Arthur Hayes - Bastille Day: Celebrating France’s Exit From The Euro - TOKEN2049 Singapore 2025

Bastile day. So this summer I was sitting in Sanrope getting [ __ ] up listening to Rufus and it occurred to me that it's quite ironic that you know an American here is having fun partying when you know it was the American Revolution and the financing of it that was one of the proximate causes of the fall of Louis the 16th and ushering in of the French Revolution. But where we stand today in the fifth French Republic is at a crossing crossroads. What are they going to do? They're broke as [ __ ] And is the ECB going to print the money to save them?

I think that Brexit is a real possibility. And the threat of France leaving the euro followed by Germany will prepare will get the ACB to print a [ __ ] ton of money. So let's go through the slides. So I don't know if you've read this book, Rich Dad Poor Dad, Robert Kiyosaki. And I want to talk about countries.

Who's a rich country? Who's a poor country? And I want to designate rich and poor based on a net portfolio balance. And this is basically how many assets a country owns abroad versus how many assets foreigners own in their own country. And we want to see what this amount of money is.

Obviously, a positive balance means you're wealthy. A negative balance means you're poor. But obviously, that's a moralistic term. more we should talk about a surplus and a deficit because everything must balance out in the end. Any country that has a surplus there's an equal and opposite deficit.

So who's rich? Germany and Japan are the wealthiest countries by this metric in the world. Uh Germany has a net portfolio balance of almost 5 trillion and Japan has one of almost $4.4 trillion. Now, this is quite interesting because if you think about 80 years ago, both of these countries were destroyed and lost the war.

Yet, in four generations, they have recovered their swag and now they're the richest countries in the world. Who is poor dad? France and America. These are the two poorest countries by this metric, net portfolio balance. Uh the United States has a minus 58% of GDP net portfolio balance.

And I have a photo here of uh the great city of San Francisco and the tenderloin. Looks like a piece of [ __ ] smells like a piece of [ __ ] Um I [ __ ] hate San Francisco. Uh next up is France. Negative 38% of GDP. And here is a recent protest that is happening.

You know, I think a month ago this this photo was taken. And what is notable here is you know what's difference between France and America. Well, America has the the reserve currency, the US dollar. Everybody uses a dollar. Everybody essentially implicitly finances America.

So they can issue bonds. Uh you know they have like 28 trillion dollars of outstanding debt in the world. But France France does not have the the global reserve currency. Yet Germany and Japan through their surplus are financing the French welfare state are financing French politicians and what they are doing for their own people. Now this situation persisted for 80 years but I believe that it's going to change very soon.

Why this man here, Donald Trump? I'm sure you all are familiar. This is uh him speaking at the UN recently. What has Trump been about since 2016 when he took the throne uh of the PAX Americana? He's been about America first.

What does that mean? It means reversing the surplus and deficit disparity between countries globally. He is tired of America essentially um being financed by the rest of the world, but the rest of the world owning assets in America. He believes they should own assets in their own country, let American companies sell their exports and get wealthy just like Germany and Japan. And so we're ushering in these America first policies.

Germany and Japan have to respond with Germany first and Japan first policies because their export market, the US market is going to be closed to them. So they need to take these savings, repatriate them and bring them back on shore, which basically means they can no longer finance defic countries like France and like America. So FAFO stands for [ __ ] around and find out. Here is the chart that everyone who is interested in whether or not France is going to leave the euro and when it should happen needs to understand. Now, I took uh this is a Bloomberg chart and basically what I did was the European Central Bank, the ECB, every month publishes the net balances in the target system and I'll get to what that is in a second.

Uh France as of early 2021 ran a surplus, meaning capital was coming in to France. So then I said okay let's take a uh a difference between today and 2021 and let's see which country has gotten um capital has left Europe I sorry not left Europe left their banking system gone somewhere else the solid white line is France it's the worst in the whole uh Euro zone meaning that French savers and French capital is afraid of something and they are leaving they are saying I don't want a euro and a French bank. I want a euro in a German bank, in a bank in Luxembourg, somewhere else in Europe. But [ __ ] no, I am not putting my capital in France. And the worse this ratio gets, the more we have to be worried about capital controls and other means by which French politicians are going to rectify this imbalance.

So what is a target balance? essentially um to make the euro work with you when you have uh I think there's like 17 or 18 different central banks and banking systems the ECB runs a centralized clearing system where Germany and France can run a surplus and deficit versus each other rather than every central bank having an account with every other central bank and it balances. And so what do you have to think about to conceptualize what a target is? Imagine if the euro ceased to exist and you had capital in a particular European country and they redenominated their currency from the euro back into the Frank or back into the Deutsch mark. Would you be okay with that?

Do you want to own a Frank or a LRA or a Deutsch mark and make that mental calculation and then say, "Okay, well maybe I don't want to own a a Frank because it's a a deficit country. They're no longer being financed. I think there's capital controls coming. Maybe I should take my euro while it's fungeible, move it over to Germany and if something happens, I get a Dutch mark and Germany is the strongest, richest country in the Euro zone and my capital is going to be safer there. So that's what how to think about the target system.

And as this target deficit gets worse and worse and worse, it is like the canary in the coal mine for you to understand that the French people are worried. [ __ ] what I say on the stage. I don't [ __ ] know. I live in Singapore. What does a French person think about their own system?

They're telling you in very clear language that they do not want to be in the French banking system. So, who is this lovely lady here? Uh, I call her the crocodile contest. This is Christine Lagarde, a uh a French lady, lawyer by training, yet she has, you know, assumed the position as a head of the European Central Bank. Now, what is her job?

Her job is to make sure that the ECB continues to exist. Her job is not to make sure that the will of pe the will of the people in every other European country is respected. And if you read between the T lines of what happened in Greece between 2011 and 2012 um in other elections around the Euro zone, you see the hands of the ECB presenting these outcomes where if you don't do what we say, we're not going to print the money to buy your bonds and then your government falls and then you have to depreciate your currency and then you can't buy oil or food or medicine. So shut the [ __ ] up people. Vote for the party we tell you to vote for and we're going to continue to finance you.

So she is all about maintaining control of the ECB over every other European country. How is she doing that? By withholding printing money. So if you take a look at global central banks and COVID, the ECB has been relatively tight because they want to make sure they have control. They say, "Hey, you can only spend 3% of your GDP as a deficit."

I don't know why they chose that number. They just did. But if you are spending too much money, we will not support your bond market until you pass an acceptable budget. And this is the problem that domestic politicians face, especially in France. So when we come to uh Emanuel Macron, the teacher [ __ ] he's [ __ ] He's got to ride two horses with one ass.

On one hand, the French people want to work three hours a day, retire at 45, and drink some nice wine. But the ECB says, "No [ __ ] way. We're not going to let you print all this money, and we're not going to support your bond market because what does that do say to the all the other countries? We have to make an example of you to make sure that everybody else falls in line with what we say." And so you have this constitutional crisis in France right now where in the past year two prime ministers have failed to pass a French budget and when there's even a hint that the government might follow an aster austere policy towards government spending meaning just reduce it from the levels at where it is today there's protests in the street there's strikes the people are saying we don't want this we want to print money for France for us we don't care what the ECB B says, "We don't care what's happening in Brussels at the European Council."

And this is why Macron is in an unwittable position. So what happens when you have to plug a hole and you are a government? The first thing you do is you steal money from the foreigners. Now you might say, "Oh, France is a capitalist country. They respect property rights and all that other nonsense."

But at the end of the day, where the solveny of the state is threatened, they will always steal the money of the foreigners first. And the foreigners are the ones who own all the assets. 53% of all stocks and bonds in France are owned by foreigners. I forgot the guy's name, but the head of the Communist Party in Parliament uh had a quote a few a few months ago basically saying, "Don't worry about us taxing more of the French people. All of our debt is owned abroad.

we're just going to take their money first. So domestic capital controls will follow the appropriation of foreign assets because once you steal the money from the foreigners, well then obviously the French people like well maybe I'm next maybe I should take my euro and send it over to Deutsche Bank rather than keep it in sock gen. And so then you have to put domestic capital controls on and then at the end of the day private capital that is left in France will be forced to buy government bonds at a rate that the government can afford which doesn't necessarily be mean the best value for you as a capital holder. So what are the implications of France taking money from the foreigners or possibly putting in capital controls? The first problem is that French assets are owned within the EU banking system.

And if the French politicians decide that they're going to sequester foreign capital in their bond and equity markets, it would essentially cause the bankruptcy of the entire banking system because banks are levered. And based on a tier one capital ratio and losses stemming from the imposition of capital controls on foreigners, I estimate it could lead to approximately a 5 trillion euro bailout by the ECB to make sure that the EU banking system remains solvent. The next is what do foreign central banks do? What is the Bank of Japan going to do when $200 billion of their money is stuck in France? Are they not going to print money, hand it to their own domestic institutions who have lent this money to France to make sure that their financial system is sound to make sure there's no knock-on effects?

What is the Fed going to do in the US? This has presented them this awesome opportunity to um excuse away the need for more money printing because there's this global contagion effect of the euro possibly breaking out. Now, obviously, I can't time any of this. How do we understand when this is going to happen? We have to look at the target system.

Even though it's only a monthly snapshot, it's the best that we have to understand if the people on the ground who are the most knowledgeable about what the French capital thinks, if this deficit continues to blow out on a monthly basis, then we have to worry about our capital in the EU. So, will the Euro survive? Probably, maybe, I don't know. It doesn't really matter from a us as a crypto standpoint. If this contagion starts, everyone's going to ask, "Who's next?

What other weak country who no longer can finance themselves are going to have to introduce capital controls? And if I have capital in that country, I need to get out. I need to do something else. No country will restrict themselves to a 3% spending limit on a federal deficit when you have the people clamoring for more, not less, spending." And finally, it comes down to the Germans.

What will they decide? Do they want to stay in the euro or do they not want to stay in the euro? I don't know. It's a political decision. But again, as investors, we do not like uncertainty.

We do not like having to handicap these binary political outcomes, especially when the majority of us are not Germans. We're not French. We are not Europeans. We don't understand how they think and what they're going to do. So, when we come to the ECB, they have a choice.

Print the money now, print the money later. Print now accept that a country can spend whatever it likes domestically on their own population. Take or restart quantitative easing to print the euros to buy the national bonds so the politicians can fund their spending. But this means a loss of control. This means sovereignty moves back to the people at a national level.

Print later. Print the five trillion after French threatens to leave the euro and sequesters assets. restart quantitative easing to buy the bonds of the countries that are left because investors don't want to finance these governments anymore and still lose control. The euro is fundamentally [ __ ] It just took 30 years for us to figure it out. The ECB has no option.

They will print money because if they don't print money, the euro is definitely dead. But if they do print money, there's a chance that Christine Lagard or whoever else replaces her can still rule Europe. So, as an investor, why would you [ __ ] around and find out? Even the threat of being redenominated in these weaker currencies should prompt you to think about why should I own any of these assets? So, let's look historically since co how have European assets performed versus other opportunities.

So, this is in white the MCI world stock index versus the Euro stocks 50 which is like the S&P 500 but for the Euro zone. And we've seen the Euro stocks has marginally underperformed the world equity markets. So if you're buying stocks, there's no reason to be in Europe. What about versus the real assets? Bitcoin in magenta, gold in uh green.

No, sorry, that's magenta green and uh other equity markets and their bond market. European assets are dog [ __ ] versus true money, gold and bitcoin. seeing this chart, listening to what I said, seeing what the French people are doing on the ground, what is going through your head by owning anything in Europe, it makes no [ __ ] sense. Get out while you can get out. And so I end this by putting this chart back on the screen because it's the most important chart if we want to understand what and when the ECB is going to print money.

And so I hope that everyone in this room says, "Hey, maybe every month I should just go on the ECB website, take a look at this target balance. If you've got a Bloomberg, you can go on Bloomberg and you could find the different uh balances for all the member countries." But I want to emphasize that the ECP is out of options. They're out of time. Lard can't maintain control while France is leaving.

It's too big to fail, yet too big to bail out. And as us as Bitcoin and crypto investors, we know the policy response. We know that trillions of euros will be printed whether France leaves or doesn't leave the euro because America is changing the world order whether you like it or not. And deficit countries like America will switch to surplus and surplus countries will switch to deficit. But if you don't have the reserve currency like France, who is going to buy these piece of [ __ ] bonds?

Thank you very much everyone.