The US Is Long-Term Insolvent | Lyn Alden

**Lyn Alden** (0:02)
Basically, the US is like long-term insolvent, not in like the sensationalist sense, but in the sense that the obligations that they owe are basically untenable.
When you also have bondholders expecting to get paid back their money on a real basis. We don't really have the tools to deal with fiscal driven inflation. Most of our tools are literally inherently designed around lending driven inflation. This is not the core of what's happening right now. You know, we don't have tools to deal with an energy crisis. We don't have tools to deal with 7% of GDP deficits. But they can't really say that. And so he comes out, says a lot, and then doesn't raise rates. The market is like, why is not raising rates when we have above target inflation? And then the deeper question is, even if he did, would that actually solve it?

**Danny Knowles** (0:44)
Lyn Alden, good to see you. This is very high definition for you. You must have better webcams in Egypt than they do in the United States.

**Lyn Alden** (0:52)
Or just a different set up and it makes it look better, better lighting, I guess.

**Danny Knowles** (0:56)
It's looking good. How's everything going? How are you doing?

**Lyn Alden** (0:59)
I'm doing well. How are you?

**Danny Knowles** (1:01)
I'm good. I'm confused. There's a lot of crazy stuff going on right now. And a lot of stuff that's really been playing into your nothing stops this trade narrative.
We've got to start on the treasury buybacks. I think that seems like the most obvious place to kick this off. With them increasing, with Scott percent increase in the treasury buybacks, is that the most clear indication that they know, we know, everyone knows that this is fiscal dominance right now?

**Lyn Alden** (1:28)
I mean, I think that's the evidence of it. Yeah, I mean, basically when a country gets deep enough into fiscal dominance, you start to get various types of financial repression. This is one of the softer types of it. So on the far end of the financial repression curve, you have the yield curve control. That's kind of like the nuclear option. And on the softer side, you have kind of just kind of moderate amounts of QE or treasury buybacks and things like that. And so the fact that they are doing it, we're not in a recession, we're not really trying to stimulate anything. They just don't like where yields are.
And so we see that kind of intervention. Now, the interesting thing is that it's not acutely needed. So when we saw the Fed step in 2020, that's because the off-the-run treasury market outright broke. It just became illiquid, basically was going no bid.
And so you had all that force selling. So they stepped in. In 2022, the treasury market got really wobbly. I mean, the UK's treasury market, the gilt market outright broke. The Bank of England had to intervene. In 2022 for the US, it just got really rough for a period of time. So the move index spiked, liquidity got really bad, but it didn't outright break. And what's interesting here is that the move index is pretty modest. So you don't really have unusually high treasury volatility. You don't really have unusual signs of liquidity stress in the treasury market. You just have yields going up fairly orderly to a level that they're not really comfortable with while you're hitting certain kind of milestones, you know, 40 trillion in US public debt, over 5% yields on the long end. It's very uncomfortable for the administration.
And so we have this kind of intervention, which is not out of the ordinary for countries that are in fiscal dominance. And I would say the only kind of interesting thing about it is that it seems very premature. Like it didn't have to be this month, even though that these types of tools increasingly get used when there is an actual issue.

**Danny Knowles** (3:31)
So why did they step in now? And if it wasn't a liquidity issue, and if yields are moving up in an orderly fashion, why did they step in?

**Lyn Alden** (3:40)
Well, I think there's multiple reasons. I mean, there's stated reasons, and then there's kind of potentially underlying reasons that we can speculate on. I think in general, basically the US is like long-term insolvent in the sense that, not in like the sensationalist sense, but in the sense that the obligations that they owe and are basically untenable when you also have bondholders expecting to get paid back their money on a real basis, right? So basically, debasement is going to happen, and or entitlements are going to be restructured, and or defense is going to have to, you know, like multiple of these variables are going to have to adjust at some point in the years and decades that follow, with most likely the bond market taking the hint, the bond and the cash market, like they have been over the past, you know, five, six plus years.