Luke Gromen: Yield Curve Control is the Only Way to Stop a Global Bond Crisis

**Luke Gromen** (0:00)
Germany, Japan and Korea are all historically big creditors from a sovereign perspective. And in particular, Japan, if they're borrowing money to do defense to me, they have turned sellers of bonds as well. So now they're selling, they're competing with Besson to place bonds.
I think everywhere you look, yield should be going up. And so to me, it's just all about when does something break at any of them? Because once it breaks at one, they're all gonna have to do something. And that something's gonna look a lot like yield curve control, although my suspicion is they'll never call it yield curve control until they have to.

**Max Wiethe** (0:34)
Today's episode is brought to you by the Fundrise Income Fund. You'll hear more about the Income Fund later in the show. But for now, let's get into today's interview. Welcome to Other People's Money. I'm Max Wiethe. I am joined today by Luke Gromen, president and founder of Forest for the Trees. Luke, thank you so much for coming on the show.

**Luke Gromen** (0:50)
Thanks for having me on, Max. Great to be here.

**Max Wiethe** (0:52)
So there is so much happening in markets and macro right now. We have yields at 20 year highs. I want to understand what is the driving force for this sell-off in the bond market?

**Luke Gromen** (1:03)
It gets ultimately a supply and demand issue.
Then the secularly inflationary dynamics or results of how the supply demand issue has been managed. What do I mean by that? Is that we've seen the US in particular shift issuance to the front end since Yellen late in 23 Besant criticized it as soon as he got in Yellen's seat. He did the same thing except more or at least as much. But then it accelerated the Treasury buybacks that Yellen was doing, which was also shifting to the front end on the margin. And he accelerated that quite a bit versus what Yellen was doing. And if you take a step back, why is this happening? It's very straightforward. No one wants to talk about it, but it's very straightforward. It's right in front of everybody's face.
We kept $100 trillion plus in the United States. Europe and the UK also have their off balance sheet liabilities. They were all off balance sheet. They were always going to stay off balance sheet until people started getting old. Any sixth grader with an actuarial table and a calculator could have seen that if 65 million boomers were going to be born, they were eventually going to hit retirement age and start collecting. Once they did, these off balance sheet liabilities would start coming on balance sheet, being cash flow negative. People said, oh, you don't have to worry about it. It's not part of our debt to GDP.
Until they turn 65 and start demanding a check. And now they are. And so that's happening all over the West. Adding to the problem, they would have been bad enough on its own, but adding to the problem has been that the United States in particular has been engaged in forever wars for going on 30 years now, 25 years, certainly. And so when you look at veterans benefits, which right after the Vietnam War, expensive, messy war, veterans benefits as a percent of the defense budget, got as high as 12% of total defense spending, because it's accounted for separately.
And then during the 80s, the 90s fell back to three, four, five, six. It's turned up sharply in 2010 and it hasn't stopped. It's now 27% of defense spending.

**Max Wiethe** (3:45)
And it's not like defense spending has gone down. It's not like the...

**Luke Gromen** (3:48)
Defense spending hasn't gone down. This chart looks like this. And this again is an off balance sheet liability that comes on. You want to go to war, great. You got an awesome military, great.
And you better reserve for what happens on the other side of a war if it lasts too long, which is you're going to be paying out a lot of benefits. We didn't. So now those are coming on balance sheet. And to put some numbers around it, $400 billion of veterans benefits annually now. It's about 8% of tax receipts, which are near all time highs. And it's growing at like 2 to 3x the rate of, of tax receipts because we, we refuse to stop doing stupid wars and because our guys are getting older and because of the money we've printed to pay for the veterans or the entitlements that are coming on balance sheet, etc. Inflation is rising and so the cost of care is rising. So you're getting like triple whammy there on the veterans benefits cost. And so when you look at just the interest expense on the debt plus the entitlements, you're nearly 100% of receipts. You throw on veterans benefits, you're over 100% of receipts. And that drives a very simple dynamic, which is once you're over 100% of receipts, with debt where it is, you can't raise taxes because it triggers a recession, you either print or you cut benefits. And when more you print, the more inflation goes up, the more inflation goes up, the more yields go up, the more yields go up, the less attractive or the more inflation goes up, the less attractive long term bonds are, the more you have to shift to the front end, the more you shift to the front end, the more inflationary it is, the faster the faster the debt reprices and the interest rates go up. This is the spiral the US, the UK, Japan and Europe are in. And being in this, it's a very recognizable spiral. We saw it after World War I in the UK, in Germany, in France.