford downtime. AT&T Business is the trusted provider for small business owners. During Small Business Month, we're celebrating success by helping them run better. That means reliable uptime , easy switching, and smart communications. Impact Theory is powered by AT&T Business, built to work. Connect to AT&T Business at business.att.com. Now back to the show. Again, Jeff is making a point that I think is really important to understand.

Low rates are not a sign that it's time to have fun . Low rates are a sign that something is broken in the economy . And so everyone is running to safety right now. Did you raise your hand? Yes. I just want to ask you a quick question: is this a reflection or a projection of what could happen to America? Are there any direct consequences similar to what happened in Japan? Or is this just an example that economists will use for future planning? So, part of it is because we have a mirror system here in the United States.

We do something similar, but on a smaller scale. China has about $15 trillion. I mean, just an astronomical amount of these, essentially, local government bonds. These kind of pseudo- illegal instruments. A very specific type. The United States does a very similar thing, but we only have about $160 billion or something. So the scale is just completely different. So pay attention to that. But the reason why it's important is because China shows you exactly what the data looks like when things are going in the wrong direction so that we can look at what's happening in the United States and see a lot of the same parallels.

in terms of the consumer in the United States starting to pull back now. As the consumer in the United States is pulling back, if that pullback continues, you're going to see that they're going to have to start cutting rates to try to get the economy going again to make sure that people have jobs. But you just had a record number of people dropping out of the labor force, either because "I applied to 300 jobs, I can't find a job," or " I just see where this is going, and this whole game is ridiculous," or "I'm getting so many free things that I want to keep getting them." So what people should be looking at is the parallels in the economy that show that we have weakness in the two largest economies right now, which you can see by looking at some of the parallels, just because they're more visible in the Chinese data.

So let's say they're a little bit ahead of us. If you look at the parallels in the Chinese data, you can see, first of all , what the moment when the housing bubble bursts looks like, and you can see what exactly they're trying to stimulate. And if we really want to make it harder, let's look at Japan as an example: what does the future of China look like? Does it reflect what happened in Japan in terms of the " lost decades "? As for what's happening, it's psychology.

So if I'm in Japan and the housing bubble bursts in '89, I'm burned and I realize, well, I just lost everything. I never want to do that again. So now I'm going to pay off all my debt. I'm going to be very conservative for a very long time. And it's completely shutting down their economy. But it's a psychological problem. And it creates zombie corporations and all that . And so all eyes are on China, mainly because they are our main competitor, so we certainly want to understand what is going on.

But it is also important to understand what this will probably mean in terms of their further departure from the US system. what this will probably mean in terms of their attempts to get more goods into the market, because one part of their economy that is still doing well—he will get to that in the video—but one part of their economy that is still doing well is exports. So now they are going to get even more insidious because the pressure on local governments is to keep growing and keep delivering , and they are going to put pressure on their businesses to do something about it.

And if consumer spending in China slows down , which it is, then they are going to look for markets overseas. So by flooding the world with these cheap goods, they are hurting their local economies; the US has to put additional tariffs in place to stop them flowing, and that continues to deplete the middle class in Europe, which is actually part of their big game. And here your historically major ally in Europe is increasingly becoming a vassal state of China, because economically China is in a desperate situation and has to do something to solve its housing crisis.

Some of that "something," given the share of exports in their GDP, is not going to solve the problem, but they're going to try everything, and it's going to have a strange side effect all over Europe. So the United States can now say, " Okay, if we were to be fiscally responsible right now , we would have a chance to use that to our advantage against China ." "But culturally, that's not where we're going ." Culturally, we're sliding into late-imperial oblivion, instead of saying, "Okay, if we were to be fiscally disciplined right now and start doing everything we can to protect consumer spending." So how do we do that?

By bringing jobs back here in the United States, by making sure that people have jobs. When the middle class has jobs, they spend money. When the middle class spends money, your economy strengthens in real terms. But if you can't get people to work, you can't get them to spend, and then the United States and China are kind of going into a tailspin at the same time. And then you're talking about a global depression. So, there's so many threads that need to be woven together to understand why this is so important.

But does that answer your question? Yes. It just showed us the back-and-forth of what it could look like if all of these things happen as a result of secondary and tertiary effects. That's what I'm talking about. How intertwined all of this is with what's going to happen to the U.S. economy. So this is one of those moments where, okay, you have a chance, while you can ride on the reserve currency until the wheels come off, or you can look at the historic exit of people from the labor market, the massive contraction in consumer spending in July, and say, " Okay, now we see what the problem is: consumers are losing confidence, workers are losing faith in the economy, jobs are getting harder to find, ” and now we know where to focus to get out of this .

Now the question of where to put the money comes down to what I think the government is actually going to do, not what they should do, as I just explained, but what they are actually going to do in the face of this —China is weakening and they are not going to buy your debt anymore. You print new money to deal with Japan, and Japan is not going to buy your debt. Europe is about to run into its own problems. You sold their debt to help cover the Japanese case.

They are not going to buy your debt. So you have a slowdown in consumer spending, China is struggling, you have no one left to buy your debt while you have to continue to spend massive amounts of debt. So what is the government actually going to do? Lower rates. They are going to lower rates. They are going to abuse the dollar in a big way. And so if you want to protect yourself from that, you're going to have to invest in assets. Well , it's just... it's all written so aggressively.

But people need to see all these different pieces coming together. Okay. A few years while the Chinese banks are backing off, the economy is getting worse, the decline is accelerating. From the Western media, from the economists, from the central bankers , what do we hear? Stimulus. And so we go through this cycle in China, these mini-cycles in China. The mini-cycle is a theme that we keep coming back to: your dollar versus this in the 2020s. But the mini-cycle in China was about "oh no, the economy is not working the way we thought." Here's some more stimulus.

"Oh no, the economy is not working the way we thought." Here's some more stimulus. And... Okay, speaking directly to America, that's exactly what's going to happen here. We're going to be in the same spirals where more people flee to safety, partly because the whole world is making one big bet on AI, which, by the way, we never talked to that guy about. Uh, as you can see, I'm so good at remembering names. But, you know, there's this guy who got fired from Open AI. He starts his own fund, I think Leopold, thank you.

It ends up just like a crazy boom, bust, and all that. Um, well, so many people in the world are betting on it . We're seeing the first cracks, like the problems that Leopold jumped into. So if people can't find salvation in AI, what does that ultimately mean? So they're going to invest in debt. Debt, and then interest rates will go down because too many people are trying to get it. You don't have to raise rates to attract them. So, yeah, things are going to get weird.

Every time stimulus doesn't stimulate, economists get excited about expecting more stimulus. from the Chinese government, which is not stimulating at all . Instead, you get lower interest rates, banks continue to collapse, and the situation in China is accelerating the recession, and that's the main theme. Is it a general theme or a specific one? The general theme is, you know, the interest rate fallacy in a depressed economy, but the specific theme of this video is why now, why is the current situation in China accelerating even more.

So, again , to emphasize : lower interest rates are consistent with lower bank lending growth. So the outstanding RMB loans in China -- which is essentially all local currency loans, which is the vast majority of lending in Chinese banks -- keep hitting new lows one after another, just look at it. The growth rate has fallen sharply at the same time that Chinese bond yields have started to fall sharply. Remember 2024, when the People's Bank of China specifically warned Chinese banks: don't buy government bonds, so that if we do stimulus, not only will you get a flood of government bonds into the market, it will work, and so you won't want to seek safety.

And the Chinese banks said, you have no idea what you're talking about, and they kept buying government bonds, and here we are two years later, and the banks were absolutely right. Risk reduction, lower rates, the People's Bank of China's stimulus has not worked. Government bonds are another parallel to the United States. Government supply doesn't change the situation. What it affects is the fundamentals of a depressed economy. Low growth, low inflation expectations, which are no longer just expectations, they are being realized in the real economy. So again, low rates are not stimulus.

They are a signal that an economic depression is coming. Here's the bad news about expectations. Expectations are actually what are driving it. The problem with recessions is that people get paranoid. They start very worried about not being able to make ends meet, so they start saving and saving and saving. And now , I know this sounds crazy, but when everyone starts saving and nobody spends money, the velocity of money goes down, which means people are going to lose jobs, they're not going to buy, there's less liquidity, and this domino effect continues.

And so, that's exactly what we need to watch here in the United States. The numbers just came out : U.S. spending fell dramatically in July . Watch the trend. We'll see if we recover in August and if it was a small thing, or if we continue the downward trend. There's been some credit growth in the Chinese economy. You look at aggregate financing of the real economy, which is a broad measure of credit creation and movement. In this case, it's more of a flow than a stock.

So , a broad measure of credit flow into the Chinese economy, and you see it's been growing in recent years, but we just found out that it's not from Chinese banks, so it's not bank lending. Instead, it's government bonds, which further supports my argument for stimulus. Government actions, government borrowing and spending on both the fiscal side and the central bank side, are a reaction to weakness, not a fix or a solution. And that's very clear when you look at the behavior of Chinese government bonds. Going back to the third quarter of 2018.

Again, it's the same time- lapse mine. We at Euro Dollar University talk about this mine all the time. I've been doing it in various forms for almost a decade, at least. Going back to the third quarter of 2018. Very serious changes. But the fact that it happened this way is not an accident. That's beyond the scope of this video. The timing in 2018 was not an accident, but since 2018, the weaker The more the Chinese economy got, the more the government tried to do something. And the more the government intervened, the less it worked, which means we're going through the same mini-cycle.

Stimulus doesn't work, the government does more , stimulus doesn't work again, the government does more, and soon there's government bonds piling up everywhere. And these numbers are just staggering . In fact, since 2024, and even earlier, but starting with the bazooka of 2024, the Chinese government has borrowed a huge, truly enormous amount, and bond yields have still fallen. Fundamentals of growth and inflation expectations weigh much more than government borrowing . In fact, expectations. Inflation expectations in these depressed economic conditions are the only thing that matters.

So when the banks back off, saying they don't want to take the risk, and the government intervenes because they're the only ones left in the game, it's the banks that have value, not stimulus. And you can see for yourself what I'm talking about. It's an inverse correlation, even though it should be a direct correlation. Government bond issuance should be up, and therefore economic growth should be up . That's what everyone says. Here's the data. Here's the proof. Government bond issuance, or government bond issuance, has gone up significantly, and what happened to economic growth in China?

It's down. That's exactly what I'm talking about. Low rates are not stimulus, government bonds are not stimulus. Low rates are, first and foremost, a market expectation of growth and inflation. Low rates from a policy perspective mean that central banks are responding to what the market has already signaled. Central banks are following the market with some lag. And government action, spending and borrowing, are also responses to weakness, not a way to fix it. So low rates are not a stimulus, and you can see that in the next graph.

Again, again, that's one of the reasons. So if you haven't been looking at the screen, what's really striking is that they're trying to put all this stimulus in place , and the more stimulus they put in place, the lower growth gets, because you're really trying to manipulate psychology. That's why Japan has been stagnant for so long. They just couldn't get over the psychology of "I need to be careful." "I need to be, you know , very conservative about all this." And they just couldn't change the psychology of Japan.

It's going to be interesting to watch now that COVID has exacerbated the situation in Japan, and people are realizing, " I need to act, and because there's inflation , I need to get a raise." And so people are negotiating harder now. They're going to find out very quickly that promising to work at one place for the rest of your life is not going to get you anything unless that place is going to give you a raise. When people get a raise, and those raises vary , competition is reborn in the system .

When there is competition, the best and the most talented start to rise to the top. And companies that can't compete fail. And really, we need to bring that level of competition back into the system. Here's what scares me about the US: we're seeing the psychology of people leaving the job market and, in part, because they no longer believe in the American experiment. They don't believe in capitalism. They are much more inclined towards socialism. They seek to lobby for everything to be free. This is one of the reasons why Tracy Rosenthal of DSA annoys me so much.

This is a person who is not trying to build anything. She is only trying to destroy what already exists. Trying to profit, consuming instead of creating something new. And when you see it in numbers, that's when it all becomes really deeply disturbing. Because if we in the US can't set the psychology so that people want to work hard, innovate, win the competition, and believe in themselves, we will never move the economy in the right direction . Part of the reason America has historically been so dominant is because of the country's psychology.

We were a place unlike any other. We were a place where people tried to escape tyranny. They were coming to the USA. They wanted to try to build something. They didn't expect anything for free . And it was the Puritan work ethic: "leave me alone," "don't touch me," "do or die," "let me do my thing," divinity in the individual. So, if I was given the opportunity to create private wealth, to own property, to have the government protect my freedoms as an individual, my rights to private property, then I could go and build what I wanted; and Hamilton had the vision to strengthen us with a little debt, but to set up a self-destruct mechanism for the central bank, so that once we were firmly on our feet and the engine began to generate prosperity, we would not continue to rely on it.

Dude, we would definitely take off. And now people's psychology is changing, and this is happening at the very moment when the economic reality here in the United States is changing. What I like about this video is that Jeff Snyder insists on the fact that the most important thing is the expectation. What do people expect, and what will be the consequences for the real economy based on these expectations? If people believe that billionaires are robbing them, that it is impossible to make a billion without robbing others, that the corporate elite uses and exploits its workers .

If such an expectation exists, and we see in the data that people are not, so to speak, "playing this game," then the economy will begin to seriously slow down. I have been saying for several years that I believe we are already in a hidden recession. And I believe that this process will only accelerate. I've gone into detail about what this will lead to, but when evaluating what to do with your own money, you have to understand the psychology of American workers and investors, and how people are taking too many risks with AI, because in the real economy there's almost nowhere to hide from what's happening.

And in the real economy, wages are not growing, at least not at the same rate as inflation. He spends the rest of the video further proving his point, but I think we've already gotten everything we need. It seems as if macro and micro processes are happening simultaneously. After all, China's history seems to be preparing us for failure, because we expect low rates. We will have to stimulate the economy, as you said, jobs are at a record low. People are leaving the labor market en masse. So Trump won't try to crash the stock market.

He wants to boost the economy. He is a businessman. He wants everything to look good. It seems like the next right step on paper would be to take the China path, but now we see that this path doesn't work either. So it's like the answer was never in China's path. At least if you delve into the microscopic details . lower interest rate. This is what I call O, an attempt at stimulation. This cannot be avoided. The Treasury does not control rates on any bonds, except short-term ones .

You hold an auction, people buy what they buy. Banks will place bets. Remember, a private individual cannot buy at an auction. So, it's the banks that say, "Okay, if you pay me this much, I'll take these securities." And the result is that the Chinese model is broken precisely because there is enormous government pressure on them: "No, no, no, you better buy these bonds." And when they start buying too much, the government says, "Stop, stop, stop." So, this system is doomed to failure from the very beginning.

If you have no power in the real economy. China relied on the fact that they had this power. They still have power in the real economy. Currently, production and exports are still operating. What is not working is a significant reduction in spending and certainly a significant reduction in new loans and new borrowing. So, people are losing faith in the economy. Residential construction, industry that drives production, for example, demand for diesel fuel as one example of side effects— all of this is declining. So the real economy is starting to weaken, if you don't take into account exports to the rest of the world.

So, by trying to control everything from the top down, you run into problems when you create an incentive structure that will lead to a downward spiral. Okay, the US doesn't have that. We have something similar, but the pressure is much, much, much less. In fact, Americans should pay attention to the psychology of what is happening now, because it is breaking down in a way that I would not call unprecedented. I don't want to paint an artificial picture, but this moment in time is very rare. It's not often that America goes through something like a " red threat." And historically, when we were going through the " red menace," the mere claim that a person was a communist was enough to make them persona non grata.

Whereas now there is so much energy behind it. So at a time when the economy is least able to withstand a change in psychology, we seem to be racing in this direction. And so two conclusions can be drawn from this . The power of psychology and how much it will matter. So where are we letting culture lead people? And finally, what signs should you pay attention to in order to understand that there is weakness in the economy? And that will be the point where we start to move to lower rates, lower rates, lower rates, we are in trouble.

This will not work as a stimulus measure. With an "artificial" AI bubble, the stock market at an all-time high, housing at a peak, and crypto at a low, is there a safe haven? Because bonds used to be such a haven; bonds are rising, but is there a place where the US economy is now " conditionally" protected from a potential crash, a possible collapse? There is no security for the ignorant. And I count myself among them . So the only thing you can do is diversify. Warren Buffett has a great quote about diversification being a way to protect yourself from your own ignorance.

And I say this because unless you've been doing this all day and proven that you can weather these storms and understand the game well enough , your only bet is diversification. So, even if I get the direction right, I don't trust myself with the timing. Besides, I am not a professional trader. I run a company. So for me, that will always be the main focus. This is what requires my most attention. So I always have to hedge my bets against my own ignorance. That's why I advise people to do just that .

I try to highlight the big macro signals that can be understood to diversify at times when you see the direction of movement. You shouldn't, well, I'm not trying to reduce my involvement in AI to zero, but I definitely limit my influence on AI. I'm not looking for zero exposure to stocks, but I am increasing my holdings of short-term US debt. I don't want to have only US debt, because what if it drags on for 3 years? Then you get 3 years of inflation where you may or may not reach par.

As you get a better idea of ​​these things, it becomes clear where you should be. Even two years ago, I wouldn't have known what it meant to be diversified. I would n't be able to tell you specific things that are worth diversifying into. So that's what I want to bring people to. I don't expect everyone listening to me right now to be a trader who trades every day and thinks, " Oh, cool." This will be the same information that will help me make a brilliant deal of the day.

It will be about understanding the fundamental principles that drive the economy, so that you don't become complacent and are not caught off guard by the idea that this is a phenomenon that is only growing, when it is not at all. Got it. If you enjoyed this conversation, check out this episode to learn more. The reality now is that people have both well -founded fears about AI and completely unfounded ones. This video will help us answer the question of whether AI is

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