Better in their words…

It’s in the news. First we have word that China is adopting a “Made in China” policy with the Nvidia chips that Trump is trying to foist on them. It seems that China learned from Trump’s 2018 export controls that the US isn’t a reliable trade partner and decided it would be better to develop its own critical tech products rather than be subject to American whims and hostility:

Bloomberg @business

China has figured out the US strategy for allowing it to buy Nvidia’s H200 and is rejecting the AI chip in favor of domestically developed semiconductors, White House AI czar David Sacks said, citing news reports.

China Is ‘Rejecting’ H200s, Outfoxing US Strategy, Sacks Says

2:38 PM · Dec 12, 2025

Arnaud Bertrand @RnaudBertrand

David Sacks confirms that China is rejecting Nvidia’s H200 chips.

Exact quote from Sacks: “They’re rejecting our chips. Apparentlythey don’t want them, and I think the reason for that is they want semiconductor independence.”

Which makes the freakout by China hawks about Trump’s decision to allow the export of the chips all the funnier. And illustrates how little they understand the situation: they thought it was a massive favor to make to China, but China actually sees it for what it likely is – a rather desperate attempt by the U.S. to regain the market share they themselves forfeited.

Next, I’ve done a transcript of the first 20 minutes or so of the hour and a half interview between Jack Farley and Luke Gromen. Those first 20 minutes are, to my mind, more organized and presented in a manner that’s more assimilable for those, like me, who aren’t terribly knowledgeable about finance and monetary policy. Again, as I stated previously, Gromen’s basic thesis is that—due to the bind that America’s excessive debt places us in and the huge amount of additional debt that will be needed—the US can pursue the reshoring of its hollowed out industrial base or can pursue AI dominance, but it can’t do both. The process of reshoring will cause interest rates to go up, and that isn’t sustainable any longer—not when debt is 120% of GDP. Just by the way, Alastair Crooke recently returned from China. While there officials explained to him that the US model for AI is based on military needs and, in the Chinese view, is unsuitable for ordinary use and unlikely to ever turn a profit.

Bond Market Sacrifice or Losing to China: The “Impossible Choice”

L: I don’t think it’s well understood that the US faces a choice between losing to China in the AI race and the great power competition and maintaining the real value of the of the bond market.

J: You’re saying in order to stay ahead of China or to beat China, it would have to devalue the Treasury market. Why is that?

L: Simply because the inflationary costs of trying to keep up on the industrial side, that’s going to be inflationary. We’re seeing that, and those are due to real supply constraints. We’re starting to see that in AI where literally in the last month it’s come out, hey, the constraint isn’t chips. The constraint is grid. The constraint is rare earths. And these are not things the Fed can print. They have to actually get them. and getting them, they actually have to pay people to get them. And to pay people to get them, you’ve got to pay a positive real rate. If you pay a positive real rate, you’re going to have wage inflation. You have wage inflation. The long end of the curve is going to go and, at a certain rate, the long end of the curve going, creates problems. And so at that point, the problems feed back into the system, hurts receipts. You basically have to do Yield Curve Control in some fashion.

“Yield curve control (YCC) is a monetary policy action whereby a central bank purchases variable amounts of government bonds or other financial assets in order to target yield curve or interest rates at a certain level.^[2] It generally means buying bonds at a slower rate than would occur under a Quantitative Easing policy. It affects long term interest rates, whereas QE is more impactful on shorter term interest rates. Where QE focuses on quantities of bonds, YCC is concerned with the price. ^[3] It can be thought of as a more effective form of QE: In QE the central bank buys bonds, but does not have a target for what interest rate those purchases will bring. In YCC, the central bank intentionally buys enough bonds to reach a certain interest rate target.”

If they want to reshore—the deal is, we offshore our factory base, we offshore our jobs, they send us stuff–’they’ being the rest of the world, it’s been heavily China the last 20, 25 years. Practically speaking we send them dollars for the stuff, they recycle the dollars into our capital markets. So fundamentally all I’m doing is double entry bookkeeping and double entry bookkeeping doesn’t care about your political views, and the double entry bookkeeping is simple. The US–if it wants to reshore, which I think it should–cannot reshore and bring the capital back here, or have the capital here in your capital markets and reshore. You can’t do the two opposite sides of the same balance sheet. You got to choose one or the other. And if you choose the reshoring, as you move the capital from one side of your balance sheet–the capital account to the current account, if you will, side of your balance sheet–rates are going to go up. Full stop. They will. And the problem is–if US debt to GDP was 20% like it was in 1980 or 25%, who cares? You’re going to have an economic cycle and private sector washes out. US debt to GDP is 120%! We’ve seen that US equity markets, the US economy doesn’t handle 4.8%, 8% on the 10 year, very well. So you’re going to have to put a ceiling on that 10 year. This is, in essence, we want to run the World War II playbook, right? We keep hearing, oh, we’re just going to go to wartime footing. We can do this fast. Go to wartime footing. Fed’s balance sheet grew 10x in three years. US ran 27% of GDP deficits [during WW2]. That’s what needs to happen. Yeah. So that’s what I’m getting at.

J: I’m joined by Luke Gromen from Forest for the Trees. Luke, you’ve got two very important tables or diagrams showing, one, the the rule book, the playbook for the past 50 years, the post 1971 US dollar reserve status structure, and then you have a slightly different table showing the proposed President Trump – Treasury Secretary Bessent economic plan, restructuring. What are the subtle but important differences between these flow diagrams, and what are the consequences of them for the American economy and capital markets?

L: In the post ‘71 system it was,

• we cut tariffs,
• we open up our markets,
• we offshore our factory base,
• the world sends us goods,
• we send dollars to the rest of the world,
• world invests in our capital markets, right?

So we run a capital account surplus, current account deficit, and then we basically collect income taxes from our citizens and finance those deficits. The winners in that system are global capital, Washington DC, too big to fail banks. They all get richer on a relative basis over time. And the USA and US citizens and, in particular, the US defense industrial base, gets hollowed out via debt based consumption.

And the flip side of it is what Trump and Bessent are proposing.Essentially,

• we increase tariffs,
• we reduce income taxes,
• the world sends dollars and pays for tariffs,
• the US sends dollars to the world for goods,
• the world invests those dollars into US factories–as we’re hearing proposed, in particular, with Japan and South Korea–to address rising US demand.
• US in theory gives swap lines, dollar swap lines, or has the Fed do QE to both supply dollars to the Japanese or South Koreans to help finance this, or to finance existing treasury markets as capital moves out of our capital markets into our real economy.
• And then the world buys gold instead of treasuries with any net surpluses.

To my mind, the inherent contradiction in the above is in the first two points: Increase tariffs, reduce income taxes. This looks like substituting one tax for another, because it’s ordinary Americans—not really the world—who ultimately cough up for either income taxes or tariffs. This may well be the smart thing to do, but it will be a hit to the cost of living for ordinary Americans. What about the ruling class? Will they find a way—by buying off politicians—to protect themselves from that hit? That’s something that remains to be seen, but I wouldn’t bet against them.

And so in that world, global capital, Washington DC, the USA and US citizens and the world all get richer on a real basis over time. And the losers in that world are too big to fail banks and long-term US Treasury holders on a real basis via financial repression, and the US industrial base gets rebuilt. So those are the two differences and who sort of the relative winners and losers are. To boil it down, it’s the losers of the last 50 years who are the relative winners and the winners of the last 50 years–which is US deficits, Washington DC, and too big to fail banks on a real basis–they’re the relative losers.

J: So in this new world that you see–or a world we already may be in, you tell me–the difference is that the world invests US dollars directly into US factories instead of into US treasuries. Take us from there into gold and the financial consequences?

L: So ultimately the world, if the world is going to invest in factories in the US, then it doesn’t also have the capital to invest in treasuries. In fact it may have to sell treasuries to invest in capital which puts upward pressure on rates and we can’t afford rates much above where they are. We’ve seen that empirically over the last, I don’t know, two, three years in terms of 10-year Treasury yields. That dynamic will require some form of yield curve control, de facto, however that is structured–whether that’s standing repo facility to help fund a hedge fund basis trade that keeps caps on yields, whether that is removing the SLR treasury exemptions, as has been being discussed, if not implemented outright in some way, shape or form.

All of the above means that, at a time when the US will need gobs of capital, countries with gobs of capital to invest will look elsewhere—not in US capital markets:

Yield Curve Control & The Gold-to-Oil Ratio

It’s all some version of the same thing, which is QE without calling it QE: de facto yield curve control. It’s a way to keep yields from going up to problematic levels. That’s fine. That’s what needs to happen. However, the release valve is inflation over time. It also means that if you are the factory of the world, in the case of China, or if you’re an energy or commodity exporter, it means you can’t store your finite reserves your, finite production, in an asset [the USD] that is going to be debased by virtue of having to cap yields. [If you do, the value of your reserves will] go down on a real basis. And so you need a reserve asset that can serve that function, whose value can go up against your finite production. And the only asset big enough, neutral enough, and that serves that role, is gold. And that’s what we’ve seen, right? We’ve seen gold priced in oil has gone from six barrels an ounce in 2007 to 72 barrels an ounce. I think it’s going a lot higher over time. The gold to oil ratio.

The problem with tariffs is up next. Once again, this relates to our outsized debt and the resultant hollowing out of our industrial base. Gromen argues that tariffs aren’t anywhere near high enough to accomplish their stated aims at this point.

J: Yeah. And so how do tariffs play into this as well?

L: Tariffs, in theory, restrict US consumption to redirect consumption into productive assets. It also helps to reduce deficits, the amount that you’re ultimately going to have to yield curve control. It also in theory provides a price umbrella under which returns are satisfactory for US producers to actually start producing here again. I don’t know that the tariffs have been big enough–not even close to what is needed to create a sustainable moat to produce here. And the other problem is, we’ve got too many policy makers who want to try to set policy for very long term projects based on a monthly hedge fund trader mentality. And I’m pointing right to Scott Bessent when I say this. You can’t say, ‘tariffs are 100%, now they’re 50%, now they’re 5%, now they’re 10%,’ depending on which way the wind blows and what his boss says. Because when you’re trying to reshore production as the CFO or CEO of an American company–or a global company, for that matter–you’re trying to figure out a weighted average cost of capital and an internal rate of return calculation on a factory that is going to last 20, 30, 40 years. And my entire return on investment–at 100% might make sense, 50% maybe makes sense, 10% maybe not, and so at some point you just go: ‘You know what? We are not doing it.’ And, unfortunately, I think when you look at the USISM November number, which is recessionary, new orders recessionary, employment recessionary, and manufacturing–despite a boom going on in AI. So if you somehow could strip the AI related spending out of manufacturing, out of the November ISM, it has to be a 14 karat disaster. And I understand why, because, look, if I’m sitting in a CFO’s seat and I’m watching the circus I’ve watched for the last 10 months about tariffs, I can’t plan a long cycle project based on a hedge fund manager moving tariff rates around that fast.

So that’s the theory—I think—of what they’re trying to do with tariffs. And the theory of it makes sense. The reason I say [the tariffs] weren’t nearly big enough is, for me, I go back to something I wrote a little over two years ago, which was, Josh Wolf gave a testimony to Congress in which he highlighted that the cost per gigawatt of nuclear power in China is 1/6th the price of a gigawatt in the United States. [That] means a dollar needs to be devalued 87% against the yuan per gigawatt–and a gigawatt’s about as fundamental a cost in an an economy as you get. You look at GDP growth against electricity consumption on a real basis. It’s pretty tight over time. So when I say the tariffs have not been nearly high enough, 50% doesn’t really do it. And that then gets us back to our initial problem of, do we want to reshore or do we want to maintain the real value of the bond market. If 50%, meh, I’ll pay the 50%, I’ll leave the stuff in China and that’s what you hear a lot of manufacturers saying. Doesn’t make sense here. Okay, what’s the price that would do? I need the dollar down 87% against the yuan. Holy cow! You probably need a 500% tariff! 400% tariff! I don’t know what the number is, but it ain’t 50%. It’s not 100%. Let’s say it’s 300%. 300% tariffs. Guess what inflation’s going to be in this country in a few months? And then when the inflation readings come out, what happens to the long end of the bond market?

And so now we’re back at 4%, 8.5%. We have bond market dysfunction. That creates a risk-off amongst the levered hedge fund basis trade that has been responsible per the Fed of 37% of long-term Treasury issuance since January 2022. And now we’re right back to risk-off with yields up. And so everywhere you push on this balloon, it sticks out the other side. It’s like it’s the same choice: the bond market on a real basis, or reshoring. That’s it. Those are your choices.

J: Your point is that US Treasury assets, US dollar assets, are just too high in value relative to the rest of the world.

L: Yeah. This is the catch 22 of having the reserve currency. This is Triffin’s dilemma, manifested in the real world. Like, we can’t compete making real stuff relative to the Chinese. It’s not even close. Even with a 1500% tariff, it’s not even close. And we can’t afford the inflation of a higher tariff. And in the meantime, if we try to block out capital flows, well, that’s a violation of the rules. Like, US Dollar Reserve Status 101 post 1971 is, you got to have an open capital account. You close it down, guess where the money is going to go? It’s going to go into gold. And that’s fine. That can work. But you get right back to that decision. What do you want?

I would say to Trump, Bessent, Lutnick, all of them. What do you want? ‘We want to reshore and we want to have 10 year yields’ and, like, what do you want? You can have 10 year yields at four. You can have them at three and you can reshore. Sure, you can do those two things. What are the trade-offs? The trade-off is the dollar is no longer reserve currency. Gold is. And the Fed’s balance sheet is going to go up about 10x in the next five years. What do you want? ‘I want the dollar to be reserve currency still and I don’t want the Fed’s balance sheet to grow.’ Okay, then call up China and tell them to make more of your missiles for you, because you ain’t going to be making any of them in 5 years. That’s it.

J: Why can’t the rest of the world finance the growth in this country without the Treasury market rupturing and needing intervention from the Fed?

L: Because the money’s already here, right? We’ve got 50 years of open capital account and, in particular, the last 25 years the US net international investment position in 1984 1982 1984 when Soros wrote his famous The Imperial Dollar Cycle paper, the US net international investment position was positive 10% of GDP. That means there was more American money overseas than there was foreign money here. 40 years later the US net international investment position is negative 85% of GDP. In other words, foreigners have %63 trillion gross, %26 trillion net, more here than we have there. That money can’t be in two place at once. That capital can own treasuries and stocks–and stocks are a key driver to our marginal consumption–or that capital can finance new factories in the US, but it can’t do both unless the Fed changes the rules. SLR is just a down payment on it. ‘Hey, Mr. Japan, Mr. rest of world. We are going to provide you a $26 trillion swap line so that you can have $26 trillion–doesn’t have to come out of US markets–but you can use it as collateral that we’ll give a zero haircut to, to also build our factories.’ And that’s fine. Like there’s no reason conceptually they couldn’t do that. But let’s be clear about what that is. That is the Fed’s balance sheet growing $26 trillion to finance the reshoring of our industrial base. And gold ain’t going to be at $4,200 bucks. Stocks aren’t going to be where they are. And the stocks not being where they are is another tricky part, which is, why the hell would I go actually work in a factory, or why the heck would I go invest in a factory, if the Fed’s actions to build the factories are going to send the S&P up 3x? I just sit here and get rich and sit on my hands. It’s a lot easier. I don’t have to get my fingernails dirty at all. I don’t get big calluses on my hand. So, it’s a pickle.

The Truth About $21 Trillion Investment Deal

J: So these foreign investment deals where President Trump is securing what appears to be a very large number of dollars for the rest of the world to invest in the US. How much of that is actually, do you think, going to come to pass? President Trump had been touting a $21 trillion investment boom. I think a lot of people realize that was perhaps an exaggeration. Bloomberg came out and said, “Oh yeah, his $21 trillion is only $7 trillion.” I was actually shocked that it would actually be that high. $7 trillion is not $21 trillion, but it still is an enormous amount of money. Do you think that this money is actually going to be coming into the country via foreign direct investment?South Korea, India, Saudi Arabia. Is this happening or is this kind of just the president is going to secure a headline and then the actual bite is a tiny fraction of what the bark was?

L: Gun to my head, I think the I think the ultimate amount is going to be way lower. But what we don’t know is the term of the deal, right? If this is a 20-year deal, then sure, $7 trillion, yeah, that’s possible. But $350 billion a year over 20 years, eh? It’s nice. It helps. It’s positive. But it isn’t if it’s seven trillion in one year. Oh, by the way, if we did seven trillion over two, three years, number one, it’s really inflationary. Go back to everything we said before about those implications. The other side of it is, you know, a friend of mine who’s a a special forces guy. He’s really, really wise. He’s really a warrior poet. And he goes, “Oh, whaddaya think about it, Luke? In a war, the other guy gets a say, right? At the end of the day, they still can shoot back. They still get a say. The other side gets a say.”