April 25, 2025 – In this compelling interview, Jim Puplava sits down with Chris Whalen, financial expert and author of Inflated: Money, Debt and the American Dream, to explore our nation’s fascinating and turbulent relationship with money, debt, and economic discipline. Whalen reveals how America’s tradition of financial innovation has often collided with political convenience, fueling cycles of prosperity and peril from Abraham Lincoln’s greenbacks to today’s ballooning deficits. They dive into the roots of Modern Monetary Theory, the real story behind the dollar’s global dominance, and why both parties seem unwilling to confront fiscal reality. With candid insights on gold, real estate, and the future of the American Dream, Whalen warns of potential corrections ahead—and offers practical advice for investors navigating chronic inflation and rising debt. If you want to understand how we got here, what’s coming next, and how to protect your portfolio, you won’t want to miss this conversation.
Buy the book on Amazon: Inflated: Money, Debt and the American Dream
Follow Chris on X: Richard Christopher Whalen (@rcwhalen) / X
Key topics discussed in today's interview:
Historical Shift to Debt: Whalen traces America’s debt-driven economy from Lincoln’s Civil War paper money to Roosevelt’s gold confiscation and Nixon’s 1971 gold window closure.
Fiscal Discipline Decline: The U.S. has abandoned budget restraint, with Congress unable to pass budgets and both parties ignoring the $37 trillion debt.
Federal Reserve Policies: Prolonged quantitative easing since 2008, especially under Bernanke, Yellen, and Powell, inflated the banking system and embedded chronic inflation.
Housing Market Risks: Low mortgage rates (below 5%) lock homeowners in, reducing supply; multifamily housing in cities faces a “new subprime” crisis by 2028.
Dollar’s Reserve Status: Despite BRICS using gold, the dollar remains dominant due to U.S. open markets, though its share may drop below 50%.
Gold’s Resurgence: Rising gold prices reflect inflation fears; Whalen supports easier gold ownership to discipline the dollar.
Policy Recommendations: Whalen advocates freezing spending, granting a presidential line-item veto, and reducing regulations to restore fiscal discipline.
Multipolar World: Trump’s policies signal the end of Bretton Woods, pushing a multicurrency world, though no rival currency matches the dollar’s role.
Transcript
Jim Puplava:
Americans as a whole view themselves as reasonably prudent and sober people when it comes to matters of money, reflecting the Puritan roots of the earliest European settlers. Yet, as a community, we also seem to believe that we are entitled to a lifestyle that is well beyond our current income, a tendency that goes back to the earliest days of the United States. Today, we're going to be talking about this history and where we're heading with Chris Whalen. He is chairman of Whalen Global Advisors. He's written a new book called Inflated: Money, Debt and the American Dream. Chris, you wrote your first book, I think it came out in December 2010. So what inspired you to write this book now? In other words, what events? Was it COVID? Was it inflation? The political polarization that we see today? What has shaped your views and caused you to rewrite this?
Chris Whalen:
Well, I think primarily, Jim, it was that I came out with that first book too early. The story I tell in the book of how it happened—my good friend David Kotok, who wrote the introduction—essentially said, “Chris, write the book.” And he had a glass of wine in his hand, and he wandered off. We go fishing up in Maine every year. So I get home, and Wiley calls me and says, “We hear you're writing a book. We want to publish it.” And I said, “Yeah, writing a book.” So I wrote the book in some haze, six months, actually. And I went back to them last year. I said, “Look, 15 years have gone by. Inflation is a much more relevant and important issue today than it was in 2010.” In 2010, we were all broke. So Wiley said, “Sure.” And what I did was I edited about 20,000 words out of the front of the book. I dropped the chapter, or half chapter, about Henry Ford because I subsequently published that in Ford Men. Henry caused a banking crisis in 1933. Most Americans don't know that. And then I added a chapter at the back and had to revise the rest of it pretty extensively to reflect changes, to talk about Janet Yellen, Jerome Powell, and the Fed during COVID and thereafter. And I think it’s an important period in American history, the last 15 years, because we have kind of given up on fiscal discipline. It’s much like the way the Soviet Union gave up. They were no longer willing to be nasty enough to keep their people under tyranny. Well, we’ve given up on budgets and spending and everything else. We can’t even pass budgets on the Hill.
Jim Puplava:
Yeah, that is absolutely amazing. Neither party seems to care about the budget deficit. In fact, even during the election year, the debt wasn’t even discussed, even though the debt had gone up by $17 trillion.
Chris Whalen:
The discipline of money, I think, was really killed first and foremost by Abraham Lincoln when he introduced paper money to pay for the Civil War. He didn’t do this in a nefarious or evil way. The country was broke, and he needed to go fight a war. And so they created national banks. And this green paper, which was originally viewed as debt, it wasn’t money. And Franklin Roosevelt, I think, put the stake in the heart of gold as money with the confiscations in 1933, the dollar devaluation, which was totally ineffective. And since then, you know, people often talk about Richard Nixon closing the gold window in 1971, but that was really the last act. We had already decided paper was money, and the world had agreed with us and said, “Okay, we’ll use your paper, but we’re going to have this regime to try and keep people inside the rails of reasonable fiscal discipline.” But even that has gone by the wayside. So when Congress realized that they could spend as much money as they wanted to and fund it with debt without having to go back to the voter, that’s really where I think we got into trouble, Jim.
Jim Puplava:
Yeah, and lately there’s an economic theory that justifies it, Modern Monetary Theory, which says basically, as a reserve currency, we can print as much money as we want and take on as much debt.
Chris Whalen:
Well, we already have Modern Monetary Theory. Those guys are late. I have a wonderful quote in the book from Joe Costello, one of my favorite political observers, and he said, “You’re selling us what we already have.” That’s what the reserve dollar is all about. The fact that we can go into the market, not only finance our cash needs, but create a risk-free asset that other people can then use. The world loves the big dollar. They don’t have to pay for it; we pay for it. And, you know, it accommodates all of their immediate needs as a means of exchange. If you remember what I talk about early in the book, we didn’t have any money. We were using foreign currency, gold, barter, whatever we could. Right up until the Civil War, there wasn’t enough money in this country. So that has always been a problem, and it’s a problem for the world today. Imagine if they had to shift off dollars tomorrow. How would they pay for oil? Oil’s big. You need a big currency to do it. So, other than the dollar, the yen and the euro are the only two currencies out there that are even remotely big enough to serve as a vehicle for trade. It’s an interesting problem we have. We can’t give up this role. Nobody else wants it.
Jim Puplava:
In your research, what historical episodes do you think best illustrate the American approach to money and debt?
Chris Whalen:
I think the S&L crisis in the ‘70s and the ‘80s was a very interesting experience because there you had a case where banks were clearly insolvent. Most members of Congress understood this, but they didn’t want to mess with it because it was about housing. And housing is, of course, viewed as being good. So we continued to let these entities operate. They got more and more deeply insolvent. Eventually, it blew up. But, you know, the legislation that came after the fiscal and financial blowup of the S&L crisis was the last time Congress really dug in its heels on fiscal issues and on disciplining the financial markets. Since then, they’ve given us everything we want. And talk about inflation, right? They talk about discipline, but they give us everything we want. If the markets were to sell off this week, Jim, trust me, the Fed would drop interest rates, and they would start buying Treasury debt hand over fist.
Jim Puplava:
I want to go back to this issue, and you’re seeing it reflected in the market now with the rise of gold. How did the transition from gold and hard money to, let’s say, fiat currency and central banking change the character of American capitalism? Because I can’t say we’re in a pure capitalistic society when you have a Fed that is altering interest rates artificially.
Chris Whalen:
Well, the Humphrey-Hawkins legislation in the ‘70s was an explicitly socialist compromise between the Republicans and the Democrats. Democrats wanted to mandate a job for anybody who wanted it. Republicans said, “No, we’ll get the Fed to target full employment.” So that was their compromise. But in order to do that, the Fed has to go from modest tightening to, quote-unquote, keep inflation under control to basically opening the floodgates. Because employment is really the first mandate. Price stability, long-term interest rates, by the way, was the third piece of Humphrey-Hawkins that we never talk about. And, you know, it’s clearly always been the case that employment comes first. Now, as we have accumulated all this debt, the government’s independence, or the Fed’s independence, if you will, has been reduced and eliminated because they have to keep the Treasury market open. So look at the first quarter of 2020 during COVID; the Treasury market essentially evaporated. The Fed had to come in and buy it with both hands. They drove interest rates down to nothing. And then, of course, we created a boom in the financial markets, the equity markets, and housing, and we’re paying the price for that. So it’s not like this tendency of Americans, this libertine tendency, is without cost. But it’s the easiest route politically. If you’re a member of Congress and you have to stand for election every two years, can you imagine what would happen to them if they actually did something courageous?
Jim Puplava:
That brings up the point. How would you assess the Fed’s actions since 2008 and during COVID? And what really surprised me, Chris, was in, I think it was 2010 when Bernanke began QE. We had QE1, QE2, QE3, infinity. I never thought I’d see a period of time where interest rates would be kept at zero for such an extended period of time. And then, even in Europe, it was even worse. They had negative interest rates. I think at one time we had $17 trillion of negative interest-bearing debt in Europe.
Chris Whalen:
That’s right. Well, Bernanke did the right thing initially. His analysis and his study of the Depression made him realize that when a lot of money leaves the financial markets and rushes out the door, you have to create an offset. Otherwise, the national income accounts just disintegrate, and the equity markets will go to zero. And we are back in the world of Irving Fisher and a debt deflation. You know, his essay in 1933 about debt deflation is more relevant today than it was when he wrote it. So the problem, of course, is that people—and I don’t mean just Bernanke, but Janet Yellen and Jay Powell—always do too much because, again, they’re worried about inflation, yes, but they’re really worried about employment. So they tend to do too much. And they kept quantitative easing, when the Fed was buying Treasury debt, for too long. What did this do? It made the banking system expand dramatically. We almost doubled the size of the US banking system between 2008 and 2024. And so it embedded more inflation in the system, Jim, than we needed to have. And they do other crazy things too. We’re still recovering. You know what the new subprime is? Multifamily apartment buildings in big blue-state cities. That’s going to be something you’re going to hear a lot about in the next couple of years.
Jim Puplava:
Where do you see us going with this? I mean, we’re just a couple hundred billion away from $37 trillion. Interest on the debt is now over a trillion. It’s 20% of government tax revenues. Do you see a realistic way that our political path for fiscal discipline in the U.S.—are we locked into a cycle of perpetual deficits and inflation?
Chris Whalen:
I would say generally we’re locked in a cycle of deficits and inflation because that’s the path of least resistance at the moment. When we have a serious enough financial crisis, however, that we end up seeing a large part of our elected officialdom get cleaned out, that’s when I think you’re going to see change. I worked for Jack Kemp years ago on Capitol Hill. In the old days, billion-dollar deficits were a big deal. We tore our hair out over that. But today, you know, we worry about loneliness instead of money, to paraphrase my friend Jim Rickards. And I think that we’ve got to refocus Americans on this idea that we do need to live within our means. That’s why what President Trump is doing is so important. He’s basically saying Bretton Woods is over. All of the post-war structures that we have depended upon are essentially over. And all the nations of the world are going to have to learn how to live in a multilateral world with different currencies. That’s a scary prospect to people who’ve had 75 years of stability simply because we won World War II. You know, people get the reserve currency job by accident, usually after war. We inherited it from Great Britain during World War I, and now nobody really wants it. The Chinese don’t want it, the Russians don’t want it, the Europeans don’t want it. But what Trump is saying is very radical in a sense. He’s saying we can no longer live this way. We can’t have our people paying for the reserve dollar because, you know, it’s not just about running big fiscal or external deficits, what Mr. Triffin wrote about years ago. It also means big inflation internally, and it clearly is unsustainable.
Jim Puplava:
What would it take, in your opinion, for the dollar to lose its reserve currency status? We’ve seen the BRICS countries now are kind of forming a unit where they trade with each other, but they don’t have the open markets that the US offers. So if you have excess dollars trading with the US, you’ve got a big financial market that you can deploy those dollars. China doesn’t want that. So they’re using gold as a settlement. So it seems like we’re moving to a multipolar world, multicurrency world. Do you see there’s any risk of the dollar losing its reserve status? Because I can’t think of anything that could replace it right now.
Chris Whalen:
It will slowly lose some of it. I think we’re going to go from 50, 60% of the total world reserves down to, well, below half. I think the ideal situation would be for the US to get down to maybe a third of total foreign exchange transactions. We’ll still be the ultimate destination for foreign investment. People are still going to want to come here because we’re an open society. We still have confidentiality with respect to investing. The other countries like China and the rest of them don’t have a sufficiently open democratic society that values the rule of law. So no matter how much gold they have, Jim, nobody’s ever going to trust the Chinese. Nobody’s ever going to trust Vladimir Putin, no matter how much gold he has. So I think for us, it’s a question of how we adjust and how we start to discipline our behavior so that we’re not constantly borrowing from the future. That, to me, is the crime. You know, when you talk to young people today who can’t buy a home, who can’t stay in the same state where they grew up because they can’t afford it—California is a case in point. That’s wrong. We need to be able to function and manage ourselves in a more reasonable fashion. But that means we’re going to cut military spending. We’re probably going to have to cut entitlements over time relative to other countries. And to me, that’s okay. It’s like we’re winding the clock back 100 years. You know, that’s what we’re really doing.
Jim Puplava:
Now you mentioned the risk of a slow-motion decline versus a sudden crisis. Which do you think is more likely? And what signs would we, or should we, be watching for?
Chris Whalen:
Look, the world is going to continue to use the dollar as a means of exchange. So for settling trade transactions, financial transactions, it’s still the only game in town. Not just because of the currency, but because of all the risk-free assets that the Treasury creates, which people use as collateral. They use it in swaps, they use it in all kinds of transactions that make global finance possible. So to that extent, I don’t see any real change in the immediate future. However, we’re going to have more market volatility. We’re going to have volatility in our housing markets. I wrote a biography last year of a fellow named Stan Middleman, who’s the founder of Freedom Mortgage, one of the smartest guys I know. Stan’s basically predicting a major housing price reset in 2028. He likes to say “misery on the 8th.” And this is a very astute lender who has managed his business using those two factors that the Fed uses: employment and inflation. Those are the two things he uses to figure out what to do with his lending business. And I think, you know, the next crisis in the US is going to be when the Fed drops rates. We’re going to have a little bit of a rally in housing. We’re going to have a little bit of a rally in the markets. And then, by about 2027, we’re going to be ready for a major adjustment.
Jim Puplava:
And because, I mean, in California, our definition of a millionaire is a homeowner. I mean, you’re seeing homes—you know, I’ve got a friend that bought a house, I think it was 1998, for $250,000. That thing’s worth $1.6 million now. So young people, Millennials, Gen Z, how can they, you know, even if you’re making $100,000—I mean, $100,000 doesn’t get you a home here.
Chris Whalen:
This is why the Fed’s posture in terms of keeping the markets open, that’s their real priority. Why is that important for this discussion? Because they don’t allow us to have a deflation the way we used to have. You know, in the 20th century, in the ‘70s and the ‘80s, you had recessions, home prices fell. Now this time around, Jay Powell was not willing to squeeze hard enough to actually force home prices down. They were afraid because they see all the US public sector debt, number one. And then they looked at all the corporate debt. The corporate debt’s coming home to roost now because, you know, when President Trump says rates are too high, he’s right. And he speaks as a former real estate developer. He can see what’s going on in that market. It’s not good. In fact, you know what the new subprime is? Multifamily housing in cities like New York, Chicago, Los Angeles. And it’s going to be a big problem.
Jim Puplava:
Yeah, we also have shortages. And how much, Chris, in your mind, did low interest rates? I mean, it’s hard to believe five years ago you could get mortgages below 3%. So if I got one, yeah, I mean, mine’s 2.8. Why would I want to sell my house and go from 2.8 to 7 and a half? How much has that played into what’s going on in housing? There’s not as much supply because a lot of people are in their mortgage and saying, “Gosh, the new houses are more expensive, and it’s going to cost me twice as much to finance it.”
Chris Whalen:
That’s correct. And, you know, people usually have a four- to five-year decision cycle when they either move to a bigger house or downsize. A lot of it has to do with how old their children are. But what you’re seeing is there’s slow prepayments in some of those older mortgages that you and I have, but still very low. More than half of the mortgages in the United States today have coupons below 5%. So it’s going to take an awful lot of interest rate easing from the Federal Reserve Board to get those markets to the point where somebody says, “Well, I can sell my house and go buy something smaller and have the same interest rate.” That’s going to take some time. And again, this is why what Bernanke and Yellen and Powell did on the Federal Reserve Board is so important. When Ben Bernanke saw that spreads in the bond market had returned to normal, he should have stopped quantitative easing. And instead, in their hubris and, I think, just total ignorance, they kept doing it. Why? Because they had a Democratic president, then they had a Republican president. And you know what? Washington doesn’t want bad news. So if the Fed is buying bonds, guess what? It takes pressure off interest rates. And they like that. This is a funny town when it comes to fiscal issues. They’re not worried about tomorrow, they’re just worried about today.
Jim Puplava:
This brings up a question. Can the American dream survive in its current form, or does it need to be reimagined? In other words, Americans have grown accustomed to entitlements, Social Security, Medicare, Medicaid. How do we deal with this when obviously we are living well beyond our means right now as a country?
Chris Whalen:
If we want to live like Europeans, we’ve got to pay taxes like Europeans. So my sense is, if we want to remain a free, democratic society where opportunity and entrepreneurship are valued and protected, then we’re going to have to take apart an awful lot of the New Deal. That’s going to come as a shock to people. They are not ready for that. But the alternative is higher taxes. Because when the day comes that the Treasury auctions start failing, then we have a big issue. You know, one of the things I did in the book, and I was really very grateful to a couple of researchers that I highlighted at the end of the book, Lev Menand and Josh Younger, who works at the Federal Reserve Board, and they wrote a brilliant piece at Columbia Law School, talking about the legal basis of the Treasury market. Where did this come from? The Fed created it after World War II. In the 1950s, they created primary dealers to go out and sell Treasury debt. Treasury debt doesn’t sell itself. You’ve got to go sell it. So what’s happened since then? In 2008, with the big financial crisis, which was kind of the early warning of what we’re talking about here, we wiped out most of the primary dealers. The ones that survived are owned by banks now. So that meant that the Treasury market really suffered a big degradation in terms of the amount of cash that they could process and their ability to support the market. Then we go to COVID 2020, another disaster for the Treasury market. And today, what do we have? We have hedge funds with 100-to-1 leverage who support, you know, Scott Bessent when he needs to go raise money. I think it’s essential that we get the deficit under control. I think the easy thing is they should just freeze spending and give the President the line-item veto. Let him rearrange things and make us live within our means. It is possible, but nobody wants to have that discussion because they’re going to lose the next election. Ultimately, if you want to get the house in order, we may have to sacrifice our democracy.
Jim Puplava:
Well, and you see the blowback from DOGE going in, trying to look at—I think the Congressional Budget Office estimates between $250 and $500 billion of waste and fraud a year. So DOGE is going in there, and they’re finding all this waste and fraud, and there’s blowback. I mean, they’re torching Tesla dealerships and things like that. So how do we cut back realistically without, you know, basically voters getting upset?
Chris Whalen:
The blowback on Tesla was just a matter of Elon Musk and his somewhat obnoxious personality. You know, people look at that much wealth, and they wonder why he feels the need to get up on stage and make speeches. I wish he would just focus on space, which he’s really good at. I’m not a big fan of Teslas. I don’t think they’re any kind of value, really. And even electric cars with batteries make me crazy because I covered the semiconductor capital equipment industry as a banker for a few years, and, you know, the periodic table has not changed since Edison and Ford had their famous conversation about, should I use a battery or should I use gasoline? And Edison looked at Ford and said, “Use gasoline. It’s a more complex source of energy.” So nothing has changed. The motors are more efficient, we have a lot more efficient electronics, but the battery is still a battery, and lithium batteries are awful. So I think we have a lot of work to do in that regard. And it’s nice that Elon Musk came out with Tesla. That’s great. It’s nice that he tried to spearhead this government efficiency effort because you’re right, there’s huge amounts of waste in the system. And if Donald Trump does nothing else but get things in order and kind of bring us back down to earth, I think that would be very valuable. There are a lot of Democrats, by the way, who are happy that he’s doing that because they know that we have problems.
Jim Puplava:
Yeah. So given this background, how should Americans look at finance, savings, and investments in the world that we live in today of chronic inflation and rising public debt?
Chris Whalen:
Look, I put on a short dollar, long gold trade earlier this year. I think that it’s important to be invested in stocks. I would be very, very careful with real estate over the next few years because we’ve had such a crazy run. Double-digit increases in home prices, land prices—that’s going to correct itself. It’s almost beyond helping or delaying it much more. So I think what you have to do is realize, as many investors around the world realize, that the dollar is not a store of value. The dollar is a means of getting from A to B. So what you want to think of is, do I want to be long dollars or short dollars? I run a portfolio like that now. I still own my bank preferreds. I only own one bank common, which is American Express. I bought it a couple of weeks ago on the lows. But you have to be tactical. This notion that you could just invest and hold and not look at your portfolio at all or, you know, rely on somebody else to do it for you, I think is very, very tenuous. You have to almost think about what it’s like to live in Argentina before we had President Milei. How did you protect yourself, or any other society that’s had high inflation? It means that you have to be very thoughtful about where you put your nest egg. When I was a kid in the ‘70s and ‘80s, real estate was like you were saying before—it would double or triple over five years. Washington, D.C., that’s where I grew up. But that’s not the case anymore. You know, we’ve gotten to the point where prices are so high that we’re running out of buyers, and that is your signal that we’re going to have a correction.
Jim Puplava:
Well, what advice would you give, Chris, if, let’s say, the president called you up and he wanted you to be a member of the cabinet? What would you give—I guess advice to policymakers and citizens hoping to preserve prosperity and freedom in this next generation that’s coming up?
Chris Whalen:
I think Trump is doing some of it, which is reducing regulation, trying to get out of the way of the private sector instead of always trying to grow government, which unfortunately is a Democratic trait. And I think ultimately we just have to have a much more tough-minded approach to fiscal policy. And again, I would just freeze spending. I would force Congress to live within its means for four or five years until I get that visible deficit almost to zero. And then we could start managing the debt. You know, $35 trillion worth of debt, whatever it is today, is not a problem. The problem is we have to stop accumulating it. $35 trillion we can deal with. It’s not that hard. But to me, if we don’t stop this progression, then ultimately we’re going to be in a hyperinflationary environment.
Jim Puplava:
You know, this is interesting because you were talking about, you know, at one time, billion-dollar deficits were a big thing. And I think, yeah, I think it was 1991, George H.W. Bush was president, the deficits were like $450 billion. And he went back on his pledge, “no new taxes,” he raised taxes. And by the time we got to the end of the ‘90s, the budget was balanced. But as we mentioned, I don’t see that anywhere with Republicans or Democrats saying, “Hey, this is a serious problem,” other than what Trump’s trying to do to reduce some of this. But both parties have been, well, they’ve been guilty, both sides, of spending.
Chris Whalen:
Well, the ‘90s was about demographics. The baby boomers were paying so much in taxes that the visible deficit almost disappeared. Remember, they were worried that we wouldn’t have enough 30-year bonds and that the markets would become dysfunctional. So, you know, unfortunately, now we’re on the other side of the baby boom peak, and the fiscal issues are more difficult. You have a lot of other factors that come into play. So members of Congress, they are not noted for their courage. And when they get up and tell the truth, that usually means they’re going to lose the next election. So I think the basic problem is that until you shock Americans and they start demanding a more rigorous accountability from our elected officials, it’s not going to happen because we’ve been giving people what they want for decades. It’s just the way things have been most of my lifetime. In fact, to look at this issue as something that we can fix easily is wrong. In fact, if you look in the front of the book, the quote from Hayek is more true than ever before. Democracies generally don’t have sound money. That’s why I think owning some gold, being very careful about where you keep your assets—even holding some foreign currency securities may be a good idea for Americans.
Jim Puplava:
You know, Chris, what sources, archives, or individuals did you find probably most valuable in the research that you did for the second edition?
Chris Whalen:
Well, I own most of the books in my library, so, you know, I was pleased to use them. I guess the way I look at it is the conservatives always make good arguments, but they’re not popular arguments. You know, if everybody was ready to have fiscal righteousness and get the country’s affairs in order, then we’d just read stuff from the Heritage Foundation. But the truth of the matter is Americans tend to be more expansive in their thinking. And so when a politician shows up and says, “Oh yeah, well, I can give you that right now, it’s not going to cost you anything,” or “You can stay in that house and not worry about paying your mortgage,” that’s when we start to erode the discipline in our society, and the wheels come off the car. This is what my friends on the left don’t understand. When you start messing with things like housing and start telling people, “Oh, well, it’s okay, we’re just going to forbear, and you don’t have to worry about it,” all of the pieces of the economy that depend on that particular aspect of finance start to disintegrate. And that’s why it’s so important that we have to have this conversation.
Jim Puplava:
Were there any surprising findings or moments that challenged your prior beliefs during your work on this book this time?
Chris Whalen:
Oh, well, there’s always new stuff that you find. I think what was most interesting to me was some of the researchers that I included at the end of the book who were talking about the Fed, quantitative easing, the whole period during COVID and afterwards. Because we saw something that had started in 2008 and got more pronounced as time went on, which was that the old benchmarks, the old market indicators that we used to use in order to figure out what was going on, suddenly became useless. The volatility in the data, the disparity in terms of how it had behaved before and after—that was, I think, a real eye-opener to me. And then this whole notion of how a lot of the structures that we put together 50 and 70 years ago to help finance American growth and really, you know, make that the primary driver of our society, it started to fall by the wayside. So, for example, under Biden, you saw Janet Yellen constantly attacking non-bank finance companies, mortgage companies. They don’t seem to understand that that’s where the growth comes from in the United States. Growth doesn’t come from banks. Banks don’t want to lend you money. You know, that’s the last place you should look for money. It’s in the non-bank sector, the bond market. That’s why America has always been able to bounce back because we have such a robust market for financing commerce. That to me was a real eye-opener. Because when you see that starting to dwindle and you see that under attack because you have people giving away stuff for free, it worries me. I did a lot of work in Latin America over the years, Jim, and I spent an awful lot of time in Mexico when that country was still laboring under a dictatorship. And at election time, you know, they would give free bags of groceries to the little campesinos in Mexico to buy their votes. That’s almost where American consumers are headed. They’re going to be completely dependent on the government and on, you know, the preferences of some politicians. And I don’t think that’s consistent with the American dream. I think we need to restore discipline in this country.
Jim Puplava:
You know, we’re already seeing some anomalies, and I want to talk about gold here for a minute because typically when you have a rising dollar, rising interest rates—I’m thinking of the Fed in 2022—that has been bearish for gold. But that is not what has happened. We’ve seen gold go up in those years and more recently when we’ve seen the downturn in the stock market, typically money goes into Treasuries. Okay, the market’s risky, I’m going to go be safe, going to Treasuries, and bond yields backed up. So we’re seeing some breakdown of these relationships given this debt and inflationary environment that we’re in.
Chris Whalen:
Or you could say we’re seeing a restoration of these relationships as to how they used to behave. Because you’re right, for decades now, the Treasury became the risk-free asset. Gold was kind of marginalized off to the side. And, you know, it’s not easy to buy and hold gold if you have a significant quantity of it. There’s almost no facilities in North America for storing monetary gold other than, you know, for banks and central banks. So I think you’ve seen a resurgence of gold after 75 years of repression by the US government. And I think it’s going to start to become a competitor with the dollar in a sense that Americans are going to be able to look at gold and say, “You know what? The markets are telling us that inflation is a problem.” I would love to see the US Treasury start to issue gold coins again, but not with a monetary value—by weight. And I’d like to see the Treasury publish the price every day the way they did under FDR, where they would buy and sell gold. Because I think that discipline and that example would allow Americans to say, “Well, you know, my costs are going up, but gold’s going up. Maybe I’ll buy a little gold for my kids.” I think we should make it easier for people to own gold because then the dollar is going to have to work harder, and maybe members of Congress are going to start doing their job well.
Jim Puplava:
One organization that’s making it easier is Costco. Chris, I am just blown away that, of all people, Costco has become one of the largest sellers of bullion.
Chris Whalen:
Yes, they adopted that small bar that’s very popular in Asia. And again, it’s easy for individuals to buy that. They can put it in a safe deposit box if you can find a bank that still offers safe deposit boxes. So there is a security issue with owning significant amounts of physical gold. But I think it’s wonderful. I think it’s the best thing that could happen because, you know, when the paper money gets bad, you want people to have an alternative. In the old, you know, in recent days, the past couple of decades, real estate served that function, as did stocks. So stocks were kind of your haven for inflation short- to medium-term, and real estate was your long-term haven. But that’s not the case anymore either. You know, there are so many stories I’m hearing in New York, for example, of buildings that are fully leased that are still going into default. And you know why? Because their debt is too expensive. They can’t survive at these interest rates. So they have a deal, you know, where they had a building that was originally financed during COVID at very low rates, 3, 4%. And now, in order to roll the mortgage on that property, it’s going to be 8 or 9% because people’s view of the property has changed. The view of the investment horizon, the cap rates, as we call it, has changed. So the value of that property has gone down. It’s more difficult to finance it. I think for me, it’s going to be very interesting the next few years to see how consumers react. All the volatility we’ve seen since President Trump has come into office—he’s really turning over the card table.
Jim Puplava:
Well, it’s going to be interesting. I guess what I really enjoyed about reading your book, I love history, and I love the way you took from the founding of the country, the development of where we got to where we are today, from, you know, the state banks that we had when we first formed a nation to eventually the Federal Reserve. Chris, if there was one chapter or episode from the book that you would consider essential reading, which one would that be and why?
Chris Whalen:
I think the first chapter they ought to really focus on is the Civil War, Abraham Lincoln, how Lincoln and Salmon Chase and Jay Cooke financed the war because our government was broke. When he came into Washington, he was surrounded by hostile military forces in Maryland and Virginia. And somehow or another, they got this character named Jay Cooke to go out and sell debt, and they created national banks competing with those state banks you just mentioned. The state banks were the original defenders and repositories for hard money because they had to have gold in the vault in order to issue paper. So to me, that’s the real wellspring of a lot of the problems that we face today, because that’s where it started. FDR made it worse, of course, during the Depression. But I think Lincoln and his quandary when he first came into office as to how he was going to defend the Union, fight slavery, and ultimately prevail is absolutely essential. When Americans understand that—especially these kids out there trading cryptocurrencies and everything else—then the light will go on because, you know, what was the original cryptocurrency? It was the US dollar.
Jim Puplava:
You know, the thing that really surprised me is, I guess it was World War I where they came in and actually began selling Treasuries to finance the war to the public. So up until that time, the public wasn’t thinking of investments the way we think of today with all the mutual funds and the ETFs and the development of our financial markets from that point. So I really enjoyed the historical aspects of your book because it gives you a better understanding of how we got to where we are today. I think that’s missing in the dialogue that we see with the media today. You know, when the inflation figures go up, but why are they going up? What is causing it? What’s the fiscal deficit? You know, the one thing that we saw in this decade is actually the government took money and put it in your pocket, put it in your bank account, and gave you spending money. And then they wondered why inflation went up.
Chris Whalen:
Well, it’s like I say, the democracy aspect of this cannot be understated because when you have somebody who, you know, as a member of Congress, they need the job. In other words, they need the salary, and they want to get reelected every two years. They do things that really don’t make a whole lot of sense. And that’s why, unfortunately, I hate to say that we’re going to have to install some much more authoritarian fiscal disciplines in our society if we’re going to survive. That is the bottom line. You know, they always go on and on about how democracy is the worst system, except for everything else, right? But, you know, we do have to run this country in a serious way, or people won’t take us seriously.
Jim Puplava:
Yeah, I mean, the thing that I think people just aren’t ready for is this is the way things have been for the last 50 or 60 years. We want something, we elect a politician that’s going to give it to us.
Chris Whalen:
That’s right.
Jim Puplava:
And now we’re running—I made this comment when Trump got into office—oil is no longer at $30 a barrel. The deficit isn’t $20 trillion, it’s almost $37 trillion. And interest rates aren’t zero, they’re over 4%. So it’s a different kind of environment. As you mentioned, I don’t think people are ready. And I think the housing crisis of 2008, I think, surprised even Bernanke that houses always went up, and all of a sudden the housing crisis came, and the housing prices went down 40%. We could see, I don’t know if it’s 40%, but around 2028, we could see something like that happen because it can’t go to the sky. I mean, you know, homes here, like my friend’s house, at $1.6 million is going to be $2.6 million. You know, who’s going to be able to afford that?
Chris Whalen:
That’s right. I live in a 1974 bi-level in Sleepy Hollow, New York. That was a house that was built in the ‘70s to be economical. Remember, we were worried about energy prices—the classic starter house—but it’s worth a million dollars today. That house probably cost less than $200,000 when it was built. So that gives you a sense of just how much inflation we’ve had. I think the big warning sign, Jim, is going to be when the Fed cuts interest rates next time and long-term yields go up. That’s when people are going to go, “Oh, you mean the party’s not going to continue the way it was?” And the answer is going to be, “Yeah, mortgage rates are not going to go down.” Then you’re going to start to see some scrambling in Washington and also in the markets.
Jim Puplava:
You know, Chris, I think we got a glimpse of that last year when the Fed cut interest rates 50 basis points in September, the 10-year was at 3.6. Next thing we know, by the end of the year, we’re at 4.6. So the Fed was cutting, but long-term rates were rising. So we got sort of a glimpse of what’s coming to this real estate market. Well, Chris, I want to tell you really how much I enjoyed reading your book. I read your first copy that you wrote in 2010, and I think updating this and bringing it up to date was just fabulous. And the other thing I like about it, you explain things so that if you’re not into finance or you’re not in our business, you explain it in a way that people can understand, which I think is really important. I would say bravo on a job well done. The name of the book is Inflated: How Money and Debt Built the American Dream. It’s the second edition. Highly recommend it. And Chris, thanks so much for coming on the program.
Jim Puplava:
Americans as a whole view themselves as reasonably prudent and sober people when it comes to matters of money, reflecting the Puritan roots of the earliest European settlers. Yet, as a community, we also seem to believe that we are entitled to a lifestyle that is well beyond our current income, a tendency that goes back to the earliest days of the United States. Today, we're going to be talking about this history and where we're heading with Chris Whalen. He is chairman of Whalen Global Advisors. He's written a new book called Inflated: How Money and Debt Built the American Dream. Chris, you wrote your first book, I think it came out in December 2010. So what inspired you to write this book now? In other words, what events? Was it COVID? Was it inflation? The political polarization that we see today? What has shaped your views and caused you to rewrite this?
Chris Whalen:
Well, I think primarily, Jim, it was that I came out with that first book too early. The story I tell in the book of how it happened—my good friend David Kotok, who wrote the introduction—essentially said, “Chris, write the book.” And he had a glass of wine in his hand, and he wandered off. We go fishing up in Maine every year. So I get home, and Wiley calls me and says, “We hear you're writing a book. We want to publish it.” And I said, “Yeah, writing a book.” So I wrote the book in some haze, six months, actually. And I went back to them last year. I said, “Look, 15 years have gone by. Inflation is a much more relevant and important issue today than it was in 2010.” In 2010, we were all broke. So Wiley said, “Sure.” And what I did was I edited about 20,000 words out of the front of the book. I dropped the chapter, or half chapter, about Henry Ford because I subsequently published that in Ford Men. Henry caused a banking crisis in 1933. Most Americans don't know that. And then I added a chapter at the back and had to revise the rest of it pretty extensively to reflect changes, to talk about Janet Yellen, Jerome Powell, and the Fed during COVID and thereafter. And I think it’s an important period in American history, the last 15 years, because we have kind of given up on fiscal discipline. It’s much like the way the Soviet Union gave up. They were no longer willing to be nasty enough to keep their people under tyranny. Well, we’ve given up on budgets and spending and everything else. We can’t even pass budgets on the Hill.
Jim Puplava:
Yeah, that is absolutely amazing. Neither party seems to care about the budget deficit. In fact, even during the election year, the debt wasn’t even discussed, even though the debt had gone up by $17 trillion.
Chris Whalen:
The discipline of money, I think, was really killed first and foremost by Abraham Lincoln when he introduced paper money to pay for the Civil War. He didn’t do this in a nefarious or evil way. The country was broke, and he needed to go fight a war. And so they created national banks. And this green paper, which was originally viewed as debt, it wasn’t money. And Franklin Roosevelt, I think, put the stake in the heart of gold as money with the confiscations in 1933, the dollar devaluation, which was totally ineffective. And since then, you know, people often talk about Richard Nixon closing the gold window in 1971, but that was really the last act. We had already decided paper was money, and the world had agreed with us and said, “Okay, we’ll use your paper, but we’re going to have this regime to try and keep people inside the rails of reasonable fiscal discipline.” But even that has gone by the wayside. So when Congress realized that they could spend as much money as they wanted to and fund it with debt without having to go back to the voter, that’s really where I think we got into trouble, Jim.
Jim Puplava:
Yeah, and lately there’s an economic theory that justifies it, Modern Monetary Theory, which says basically, as a reserve currency, we can print as much money as we want and take on as much debt.
Chris Whalen:
Well, we already have Modern Monetary Theory. Those guys are late. I have a wonderful quote in the book from Joe Costello, one of my favorite political observers, and he said, “You’re selling us what we already have.” That’s what the reserve dollar is all about. The fact that we can go into the market, not only finance our cash needs, but create a risk-free asset that other people can then use. The world loves the big dollar. They don’t have to pay for it; we pay for it. And, you know, it accommodates all of their immediate needs as a means of exchange. If you remember what I talk about early in the book, we didn’t have any money. We were using foreign currency, gold, barter, whatever we could. Right up until the Civil War, there wasn’t enough money in this country. So that has always been a problem, and it’s a problem for the world today. Imagine if they had to shift off dollars tomorrow. How would they pay for oil? Oil’s big. You need a big currency to do it. So, other than the dollar, the yen and the euro are the only two currencies out there that are even remotely big enough to serve as a vehicle for trade. It’s an interesting problem we have. We can’t give up this role. Nobody else wants it.
Jim Puplava:
In your research, what historical episodes do you think best illustrate the American approach to money and debt?
Chris Whalen:
I think the S&L crisis in the ‘70s and the ‘80s was a very interesting experience because there you had a case where banks were clearly insolvent. Most members of Congress understood this, but they didn’t want to mess with it because it was about housing. And housing is, of course, viewed as being good. So we continued to let these entities operate. They got more and more deeply insolvent. Eventually, it blew up. But, you know, the legislation that came after the fiscal and financial blowup of the S&L crisis was the last time Congress really dug in its heels on fiscal issues and on disciplining the financial markets. Since then, they’ve given us everything we want. And talk about inflation, right? They talk about discipline, but they give us everything we want. If the markets were to sell off this week, Jim, trust me, the Fed would drop interest rates, and they would start buying Treasury debt hand over fist.
Jim Puplava:
I want to go back to this issue, and you’re seeing it reflected in the market now with the rise of gold. How did the transition from gold and hard money to, let’s say, fiat currency and central banking change the character of American capitalism? Because I can’t say we’re in a pure capitalistic society when you have a Fed that is altering interest rates artificially.
Chris Whalen:
Well, the Humphrey-Hawkins legislation in the ‘70s was an explicitly socialist compromise between the Republicans and the Democrats. Democrats wanted to mandate a job for anybody who wanted it. Republicans said, “No, we’ll get the Fed to target full employment.” So that was their compromise. But in order to do that, the Fed has to go from modest tightening to, quote-unquote, keep inflation under control to basically opening the floodgates. Because employment is really the first mandate. Price stability, long-term interest rates, by the way, was the third piece of Humphrey-Hawkins that we never talk about. And, you know, it’s clearly always been the case that employment comes first. Now, as we have accumulated all this debt, the government’s independence, or the Fed’s independence, if you will, has been reduced and eliminated because they have to keep the Treasury market open. So look at the first quarter of 2020 during COVID; the Treasury market essentially evaporated. The Fed had to come in and buy it with both hands. They drove interest rates down to nothing. And then, of course, we created a boom in the financial markets, the equity markets, and housing, and we’re paying the price for that. So it’s not like this tendency of Americans, this libertine tendency, is without cost. But it’s the easiest route politically. If you’re a member of Congress and you have to stand for election every two years, can you imagine what would happen to them if they actually did something courageous?
Jim Puplava:
That brings up the point. How would you assess the Fed’s actions since 2008 and during COVID? And what really surprised me, Chris, was in, I think it was 2010 when Bernanke began QE. We had QE1, QE2, QE3, infinity. I never thought I’d see a period of time where interest rates would be kept at zero for such an extended period of time. And then, even in Europe, it was even worse. They had negative interest rates. I think at one time we had $17 trillion of negative interest-bearing debt in Europe.
Chris Whalen:
That’s right. Well, Bernanke did the right thing initially. His analysis and his study of the Depression made him realize that when a lot of money leaves the financial markets and rushes out the door, you have to create an offset. Otherwise, the national income accounts just disintegrate, and the equity markets will go to zero. And we are back in the world of Irving Fisher and a debt deflation. You know, his essay in 1933 about debt deflation is more relevant today than it was when he wrote it. So the problem, of course, is that people—and I don’t mean just Bernanke, but Janet Yellen and Jay Powell—always do too much because, again, they’re worried about inflation, yes, but they’re really worried about employment. So they tend to do too much. And they kept quantitative easing, when the Fed was buying Treasury debt, for too long. What did this do? It made the banking system expand dramatically. We almost doubled the size of the US banking system between 2008 and 2024. And so it embedded more inflation in the system, Jim, than we needed to have. And they do other crazy things too. We’re still recovering. You know what the new subprime is? Multifamily apartment buildings in big blue-state cities. That’s going to be something you’re going to hear a lot about in the next couple of years.
Jim Puplava:
Where do you see us going with this? I mean, we’re just a couple hundred billion away from $37 trillion. Interest on the debt is now over a trillion. It’s 20% of government tax revenues. Do you see a realistic way that our political path for fiscal discipline in the U.S.—are we locked into a cycle of perpetual deficits and inflation?
Chris Whalen:
I would say generally we’re locked in a cycle of deficits and inflation because that’s the path of least resistance at the moment. When we have a serious enough financial crisis, however, that we end up seeing a large part of our elected officialdom get cleaned out, that’s when I think you’re going to see change. I worked for Jack Kemp years ago on Capitol Hill. In the old days, billion-dollar deficits were a big deal. We tore our hair out over that. But today, you know, we worry about loneliness instead of money, to paraphrase my friend Jim Rickards. And I think that we’ve got to refocus Americans on this idea that we do need to live within our means. That’s why what President Trump is doing is so important. He’s basically saying Bretton Woods is over. All of the post-war structures that we have depended upon are essentially over. And all the nations of the world are going to have to learn how to live in a multilateral world with different currencies. That’s a scary prospect to people who’ve had 75 years of stability simply because we won World War II. You know, people get the reserve currency job by accident, usually after war. We inherited it from Great Britain during World War I, and now nobody really wants it. The Chinese don’t want it, the Russians don’t want it, the Europeans don’t want it. But what Trump is saying is very radical in a sense. He’s saying we can no longer live this way. We can’t have our people paying for the reserve dollar because, you know, it’s not just about running big fiscal or external deficits, what Mr. Triffin wrote about years ago. It also means big inflation internally, and it clearly is unsustainable.
Jim Puplava:
What would it take, in your opinion, for the dollar to lose its reserve currency status? We’ve seen the BRICS countries now are kind of forming a unit where they trade with each other, but they don’t have the open markets that the US offers. So if you have excess dollars trading with the US, you’ve got a big financial market that you can deploy those dollars. China doesn’t want that. So they’re using gold as a settlement. So it seems like we’re moving to a multipolar world, multicurrency world. Do you see there’s any risk of the dollar losing its reserve status? Because I can’t think of anything that could replace it right now.
Chris Whalen:
It will slowly lose some of it. I think we’re going to go from 50, 60% of the total world reserves down to, well, below half. I think the ideal situation would be for the US to get down to maybe a third of total foreign exchange transactions. We’ll still be the ultimate destination for foreign investment. People are still going to want to come here because we’re an open society. We still have confidentiality with respect to investing. The other countries like China and the rest of them don’t have a sufficiently open democratic society that values the rule of law. So no matter how much gold they have, Jim, nobody’s ever going to trust the Chinese. Nobody’s ever going to trust Vladimir Putin, no matter how much gold he has. So I think for us, it’s a question of how we adjust and how we start to discipline our behavior so that we’re not constantly borrowing from the future. That, to me, is the crime. You know, when you talk to young people today who can’t buy a home, who can’t stay in the same state where they grew up because they can’t afford it—California is a case in point. That’s wrong. We need to be able to function and manage ourselves in a more reasonable fashion. But that means we’re going to cut military spending. We’re probably going to have to cut entitlements over time relative to other countries. And to me, that’s okay. It’s like we’re winding the clock back 100 years. You know, that’s what we’re really doing.
Jim Puplava:
Now you mentioned the risk of a slow-motion decline versus a sudden crisis. Which do you think is more likely? And what signs would we, or should we, be watching for?
Chris Whalen:
Look, the world is going to continue to use the dollar as a means of exchange. So for settling trade transactions, financial transactions, it’s still the only game in town. Not just because of the currency, but because of all the risk-free assets that the Treasury creates, which people use as collateral. They use it in swaps, they use it in all kinds of transactions that make global finance possible. So to that extent, I don’t see any real change in the immediate future. However, we’re going to have more market volatility. We’re going to have volatility in our housing markets. I wrote a biography last year of a fellow named Stan Middleman, who’s the founder of Freedom Mortgage, one of the smartest guys I know. Stan’s basically predicting a major housing price reset in 2028. He likes to say “misery on the 8th.” And this is a very astute lender who has managed his business using those two factors that the Fed uses: employment and inflation. Those are the two things he uses to figure out what to do with his lending business. And I think, you know, the next crisis in the US is going to be when the Fed drops rates. We’re going to have a little bit of a rally in housing. We’re going to have a little bit of a rally in the markets. And then, by about 2027, we’re going to be ready for a major adjustment.
Jim Puplava:
And because, I mean, in California, our definition of a millionaire is a homeowner. I mean, you’re seeing homes—you know, I’ve got a friend that bought a house, I think it was 1998, for $250,000. That thing’s worth $1.6 million now. So young people, Millennials, Gen Z, how can they, you know, even if you’re making $100,000—I mean, $100,000 doesn’t get you a home here.
Chris Whalen:
This is why the Fed’s posture in terms of keeping the markets open, that’s their real priority. Why is that important for this discussion? Because they don’t allow us to have a deflation the way we used to have. You know, in the 20th century, in the ‘70s and the ‘80s, you had recessions, home prices fell. Now this time around, Jay Powell was not willing to squeeze hard enough to actually force home prices down. They were afraid because they see all the US public sector debt, number one. And then they looked at all the corporate debt. The corporate debt’s coming home to roost now because, you know, when President Trump says rates are too high, he’s right. And he speaks as a former real estate developer. He can see what’s going on in that market. It’s not good. In fact, you know what the new subprime is? Multifamily housing in cities like New York, Chicago, Los Angeles. And it’s going to be a big problem.
Jim Puplava:
Yeah, we also have shortages. And how much, Chris, in your mind, did low interest rates? I mean, it’s hard to believe five years ago you could get mortgages below 3%. So if I got one, yeah, I mean, mine’s 2.8. Why would I want to sell my house and go from 2.8 to 7 and a half? How much has that played into what’s going on in housing? There’s not as much supply because a lot of people are in their mortgage and saying, “Gosh, the new houses are more expensive, and it’s going to cost me twice as much to finance it.”
Chris Whalen:
That’s correct. And, you know, people usually have a four- to five-year decision cycle when they either move to a bigger house or downsize. A lot of it has to do with how old their children are. But what you’re seeing is there’s slow prepayments in some of those older mortgages that you and I have, but still very low. More than half of the mortgages in the United States today have coupons below 5%. So it’s going to take an awful lot of interest rate easing from the Federal Reserve Board to get those markets to the point where somebody says, “Well, I can sell my house and go buy something smaller and have the same interest rate.” That’s going to take some time. And again, this is why what Bernanke and Yellen and Powell did on the Federal Reserve Board is so important. When Ben Bernanke saw that spreads in the bond market had returned to normal, he should have stopped quantitative easing. And instead, in their hubris and, I think, just total ignorance, they kept doing it. Why? Because they had a Democratic president, then they had a Republican president. And you know what? Washington doesn’t want bad news. So if the Fed is buying bonds, guess what? It takes pressure off interest rates. And they like that. This is a funny town when it comes to fiscal issues. They’re not worried about tomorrow, they’re just worried about today.
Jim Puplava:
This brings up a question. Can the American dream survive in its current form, or does it need to be reimagined? In other words, Americans have grown accustomed to entitlements, Social Security, Medicare, Medicaid. How do we deal with this when obviously we are living well beyond our means right now as a country?
Chris Whalen:
If we want to live like Europeans, we’ve got to pay taxes like Europeans. So my sense is, if we want to remain a free, democratic society where opportunity and entrepreneurship are valued and protected, then we’re going to have to take apart an awful lot of the New Deal. That’s going to come as a shock to people. They are not ready for that. But the alternative is higher taxes. Because when the day comes that the Treasury auctions start failing, then we have a big issue. You know, one of the things I did in the book, and I was really very grateful to a couple of researchers that I highlighted at the end of the book, Lev Menand and Josh Younger, who works at the Federal Reserve Board, and they wrote a brilliant piece at Columbia Law School, talking about the legal basis of the Treasury market. Where did this come from? The Fed created it after World War II. In the 1950s, they created primary dealers to go out and sell Treasury debt. Treasury debt doesn’t sell itself. You’ve got to go sell it. So what’s happened since then? In 2008, with the big financial crisis, which was kind of the early warning of what we’re talking about here, we wiped out most of the primary dealers. The ones that survived are owned by banks now. So that meant that the Treasury market really suffered a big degradation in terms of the amount of cash that they could process and their ability to support the market. Then we go to COVID 2020, another disaster for the Treasury market. And today, what do we have? We have hedge funds with 100-to-1 leverage who support, you know, Scott Bessent when he needs to go raise money. I think it’s essential that we get the deficit under control. I think the easy thing is they should just freeze spending and give the President the line-item veto. Let him rearrange things and make us live within our means. It is possible, but nobody wants to have that discussion because they’re going to lose the next election. Ultimately, if you want to get the house in order, we may have to sacrifice our democracy.
Jim Puplava:
Well, and you see the blowback from DOGE going in, trying to look at—I think the Congressional Budget Office estimates between $250 and $500 billion of waste and fraud a year. So DOGE is going in there, and they’re finding all this waste and fraud, and there’s blowback. I mean, they’re torching Tesla dealerships and things like that. So how do we cut back realistically without, you know, basically voters getting upset?
Chris Whalen:
The blowback on Tesla was just a matter of Elon Musk and his somewhat obnoxious personality. You know, people look at that much wealth, and they wonder why he feels the need to get up on stage and make speeches. I wish he would just focus on space, which he’s really good at. I’m not a big fan of Teslas. I don’t think they’re any kind of value, really. And even electric cars with batteries make me crazy because I covered the semiconductor capital equipment industry as a banker for a few years, and, you know, the periodic table has not changed since Edison and Ford had their famous conversation about, should I use a battery or should I use gasoline? And Edison looked at Ford and said, “Use gasoline. It’s a more complex source of energy.” So nothing has changed. The motors are more efficient, we have a lot more efficient electronics, but the battery is still a battery, and lithium batteries are awful. So I think we have a lot of work to do in that regard. And it’s nice that Elon Musk came out with Tesla. That’s great. It’s nice that he tried to spearhead this government efficiency effort because you’re right, there’s huge amounts of waste in the system. And if Donald Trump does nothing else but get things in order and kind of bring us back down to earth, I think that would be very valuable. There are a lot of Democrats, by the way, who are happy that he’s doing that because they know that we have problems.
Jim Puplava:
Yeah. So given this background, how should Americans look at finance, savings, and investments in the world that we live in today of chronic inflation and rising public debt?
Chris Whalen:
Look, I put on a short dollar, long gold trade earlier this year. I think that it’s important to be invested in stocks. I would be very, very careful with real estate over the next few years because we’ve had such a crazy run. Double-digit increases in home prices, land prices—that’s going to correct itself. It’s almost beyond helping or delaying it much more. So I think what you have to do is realize, as many investors around the world realize, that the dollar is not a store of value. The dollar is a means of getting from A to B. So what you want to think of is, do I want to be long dollars or short dollars? I run a portfolio like that now. I still own my bank preferreds. I only own one bank common, which is American Express. I bought it a couple of weeks ago on the lows. But you have to be tactical. This notion that you could just invest and hold and not look at your portfolio at all or, you know, rely on somebody else to do it for you, I think is very, very tenuous. You have to almost think about what it’s like to live in Argentina before we had President Milei. How did you protect yourself, or any other society that’s had high inflation? It means that you have to be very thoughtful about where you put your nest egg. When I was a kid in the ‘70s and ‘80s, real estate was like you were saying before—it would double or triple over five years. Washington, D.C., that’s where I grew up. But that’s not the case anymore. You know, we’ve gotten to the point where prices are so high that we’re running out of buyers, and that is your signal that we’re going to have a correction.
Jim Puplava:
Well, what advice would you give, Chris, if, let’s say, the president called you up and he wanted you to be a member of the cabinet? What would you give—I guess advice to policymakers and citizens hoping to preserve prosperity and freedom in this next generation that’s coming up?
Chris Whalen:
I think Trump is doing some of it, which is reducing regulation, trying to get out of the way of the private sector instead of always trying to grow government, which unfortunately is a Democratic trait. And I think ultimately we just have to have a much more tough-minded approach to fiscal policy. And again, I would just freeze spending. I would force Congress to live within its means for four or five years until I get that visible deficit almost to zero. And then we could start managing the debt. You know, $35 trillion worth of debt, whatever it is today, is not a problem. The problem is we have to stop accumulating it. $35 trillion we can deal with. It’s not that hard. But to me, if we don’t stop this progression, then ultimately we’re going to be in a hyperinflationary environment.
Jim Puplava:
You know, this is interesting because you were talking about, you know, at one time, billion-dollar deficits were a big thing. And I think, yeah, I think it was 1991, George H.W. Bush was president, the deficits were like $450 billion. And he went back on his pledge, “no new taxes,” he raised taxes. And by the time we got to the end of the ‘90s, the budget was balanced. But as we mentioned, I don’t see that anywhere with Republicans or Democrats saying, “Hey, this is a serious problem,” other than what Trump’s trying to do to reduce some of this. But both parties have been, well, they’ve been guilty, both sides, of spending.
Chris Whalen:
Well, the ‘90s was about demographics. The baby boomers were paying so much in taxes that the visible deficit almost disappeared. Remember, they were worried that we wouldn’t have enough 30-year bonds and that the markets would become dysfunctional. So, you know, unfortunately, now we’re on the other side of the baby boom peak, and the fiscal issues are more difficult. You have a lot of other factors that come into play. So members of Congress, they are not noted for their courage. And when they get up and tell the truth, that usually means they’re going to lose the next election. So I think the basic problem is that until you shock Americans and they start demanding a more rigorous accountability from our elected officials, it’s not going to happen because we’ve been giving people what they want for decades. It’s just the way things have been most of my lifetime. In fact, to look at this issue as something that we can fix easily is wrong. In fact, if you look in the front of the book, the quote from Hayek is more true than ever before. Democracies generally don’t have sound money. That’s why I think owning some gold, being very careful about where you keep your assets—even holding some foreign currency securities may be a good idea for Americans.
Jim Puplava:
You know, Chris, what sources, archives, or individuals did you find probably most valuable in the research that you did for the second edition?
Chris Whalen:
Well, I own most of the books in my library, so, you know, I was pleased to use them. I guess the way I look at it is the conservatives always make good arguments, but they’re not popular arguments. You know, if everybody was ready to have fiscal righteousness and get the country’s affairs in order, then we’d just read stuff from the Heritage Foundation. But the truth of the matter is Americans tend to be more expansive in their thinking. And so when a politician shows up and says, “Oh yeah, well, I can give you that right now, it’s not going to cost you anything,” or “You can stay in that house and not worry about paying your mortgage,” that’s when we start to erode the discipline in our society, and the wheels come off the car. This is what my friends on the left don’t understand. When you start messing with things like housing and start telling people, “Oh, well, it’s okay, we’re just going to forbear, and you don’t have to worry about it,” all of the pieces of the economy that depend on that particular aspect of finance start to disintegrate. And that’s why it’s so important that we have to have this conversation.
Jim Puplava:
Were there any surprising findings or moments that challenged your prior beliefs during your work on this book this time?
Chris Whalen:
Oh, well, there’s always new stuff that you find. I think what was most interesting to me was some of the researchers that I included at the end of the book who were talking about the Fed, quantitative easing, the whole period during COVID and afterwards. Because we saw something that had started in 2008 and got more pronounced as time went on, which was that the old benchmarks, the old market indicators that we used to use in order to figure out what was going on, suddenly became useless. The volatility in the data, the disparity in terms of how it had behaved before and after—that was, I think, a real eye-opener to me. And then this whole notion of how a lot of the structures that we put together 50 and 70 years ago to help finance American growth and really, you know, make that the primary driver of our society, it started to fall by the wayside. So, for example, under Biden, you saw Janet Yellen constantly attacking non-bank finance companies, mortgage companies. They don’t seem to understand that that’s where the growth comes from in the United States. Growth doesn’t come from banks. Banks don’t want to lend you money. You know, that’s the last place you should look for money. It’s in the non-bank sector, the bond market. That’s why America has always been able to bounce back because we have such a robust market for financing commerce. That to me was a real eye-opener. Because when you see that starting to dwindle and you see that under attack because you have people giving away stuff for free, it worries me. I did a lot of work in Latin America over the years, Jim, and I spent an awful lot of time in Mexico when that country was still laboring under a dictatorship. And at election time, you know, they would give free bags of groceries to the little campesinos in Mexico to buy their votes. That’s almost where American consumers are headed. They’re going to be completely dependent on the government and on, you know, the preferences of some politicians. And I don’t think that’s consistent with the American dream. I think we need to restore discipline in this country.
Jim Puplava:
You know, we’re already seeing some anomalies, and I want to talk about gold here for a minute because typically when you have a rising dollar, rising interest rates—I’m thinking of the Fed in 2022—that has been bearish for gold. But that is not what has happened. We’ve seen gold go up in those years and more recently when we’ve seen the downturn in the stock market, typically money goes into Treasuries. Okay, the market’s risky, I’m going to go be safe, going to Treasuries, and bond yields backed up. So we’re seeing some breakdown of these relationships given this debt and inflationary environment that we’re in.
Chris Whalen:
Or you could say we’re seeing a restoration of these relationships as to how they used to behave. Because you’re right, for decades now, the Treasury became the risk-free asset. Gold was kind of marginalized off to the side. And, you know, it’s not easy to buy and hold gold if you have a significant quantity of it. There’s almost no facilities in North America for storing monetary gold other than, you know, for banks and central banks. So I think you’ve seen a resurgence of gold after 75 years of repression by the US government. And I think it’s going to start to become a competitor with the dollar in a sense that Americans are going to be able to look at gold and say, “You know what? The markets are telling us that inflation is a problem.” I would love to see the US Treasury start to issue gold coins again, but not with a monetary value—by weight. And I’d like to see the Treasury publish the price every day the way they did under FDR, where they would buy and sell gold. Because I think that discipline and that example would allow Americans to say, “Well, you know, my costs are going up, but gold’s going up. Maybe I’ll buy a little gold for my kids.” I think we should make it easier for people to own gold because then the dollar is going to have to work harder, and maybe members of Congress are going to start doing their job well.
Jim Puplava:
One organization that’s making it easier is Costco. Chris, I am just blown away that, of all people, Costco has become one of the largest sellers of bullion.
Chris Whalen:
Yes, they adopted that small bar that’s very popular in Asia. And again, it’s easy for individuals to buy that. They can put it in a safe deposit box if you can find a bank that still offers safe deposit boxes. So there is a security issue with owning significant amounts of physical gold. But I think it’s wonderful. I think it’s the best thing that could happen because, you know, when the paper money gets bad, you want people to have an alternative. In the old, you know, in recent days, the past couple of decades, real estate served that function, as did stocks. So stocks were kind of your haven for inflation short- to medium-term, and real estate was your long-term haven. But that’s not the case anymore either. You know, there are so many stories I’m hearing in New York, for example, of buildings that are fully leased that are still going into default. And you know why? Because their debt is too expensive. They can’t survive at these interest rates. So they have a deal, you know, where they had a building that was originally financed during COVID at very low rates, 3, 4%. And now, in order to roll the mortgage on that property, it’s going to be 8 or 9% because people’s view of the property has changed. The view of the investment horizon, the cap rates, as we call it, has changed. So the value of that property has gone down. It’s more difficult to finance it. I think for me, it’s going to be very interesting the next few years to see how consumers react. All the volatility we’ve seen since President Trump has come into office—he’s really turning over the card table.
Jim Puplava:
Well, it’s going to be interesting. I guess what I really enjoyed about reading your book, I love history, and I love the way you took from the founding of the country, the development of where we got to where we are today, from, you know, the state banks that we had when we first formed a nation to eventually the Federal Reserve. Chris, if there was one chapter or episode from the book that you would consider essential reading, which one would that be and why?
Chris Whalen:
I think the first chapter they ought to really focus on is the Civil War, Abraham Lincoln, how Lincoln and Salmon Chase and Jay Cooke financed the war because our government was broke. When he came into Washington, he was surrounded by hostile military forces in Maryland and Virginia. And somehow or another, they got this character named Jay Cooke to go out and sell debt, and they created national banks competing with those state banks you just mentioned. The state banks were the original defenders and repositories for hard money because they had to have gold in the vault in order to issue paper. So to me, that’s the real wellspring of a lot of the problems that we face today, because that’s where it started. FDR made it worse, of course, during the Depression. But I think Lincoln and his quandary when he first came into office as to how he was going to defend the Union, fight slavery, and ultimately prevail is absolutely essential. When Americans understand that—especially these kids out there trading cryptocurrencies and everything else—then the light will go on because, you know, what was the original cryptocurrency? It was the US dollar.
Jim Puplava:
You know, the thing that really surprised me is, I guess it was World War I where they came in and actually began selling Treasuries to finance the war to the public. So up until that time, the public wasn’t thinking of investments the way we think of today with all the mutual funds and the ETFs and the development of our financial markets from that point. So I really enjoyed the historical aspects of your book because it gives you a better understanding of how we got to where we are today. I think that’s missing in the dialogue that we see with the media today. You know, when the inflation figures go up, but why are they going up? What is causing it? What’s the fiscal deficit? You know, the one thing that we saw in this decade is actually the government took money and put it in your pocket, put it in your bank account, and gave you spending money. And then they wondered why inflation went up.
Chris Whalen:
Well, it’s like I say, the democracy aspect of this cannot be understated because when you have somebody who, you know, as a member of Congress, they need the job. In other words, they need the salary, and they want to get reelected every two years. They do things that really don’t make a whole lot of sense. And that’s why, unfortunately, I hate to say that we’re going to have to install some much more authoritarian fiscal disciplines in our society if we’re going to survive. That is the bottom line. You know, they always go on and on about how democracy is the worst system, except for everything else, right? But, you know, we do have to run this country in a serious way, or people won’t take us seriously.
Jim Puplava:
Yeah, I mean, the thing that I think people just aren’t ready for is this is the way things have been for the last 50 or 60 years. We want something, we elect a politician that’s going to give it to us.
Chris Whalen:
That’s right.
Jim Puplava:
And now we’re running—I made this comment when Trump got into office—oil is no longer at $30 a barrel. The deficit isn’t $20 trillion, it’s almost $37 trillion. And interest rates aren’t zero, they’re over 4%. So it’s a different kind of environment. As you mentioned, I don’t think people are ready. And I think the housing crisis of 2008, I think, surprised even Bernanke that houses always went up, and all of a sudden the housing crisis came, and the housing prices went down 40%. We could see, I don’t know if it’s 40%, but around 2028, we could see something like that happen because it can’t go to the sky. I mean, you know, homes here, like my friend’s house, at $1.6 million is going to be $2.6 million. You know, who’s going to be able to afford that?
Chris Whalen:
That’s right. I live in a 1974 bi-level in Sleepy Hollow, New York. That was a house that was built in the ‘70s to be economical. Remember, we were worried about energy prices—the classic starter house—but it’s worth a million dollars today. That house probably cost less than $200,000 when it was built. So that gives you a sense of just how much inflation we’ve had. I think the big warning sign, Jim, is going to be when the Fed cuts interest rates next time and long-term yields go up. That’s when people are going to go, “Oh, you mean the party’s not going to continue the way it was?” And the answer is going to be, “Yeah, mortgage rates are not going to go down.” Then you’re going to start to see some scrambling in Washington and also in the markets.
Jim Puplava:
You know, Chris, I think we got a glimpse of that last year when the Fed cut interest rates 50 basis points in September, the 10-year was at 3.6. Next thing we know, by the end of the year, we’re at 4.6. So the Fed was cutting, but long-term rates were rising. So we got sort of a glimpse of what’s coming to this real estate market. Well, Chris, I want to tell you really how much I enjoyed reading your book. I read your first copy that you wrote in 2010, and I think updating this and bringing it up to date was just fabulous. And the other thing I like about it, you explain things so that if you’re not into finance or you’re not in our business, you explain it in a way that people can understand, which I think is really important. I would say bravo on a job well done. The name of the book is Inflated: Money, Debt and the American Dream. It’s the second edition. Highly recommend it. And Chris, thanks so much for coming on the program.
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