Imagen-The Everything Code: Understanding How Central Bank Policies Drive Asset Markets
The Everything Code: How Our Economy Became a Ponzi Scheme and What It Means for Your Future
In a recent episode of the podcast "Powerful Conversations with Thought Leaders," host Justin Murphy sat down with macro-investor and economic thinker Raoul Pal to discuss his groundbreaking "Everything Code" theory. Pal, former hedge fund manager and founder of Global Macro Investor, delivered a masterclass on why the global economy functions as a massive debt cycle that increasingly resembles a Ponzi scheme—and why most people can no longer afford basic assets like housing.
This deep dive into global economics unpacks why millennials struggle to buy homes, why stock markets keep rising despite recessions, and how central banks have trapped themselves in a cycle of money printing that can't easily be escaped.
The Crisis of Stagnant Wages and Mounting Debt
The conversation began with an examination of how we arrived at our current economic predicament. According to Pal, "We have this constant looping cycle of debt where we have these boom and bust periods." The 2008 financial crisis exposed the fragility of a system that had been masking a fundamental problem: real wages weren't increasing.
"We realized the whole system is very fragile because people are disguising the fact that real wages are not going up by taking on more and more debt, both at the individual level and at the governmental level," Pal explained.
This problem was compounded by globalization, which drove down the cost of goods through labor arbitrage—moving jobs to countries with cheaper labor costs. While beneficial for asset owners, this practice hollowed out the middle class in developed nations.
"The people that own assets in these companies that are using labor arbitrage to drive the cost of their goods down to drive their revenues up, they're loving life," Pal noted. "But all the people that used to go to the factory, they're either stagnant, down, or headed towards the deaths of despair route where people are just doing drugs."
This economic shift helps explain phenomena like the opioid epidemic in the U.S.—what Pal called "deaths of despair" resulting from economic displacement.
The Growing Fragility of the Financial System
The discussion then turned to how the financial system has become increasingly concentrated and fragile. Murphy highlighted a startling comparison: during the Great Depression in 1929, it took the collapse of about 5,000 banks to wipe out a certain amount of value. In 2008, it took far fewer, and in recent banking crises, just four banks caused similar damage.
"We have this consolidation, consolidation, consolidation," Murphy observed. "It's not like we're just going horizontal; we're getting more fragile with every passing day, every time this boom and bust cycle happens."
Pal agreed, adding that we're "papering over" these problems "simply by making money out of nowhere."
The Mutualization of Bankruptcy
What exactly has been happening since 2008? According to Pal, we've been "mutualizing the bankruptcy of the system via the debasement of currency."
"When you say mutualizing, you mean making it everybody's problem?" Murphy asked.
"Yes," Pal confirmed. "You can either raise taxes, which they're trying to do too, but they're also printing currency via the mechanism called quantitative easing, which is actually debasing the currency."
This debasement creates what Pal calls a "money illusion" where asset prices appear to rise, but they're not actually increasing in real terms. If you divide all assets by the central bank balance sheet (effectively accounting for the excess dollars created), most assets—like the S&P 500, real estate, and gold—haven't actually increased in value. Only technology stocks and cryptocurrencies have truly outperformed.
"This is why we all feel like even though stocks are going up and our 401(k)s are going up, nobody's getting any richer," Pal explained. "We all know this intuitively that we're not actually getting richer because the stocks I sell doesn't buy me more of a house."
This debasement particularly harms those without assets. "It mutualizes it amongst people who don't have assets, so you'll never be able to buy an asset," Pal said. "That's why when you speak to a millennial now, they're like, 'We can't afford a house.' Why? Because they came into the labor force after the Fed started monetizing or lowering the value of the denominator."
The Everything Code: Understanding the System
The heart of the conversation focused on Pal's "Everything Code" theory—his framework for understanding how global economics now functions. Murphy quoted Pal's original formulation:
"What I had suddenly stumbled across in the everything code was the fact that the global central banks had probably agreed together sometime around 2012, after Europe blew up, that with governments at 100% of GDP in debt, they were going to crowd out all of the private sector, and we were going to just keep having financial crises."
Pal explained that when governments reach debt levels of 100% of GDP, there's a mathematical problem. Economic growth (typically around 2%) is needed to service interest payments on government debt. But if interest rates are also around 2%, and government debt is 100% of GDP, then all economic growth is consumed just paying interest on government debt.
"Once all of these governments hit 100% [debt-to-GDP], then they either blow up the private sector, the banking sector, corporates, or the government sector—choose—because there's not enough income to service that level of debt," Pal said.
The problem becomes even more severe when you consider that the private sector (households and corporations) typically holds debt of around 120% of GDP. This creates what Pal calls "negative growth every year of 2%" that compounds over time.
The Central Bank Balance Sheet: The Real Driver of Asset Prices
So how do governments handle this impossible math? According to Pal, they've turned to a predictable mechanism: quantitative easing (QE), or money printing. After analyzing central bank behavior, Pal discovered something remarkable: central banks are essentially monetizing interest payments on government debt about three and a half years after the debt is incurred.
"All debt that is in excess of GDP at government level is ending up on the [central bank] balance sheet three and a half years later," Pal explained. "I went and looked at this and I realized that what they were monetizing was the interest payments on the debt."
Why the 3.5-year lag? Pal explains: "In 2008, all interest rates went to zero, everybody, every government refinanced itself at zero, and most of the debt for all governments is in the 3 to 5-year sector... Every time you service the debt, you need to get the interest rates back down again, you end up having a recession, you get this very cyclical phenomenon."
The most crucial insight Pal offers is that central bank balance sheets are "97% correlated with asset prices." In other words, the true driver of stock market performance isn't company fundamentals or economic health—it's the size of the central bank's balance sheet. When central banks print money, asset prices rise proportionally.
"You could basically... the thing that's actually driving the S&P 500 is the Fed balance sheet. It's not companies getting [more valuable]," Pal clarified.
"So it's a optical illusion, it's a money illusion?" Murphy asked.
"The price simply rises to meet the level of inflation caused by printing money," Pal confirmed.
Predicting the Future Through the Everything Code
This understanding gives Pal a powerful predictive tool. By tracking the business cycle and knowing the amount of interest payments that need to be monetized (which happened 3.5 years ago), he can forecast how much central bank balance sheets will expand, and therefore, how asset prices will perform.
"The balance sheet right now is what, $6.5 trillion dollars, and it looks like it will get to $7 trillion or so, and it looks like it will get to 12 to 14 trillion by the end of 2025," Pal predicted. "That puts asset prices massively higher than here, hugely higher. We're looking at more than a doubling of the NASDAQ from here. We're looking at another gigantic crypto run into 2025."
However, as more people become aware of this mechanism, Pal believes we'll see even more extreme boom-bust cycles, though the long-term trend will remain upward due to continued currency debasement.
"We'll be more like the crypto cycle... We had a big collapse last year, and now we're straight back into the boom," he noted.
The Consequences of Knowledge: Cynicism and System Fragility
An interesting philosophical tangent emerged when Murphy reflected on what happens as more people become aware of the mechanics behind our economic system. He suggested that widespread knowledge could lead to increased cynicism and potential system instability.
"As everybody becomes aware of the trick, the trick won't work anymore," Murphy suggested. "I'm in this weird spot of like wanting to tell people, 'Hey, when they print money—quantitative easing—they are counterfeiting money, it is destroying your buying power.' And but it is the only way that we glide [forward without collapse]."
Pal noted that while everyday consumer goods have become cheaper (TVs, food, beer), the assets that represent future consumption—homes, retirement savings—have become unaffordable for many. "You've kept them numb," he said, correcting Murphy's suggestion that consumers are being "kept happy."
The Path Forward: Alternative Systems
For Pal, recognizing these systemic problems led him to cryptocurrency as a potential solution. "This Journey led me to crypto," he said. "I saw it and I knew that this was the answer, and that's why I first bought Bitcoin in 2013... Once you see what has happened, we know the system now, regardless of how it ends, whether it ends in slow ongoing death of economic vibrancy or a spectacular blowup, the answer is you need to transition to what I call the Bitcoin life raft or the parallel financial system."
While the conversation concluded without fully exploring alternatives to the current system, Pal clearly sees decentralized finance as part of the solution to an increasingly unsustainable economic model.
Conclusion: Living with the Everything Code
Understanding Raoul Pal's Everything Code theory helps explain many economic phenomena that otherwise seem disconnected or contradictory: why asset prices rise during recessions, why younger generations struggle to afford homes despite technological progress, and why governments seem trapped in endless cycles of debt.
The implications are profound. If Pal is correct, we're living in an economic system where central bank balance sheets—not economic fundamentals—drive asset prices, where debt is never truly paid off but merely rolled over with interest payments eventually monetized through currency debasement, and where the winners and losers are increasingly determined by who already owns assets versus who does not.
Whether this system can continue indefinitely or will eventually require a more dramatic reset remains an open question. But Pal's framework gives us a powerful lens through which to view economic events and potentially navigate the increasingly volatile financial landscape ahead.
Key Points
- The Debt Trap: Governments with debt at 100% of GDP create a mathematical problem where all economic growth is consumed by interest payments, leaving nothing for the private sector.
- The Money Illusion: Asset prices appear to rise due to currency debasement (money printing), but when measured against central bank balance sheets, most assets haven't actually increased in value.
- The 97% Correlation: Central bank balance sheets are 97% correlated with asset prices, meaning market performance is primarily driven by monetary policy, not economic fundamentals.
- The 3.5-Year Cycle: Interest payments on government debt are typically monetized (printed) about 3.5 years after the debt is incurred, creating predictable cycles of monetary expansion.
- The Widening Wealth Gap: This system disproportionately benefits asset holders while making it increasingly difficult for non-asset holders (particularly younger generations) to acquire assets like homes.
- Future Asset Inflation: Based on projected central bank balance sheet expansion, Pal predicts significant asset price increases through 2025, including a doubling of the NASDAQ and another major cryptocurrency bull run.
- The Alternative System: Cryptocurrencies and decentralized finance potentially offer an escape route or "life raft" from a financial system that appears mathematically unsustainable in the long term.
For the full conversation, watch the video here.