We’re going to look at what exactly Janet Yellen said. We’re going to break down the math of what she’s saying, and I’m going to explain what this means, what’s coming, and what we should be doing and expecting. So let’s go. All right, welcome back. If you’re new to the channel, my name is Mark Moss. I make these videos to change the way you think about money, because almost everything you’ve learned is wrong, but almost everything you’re hearing is wrong.

Today we’re dealing with the Federal Reserve Board, the banks, the media, Wall Street, and even the treasury telling us things that aren’t necessarily true. But don’t worry, we’re going to dig through this. We’ll break it down. Now, one thing before we dig into this math that I’m going to show you, I want to say that I’m having a very special event with a friend, the King of Debt.

And we’re going to talk about how you can build up credit lines with hundreds of thousands of dollars so that you can take advantage of a potential downturn that’s coming in the market. So we’re going to talk about what the market is doing, but I believe a sell of a lifetime is coming up. And just like in 2008 or 2020, if you have what we call dry gunpowder ready to go, it could be the biggest opportunity of your life.

And so come join us. There’s a link down below. It’s a free event. He’s going to show you how he sets up hundreds of thousands of dollars of credit line. You don’t have to use it, but you can have it ready in case you need it. So come check it out. There’s a link down below. All right. Now, jumping into this, you already know we’ve seen the Federal Reserve go from the fastest rate hiking cycle in history trying to slow down inflation.

So I don’t need to go through that. I don’t need to go all the way back through that. But we are living through these consequences right now, like homes being completely unaffordable. With mortgage rates now at about 8%, the first time in 23 years, the median US. Home price is now requiring an income of $114,000 just to qualify for it. That’s a 50% increase in the monthly payments in just the last three years.

Did your pay go up by 50%? Probably not. This is a big problem, especially when the median income is only 70,000. This moves the housing affordability index to a record new low. We’ve also seen stocks breaking down. The S and P 500 has now lost 3. 5 trillion in value since the Fed removed a recession from their forecast. It’s down now 9% at its lowest level since May 31.

And the government interest expenses this is the big one the government interest expenses are more than the national defense, pushing a trillion dollars per year. Now, if you watch my channel, you follow me on social media. You already know the details of all this. So what everybody really wants to know is when will the Fed pivot come? When will they stop tightening and lower rates? And there’s some leaked intel from Janet Yellen from the treasury that gives us clues as to what to expect even when we have the media still telling us that the Fed is going to keep rates higher for longer.

Now, in a Reuters article published October 18, they said the media, they said that the Fed is done hiking rates but the higher for longer message is gaining traction. And they said, quote the US federal Reserve will keep its key interest rate on hold on November 1. So that means a pause, no more rate hiking. And they went on to say and may wait longer than previously thought before cutting it that’s the higher for longer.

Now according to economists in the Reuters poll, this is what they’re saying as the central bank’s higher for longer message gains traction. But the very next day at the Economic Club of New York meeting Fed chair Jerome Powell said that the US monetary policy is not too tight. So what is it? Now, we call this Fed speak. It was a term that was brought into the lexicon by previous Fed chair Bernacki which is basically a way of saying a bunch of gibberish that doesn’t really mean anything.

It’s basically a way of using a bunch of big words to sort of confuse and make it seem like they’re doing something without doing anything. Now we also call this jawboning, where they try to calm a market or even move the market based off of what they’re saying jawboning but without actually having to do anything. So from the Fed, they’re using broad language telling us they might have done enough, but they could raise again if needed, but we should all prepare for the higher for longer.

But then we have something else from Janet Yellen and the US treasury and it’s telling us a completely different picture. And you know what else we have? We have math, we have reality, we have actual real world constraints. So let’s dig into that to find out what the actual limits are. And we’re going to look at some concrete facts as to where rates are really going over the next few years.

In a Reuters article from October 5, Yellen said that the debt service cost will be 1% of GDP for the next decade. Now, her statement implies that either the economy will be strong and the government will run budget surpluses, or that interest rates are going to be near zero for the next ten years. So which is it? Well, if you look at the math, it’s pretty easy to understand that there’s only one answer.

Now, to understand the math we’re about to go through, you first have to understand why the math is what the math is. You see, when the Fed raises rates, the amount of interest the US government has to pay on their debt goes up, right? You get that when rates are low, you can borrow more. And when rates go up, you have to borrow less, especially when you’re the government spending like a drunken sailor with no end in sight.

And this isn’t great for a US government that has a debt to GDP ratio of over 120%. Because if they, the government, allow rates to rise past a certain level, it will call into question the solvency of the US government. And that’s right around where rates reach a level where the interest expense is greater than the tax receipts. So that’s a hard level. It’s a hard cap, it’s a constraint.

Now, if they don’t manage to cap yields at that level and the rising yields rise to send the interest expense above tax receipts, then the government has to actually print the interest. Sounds bad, right? It is. This is what threatens hyperinflation. Now, for the math, I want to first shout out, recognize a website called Real Investment Advice for this article, all right? Now this isn’t Investment Advice for you, but that’s the name of the website.

The article that they put out was titled janet Yellen Suggests much Lower for Much Longer. And so I’ve got some of the charts that I’m using from that article. I’m going to link to it down in the description below. If you want to go read that entire article from them, you already know, common sense tells you this, that low interest rates make debt manageable. And so, as you can see on the screen, while the US government’s debt to GDP ratio has climbed 300% just since 1966, until very recently, the ratio of the federal interest expense to GDP was actually at its lowest level.

Since 1966, the rapidly rising amount of debt has been offset by the falling interest rates. So adding all this new debt wasn’t really a big deal because the payments were manageable. Now, to put this into perspective, if $1 trillion of debt with a 4% coupon matures and the treasury replaces it with a $2 trillion bond at a 2% coupon, then the interest expense doesn’t change despite doubling the amount of debt.

Now, this is a very simple example, but this is basically what’s happened for the last several decades. Now, as you can see on the chart on the screen now, the five year US Treasury note was falling and then so was the cost of funding the government’s debt. But here’s the problem. When the lower interest rate debt has to be replaced with higher interest rate debt, then this works in reverse.

Just like if you took out a credit card with a low introductory interest rate, you maxed it out and then it reset to the new higher rate. Sort of the same thing. Now let’s get back to Janet Yellen’s message, the intel she leaked, and let’s look at the math. So in the five years leading up to the pandemic, so pre pandemic, the nominal GDP grew at 5. 3% annually.

So let’s just pretend that we live in a perfect world and optimistically, somehow we assume that growth continues at 5% consistently for the next ten years. There’s no downturns, there’s no recessions. It’s just straight growth for a decade. What do you think the ODS of that happening are? I don’t know. And then let’s get even crazier and let’s imagine somehow, magically, the government changes directions and for the first time in almost six decades decides that they’re spending too much money and they want to now all of a sudden go on a balanced budget every year for the next ten years.

What do you think the odds are of that? Now, if those two things did happen, the debt to GDP ratio would drop considerably, to about 70%. However, even still, the interest cost would still be equal to 2% of GDP, which is way better than the current 3. 36, but it’s still double Janet Yellen’s 1% objective. Now, if we want to dream even harder, imagine growth stays at 5% and the government doesn’t just balance the budget, but they actually have surpluses.

Then maybe, just maybe, they could get the interest expense to GDP ratio to 1%. However, the ODS of that happening is about the same as well, I don’t know, zero. So if those options are not realistic, what is? What would it take to get the interest expense in line with what Janet Yellen claims? Something a little more realistic, but still probably too optimistic, would be that the debt to GDP growing at the same rate.

Now, let’s also assume interest rates remain at current levels. So in this exercise, we assume an average borrowing cost of 4. 75%, which is a little bit below the current weighted average funding cost for the government. Now, under this realistic picture, interest expense would climb to 5. 6% of GDP, which is of course, nowhere near where Yolen projects the interest expense to be. So if we’re going to get to the 1% number she said we’re going to be at, and if we optimistically assume the debt grows at the rate of GDP, that’s an optimistic assumption, then interest rates cannot be higher for longer.

In fact, they’re going to have to be much lower for longer. How much lower? Well, they’re going to have to go all the way down to a weighted average interest rate of zero point 85%. That’s the number that would be needed to put the nation’s interest expense at 1% of GDP. When Janet Yellen tells us the debt cost to GDP ratio will be 1% over the next ten years, she’s really saying interest rates will be below 1% for the next ten years.

Therefore, Janet Yellen must believe that the recent spike in inflation and yields is an anomaly. If the pre pandemic economic and interest rate trends resume, she’s going to be correct. Now, you gotta keep in mind, just like the Fed uses Fedspeak to jawbone the market, so does Janet Yellen, so does the treasury, so does the government. Now, part of Janet Yellen’s job is to give investors and the market confidence.

In this case, it means telling the public that the current jump in interest rates and interest expense is not going to last. Now, while she would probably prefer to be straightforward, maybe she’d like to say that interest rates will be much lower. She also has to be sympathetic to what the Fed’s doing the Fed’s job of getting inflation down. So she has to sort of walk the party line.

She must speak in code, so to speak, or Fed speak. Now, whether you agree with Yellen’s projection or not, the chart on the screen is from the CBO Congressional Budget Office and it projects interest costs as a percentage of tax revenues. Now this chart’s courtesy of Bianco Research and it highlights that the government has no choice but lower for longer interest rates. The current level of interest rates will bankrupt the nation at the rate we’re on.

So this is just math. And the government is forced with one of two choices. Choice one, they can hold rates higher for longer, they can fight inflation, which will put the nation into a debt doom loop. It’ll put hyperinflation, it will basically bankrupt the government and it’ll shut it all down. Now the second option is they’ll lower rates, they’ll make the debt more manageable and they’ll go back to an easy money policy.

Now, as I always point out, no nation with a money printer has ever or will ever choose option number one. They’ll never bankrupt themselves and shut down. So option number two, lowering rates and more money printing is the only option. Which means I expect assets, real estate, stocks, gold, bitcoin energy and more to be much higher in the future. Now, there’s a few things about this. First, this doesn’t mean straight up from here, right? Nothing goes up or down in a straight line.

I expect a very turbulent and a very volatile times ahead of us because things have to get bad enough to actually force the Fed and the Treasury’s hand. So more trouble ahead in the short run before exploding way higher in the long run. Also, this isn’t necessarily a good thing. We’re talking about an inflationary crash and this is going to be catastrophic for most people, especially those that are not able to get their incomes up with the rate of inflation and those that don’t own any assets.

Now let me know which camp you’re going to be in and if you want more videos breaking this down, how to avoid being caught offsides during all of this. Now, like I said, I’m having an event with my friend Jack McCall, the king of debt, and we’re going to talk about how you can get some dry gunpowder ready to take advantage of this volatility to turn this into one of the biggest opportunities of your life.

It’s a free event. He’s going to show you all the secrets, how he does it. There’s a link down below if you want to come join us. See what he has to say. Learn his system. Ask all the questions you want, live while we’re there. Check it out. There’s a link down below. Otherwise, let me know what you’re doing so you don’t get caught off sides. Don’t be like the majority that gets caught off sides on this.

Let me know in the comments down below what, you want me to break down more in detail? Give me a thumbs up if you like it. If you don’t, give me a thumbs down, that’s okay, but at least let me know in the comments down below. Subscribe if you’re not already subscribed. And that’s what I got. To your success. I’m out. .