DOGE has failed to curb government spending. So what now? Joe Brown breaks down the four paths the economy might take from here: inflationary deleveraging, default, productive growth or austerity. In this episode, we dive into everything from future macro scenarios to personal finance tips.
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Additional Resources
The Marginal Productivity of Debt
Transcript
Monetary Metals:
Welcome back to the Gold Exchange podcast. I’m joined by my good friend, Joe Brown of Heresy Financial. Joe, welcome to the show.
Joe Brown:
Hey, thank you for having me on.
Monetary Metals:
Joe, most people probably know you because they’ve seen your YouTube channel, Heresy Financial. You’ve got tens of millions of views all about financial topics, your super blunt analysis, no fluff whatsoever, and of course, you’re one of the best when it comes to Fed policy, financial risks in the economy. And today, we’re going to break some of those down. So before we start, for someone who just somehow doesn’t know you because they’ve never clicked the YouTube app. Tell us a little bit about Joe Brown and how you got to be Heresy Financial.
Joe Brown:
Yeah, sure thing. Well, my wife and I got married. We were completely broke, had a ton of debt, and I didn’t know the first thing about money. And so I started studying personal finance and fell in love. I had a friend who was a stockbroker, and he was like, Hey, you should come work with me if you like this stuff. And I was like, I don’t think I can. He’s like, I’ll help you get through the interview process. So he did. I started the broker training program, grunt work. For about five years, I was a stock broker, worked my way up the ladder, and eventually got to the point where I realized I didn’t really believe in the stuff that I was selling anymore because of basically what I had learned about how the economy works. Things like, you talk to a traditional financial advisor about, Hey, I want to buy some gold. They’ll be like, The only thing that’s good for is to throw through the windows during the Apocalypse so you can break in and steal some food. At that time, gold was trading at $1,200 an ounce or something. Anyway, it got to a point where I was like, You know what?
I’d rather go out on my own, teach people the way that money really works. That was about 2019 when I did that, and I started Heresy Financial. Now my goal in what I do is teach you people how money really works, explaining the economic system and how to invest for better gains during the good times and the bad.
Monetary Metals:
What was the first thing that you noticed that made you think, That just seems wrong. You didn’t maybe know anything about finance initially, but then what was the first thing that made you skeptical of the more mainstream view?
Joe Brown:
That’s a good question. One of the things that stands out, I don’t know if this was in real-time, one of the first things, but in my memory, one of the first things that stands out was one of the top… I don’t want to give the name away, but one of the top names that is routinely on mainstream financial news sources, explaining things about how the economy works. I remember listening to her talk one time explaining some things to me about booms and busts, and it basically boiled down to, We don’t know why any of this stuff happens. We call it animal spirits, which is basically just people decide to do crazy things sometimes. I was going deeper and deeper down this rabbit hole trying to figure out how the machinery underneath the economic system actually works. Somebody who I thought was at the top who is teaching other people at a high level how this stuff works is basically saying, Yeah, we don’t really know how it works. I got very interested in exploring alternative explanations at that point, discovered Austrian economics, people like Peter Schiff, one of the first people I discovered down that rabbit hole.
I remember then talking to one of my coworkers about the true cause of inflation and the money supply. I just remember that it was just such a disconnect in the understanding of how this stuff works. I was like, Oh, man. If this is why we’re selling the stuff, the stuff that we’re selling, it’s based on a flawed assumption about how the world works, which means that it’s probably not the best way for people to position their portfolios for what’s probably going to be coming right around the corner. So yeah, animal spirits, to explain booms before the bust. That was one of the big red flags for me.
Monetary Metals:
And what’s something that, let’s say someone sits down with their financial adviser, a nice guy or gal, but what do you think is that main crux of the issue that they’re missing? Is it that they don’t understand money, they don’t understand central bank policy, they don’t understand inflation. What would you say is the number one blind spot that maybe your average Joe financial advisor is missing?
Joe Brown:
Yeah, I mean, I think it’s It’s probably, to be honest, better today than it was back pre-2020. Because when 2020 happened, it was such a large experiment putting to the test Keynesian economics and the mainstream economic views of, Hey, we want to stop this bad thing from happening. We can print our way out of it, and there aren’t going to be any consequences. Modern monetary theory was really cropping up at that time and entering its way into policy-making decisions and saying, Hey, we’ve got all of this slack in the economy, and as long as we don’t pull too much slack out of the rope here, then we’re not going to overheat the economy. There was all this just very unintelligent decision making going on, and people got to see the results of that. I know a lot of people who are still in the industry, and they’re a lot more aware of it now and a lot more aware of how these things work than they used to be. I will give your general average financial advisor a little bit more credit than I would have back in 2019 and before. But I still think the main thing is just it comes down to really a trust in central planning in in this case, over money, the price of money, monetary policy and fiscal policy, versus liberty and freedom.
We outright reject price controls in every area of the economy, most people at least, except when it comes to money, which is one-half of every transaction. To imagine that we won’t have distortions and misallocations of resources and malinvestments as a result of that is just idiotic.
Monetary Metals:
And so when someone hears, Hey, the Fed is changing interest rates this month, or, Hey, I got to pay attention to Fed policy, most people think, Well, they got to do that to save the economy from overheating or overheating, or Or they think there’s some reason that these countries have to have a central planning body that changes interest rates. So what would be the alternative in a world where we say, Hey, listen, we don’t like price controls for food or gas or bread. So if we don’t want price controls on money, well, what would be the alternative to this type of system that we have now?
Joe Brown:
Well, are you talking like an ideal alternative or something that could actually happen in today’s world?
Monetary Metals:
Well, let’s start with something closer reality, because obviously, there’s been a lot of tension between the current Fed board, mainly Jerome Powell and Trump, Trump calling him, of course, a loser, saying they’re not doing a good job. So do you think there’s a chance that, first of all, the Fed becomes either less independent, where they may be subsumed by the treasury, or do you think altogether, Trump might say, Hey, we don’t need the Fed. We’re going to start doing some radical changes?
Joe Brown:
Yeah, I think the most likely outcome is everything stays the way it is right now. The second most likely outcome would be a an amendment to the Federal Reserve Act and giving the Federal Reserve new mandates, because at the end of the day, that’s why the Fed operates the way they do, is because in the ’70s, when they were given the amendment to the Federal Reserve Act, they were told, We want you to focus on maximum employment, stable prices, and moderate long-term interest rates. Everybody forgets that third one. But all of those three things are to maximize government revenue. When you maximize employment for employment’s sake, it’s not to make people wealthier, it’s not to make people financially free, it’s to keep an employed workforce. The way you do that is by eroding the value of money so that people have to continue to work and continue to pay taxes. It’s in order to maximize the tax base. The second thing, stable prices, they interpret that as rising prices, which I don’t know how stable equals rising, but that’s the way they interpret it. That means, again, your savings get eroded, so you have to continue to work, you have to continue to pay, you have to continue to borrow because you borrow at today’s value of money and you pay it back with a future lower value of money.
That It keeps Americans encouraged to stay enslaved to debt, which again keeps people encouraged to have to stay as employees to maximize that tax base. Then the moderate long-term interest rates, that’s so the government can borrow on top of all of that, the mole tax revenue that they’re taking in. The entire thing is designed so that the government can maximize the amount of money that they can take from the economy. The only reason why that would be amended would be because the Federal Reserve does not do to the extent that the government wants them to. Let’s say in the next couple of months, something that’s very realistic that could happen is interest rates continue to rise on treasuries. Let’s say they exceed 5% in the next six months. That’s potentially a catastrophe for the US government because the cost of the interest alone on the debt is over $1. 2 trillion per year. It’s quickly becoming the largest line item on the entire budget. It’s more than defense spending. I think the only thing above it right now is Social Security. I could be wrong about that. But it’s massive, nonetheless. That The rising interest rate just means they pay more and more.
If the Federal Reserve says, No, we’re not going to lower rates because that might reignite inflation, then that could be, Okay, now we’re going to take action. We’re going to tell the Federal Reserve outright, you have to engage in some form of QE or yield curve control or something in order to make sure that the federal government can continue to borrow at rates that we want to borrow at so we can continue to spend. The third most likely outcome would be just folding the Federal Reserve underneath the treasury. It would be done under the guise of having more accountability so they’re not off on their own doing their own independent thing. But then that just completely politicizes the central bank, and it becomes 100% controlled by whoever is in power, which is going to be wielded and used for that party’s own benefit. I think that’d be an absolute terrible move because it’s not like the people who are appointed underneath the executive branch have any more accountability than the people appointed to work at the Federal Reserve. There’s still unelected appointed bureaucrats doing their own thing for the person that put them in power. I don’t think that would be a good thing.
Now, when we When we talk about good solutions, we talk about a rules-based system. You don’t need the Federal Reserve. At the end of the day, the interest rates are the price of money. It is the cost of acquiring dollars. That’s what an interest rate is. If you imagine in a sound money system where all money is, let’s just say, gold coins, and everybody has a bunch of savings. If I want to go lend money to somebody, I’m going to be competing against everybody else who has savings. The borrower is going to be able to bid us against each other and get a very low rate. When the savings pool is abundant, interest rates naturally get suppressed, which encourages me to spend and loan out my money and get rid of, or not loan out my money, spend it and borrow it. I want to be a borrower because borrowing is cheap. I want to spend my money and invest it because there’s no sense, there’s no profit in holding on to it. When the savings pool is large, the natural occurring thing is that interest rates go down, it encourages spending and borrowing and investment.
On the other hand, when it swings back the opposite direction, and I’m the only person with savings, and everybody else has spent all their money, and everybody else is a borrower. Now, I’m going to be the one, all the borrowers are going to be bidding against each other, trying to borrow from me. I could charge an extremely high interest rate. I could charge 20%, and some of the borrowers will have to pay that because they need it. Then when the savings pool is depleted, that natural incentive, that natural swing, that force drives interest rates higher, incentivizing people to save, to not spend, to not borrow, and to build their savings pool back up because you can be profitable just by saving money. There’s already going to be a natural equilibrium. That’s how prices work. It’s supply and demand. That’s how the price of anything works. It works that way with money, too. When the central bank comes in and tries to set interest rates artificially, what they are doing is they are distorting that signal sent out to the economy. They are telling the economy the money supply or the savings pool is abundant, so go out and borrow and spend, or they’re telling people the savings pool is depleted, save and don’t invest and pay down your debt.
Either way, if you are not allowing interest rates to adjust dynamically based on just the free market and supply and demand, The interest rate will always be wrong. It’ll either be too high or too low. There’s always going to be misallocation of resources as a result of a determined interest rate from a central bank. The first step would be to just remove the central bank with a rules-based system. But even better than that would be to replace it entirely with just free market, free floating, allow banks to fail if they get over extended, no bailouts, no money printing, allow the free market to determine the cost of money.
Monetary Metals:
What do you think about this idea of negative nominal interest rates? So sometimes you might hear that, Oh, inflation is 3 %, and the interest rate is only 2%, so really, I’m getting a negative 1 % if you think about it in real terms. What do you think about a negative nominal interest rate where the actual interest rate itself isn’t even zero, but some slightly negative, which has happened in other countries? So do you think that’s a threat that could happen to the United States, especially if Federal Reserve independence goes away, or do you think that that’s likely not going to happen in the near future?
Joe Brown:
I don’t think… Not only is it not going to happen in the near future, I don’t think it’s possible for the global reserve currency. The only reason why that’s possible for other countries is because they are not operating a global reserve currency. It throws the entire global financial system upside down if the dollar has negative nominal interest rates. Even 0%, the reason why I’m saying that that’s not even going to happen in the near future is because when you zoom out and you look at the long-term history of this, the government goes through cycles of levering up and then deleveraging. 1940 through 1980, 40 years from the end of World War until 1980, the United States government was deleveraging, and they did that through inflation. It was an inflationary deleveraging. They printed a bunch of money. The Fed did yield curve control. Interest rates went up. Inflation went up that entire time. But that was an inflationary deleveraging. The US government went from 120% debt to GDP down to 30% debt to GDP. The government offloads the cost of their debt onto the economy, pushing up the value of GDP through the inflation and through real productive growth, and unloads their leverage onto the economy, the cost of that debt onto the economy.
That cycle ended in 1980 when the debt to GDP ratio was 30%, interest rates toped out, inflation toped out, and then the cycle reversed itself. From 1980 through 2020 was the next phase of the cycle where the government started levering up yet again. Forty-year bond bull market, interest rates dropping over that entire time. Inflation, we had disinflation that entire time where inflation went from double digits down to close to… We had a couple of periods of deflation towards the end of that cycle. That can’t continue once interest rates hit zero, especially if inflation gets out of the bag. Interest rates did hit zero after the great financial crisis, but they didn’t increase the broad money supply. You didn’t have a burst of inflation like you did in 2020. Once When inflation breaks out and you’re at 0% interest rates, the cat’s out of the bag and it starts to swing the other way. Because if you lower interest rates again, you add fuel onto the fire of the inflation. Because, again, it’s that signal to the economy to go spend money, to go borrow money, and it’s a false signal. So it increases inflation. People have artificially high demand versus the amount of wealth that there is in the system.
And so they have to keep on raising interest rates. But the problem is everybody’s already so over leveraged that every time they start to raise interest rates, it causes the potential of a deflationary death spiral. And so it’s just a ratchet. It’s a little bit higher, a little bit lower, a little bit higher, a little bit lower over a very long period of time. This is decades long, and we’re five years into this new phase of long-term debt cycle. We’re seeing this exact same thing again, where we’ll get periods of time where the interest rates come down a little bit, and then they’ll go up more. They’ll come down a little bit, then they’ll go up more. The government will be deleveraging this entire time. Their debt to GDP ratio will go down. The idea is that productive growth will continue to happen with the economy, and they will unload the cost of that through negative real interest rates. Just them, though, we won’t get negative real interest rates. The US government will through coordination with the Fed and deregulation with the banks and all sorts of other shenanigans, QE, whatever. They’ll unload the cost of that debt onto the economy, deleverage themselves, while we get higher rates, higher inflation, and basically the opposite of what we had for the last 40 years.
Monetary Metals:
What do you think about this question that we talked about earlier about the borrowing cost? For example, we said that interest expense on the debt alone is now soon going to be surpassing even something like military or defense spending. So how do you see the government trying to thread that needle? At a certain point, they have to do something to make sure that the entire budget isn’t just interest expense, but on the other hand, lowering interest rates can also be a big issue. So do you see that there’s just massive growth on the way? Do you see there’s a reduction in the deficit on the way? How do you see them trying to square that circle?
Joe Brown:
Well, there are all sorts of ways that they will try, but there’s only four ways to deal with a sovereign debt crisis. I define that as 120% debt to GDP. You’re in the midst of a sovereign debt crisis. Number one is an inflationary deleveraging, where you use the central bank to print money and use that to pay for the debt. What that does is that devalues the cost or the value of money, which devalues the real cost of servicing that debt. Even if the debt goes up, the real cost of paying for that debt goes down. That is the most likely outcome is an inflationary deleveraging, just like they did during the ’40s and the ’50s with yield curve control. The Federal Reserve will absorb a lot of the national debt around the world because most foreign nations are no longer buyers of US treasuries. They’re still using the dollar. The usage of the dollar still goes up, but they’re holding up treasuries as the reserve asset goes down. It’s largely being replaced by gold. All of the borrowing has to go somewhere. All that debt continues to get rolled over, and that will eventually have to make its way onto the Fed’s balance sheet.
The Fed, they get paid the interest rate by the government on that debt, and then the Fed sweeps those profits back to the treasury. Any debt that the Federal Reserve owns is It’s largely interest-free debt for the US government. That pushes the interest cost down because they get a lot of that interest back, or they will in the future. That’s the inflationary deleveraging. The next way out of it is just through austerity. This was what a lot of people were thinking this current administration would do, is, Hey, we’re just going to cut spending like crazy. That’s not happening. Initially, it came in saying, Hey, we’re going to cut military spending down to 500 billion, and then recently just said, No, we want to actually increase it to a trillion. That’s happening across the board. Any spending cuts are absolutely negligible because the only real things that you could cut to make a decent impact would be military, Medicare, and Social Security. None of those are getting touched. It’s political suicide to do that. Also, you need Congress to do that. Anybody in Congress that tries to do that will absolutely get destroyed and will lose their seating power because every single one of those interests is more powerful than they are.
Spending cuts are not happening. So austerity will not happen. You’re not going to get the spending cuts needed in order to reverse this train. The next one is just default, which would be the most honest way out because they are defaulting in real terms. They’re not paying back full purchasing power of what they borrowed. If you default, you no longer get to borrow at the low rates. Interest rates shoot through the roof because you defaulted and nobody expected you to do Now, if somebody’s going to loan you money, it’s going to be at a really high interest rate, which means that it automatically solves the problem of you just borrowing and borrowing and spending into eternity, and it replaces the treasury with something else as that global reserve asset. That would be the best way out. That would be the most honest way out. The people who get hurt by that are the ones who have been profiting the most off of it, which is largely financial institutions printing money into existence to loan to the US government in the first place. But that’s not going to happen either because default only happens by choice if you print your own money that you borrow in.
The last way out is through productive growth. The idea is you can grow your way out of the debt. If I make 100 grand a year and I have $50,000 worth of debt, that’s pretty painful. But if I take on a little bit more debt to pay for a certification and get some skill and I get my income up to $300,000, now that increase of debt from $50,000 to $60,000 is still more debt, but it’s way less painful my income is so much more that I can pay for that super easily. If the United States economy can grow extremely rapidly from advancements in AI and robotics and deregulation in energy like nuclear, and we get a big energy production explosion, and we replace a lot of human jobs with robots that go and do the dirty work that we don’t want to do anymore, and we get to focus on higher productive things. There’s a potential for a big economic explosion that would require a lot deregulation and probably lower taxes as well. If that were to happen, the size of the economy grows so much that the US government can tax that economy in a way that makes the current debt pile very, very manageable.
That is less likely. I think the inflationary deleveraging route is the most likely, but we will get bits and pieces of all those.
Monetary Metals:
And all of those different options, and how much is used in one, how much we try to inflate away, how much we try to grow away, versus just straight default, right? It sounds like in the air, there’s lots of these different options. So as someone who’s an investor thinking about their portfolio, how should they think about positioning into different assets or different allocations depending on, hey, they’re just straight up defaulting. Well, okay, then you don’t want bonds. If they’re saying, Hey, we’re going to grow away like crazy, maybe you want growth stocks or AI. So how should people think about all these different scenarios and their own portfolios?
Joe Brown:
Yeah, well, a couple of ways. So number one is that things that are inflation-protected assets tend to do extremely well during time periods like this. You think about 1940 through 1980 was the last time that we went through an inflationary deleveraging long-term cycle. That whole entire time, Gold stayed flat. It was at $35 per ounce because it was held there by law. As soon as that broke, because the real value of gold was a lot higher, because the claims on gold were a lot higher than the actual gold was, it went It went to $100. Let’s see, what did it hit by the end of the ’70s? It peaked above $800 per ounce, went from $35 to over $800 an ounce within 10 years. All of that movement would have happened more steadily from 1940 through 1980 if it was freely floating, if it wasn’t pegged or held down by law. That’s the environment that we’re in right now with governments around the world in the beginning stages of inflationary deleveragings. There’s a reason why central banks and sovereign wealth funds and smart individual investors are stocking up on gold, and the price of gold is $3,200 an ounce, whereas a year ago, it was 20 something per ounce.
There’s a big bullish force behind gold for that reason, number one. Number two, you have a swing back towards active investing over passive investing. When you have a 40-year time period where interest rates move down, that’s a bond bull market. Essentially, you have… We don’t need to get too much into the weeds on this, but it pushes the incentive towards passive investing because everything gets just ballooned higher from corporations continuing to be able to take out cheaper and cheaper debt and roll that over over time, and that just lifts asset prices. And so there’s less and less of a reason over that period of time to look at fundamentals and to look at value and to sell what is over priced and buy what is underpriced because everything just rises. And so why spend all that time and energy and money and cost on trying to find value when you can just buy everything because everything goes up? That changes when you’re in an inflationary deleveraging because you no longer have that 40-year bond bull market to get you through to lift all tides. You have real businesses that make real profits and real cash flows and real solid growth do well.
Other companies, they die because the cost of debt gets more and more expensive for them over time. You have an unwinding of the passive investing. That’s why from 1940 through 1980, that’s why you had like… That’s the origin of how Warren Buffet invests and Benjamin in grand. It’s like that’s where active investing comes in, and we’re entering into that time period again. Commodities do well for the exact same reason that gold does well. Then you also have increased volatility because as the passive investing unwinds, passive investing is just, I’ve got money to invest, I’m going to buy everything. When I want money back from my investments, I sell everything. Value doesn’t matter. You get increasing volatility in markets the more you have passive investing, which right now dictates everything, which is why we’ve had three bear markets, 20% drawdowns in the last five years. That has never happened in the last 50 years. That’s never happened before. You have increasing volatility with passive investing, not less. So you want to make sure that you are being, at least in the short term, more attentive to that volatility and potentially try and capitalize on that, unless you’re just saying, No, I’m strictly long term investor, and I’m just buying more at the…
Buying the dips, whatever. But those are some things that investors can do to prepare for and protect themselves during this next couple of decades.
Monetary Metals:
And what do you think this AI trend is going to mean for things like commodities or people who mine, right? And there’s often that saying, when there’s a gold rush, sell the shovel. So if there’s going to be a chip rush and an AI rush and all these new technologies, whether it’s nuclear to fuel the AIs or solar to give energy to the AI, where do commodities like gold or other commodities, as well as miners, fit into this picture? Because for so long, miners, commodities, gold, they’ve just been an alternative way out to the side, not necessary for the modern economy. How do you think that changes going forward?
Joe Brown:
Well, number one, this is why active investing and paying attention to value matters so much is because many people assume that just because gold does well, that all gold miners are going to do well. Just because silver does well, all silver miners are going to do well. A lot of people, especially older investors, look back to the bubble that happened, that peaked in 2011 and are just waiting for that to happen again. In all likelihood, that’s not going to just happen again. Minors are stocks. You have to value them as a business. Most of these miners don’t produce anything. They’re sitting on a plot of land. They have one person that went to college for some geological degree. They’re drilling one hole in. They’re doing some analysis and they’re saying, Okay, well, we know there’s this down here. Does anybody want to buy our company, buy us out so you can come get what’s in the ground? It’s like most of the time, nobody wants to do that. Most of these companies are still going to go to zero. There are some very good companies, but if you’re going to be exposed to miners, I would probably lean towards the indexes and maybe some of the really strong royalty companies because at least then there’s some element of I don’t have to know whether this is just a hole in the ground with a liar sitting on top, like Mark Twain says about gold miners.
That would be what I would say about miners, is that you have to have the ability to value it as you would value any company and not just rely on the move in the commodity, which is why you’ve seen stellar performance out of gold recently, and most gold miners have not. But the indexes have done fine. In terms of betting on the next big AI revolution, tech revolution, industrial revolution 2. 0, whatever that is, A lot of that does come down to the government allowing it to happen. In this day and age, that is a big if. We know that there’s big tech companies pushing for nuclear, so I think it’s pretty safe to say that we are going to get a nuclear energy renaissance, but it may not actually come to pass. The reason why nuclear dies died in the ’70s is because of regulation, because of lobbyists pushing for, Hey, we want to make sure that this doesn’t happen. Meanwhile, the US Navy has been running a total equivalent of 6,000 man-hours of nuclear energy production with the US with zero accidents this entire time. It’s not like we don’t have the technology when we say, Hey, we’re going to do this or allow it to happen.
It can happen. Every city can have a nuclear power plant. It’s just a matter of the government getting out of the way, and they don’t seem to be very good at that. In any area that they do get out of the way, I think that’s probably a safe bet to start throwing some money in. But Yeah, we’ll see.
Monetary Metals:
Let’s talk about some of the areas where it feels like maybe the government is trying to get out of the way, and that’s the crypto regulation in the crypto area. A lot of people in the crypto community said, Hey, there’s no clear regulation. This guy, Gary Gensler, is just really hurting us, and there’s no clear rules, whether good or bad. There’s just no clarity, and we can’t work, and we can’t build in an environment like this. And recently, you’ve seen a more cozy up, whether that’s good or bad, to the crypto industry and the crypto people. So do you think that’s an area where maybe we’ll see some information on what this new administration will allow in terms of building or growth in different ecosystems? Should we watch crypto before we see what happens with nuclear as a test case?
Joe Brown:
Maybe. The nice thing about deregulation is that it allows failure to fail. Nine times out of 10, regulation does the opposite of what it’s supposed to do, and it props up players that should not be propped up. A real physical example of this, I know somebody that started a coffee shop in Washington, DC. They had inspectors coming in from DC, from the state, federal, about everything that they had to do, like where the drain had to be in the floor, how big it could be, which way the door had to swing open and closed from the front into the back. All these insane little and a lot of them contradicted each other. There’s this cookie store, Cookie Baker store, where he would have to have two doors. He knew when the state was coming in, he would have to put the one door on that swung to the outside. When the feds When he was coming in, he’d have to put the other door on that swung to the opposite direction because they had conflicting laws about which way the door had to swing. Who is the most likely to be able to get around that without getting shut down?
It’s the massive corporations that are pushing for this regulation because they know they’re going to survive from this. They know they’ve got a guy on the inside. They can hire the lawyers. They can hire the people. It’s going to be the small guys that get crushed out, which weeds out the competition. So nine times out of 10, that’s what regulation does, is it props up the big guys, and it doesn’t allow competition to come in and thrive and beat out the older, slower, less competitive companies. So when you look at something like crypto, do Deregulation allows failure to fail. It allows people to look at something, try it out, and get burned by it, and no subsidy, no bailout comes in, and now nobody touches that ever again. That’s one of the good things that happened with FTX blowing up. It’s like many people are very skeptical of doing anything like that again because if they got their money back, it was a fraction of what they lost. Deregulation in crypto is good, I think, for that reason, on one hand. On the other hand, I think that one of the hidden reasons behind this push is because of stablecoins.
First, you deregulate to get a bunch of adoption. Stablecoins are like the big… Tether is one of the top holders of US treasuries. Anybody who’s trading crypto, they’re holding their dollars in stablecoins. Behind the scenes, that’s going into treasuries. If we just stop all crypto right now, then big holders of treasuries have to dump a bunch of treasuries, and that’s something government can’t handle right now. Once it reaches adoption, then they’ll come in with some more rules. Maybe they co-opt some things. Maybe they incorporate it into the larger financial system overall. But I think that’s the other reason why it’s because of the propping up the treasury system right now.
Monetary Metals:
What do you think about this central bank digital currency idea? A lot of people said, Oh, this is going to be used for financial repression. Everyone’s not going to have bank accounts anymore. It’s all going to be directly linked to the Fed. There’ll be no more cash. They can use negative interest rates because there’s nowhere to just store physical dollars anymore. Do you think that crypto is a test case to see, Hey, do people like using this digital dollars? Or do you think that they’re actually really different and this whole central bank digital currency is a boogie man?
Joe Brown:
For right now, it is a boogie man. The people who are in power right now will not do that. Okay, a couple of different angles on this. Number one, if we have a If we had a CBDC right now, we wouldn’t be able to tell. Because the banks are the operating system, they’re the infrastructure that would stay in place to operate the CBDC. If you strip back the layers of the onion to see, Okay, what is a CBDC and how would it differ from the current system that we have right now? The dollar is a digital ledger system. A ledger is like an Excel spreadsheet that says, This person has this account number, this much money in their This account, and here’s the transactions that happened inside this account that got the money in and out. It’s just an Excel spreadsheet. Right now, every bank has their own Excel spreadsheet, and it’s internal. They manage it. They say, Okay, this person moved money in from this account to this account, this account to this account. Then those banks go to each other at the end of the day through the Fed, and there’s one central ledger at the Fed where they do their transactions with each other.
This bank has one account at the Fed, this bank has another account at the Fed, and they batch settle their transactions between each other, so those transactions show up at the Fed. We have a distributed ledger system today. A CBDC would simply be consolidating all those ledgers onto one ledger. That’s it. That’s the only difference. Now you say, Okay, well, that doesn’t sound very scary. Why would that be such a bad thing? It’s because 10 tyrants are better than one. You want power to be as distributed as possible so that it is at least a leash against tyranny. If you operate a business right now in the marijuana space or in firearms, or sometimes even like gold and silver bullion or some other areas of business, like strip clubs and stuff, sometimes it can be very hard to get a business bank account. Some banks just do not want to do business with you. I’ve heard stories of companies that are in spaces like this. They just get their bank accounts shut down, and they and go do banking somewhere else and they cannot find anybody who will open a bank. They’re not going to go to the black market unless they just shut down.
At least that’s better because there are some other options sometimes than everything being on one ledger, where if the decision is, you don’t get to make this transaction or do this business, there’s nowhere else to go. All transactions are done on the one ledger. That’s the fear is the tyranny because of the lack of choice. Then all the information is centralized and the ways that they can manipulate the flow of resources because they can control, Okay, well, we should put an extra little tax on this, a subsidy over here. Then because you’re controlling all of the money, the flow of the money, you are, in essence, controlling the flow of all resources. It centralizes planning and control over. It’s 100% just direct communism then at that point, or the potential for it, I should say. They don’t have to use it that way, but they could. And that potential for power is the reason why the CBDC is so dangerous. I think enough people, at least right now, are skeptical of it enough to say, Hey, we’re not going to stand for this. We’re not going to use this. We don’t want this. That for right now, they’re biding their time.
It’s probably going to happen at some point in the future, but it’s probably a lot farther off than most people are scared of.
Monetary Metals:
Joe, as we come towards the end of our interview, I want to do a series of rapid fire questions, so there’ll be different topics. You can answer as short or as fast as you want. You can spend the rest of the time talking about one question, or just give me a yes or a no as well. So let’s start. Do you think the Fed should have a dual mandate? Should they have more than a dual mandate? Should they maybe tweak part of their dual mandate? Or do you think they should just get rid of this dual mandate altogether and say, Hey, we’re going to do centrally planned interest rates the way we want to do them?
Joe Brown:
Do I get to say a different option? But I think it should be replaced with a rules-based system. No discretion, no mandate, just a rules-based system on what interest rates do and what monetary policy does that’s automated. No discretion.
Monetary Metals:
Next question for you, a similar topic. Do you think that Jerome Powell is going to stay at the Fed during Trump’s term, or do you think there’s actually going to be a shift up where Powell is out and someone else is in?
Joe Brown:
Powell will serve out the remainder of his term. He will not be removed.
Monetary Metals:
Next one for you. This is about technology technology and AI. Do you think AI will be a deflationary force where in general people can see consumer prices going down, or do you think it’ll be an inflationary force where most people see consumer prices actually going up because it’s being bid on by AI companies?
Joe Brown:
Ai is a tool. A tool is something that increases output given the inputs. Every technology or tool throughout history is the same thing. It increases the outputs of human labor compared to the inputs. Every single time we get a a new tool or a new technology, whether it’s a tractor or fire or animals or oil, we see greater human productivity compared to the human input. And that means you get more for less. In other words, that is deflation. It makes the cost of acquiring the stuff we want cheaper.
Monetary Metals:
What do you think about self-driving car technology, sometimes called autopilot or full self-driving? Do you think that’s going to be as big of a disrupter in the economy as most people think, or do you still think it’s a ways out?
Joe Brown:
It will not be a disrupter in terms of ruining anything. It will be a massive value add because there is an entire addressable market that is not being met right now. It will not displace anything. It will add to things. It’s going to be insanely massive. The companies that are prepared to benefit from it will make a lot of money, and almost everybody’s lives will be made better off as a result of having extremely cheap transportation and safe transportation anywhere they want, give almost any time.
Monetary Metals:
All right, let’s say you’re king for the day and you get to ban one financial product. No one’s allowed to sell this financial product anymore. What’s something that you would warn investors since you can’t actually ban anything away from in terms of, Hey, you should be afraid of a financial product like this?
Joe Brown:
That’s a good question. Anything that mixes two financial purposes or more into one. So don’t mix insurance with investing. Don’t mix tax savings with investing. Don’t mix getting out of debt with insurance. Don’t mix two financial goals into one product. You end up with an inferior product for both goals.
Monetary Metals:
What’s something you think that the average 60, 40 portfolio is missing? If you could add something to that 60, 40 portfolio to try to help it out, what would you say people should think about?
Joe Brown:
Step one, turn it into a 100/0 portfolio, no bonds, all equities. Step two, add in inflation-protected assets like gold and real physical real estate like single family homes.
Monetary Metals:
What’s one lesson that you, Joe Brown, took way too long to learn and you had wished you had learned earlier?
Joe Brown:
Number one rule is don’t lose money. The number two rule is never forget rule number one. There’s no such thing as a big loss that didn’t start off as a small loss. If you always get rid of your small losses and take them and fall in love with your small small losses, you will never have a chance for a big loss. Big losses are more powerful than gains, exponentially so. A 50% loss needs 100% gain just to get back up to break even. If the only thing you ever do is limit your losses and never take big ones by always taking small ones, then your profits will take care of themselves.
Monetary Metals:
Who’s someone that you listen to and you disagree with the most, but you still follow them super closely because you just want to hear what they have to say?
Joe Brown:
It depends on the topic. Probably Keith when he talks about Bitcoin. Probably Peter Schiff as well talking about Bitcoin. Ray Dalio talking about the importance of government intervention. Those are a couple.
Monetary Metals:
Can you give some investors psychological tips? So obviously, for some people, we joke around, say, Hey, just put it all 100 % into stocks because over the long term, you might have better returns than bonds. But for a lot of people, it’s it’s psychologically difficult to see their portfolio have a drawdown of 20 %, even though they know, statistically, it’ll probably turn out much better. So what are some psychological tips you can give people when it comes to investing?
Joe Brown:
Well, number one, volatility does not equal risk. Risk is what is the worst case scenario here? When you buy a stock, the worst case scenario is it goes bankrupt, liquidates its assets, and then returns whatever’s left over to shareholders. If you buy a stock, worst case The scenario is not zero. Usually, you get something back for the shares if they go bankrupt. Volatility, many times, is revealing the true risk. So low volatility equals suppressed risk. That’s why the price of gold had no volatility for so long, and then it burst onto the scenes and went to $800 per ounce. There was real risk there with the dollar. It was just being suppressed by law. So volatility does not equal risk. The idea that investing in something with subpar returns is going to protect you from losses means that you are guaranteeing lower returns because you’re afraid of lower returns. So implementing an asset into your portfolio for that purpose is illogical. Bonds almost always return lower than the rate of inflation. So you are guaranteeing a loss, a small loss at best, and in the case of default, a big loss at worst. Lastly, I would say, the more you learn, the more you earn.
Like Warren Buffett says, true risk comes from ignorance, and you can eliminate most risk if you really understand the company you’re buying, and you’re buying it at a good value, you understand how to hedge, you understand how to set proper risk exits. There are lots of ways that you can manage your risk, but a way to manage risk, figuring out at least a way to manage your risk is the number one most important thing.
Monetary Metals:
What do you think the gold people are missing about Bitcoin and crypto that they could actually benefit by learning from? And what do you think vice versa, the crypto people are missing when it comes to gold?
Joe Brown:
Crypto people are missing when it comes to gold is the Lindy effect. Gold has maintained its purchasing power and grown its purchasing power for 5,000 years. Something like that will not be displaced easily. And it has survived through a transition to fiat currency around the globe, a pure fiat financial system, and survived a transition to digital fiat. Those are two massive shifts that gold has survived and thrived through, and it has still maintained and grown its purchasing power. Again, it’s got a 5,000-year track record. It will not be displaced easily. Something that gold people are not getting about, I would say Bitcoin because I don’t like crypto. I do like Bitcoin. Something that gold people are not getting about Bitcoin is that unless we have a return to the… Nuclear Holocaust wipes out all technology, nobody will ever use gold coins as money again. We’re not going to be using physical transfers of gold ownership. Paper, the technology of paper, which represented ownership of gold, replaced gold as money hundreds of years ago. That’s gone. And that’s what paper is. It’s just a technology that transfers the ownership of gold rather than the physical moving of gold.
And so if gold does get used as regular everyday transaction money again, it will be the digital ownership of that gold being transferred, not the movement of physical gold from vault to vault. Which means if you’re going to be just transferring digital ownership of an asset, then fundamentally, there is a very little difference between Bitcoin and gold. And the differences mean that gold does have some advantages, Bitcoin does have some advantages, and people may choose Bitcoin. Whether you agree with it or not, money is a winner-take-all game. And if people choose Bitcoin over the long term, its value will go up a lot more than the value of gold will go up.
Monetary Metals:
Very, very cool. Joe, what is the best investment that you’ve made that’s not been a financial investment? So something you’ve invested and you’ve said, This was a great investment, but had nothing to do with finances.
Joe Brown:
Probably my wife. Choosing the right woman to marry. That was not a financial investment, but it has produced wild returns in terms of both money, financial returns, and just overall life satisfaction, marrying somebody who’s your best friend that you trust with anything that you want to hang out with that person more than you want to hang out with anybody else. That’s one. Number two is having kids early. This is a little bit of an accident, but I ended up having kids earlier than I had planned on, and definitely by far the best the best thing to ever happen. There’s nothing in life that will give you more joy and satisfaction than raising kids. That doesn’t mean that it’s not difficult because it takes effort, but anything in life worth doing takes some effort. Then I would say this does lean more towards financial, but the jobs, many people get sucked into the idea that you need to get better and better jobs for better and better income, for more and more wealth. Jobs are for learning, not for earning any. If you approach jobs with the idea that I’m here to get a return on my investment in terms of the skills that I’m acquiring, and then you start stacking those skills together, you will make a lot more money from that rather than just looking at the job itself as being there for earning.
Jobs are for learning, not for earning.
Monetary Metals:
What’s something as a parent that you think most parents should be telling kids about money but aren’t?
Joe Brown:
Make as much as possible, keep as much as possible, and give as much as possible. So with money, you want to make as much of it as possible by increasing your income, stacking skills, starting a business, whatever you can do to make as much as possible. You want to save as much of that as possible because it’s possible to outspend any income. We’ve all heard about the professional athletes and lottery winners who lose it No matter how much money you have, you can always spend it all. It’s about the difference. It’s about what you keep, not what you make. You have to make as much as possible because you can’t coupon clip your way to prosperity. You have to save as much of it as possible because that’s where you actually create your wealth from. Then the most important is you give as much as possible. I don’t think there’s anything more satisfying to do with money than to give it away. The more you make and the more you save, the more you can give away. I think wealth is by and large demonized because people don’t have it, so they want to feel better about not having it.
So they demonize wealth and look down on people who have created it. And so they implicitly create a worldview raising their kids that money is not something to be sought, but money is a tool, and it allows you to live the life that you think you should be living. And it amplifies. So if you’re evil and you have a lot of money, you’re going to do a lot of evil things. It’s a tool. It just amplifies human behavior. But if you are a good person, you want to change the world, and you want to do good for people, and you want to make the lives of the people around you better, and you want to give as much as possible, the more money you have, the better you’re going to be able to do that. And so it should be praised. It should be looked at as something that is good, a moral good, not a moral neutral or even a moral evil, and make as much as you can, save as much as you can, and give as much as you can.
Monetary Metals:
Joe, what’s a question I should be asking all future guests of the Gold Exchange podcast?
Joe Brown:
Probably what is your either biggest financial mistake or biggest financial loss, and what is the lesson that you learned from that?
Monetary Metals:
All right, I’ll turn it around on you, Joe. What was the biggest financial mistake you ever made, and what was the biggest financial loss you had?
Joe Brown:
All right, the biggest financial loss that I ever had was percentage-wise. I lost about 90% of my networth when I first became a trader. It was because I was trading extremely aggressively, a strategy that was guaranteed to work and would I could really lose one time out of a million. I was highly leveraged and just printing the cash. Then something happened that statistically shouldn’t have happened, and I lost it all or close to it. Wiped me out, not in my stomach. I couldn’t I was still asleep for months. Ultimately, it started me down the path of trying to learn how to trade and how to invest, and realized I was doing it 100% wrong. I was picking up pennies in front of a steamroller, and you should be doing the opposite. You should be doing something that exposes you to more upside potential than your downside risk, that losses are always the things you should focus on, not the potential gains. In terms of biggest financial mistake, it’s making an investment decision based off of the tax implications. I lost seven figures of gains, so I still came out with a gain on this, but I I had seven figures of gains because I wanted to hold out to the next tax year.
I didn’t have to pay taxes on this year. I wanted to wait until the next year, held out, and watched seven figures of gains evaporate in front of my eyes over that six-week period until the year turned over. So never make an investment decision based off of tax implications. Make your investment decisions the way you should and let the taxes do what they’re going to do.
Monetary Metals:
Joe, it’s been awesome interviewing you. Where can people find more Joe Brown and Heresy Financial?
Joe Brown:
Youtube and X, but mainly YouTube. I post there a couple of times a week, long-form videos. If you like what you find there, there’s always more of me somewhere else.
Monetary Metals:
Make sure to subscribe to Heresy Financial. If you liked our interview, of course, the Gold Exchange podcast. Joe, it’s been awesome. We’ll have to have you back again soon.
Joe Brown:
Thanks again. It was a good time.
