Financial repression: how the Fed may shrink US debt

0:00Right now, social media is exploding with claims that the incoming Federal Reserve chair has a secret plan to cancel America's $39 trillion debt. People are calling it the financial reset. But here is what nobody is telling. The Federal Reserve is not actually federal. It's privately owned. And the people who own it are about to make decisions that determine the fate of your savings.

0:29It's not a conspiracy theory. There is a documented historical playbook for exactly this situation that has been used before successfully to make trillions of dollars of debt simply vanish. So by the end of this video, you'll know what's real, what's hype, what the Wall Street insiders are actually doing about it, and the three-step framework you can use to position yourself so you don't get left behind. I'm going to put on my yellow glasses because I can see better with them. No, it's for the bright lights. Winston needs some too, don't you really, Winston? You want your own yellow glasses?

1:05Stay there, my darling. There he is. We did a three-hour hike this morning, which is why he's looking a little bit pooped, aren't you? All right, hang around, Winston. So a lot of you will have seen these secret plan claims floating around social media. And if you have, just put the word plan in the comments down below. It'd be interesting to see how many of you have actually seen this.

1:27He's seen it. He's the one who sniffed it out. And if you're wondering who the heck we are, my name is Felix Prehn. I'm an ex-investment banker here. And this is of course Winston, who's an economist. And we've sat in the rooms where these games actually get played. Today we run the Goat Academy. We have over 20,000 students over the last 6 years. And what makes us different is that our mentors are retired Wall Street goats, real veterans of Wall Street, and they teach regular investors the same institutional strategies that normally never ever leave those trading floors.

1:59So our mission is simple. Give regular investors and golden retrievers the knowledge that's usually locked behind Wall Street's doors and Bloomberg terminals. So when I tell you the Fed is about to do something that affects literally every dollar you own, I'm not guessing here. So let's start with the number that everyone's freaking out about, right? $39 trillion. It's the US national debt. It crossed $39 trillion this year.

2:25And look, it's just a number, isn't it? Your brain can't picture it. Mine can't either. So if you spend $1, maybe that's how we put it, give you an analogy. If you spend $1 every single second since the day Jesus was born, you'd still not have spent a trillion dollars yet. I attended two Catholic masses over the weekend, so I'm in Jesus land at present.

2:47But what should really get your attention is that the debt grew almost $3 trillion in the past year. It grows $7 billion every single day. So while you're watching this video, literally the time it takes me to finish just a section of the video, the US will have added more debt than most countries make in the year.

3:07But the debt isn't actually the scary part. The interest is. The US will pay about a trillion dollars in interest. So they're not paying down any debt. It's just the rent on the money, more than the US military budget, bigger than education, bigger than infrastructure. It's the 2nd largest item in the federal budget.

3:28And another way of looking at that is that about a 5th of every tax dollar you pay goes straight to interest payments. So you go to work, you pay your taxes, and almost a 5th of what you send to Washington just funds yesterday's spending. So the obvious question is, why don't they just fix it?

3:49Well, how do you fix it? You could raise taxes, right? Tax the rich. Well, the math doesn't really work. Even if you taxed every billionaire at 100%, you wouldn't make a dent. Option two is you spend less. But the problem is Social Security, Medicare, defence and interest are most of the budget. You can't cut interest and the other three are politically untouchable.

4:14Option three, you grow your way out. That's what El Presidente kind of campaigned on, right? Which is great in theory, but the debt is growing faster than the economy. So what's left? One thing, one option, and it involves making every dollar worth less.

4:35So when people talk about the secret plan, this is what this is really about. And you're going to see it in a minute. It's not actually a secret. It's historically proven. It's been done before. But before we go into that, you need to understand something that they don't teach you in school. Something I genuinely didn't fully appreciate until I got into the financial industry. The Federal Reserve is not a federal agency.

4:55Say that again because it sounds wrong, right? There is nothing federal about the Federal Reserve. The most powerful financial institution on earth is not part of the federal government. The Fed is structured as 12 regional Federal Reserve banks. And those regional banks are basically private corporations.

5:17And you don't have to take my word for it. There's literally a legal case on it, Lewis against the United States. And the 9th Circuit Court literally ruled that the Fed are, and I quote here, independent, privately owned, and locally controlled corporations. Corporations means companies.

5:37So who are the owners? Who own these commercial banks? The big member banks own stocks in their regional Feds and they collect a guaranteed 6% annual dividend. I mean, this sounds like a pretty good investment. I want in on this. 6% guaranteed by law forever, right? Try getting 6% from your bank.

6:05And each Fed bank, the way it works, has 9 board directors. 6 of those are elected by the banks, the private banks. So when the news tells you the Fed decided to raise rates or the Fed decided to ease policy, guess what? The biggest Wall Street banks literally have seats at that table. They're not lobbying from the outside trying to influence, dangle jobs in front of them. No, no, no. They're literally inside the room.

6:33And I'm not saying this is some villainous conspiracy. There's no smoky room with bald guys stroking cats. We need to bring the cats back, don't we? They will be appearing shortly. Winston, come on up here. Act as a cat. Here we go.

6:50So what I'm telling you is that the system is designed to protect the people who own assets, banks, big institutions, large investors. And the so-called secret plan we're going to talk about benefits one group massively, asset owners. Guess who owns most of the assets? The same people who sit on the Fed boards. So I'm not judging this morally. I'm a cynic all around. But it's how the machine is built. And once you see it, well, you know something that nobody knows.

7:23And it's only if you understand the rules of the game that you can stop being the person it's played on and start being the person who plays it. And in that spirit, let me ask you this. Does it ever seem like Fed decisions, stock price moves are a bit random? Your stock portfolio bumps up and down a bit randomly? That's actually not true. There is a rule book. There is a set of patterns Wall Street understands, but most regular investors have never even heard of them.

7:53How did I learn this rule book? Well, I was working in an investment bank and I was like, really, this works like that? And I kept learning from my mentors, retired Wall Street goats, the guys who literally move the markets for a living. We literally have 3 market makers on the team. And these are the people who now teach my students one-on-one. It's the real thing.

8:16And I'm about to spill those secrets to you if you wish in a free live train. No fluff, just the real playbook. You can join me for that. I want to say it's Saturday 8 p.m. New York time, but I could be slightly off on that. Go to felix.org/training. There's a link down below and I will literally teach you how these Fed moves move the market and how you can move with it because it's actually fairly straightforward, isn't it, Winston? Winston, is it straightforward? Sit down if it's straightforward. There we go.

8:46So literally link down below. It's a free training. If you want to get smarter, you want to feel like you're actually in control, come and join me. Now there is something else here which is called the Warsh plan, named after Kevin Warsh, the man that Trump nominated to be the next Fed Poodle, sorry, Federal Reserve chair. And his confirmation hearing just happened.

9:07And there are 4 pieces to what's kind of going viral around this. I'm going to walk you through each one because it's really important to understand this. The 3 pillars that people are throwing around are that he's going to cut rates aggressively. He's going to slash them fast and hard.

9:27Piece number 2 is that he's going to shrink the Fed's balance sheet. The Fed currently has about almost $7 trillion in assets, mostly the debt we've been talking about. And Warsh said he wants to bring that down. And then piece 3 is, and again I'm not going to hold you hostage, I'm just going to tell you as quickly as I humanly can for this to make sense, that AI is going to boost productivity, which is going to lower inflation.

9:56And then the 4th thing is that there is a May transition date. And the way I'm seeing this on social media annoys me slightly because it's just wrong. Sit down, Mr. Sit. Sit. Good boy. It's just wrong is that the moment Warsh comes in, he's going to cut rates, he's going to shrink the balance sheets and AI is going to save us some inflation. The debt magically is going to become manageable. And people are calling this some sort of secret plan because framing it that way implies hidden knowledge. So people want to click on it, right?

10:27Suppose what we do, isn't it? So let's fact check this. Let's fact check this so you guys really understand this. How much of this is actually true? First off, what's genuinely true? The debt problem is real. $39 trillion. The trajectory is bananas.

10:46And then we talk about this thing called financial repression. I'm going to explain that in a moment. It's a real documented policy tool he's very likely to use. Governments have done it before. It's not made up, is it, Winston? No, it's not.

11:01And Walsh has literally on the record criticised the Fed's bloated balance sheet. He used the phrase "regime change" to describe what he wants to do at the Fed. And he's literally testified to them. And the historical precedent is real because after World War II, the US was in an even worse debt position than today. And what did they do? The playbook we're about to walk you through.

11:25So the bones of the story are actually true in fairness to most videos out there. Now, what's exaggerated or just plain wrong is this. There is no secret plan. Walsh has been saying this publicly in front of the Senate. It's on C-SPAN if you like to watch that.

11:45And then second, this transition date of May is not a sure thing. Jerome Powell has pledged he will not leave his position until his Department of Justice litigation is resolved and the Walsh confirmation is currently being blocked by a chap called Tillis. I don't know who he is but it appears to be a senator. So the clean handover on a specific date, it's not necessarily going to happen.

12:09But more importantly this rate cut target that we're going to go down to 2.7% interest rates, it's speculation. Walsh has not promised a number. People are just making it sound like it's real. It's not right now.

12:24AI as a magic inflation bullet is an assumption. AI, if it makes it cheaper to make the same things, would be deflationary. But it has very high energy demands which are inflationary. Maybe it makes lots of people unemployed and then the government's going to give all those people some sort of stimulus check. That would be inflationary. So we don't know yet.

12:52But the biggest thing that people get wrong is that people think Walsh alone is going to decide Fed policy. He doesn't. The Fed has 12 voters. So the chair gets one vote. And yeah, he has a lot of influence, but he's not the king.

13:10So what's the actual real story here? The direction of travel is right. The US will almost certainly move towards a financial repression environment because it's the only way out. But it isn't a switch flipping in May. It's a slow drift over the next decade. And how you position for that matters way, way, way more than you think.

13:34So let me spend a minute to walk you through what happened last time we were in this situation. If you travel back to 1946, World War II just ended. The US had just spent unimaginable amounts of money winning the war and the US national debt was 106% of the economy. Bigger than the economy. Higher than today. Right now it's 101%.

14:02And people were pretty terrified about the debt. Now, fast forward to 1974. You're wearing flared trousers and doing all sorts of things you don't want to talk about. And the debt to the economy ratio was only 23%. So it collapsed. So let that sink in. We went from 106% to just 23% without defaulting.

14:26So I have to keep massaging the ears. He really likes that. There were no defaults. There were no austerity riots. There were no massive tax hikes. So how did they do it?

14:36Well, they ran a budget surplus. The government actually ran small surpluses in some of the years. That's not going to happen today. Congress is just incapable of running surpluses now. So forget about that ingredient. That was ingredient number 1.

14:50Ingredient number 2, inflation. Inflation came in higher than people expected. And the magic here is that inflation eats the value of the dollar and therefore it eats the value of the debt at the same time.

15:03Ingredient number 3 is the big one. Financial repression. Financial repression is a fancy term for a simple idea. The government keeps interest rates below the rate of inflation. You might want to write this down. On purpose.

15:20For a long time after World War II, the Fed literally pegged interest rates at low levels from about '42 to '51. Banks were forced by regulation to hold government bonds, which is what's happening in the stablecoin space at the moment. There were caps on how much interest banks could pay you on your savings. It was like socialism was exploding in the US and the whole system was rigged in one direction.

15:51Let me give you a very simple analogy of how this works. Say you owe Winston $100 and then over the next 10 years, the dollar loses half of its value because of inflation. How much do you really owe Winston? In real purchasing power terms, well, you only owe Winston $50. The debt didn't go anywhere. The government didn't pay it down. The dollar just got smaller. So the burden shrank.

16:21And this is called the inflation tax. It's a tax that gets collected silently. No politician ever votes for it. You never voted for it. But what you really need to understand is that there are winners in this situation. Lots of losers, mostly losers. And you will be a loser unless you do something about it.

16:37But the winners were the people who owned things. That's pretty much all you need to know. You need to own things. Stocks, real estate, gold, businesses, any kind of productive assets. Golden retrievers apparently don't qualify.

16:51The losers were people who held cash, bond holders, savers, people with salaries, fixed incomes, pensioners. The wealth never disappeared. It just transferred from one group to another.

17:04And what I learned, and I discussed this with my mentors, with my Wall Street guys, and they all agree with this, they all say governments will always choose inflation over higher taxes or less spending because it's politically easier. It's quieter. And you don't understand it. The people who actually get hurt, they understand it the least.

17:23So enough analysis, enough history lesson. Let's get tactical here. 3 steps, simple, actionable. Step number 1, understand the real risk here. The risk is not that the US defaults on the debt. No, the US just prints its own currency. It'll not default in the traditional sense. The risk is that your dollar loses power over the next 10 and the next 20 years.

17:49That is the thing people just miss out on. They don't plan for it. They look at their bank statement. The number looks good, but the number will not mean the same thing. Imagine a loaf of bread costs 3 times more.

18:02So how do you really measure your wealth? Don't measure it in dollars. Measure it in the stuff that my money can buy. Gold's one way of looking at it. Real estate is a way of looking at it. The stock market's a way of looking at it. If the stock market goes up 20% in a year and your portfolio went up zero, well, you've lost 20%.

18:24You get the idea. Over the last 3 years, the stock market's done what, 75% or something. So yes, $100 from 3 years ago today is worth about $25. Sounds a bit extreme, but it's actually true.

18:38Your enemy is the silent erosion. So you need to position for this repression. The one thing that goes up when the dollar goes down are stocks. High quality stocks only. The ones with pricing power, the companies that can raise prices when their costs go up.

18:55Hard assets, gold, silver, real estate, things you can touch that have an intrinsic scarcity. Probably really rare baseball cards and collectibles probably will, and real extreme rare luxury items, art and the rare Hermès bag and that kind of thing.

19:16Now people say, "Oh, put your money into international stuff." The same thing is happening in Europe. The same thing is happening in Asia. The same thing is happening pretty much everywhere else in the world. So where are you going to put your money? Forget about this internationalisation nonsense.

19:33And then step number 3 is avoid the traps. The traps are people buy these long duration bonds. But the problem is if you lock in today's interest rate and inflation runs hotter than expected, the value of those bond payments gets crushed. That's what happened to people in the '70s.

19:52Trap number 2 is I feel uncertain, therefore I hold cash. It's the worst thing you could possibly do. It's definitely not safe. It's definitely going to lose money. Now, I'm not a financial adviser. I'm not a registered investment advisor. Go and talk to one who's got something between the ears because that will give you some advice. I just educate and share what we've learned here.

20:15And the 4th one, which people don't really talk about, is just getting frozen doing nothing. It's probably the most expensive choice you can make. If you've got most of your money in something, you might want to move it into something else. And that's not very specific because I could teach you that, but it would take me about 2 hours. And I'm going to do that for you guys if you join me on the live session, felix.org/training. Winston will be there, won't you? Be snoozing around.

20:44And literally the way I think about that is the stock market is a chessboard and the money moves from one square to another square. It just moves around. It doesn't disappear. It just moves around. But you just stay in the same squares because you feel safe there. You think, "Oh, tech is the place to be or whatever it might be." Or maybe you're all in gold, all in crypto, all in real estate or whatever. Concentration is the fastest way to get wrecked here.

21:10So let's recap this. This thing is real. The debt is real. The interest bill is real. The maths doesn't work unless something

21:17Gives. And the secret plan you're seeing all over social media is kind of right. Bit oversold. There isn't a magic switch where you'd cancel all the debt. The Fed isn't actually federal. It is owned by the banks.

21:34But there is a tool they're going to use. It's called financial repression. It's been used before. It worked. And it transfers the wealth from the savers, the salary men, to asset owners.

21:45And the difference between Wall Street and Main Street is not intelligence. The guys working at the banks are no smarter than you are. The difference is access. Access to the rules in the playbook. Access to the people who've done it before. Access to the framework.

22:00And that's the entire reason that we built the Code Academy and run this channel, to close that access gap. So if you want to keep learning, join the free live training at felix.org/training. And two, share this video with someone else who might benefit from it.

22:15Winston, sit down.

22:23And Winston says, thanks for tuning in.

22:59Silver has just gone from the boring thing your grandmother had in her cutlery drawer to being the most fought over industrial commodity on the planet. And almost no regular investor.