Welcome back, ladies and gentlemen, to another episode of financial Heresy, where we talk about how money works so that you can make more, keep more, and give more. There's a lot going on in the world today. One of them is the yield curve inversion. It's something that people have been talking a lot about lately. It's something that actually came up earlier in the year as well, and so we are going to talk about a couple of things regarding interest rates. Number One, um, we're gonna really take a deep dive into interest rates, into bond prices, bond yields, so that you can really understand the relationship between these things how they work, because that's essential to understand Number two. Then we're gonna use that knowledge to look at how the yield curve works and what it means, if anything, to see if it's important that the yield curve is inverting right now, We're going to talk about what that means that it's inverted, and then talk about the causes of why it is inverting and what that means for the future. Because many people have differing opinions about what an inverted yield curve actually means for the state of our economy. Uh So let's start off with interest rates. The number one thing that people need to understand about interest rates is that interest rates are the cost of money. Interest rates are not, uh not what it costs to borrow money. This is how the rich think of this. They think of this as interest rates are the price to purchase money. Interest rates are the cost of buying money. So when you look at money, there are going to be different interest rates associated with purchasing new amounts of money depending on what you're going to be using that money for, which makes sense, right. If you're going to be purchased money and then you're going to be going to use that money to buy toys, uh, that might be a little bit more expensive. Now, if somebody is going to allow you to buy money from them and you're going to use that to buy something that they have a legal right to get back if you don't pay them back the money, like a house, meaning that debt is collateralized, then you're gonna get a much more favorable interest rate. The cost of buying is going to be really low. Cost of buying that money. So that's how we need to look at interest rates. Number one is that they're they're the cost of purchasing money. Now, what the rich do is they buy money and then they use that money to buy assets, and those assets then produce money that they use to pay back the money that they borrowed that they bought. What the poor do is they buy money and then they use that money to buy toys, grocery liabilities, and then they don't have anything left over and they go have have to go work over time or work a side job in order to pay back that money. Um. Now, this is nothing new. This is you know, many many, many people much smarter than I have talked about this many times. But really that's the distinguishing factor here is that the poor look at money and say, hey, I'd like to borrow some so that I can go have fun. The rich look at money and they say, hey, I'd like to borrow some so that I can buy assets. Now. Uh, The reason why it's important to understand this is because for every for every bar where there's also a lender. There's two sides to every piece of debt. Um there's somebody who is doing the lending and somebody who's doing the borrowing. When this debt is created, you actually have a contract created a legal piece of paper, and many times it is called a bond, and a bond is literally just debt between ween two people. There's a borrower on one side and a lender on the other side, the same thing as when you swipe your credit card, when you get a mortgage, as when the government borrows. These are all forms of debt, and so some forms of debt they're just called bonds. Um. Now, bonds are piece are forms of debt that are uh, there's a lot of demand for them, and so relative to others. Like if you have you you oh, Bank of America your you know, thousand dollars for your credit card bill this month, um, chances are Chase doesn't want that, uh doesn't want that debt from Bank of America. Chances are your aunt Sally doesn't want that debt from Bank of America. So that kind of debt isn't bought and sold. The only time that kind of debt is bought and sold is if you start, you know, being delinquent on your payments, your default. The Bank of America packages all the bad debt together and they sell it to somebody called a you know, a collector, debt collector and they sell it for ten cent so on the dollar, and then that the collectors try and get as much as they can once they own your debt. Apart from that, though, that kind of debt is really not bought and sold a lot. However, debt from entities like Google and UH, from companies like Apple, and from governments like the United States government. Uh, this debt is bought and sold a lot. It's a lot more liquid, there's a lot more of it, and these entities that do the borrowing and the lending are a little bit have a little bit more of a track record, and so there is a little bit more demand to be buying and selling this debt. So what does it mean when debt is bought? We're sold? Because, Um, we just talked about how all debt, whether it's a bond or not, is just one person borrowing from another. We also talked about the interest rate being the price of money. Um, but now things are getting a little bit convoluted because we're talking about that debt itself being bought us old. So let's break it down very simply. You've got Uncle Sam, the United States government. They've got a military, they've got a tax base, and they want to borrow some money because they want to spend more than what they're getting in taxes. At the end of the day, they can always enforce through uh whatever means necessary, higher taxation in order to pay off debt if they want to, if they need to, if they have to. So they're a pretty low risk lender. So if I'm sitting on a fat pile of cash and I don't need to make a large return, I just want to make a safe return, I might lend some to the United States government. So let's say I throw Uncle Sam a thousand bucks because I want to earn a safe return on that. The going right right now on that is about four percent, So I give them. I give them a thousand bucks, and then in one year from now, I get forty bucks on top of my thousand bucks back. So I made my made my four percent. So let's say I give them my thousand bucks. But tomorrow something comes up and I realized I'm not sitting on as fat of a stack of cash as I thought I was. Suddenly I am in need of some extra money and I need that thousand dollars back. Well, the government has already spent at Uncle Sam they've got, you know, he's got holes in his pockets. That money is on fire the moment it comes in. It's been spent last year, so it's not there anymore. So what do I need to do in order to get my money back? Well, what I'm gonna do is I'm gonna go around and I'm gonna ask anybody. I'm gonna say, hey, does anybody want the United States Government to owe you money instead of me? Because right now the United States Government owes me money. Uncle Sam is going to pay me a thousand, forty dollars next year. Does anybody else want to be in that position? So there might be thousands of people who want to be in that position. So let's say there are a lot of you who all want to be in that position. What will happen is I'll say, hey, okay, well you can buy this debt from me for a thousand dollars so that when you pay me a thousand dollars, I walk away without taking a loss. I get my thousand bucks back. You spent a thousand dollars. Now Here is the key. How much money will Uncle Sam pay you if you buy that debt? One thousand, forty dollars. Now, let's say there are a lot of you who want this, and so there's a little bit of an auction, A bidding war goes for this debt that I that I own, the government owes me money. Everybody wants in on it. So instead of selling it for a thousand dollars, I sell that debt for one thousand forty dollars. So you buy this stept from me for one thousand forty dollars. So a question how much does he does Uncle Sam pay you in a year? One thousand forty dollars. So Uncle Sam still has to pay four percent because Uncle Sam borrowed a thousand from me, and at the end of the loan he has to pay back a thousand forty regardless of who he's paying that money back to his interest rate. Uncle Sam's rate that he has to pay is still four but the rates have changed because of the demand for that debt in between when I lent him the money and when you bought that debt from me. So I sell you that bond for one thousand forty dollars in one year, you are then going to get one thousand forty dollars from Uncle Sam instead of me, because now you own the debt instead of me. I take my thousand forty bucks. I walk away with my nice little four percent profit. In one day, you pay a thousand forty dollars. Next year you get one thousand forty dollars back from Uncle Sam. What is your interest rate? Zero percent? You get you get zero on top, zero loss, zero gain nominally speaking, so you get exactly what you paid. Now we can see where this goes. Let's go the uh. Let's go the an extreme. Let's say you paid me two thousand dollars for it. Well, when you get paid back, you're only going to get a thousand forty. You're you're taking a loss. That's a negative interest rate that you're getting. Still positive for Uncle Sam. He borrowed a thousand pays back a thousand forty, But you paid two thousand dollars in order to get a thousand forty dollars back. That's a bad deal for you. Let's go the other way. Let's say when I need my money, so does everybody else. So there's nobody that wants Uncle Sam's debt. That means that when I go to sell it to you, you can say, hey, you know what, I'm willing to buy it from you, but I'm not gonna pay full price for it. I'll give you fifty bucks. Um well, okay, well fifty bucks is pretty extreme. So let's say five hundred bucks. You give me five hundred bucks, and you get now in uh in a year, one thousand forty dollars from Uncle Sam. That's a hugely positive interest rate. You're making bank on that. And so what we're watching here is once the debt is created, once that loan is made, as that loan gets bought and sold between people on the open market, the as that price is being is going up and going down. What that does is that means that the interest rate that yields for the new buyers of that debt, it goes up and down. So this is how bonds prices and yields are inversely correlated. So when the bond price goes down, you get to buy that debt for a lot cheaper. That means at the exact same time that the interest rate paid on that debt is a lot higher. Not the interest rate from the borrower's perspective, because they borrowed a thousand and they're paying back a thousand forty. But for the new buyers of that debt, that interest rate has changed and constantly as supply demand pushes the debt up and down. Now, the last thing to know about this is that competition is at play. I'm not the only one who lent Uncle Sam a thousand bucks. There's millions of us, and since there are so many, this pushes some sort of an equilibrium between the new debt interest rates and the previously existing interest rates. So if I go out to the open market, I say, hey, I'd like to sell this debt. I you know I'm gonna get a thousand forty dollars back. I would like to sell it to you for two thousand dollars. Nobody will buy it from me, because they're not going to pay two thousand just to get a thousand forty if they can make a new loan to Uncle Sam themselves for a thousand and get a thousand forty. So there's a supplying demand and equilibrium happening here from all of the people buying and selling all the debt, many many actors participating in this game lending to the government. Then that debt being bought and sold from each other and by the way, it's not just the government, it's all entities. So the interest rates for more risky organizations will be higher, for less risky organizations will be lower. And so it's constantly being lent, so that those bonds are being created every time money is loaned, and then those bonds are being bought and sold on the open market um as people want more of it and as people want less of it, and the prices are going to go up and down. And if the prices go down, that means interest rates go up. That means if the government wants to lend new money again, they're gonna be forced to do it at the rate that the market is currently requiring. Because if I go to sell my thousand, my thousand dollars for a thousand forty dollars bond, which is four percent, if I go to sell that to somebody and somebody only wants to pay me for it, well, then the government is not going to be able to borrow at four percent because nobody's willing to buy debt for four percent right now. The only price people are willing to buy debt at pushes that interest right up to you know, fift sixteen percent, whatever that is. And so if the government wants to borrow more money in that situation, they're gonna have to borrow at whatever that interest rate is. So there's always going to be an equilibrium there between this. But the bottom line is that as bond prices go down, the interest rates go up, and as interest rates go down, bond prices go up. There inversely correlated by math. It's not just hey, these things sometimes move, uh, inversely correlated to each other. No, it's just literally math. It's it's it's the way that the math works out on how it is paid back. So that's how a bond works. So we've gone through kind of like a masterclass here on on what interest rates are, how the rich use debt to buy assets, what the poor do with it, what it bond is, how in debt is created then it's bought and sold, and how the interest rate versus the price works. We have to understand that as the foundation to get into the yield curve, because this is where things start to get dicey, things start to get spicy about the economy. So what is the yield curve? The yield curve is a graph. It is a visual representation of the price of debt the interest rates over time. So think about it this way. Think about a mortgage. If you've ever shopped for a mortgage, if you've ever listened to somebody like Dave Ramsey, he says, hey, if you're going to buy a house, buy it for cash. But if you have to get a mortgage to a fifteen year mortgage only, never go for a thirty year. Um. What you'll notice if you ever looked at those is the fifteen year mortgages are cheaper to have a lower interest rate than the thirty year mortgages. So right now, thirty year mortgage is somewhere around thirty percent I'm sorry, at six seven eight percent is the interest rate on a thirty year mortgage. Now, if we look at the fifteen year mortgage rate, we know that it is going to be cheaper than that. So the fifteen year mortgage rate right now is going to be let me pull it up right here, it's going to be slightly under that. The reason for the fifteen year being cheaper, think about it, Have any guesses the fifteen year mortgage there's less risk, there's less time for something to go wrong. Okay, I just pulled it up thirty year fix straight right now seven percent, fifteen year six point three six percent. So it's significantly cheaper over number one over the period of time for the borrower number two because there's less time that you're paying all that interest on. So when you when when you look at debt that has a shorter time frame on it, it's going to be cheaper for the barrow war because there's less risk from for the lender. Um, imagine it this way. Your buddy comes to you and he says, hey, I need to borrow a thousand bucks. I'll literally give it to you tomorrow, but i'll give it back to you tomorrow. My paycheck got delayed, my rent is due, blah blah blah. Please just spot me a thousand bucks. I'll give it back to you tomorrow. Uh. You're probably gonna do it as long as you can trust him. Uh, and you're not going to charge him for it. But you've got somebody who comes to you and says, hey, I need a barrow a thousand dollars. I promise i'll give it back to you in three years. What is the likelihood that you're going to do that? Maybe it's probably a lot lower and if you do that, you might say, okay, well, sure I'll give you a thousand dollars, but look at the look at the the inflation rate right now. So if you give me a thousand dollars back in three years, the stuff that costs me a thousand dollars right now is going to cost me like hundred hundred, fourteen hundred dollars in three years. So you'll say, sure, I'll lend a thousand bucks, you pay me back in three years, But you have to pay me back instead of a thousand dollars because while you have my money, prices are going up, and by the time you give me back that money, it's not worth as much anymore. And so the longer the time period of the debt in a normal environment, the longer the time period for the debt, the higher that interest rate is going to be. Normally, because number one, there's more risk, like what happens if your buddy gets hit by a car, what happens if he dips out and leaves the country, and what happens if he does something where he's not able to pay you back that money. There's a lot higher chance of something like that happening. If we go three years out versus tomorrow um. And so the longer the debt is the maturity the time frame until that debt is paid back, the higher the interest rate is going to be because of things like potential inflation and risk of default. And that that's nor Mole, right, that's very clear for most people to be able to put wrap your minds around. It seems intuitive and that that's the way that things should be. So the yield curve is a graphical visual representation of this, where you have a graph, you have your x axis and your y axis. And as the debt becomes longer and longer, as it goes from one year to five years, at ten years to fifteen to thirty, you're going to see the interest rate on that debt become more and more and more expensive. It's going to go higher and higher and higher. This is normal. This is what you would expect to see in a normal environment. So what is an inverted yield curve? Because that is what everybody is talking about right now. What is an inverted yield curve? And inverted yield curve is going to be the exact opposite, and it is strange. An inverted yield curve is where you look at debt that's let's say five years, and it has a higher interest rate than debt that is further out at let's say ten or fifteen years. So think about that. If you're looking at the choice between two mortgages, a fifteen year and a thirty year, and the fifteen year, it's already going to be higher payments because you have to pay back the whole thing within fifteen years versus thirty year gives you more time, right, So you're looking at this, uh, these two mortgage options. Normally, you'd have some incentive to go for the fifteen because it's a cheaper interest rate, But you'd also have some incentive to go to the third year because it's longer, so it's cheap, so it's you know, lower, lower monthly payments. But what if it was flipped and the interest rate on the third year was cheaper than the interest rate on the fifteen Here you would have zero incentive to choose the fifteen. Now, maybe for a mortgage because of the way that the interest has calculated, because you want to pay pay it off faster than befced two that then maybe there's still a little bit of incentive there, but most of the incentive comes in the form of the interest rate. That money costs more to buy normally at the longer end than it does at the cheap rent. But when the yield curve is inverted, this is all flipped upside down. It's all on its head. It means borrowers are able to borrow at longer dates, longer maturities, debt that doesn't have to be repaid for a longer amount of time, and it's cheaper than doing it in a short amount of time. Now, specifically, regarding the yield curve that everybody talks about. Normally, what people are referring to is the United States government debt. They're called treasuries, their bonds, they're called treasuries. They're looking at the two year treasury versus the ten year treasury. This is the normal measure of the yield curve, is the two year treasury versus the ten year treasury. So the government borrows for two years, government borrows for ten years. You look at the interest rates on those and normally the ten years more expensive. That interest rate is higher than the two year, And when it's inverted, it's flipped. Now this happened earlier. In UH, this happened already. But when it happened, the Federal Reserve came out and said, no, no, no, no, no, that's not really the indicator that we like to use for an inverted yield curve. We like to use the three month bill versus the ten year. UH. Really just changing the game. And part of the backstory for why they want to change the game is because the inverted yield curve is a measure of the likelihood of a recession coming soon. We're going to get into that UM. But the yield curve inverted that everybody normally watches the two and the ten FED came out and said, no, that doesn't mean a recession is coming. We don't actually like to look at the two in the ten. We like to look at the three month and the ten um. And so you know that was you know, they're constantly doing things like that. And then when we had two quarters in the first two quarters had declining g d P, typically people say, hey, that's a recession. Like that's what the typical UM UH definition of recession has been for a long time is two consecutive quarters of a decline in GDP. When that happened, they came out and said, oh no, no, no, no, no, or not really in a recession because the jobs market is really strong and there's some other things. So, uh, they're always trying to change things. Same same thing with how they change the measurement of inflation. There's some private websites you can look at that estimate that the inflation rate right now is probably somewhere around sixteen eighteen percent and not the you know eight percent that the official numbers say. It's because the uh, the statistics that the government uses, they massage the data and they do things to make prices look like they're not going up as much. They have adjustments built in, like, for instance, when the new iPhone comes out, it's a lot more powerful, and so even though the price of the iPhone went up, they say the price of the iPhone actually went down because the chips inside the new iPhones are so much more powerful, so you're getting more for your money, and so they count that as deflation, not inflation. So we got off on a little bit of a bunny trail. They're back to the yield curve inverted earlier this year, the two and the ten. They said no big deal. Well, recently within the last few weeks during October of the three month and the ten flipped and it inverted. So the measure that the Federal Reserve likes to use for the UH for whether the invert yield curve is signaling a soon recession that flipped as well. So we have to we have to ask in order to understand why it signals a coming recession. We have to understand UH why it inverts. And there are two reasons why a yield curve would invert. One of them has to do with intervention, and then one of them has to do with UH intervention causing natural, natural things to happen. So we're gonna take this slowly, but let's deal with the first one. First intervention across the board. If we look back throughout history, back since the let's say the late nineties, we've had a history of the Central Bank intervening more and more to rescue our economy in UH in the dot com bubble burst, the Greenspan put came in even before that. When we look at this is a little known story. There's a great book at about it called When Genius Failed Highly recommend it um. It's about the fall of a hedge fund called Long Term Capital Management. These were Nobel Prize winners, supposed to be the smartest people in the world, and uh, they invented a new way to make money risk free and more than anybody. And we all know when that happens that they're, you know, one move away from a blow up. And blow up they did. Uh, they almost took down the financial system. And so the FED got together and got the big banks together and said, hey, look, we're orchestrating this work, putting me on the room together. You guys need to bail out this hedge fund because if you don't, bad things could happen. And so that was the first little uh opening of the door. The Bible says, do not underestimate the day of small beginnings. It's like a mustard seed, something very small grows into something strong and big. Do not underestimate the day of small beginnings because compounding interest and compounding growth impacts everything, whether you're headed to heaven or hell. So when we look at the Federal Reserve and we look at them orchestrating that first bailout, they paid no money, they printed no money. They just slightly cracked the door, and that paved the way, set the precedence for going a little bit further next time, and a little bit further next time, and a little bit more until we get to where we are today. So that happened late nineties. Then dot Com bubble burst, Greenspan put comes in and he lowers interest rates to save the economy from the stock market crashing. Well, that adds fuel to the fire for the housing bubble, housing bubble booms. We all know how that ended, massive crash. They then stepped in again to bail out the economy because they didn't learn their lesson the time before that, and lowered interest rates again. And that wasn't enough, so they had to do more, which was UH TARP, Troubled Asset Relief Program, Toxic Asset Relief program, print a bunch of money, bail at the banks, and so that that worked. They printed a bunch of money, build at the banks and bailed out a few large corporations, a bunch of people, a bunch of UH CEOs got their fat paychecks, and they were able to stop the economy from imploding that way. Well, fast forward twenty nineteen, stuff starts to go wrong again and UH many people don't realize this, but in twenty nine, team financial market started to show big troubles. Um, there's this thing called the repo market, which will dive into at a later in a later episode. That started to blow up, so the Federal Reserve had to step in and start lending overnight into this repo market so that banks had enough cash. The yield curve actually inverted then in in August or September nineteen, and then fast forward just a few months, everything started to fall apart in about February one. Uh, that's when everything started to crash. Everybody started becoming aware of this little, uh, little thing called COVID and Uh. They decided that they needed to build the economy out again. But what they did last time wasn't good enough. Still, they had to do way more. So they lowered interest rates to zero, and they printed a bunch of money about the banks, and they printed a bunch of money to bail out all the all the businesses instead of just a few. And they printed a bunch of money to bail out all the people so that they could stay home and not have to work, and print a bunch of extra money to give to the government so they could spend it on whatever they want just for good measure, and so we had this massive, massive bailout. So we can see this trend here of increasing these bailouts and these interventions along the way. And every time you lower interest rates, you print money, prices prices go up, you stop prices from falling at least or prices go up. That's what's happened for the last twenty years. So what does this have to do with the yield curve? Well, when you have something that indicates a recession is coming, and that indicator says that debt is cheaper in the future than it is right now, that that the two year treasury is more expensive than the ten year treasury, the reason for that is intervention. Because the market has now come to expect that if we have trouble, the Fed will lower rates, that if things start to implode, rates will drop to zero. Because those central bankers that are here to rescue us. As Ronald Reagan said, you know, I'm the scariest words are I'm the government and I'm here to help. When they come in and they lower interest rates and they bail out the economy, that pushes rates down, they print a bunch of money that pushes prices up. They do this to try and stimulate economic activity. So when the market sees a recession around the corner, that's how debt responds. It responds with the anticipation that rates are going to get shoved down. Now step back just for a second and think about this. Logically, if you, as a lender, are looking at something in the economy and saying we have a high likelihood of a recession happening soon, there's a higher likelihood of recession happening within the next ten years than there is within the next two years. The more time we put in front of us here, things are going to get worse and worse and worse. So we've got more risk of something crazy bad happening in ten years and we do in two years. If you are a lender in that environment, would you logically go to a borrower and say, hey, because of this, would you like to borrow in for a ten year time frame at a cheaper rate than for a two year time frame? Of course, not be ludicrous. You would absolutely not do that. You do the exact opposite. Rates would go up as lenders would get tighter. Uh, it would be harder and harder to borrow without paying more and more, because anybody who has their money looking ahead, thinking things are gonna get tough, would start to save and would start to say, hey, we need to have a risk off environment. We need to make sure that we're not being overly aggressive because times are about to get tough. We need to make sure, you know, we're batting down our hatches and make sure that everything is tight and we're not We're not lending unless we know for sure it's gonna be a good borrower and they're gonna pay us back, and it's going to be worth at the interest rate. Uh, it'll be worth us not having that hash on hand. So that would be normal. But because of the expectations of intervention given a coming recession, well you have things like an inverted yield curve. Now that's not unfortunately, because I love to be able to point fingers and say, hey that you know, everything wrong in the world is because of these you know, these a few people that are in charge of these few things. Unfortunately, that is not the only reason why yield curve would invert. So we're gonna have to put on our thinking caps here because this one gets a little bit more technical. That's not the reason, the only reason to yield curve would invert. So let's take a look at what happens when interest rates go up. We've talked about this a few times in past episodes. When interest rates go up, debt gets more expensive. Right, obviously, that's what That's what it is. Two ways to say the same thing. When deck gets more expensive. Let's say you have a lot of debt. You've got credit card debt, you've got a car, and you've got a mortgage, you've got a personal loan, whatever, you've got a lot of debt. Interest rates start to go up. You watch, let's say you're not even adding to your debt because times are tough, so you've just kind of been chilling at your minimum payment. But interest rates just ticked up. That means your minimum payment went up. Interest rates just ticked up again, minimum payment goes up again and again and again. It's happened a few times this year. And so you're watching your payments go up and you're saying, this debt is getting more expensive without me even adding to it. So in a good environment, let's say everything is peach, everything is cheap, your income is going up every month, you're getting pay raises, blah blah blah. You're gonna be loading that thing up. If you're the average American, you're going to be spending more and more, getting more and more into debt because you're gonna say, who cares, I'm adding a little bit more debt, I'm going to make so much more money by the time I have to pay this back that it will it will be inconsequential. You're gonna be loading that thing up. What do we know about debt that is loaning money into existence? When you swipe your credit card, are that money didn't exist before you swiped it. That money that was deposited into the grocery stores bank account did not exist before you swipe that card. So that new debt loaned money into existence. And now there are new dollars in circulation that we're not in circulation before. So the opposite is true. As well, times get tough, interest rates start to go up, you stop paying back, stop loading up on debt. At the very least, what are you doing. You're keeping your debt, but the minimum payments are going up, so you're paying more money too to your bank, Your credit card just for the minimum payments. You're sucking dollars out of circulation paying them back. You're working, you're taking from savings. Those are dollars that are slowly dripping and bleeding out of circulation. Now let's say things get really tight and you say, man, if I don't pay this debt off, soon things are going to be really tight. I gotta pay this debt off so I don't have these payments anymore. So you tap your savings, you sell some assets, you go work a second job, you do everything you can button down, get financially responsible. You start paying off that debt. Well, now the money supply is really going down, right, because the money was loaned into existence, So when that debt is paid off, that money ceases to be in existence. You're sucking dollars out of circulation to pay off that debt. So money supply goes down as interest rates go up because the debt pile starts to get smaller, money gets sucked out of circulation just to pay the higher and higher interest rates on that debt. So that's not and that's not even saying anything about defaults, because defaults, you know, that's a whole another set of problems that we don't even need to get into. That's just very basically. Interest rates go up, it starts to push down the money supply. Now, it doesn't happen immediately. So when UH the Feds arted tightening at the beginning of the money supply at that point stopped expanding. So you can look at them two. It's the measure of the money supply, the money the amount of money in circulation. It was growing, growing, growing, growing, growing at a fast rate, and then in December of boom stopped growing and it is flatlined since then, and it is now within the last few months starting to trend a little bit down. They don't release this data very often, unfortunately, about once a month, and when they release the next one for UH for October, it looks like it is going to be even further down. We're about to start to see a big drop in the total money supply as a result of all of the tightening. What do we know about the money supply in relation to inflation and deflation. Money supply goes up, that means prices go up, money supply goes down, prices go down. It's very simple. Why is that? Well, because the prices of all the stuff are like the pizza, and the money is like the slices. You've got one large pizza with eight slices. You say, oh, we've got more people coming over. We need more pizza. So you go over, you take your knife, and you cut each slice into two. So now you have sixteen slices of pizza. Did that help Absolutely not, because now in order to get the same amount of pizza, you have to have two slices instead of just one. You don't create more pizza by cutting more slices, just like you don't create more wealth by printing more money. All it means is now it takes more money to get the same amount of stuff. That's it. You're not printing wealth, you're printing money. Money measures wealth. So when the money supply goes up, prices go up. When the money supply goes down, prices go down. It's a little bit harder to wrap your head around. But when the money supply goes down, dollars become more scarce. The value of anything is just the relationship between that thing and everything else, and so when money becomes more scarce, it becomes more valuable relative to everything else. If money becomes more valuable relative to your car. That means that it takes less money to equal the value of your car. Because the money became more valuable than your car. That means less money to equal the value of your car. That's the other way of saying. Price just went down. So when the money supply goes down, money becomes more scarce. That means money becomes more valuable. That means prices of everything go down. So we get deflation when interest rates go up and the money supply collapses. Why does that matter about regarding the yield curve? Because right now, for the last almost year now, we've been in a mode where the Federal Reserve has been tightening. They've been raising rates, they've been letting assets bleed off their balance sheet, they've been sucking cash out of circulation. UH. Conditions financially speaking, have been becoming tighter and tighter and tighter. That just means there's less money going around. Money is harder now it used to be easier. When that happens, prices start to go down, we start to get the che ants of major deflation hitting us soon. We already got a bunch of deflation and asset prices we're looking forward to deflation in goods and services. When we have deflation and ahead of us, what does that do to debt prices ahead of us? Well, just like we talked about earlier, if you expect your your gonna your friend. Let's go back to your friend. Example, they want to borrow a thousand bucks for you and pay you back in three years. You say, the rate of inflation is eight percent right now. Blah blah blah. So if you're gonna borrow a thousand dollars from me, I want four dollars from you in three years instead of just a thousand, because prices are going to go up, so you need more money to be able to buy the same amount of stuff. Otherwise you're gonna lose by letting him borrow money for that long. Deflation is the exact opposite. Let's say you give your buddy a thousand bucks. Three years go by, he gives you back exactly a thousand dollars. But prices of everything I've gone down. Did you win or lose? You won big because prices went down, so you gained purchasing power. Deflation means that he than zero percent interest rates are real positive interest rates even though you're getting back the exact same dollar amount no more. Those dollars go way farther than they did before, so you're purchasing power went up. So adjusted for inflation or adjusted for deflation, in this case, you have a positive rate of return on your money. If you know or if there's a good chance that there's deflation coming in the future, you will be willing to accept a lower interest rate on that debt. If we look at two years from now versus ten years from now, and we look at the FED continuing to get tighter and tighter and tighter, what we are expecting is that deflation is going to be more likely to hit within the next ten years than it is within the next two years. And if we expect that prices may fall and may fall to it, and they have a greater chance of falling in ten years than two years, we will be willing to accept a lower interest rate on ten uere debt than to your debt, especially given the fact that we currently have inflation. So if we have inflation now where your money is becoming worth less, and we think deflation is coming into future where your money will be worth more than that short term debt it would be logical to demand a higher interest rate, and the long term debt it would be logical to be okay with a lower interest rate. And so that is kind of the free market um approach to understanding why the yield curve may invert. Now, it's not completely free market, I will give you that, because it all stems from the fact that we have this giant debt bubble blown up by intervention in the first place. But it is not all just expectations about a FED bailout. A lot of it has to do with the expectations of conditions get tighter and harder and a recession coming in prices falling and collapsing as a result. Well, then lower interest rate debt becomes very positive in real terms, even if it's not very positive in nominal terms. So that is why the yield curve is such a big deal, um, and why it inverting is something that everybody's watching because it signals ahead whether or not we expect to have hard times or easy times. And UM, some of the reasons behind that are debated, and I gave you kind of both sides of the coin, and they both have validity there Um, it's it's due to intervention and we would not have the boom bus cycle without it. And if you doubt that, go back and listen to the first three episodes of this podcast where you go through the entire history of money UM. The first three episodes are kind of like a tour through history of how we got to where we are today, and that will explain it. But it's uh, it's a very good indicator due to the intervention and due to central planners and do to central bankers and the debt bubble that we have and the money printing that we have about what's going to happen in the future. So the yield curve inverting gives us a heavy indication that we do have UH deflation ahead of us, we have a recession ahead of us, we have hard times coming now. The only question is what will the central bank do as a result of that. Will they do what they have done for the last twenty years and lower interest rates again, will they start printing money again, or will they say, hey, you know what, we actually can't risk doing that because what if we get hyper inflation, because last time we have the highest inflation you know, in forty years. So the question is will they Will they have learned their recent lesson, or will they fall back into the habits of the past. I really appreciate you guys, Thank you so much for sticking around for another episode. Got a lot more great episodes coming up coming down the pipeline here. And I really appreciate you guys listening always, and thank you so much. I have a great day.