Future Growth Will Be Driven By Banks, Not the Fed | Andy Constan

Episode Summary

Executive Summary: Andy Coston argues that the macro regime is shifting from central-bank-led liquidity to private credit creation driven by AI capex, onshoring, deficits, and FDI promises. He says money and credit now flow through spending loops in the real economy, making bonds more vulnerable while growth and equities may benefit—if the promised projects are financed and productive.

Main Topics: Shift from central bank money creation to private credit creation (Priority: 5/5): The conversation frames a major regime change: the Fed is less central than private-sector lending and credit demand, with banks and borrowers now determining liquidity dynamics. Money, credit, and risk as separate economic channels (Priority: 5/5): Andy distinguishes money creation from credit creation and explains how risk pricing determines whether lending supports growth or turns fragile. AI capex and data-center spending as a major credit cycle (Priority: 5/5): Massive AI infrastructure spending is portrayed as a large, immediate demand for credit and capital, with spending flowing into wages, suppliers, and eventually savings. Onshoring and foreign direct investment promises (Priority: 4/5): Tariff-linked and geopolitical efforts to reshore production are treated as additional borrowing/investment promises that may be economically inefficient but strategically important. Implications for asset classes and market pricing (Priority: 4/5): The guest argues the new regime could favor equities and growth while pressuring bonds, credit spreads, and possibly gold/crypto if debasement flows diminish. Business cycle normalization and uncertainty about consumers (Priority: 4/5): He suggests the economy may be returning to a more traditional cycle, but warns that AI-related job displacement and weak household demand could prevent a durable expansion.

Key Arguments: Central bank balance-sheet expansion mattered most when banks were impaired or when government spending directly pushed money into the economy; that era is ending. Banks already have the ability to lend, but lending only accelerates when borrowers want to borrow and are willing to pay higher rates for credit. Money creation occurs when the Fed or a commercial bank creates spendable deposits; credit creation can occur without new money, but it still changes spending patterns and risk. The spending from AI and onshoring investments becomes someone else’s income and then savings, which helps fund the original borrowing through a circular flow. Short-term market pain can occur because investors must sell assets or borrow to finance purchases of new issuance, which can pressure bond prices and credit spreads. The current cycle looks bullish for real economic growth but not necessarily for bondholders; equities may hold up better than duration assets if earnings grow. AI and onshoring are not classic consumption-led cycles; they are supply-side investment booms that may not immediately translate into household-led leverage. If the projects financed by current borrowing do not generate returns, the loop breaks and a credit crunch could follow. Foreign investors’ willingness to fund U.S. assets is tied to trade deficits and their need to recycle dollars, but large new FDI promises likely still require selling Treasuries or other assets. The key risk is that interest rates and credit spreads rise enough to slow or cancel promised projects before they become productive.

Data Points: Grayscale product count: 30+ - Sponsor read noting Grayscale offers more than 30 crypto investment products. Historical bank capital-to-assets ratio stress point: 8.5% - Andy cites severe stress in the U.S. banking system at this level. Approximate U.S. banking system debt/capital to assets: ~10% - Used to estimate the upper bound of additional bank-credit creation. Approximate banking-system assets: ~$20 trillion - Rough estimate cited to frame limited incremental credit capacity. Potential additional bank credit capacity: At most ~$2 trillion - Derived from the rough capital and asset figures; used to argue promises exceed bank-funded capacity. Forecast earnings growth: 10% - Used as a benchmark for why equities could still rise even if valuations compress. Multiple contraction scenario: 2-handle - Andy says stocks could still rise even with roughly two points of multiple compression if earnings grow 10%. Interest-rate expectations: ~3 cuts - Current market pricing for Fed cuts over the coming year. Oracle data issuance spread move: ~70-80 bps wider - He says Oracle CDS/bond spreads widened materially after the debt came to market. Trade deficit dynamic: Ongoing / not meaningfully improving - Explains persistent foreign demand for U.S. assets through dollar recycling.

Pivotal Quotes: "central bank money creation will largely be a non-factor. And what matters going forward is credit creation and private sector bank money creation." — Andy Coston: Core thesis of the episode; marks the macro regime shift. "The answer to that is from the spending." — Andy Coston: Explaining how the huge amount of promised investment gets funded through the circular flow of spending, income, and savings. "It's hard to be bullish on credit spreads and interest, long-term interest rates." — Andy Coston: Bottom-line market implication of the new private-credit-heavy investment cycle.

Implications: Listeners should expect a more traditional credit cycle: stronger growth, more pressure on bonds and spreads, and market volatility around AI/onshoring financing. The big question is whether the real economy can absorb and repay the new leverage without a credit crunch.