How was it that some people were able to predict the 2008 financial meltdown? Were they clairvoyant?
To be clear, I’m not talking about those who predict a financial meltdown every year. I’m talking about groups like ITR economics who we had on the show a few weeks ago that also accurately predicted periods of financial prosperity as well.
Those who best understand how the global economy works at the macro level are the ones who can see where it is headed. Most of us are down in the weeds seeing things happen in real time wondering when to take cover or when to shoot for the moon.
The good macroeconomist, though, is not guessing. He sees the financial world move in concert from a thousand feet above with its complex interactions. He understands that the economy is dynamic and, in the global economy of today, cannot be seen through the same lens that it was 50 years ago when economies were more isolated from one another.
I am certainly no economist. However, I am good at surrounding myself with people smarter than myself (which isn’t that hard frankly). That is a skill that has essentially accounted for all of the investing success I have had.
In the world of macroeconomics, Richard Duncan is one of the guys that I listen to and he is my guest on Wealth Formula Podcast this week. If you want to know what the financial world looks like from a thousand feet up and several thousand miles away, do not miss this episode!
Richard Duncan is the author of three books on the global economic crisis. The Dollar Crisis: Causes, Consequences, Cures (John Wiley & Sons, 2003, updated 2005), predicted the current global economic disaster with extraordinary accuracy. It was an international bestseller. His second book was The Corruption of Capitalism: A strategy to rebalance the global economy and restore sustainable growth. It was published by CLSA Books in December 2009. His latest book is The New Depression: The Breakdown Of The Paper Money Economy (John Wiley & Sons, 2012).
Since beginning his career as an equities analyst in Hong Kong in 1986, Richard has served as global head of investment strategy at ABN AMRO Asset Management in London, worked as a financial sector specialist for the World Bank in Washington D.C., and headed equity research departments for James Capel Securities and Salomon Brothers in Bangkok. He also worked as a consultant for the IMF in Thailand during the Asia Crisis.
Richard has appeared frequently on CNBC, CNN, BBC and Bloomberg Television, as well as on BBC World Service Radio. He has published articles in The Financial Times, The Far East Economic Review, FinanceAsia and CFO Asia. He is also a well-known speaker whose audiences have included The World Economic Forum’s East Asia Economic Summit in Singapore, The EuroFinance Conference in Copenhagen, The Chief Financial Officers’ Roundtable in Shanghai, and The World Knowledge Forum in Seoul.
Richard studied literature and economics at Vanderbilt University (1983) and international finance at Babson College (1986); and, between the two, spent a year travelling around the world as a backpacker.
- Richard Duncan’s story
- A shift in how the economy works after the gold standard
- Why do trade deficits matter, for both sides?
- With all the bubbles around, what next?
- Don’t be stuck in a traditional mindset
- Trade war policies
- The MacroWatch Newsletter
- Subscribe and get 50% off for Wealth Formula listeners, coupon code: formula
Buck: Welcome back to the show everyone. Today my guest is Richard Duncan. He is the author of three books on the global economic crisis. He wrote The Dollar Crisis: Causes, Consequences, Cures which predicted the recent global economic crisis with extraordinary accuracy and that one was an international bestseller. Second book was The Corruption of Capitalism: A strategy to rebalance the global economy and restore sustainable growth. And his latest book is The New Depression: The Breakdown of the Paper Money Economy. He’s at an impressive career in the private financial sector and has also worked for the World Bank in Washington and he’s also been a consultant for the IMF in Thailand during the Asia crisis. Richard is a frequent contributor to national and international business news outlets and is a prolific writer and speaker internationally. He’s also the editor of Macrowatch which is a highly acclaimed newsletter that follows global macroeconomic trends and we’ll get into that in a bit. But welcome Richard from Thailand.
Richard: Buck, thank you for having me on.
Buck: Yeah I appreciate it. It’s funny to have these conversations across the world like this and tomorrow morning I’m supposed to speak to a guy in New Zealand and I’m sitting here in Santa Barbara talking to everybody but it’s an interesting world we live in. Listen I wanted to kind of get a little bit of background on you first Richard. You have a pretty interesting story, I mean, how did you end up in Thailand?
Richard: Okay so I grew up in Kentucky and went to Vanderbilt and after Vanderbil backpacking around the world for a year and I saw Asia the first time then when I had just turned 24 and it was booming economically. So I went back to business school at Babson outside Boston and when I finished Babson, I flew to Hong Kong and found a job working as a Securities Analyst, doing research on the Hong Kong stock market and since then I’ve lived in overseas almost all the time except for a couple of years with the World Bank in Washington. It’s moved around from Hong Kong, Singapore and Thailand several times each and also spent a few years in London and Paris. So most of my career has been focused on Asia. I have I had very lucky timing and arriving in Asia in the midst of an extraordinary boom. The first year I was in Hong Kong the economy grew by 13% in the first 12 months I was there, it went up, the stock market went up 100% so it was great timing, but I’ve also been fortunate in seeing a number of very extreme economic booms and bust during this period and watched globalization in action if you will. It struck me very early on, looking at the developments around southern China back even in the late 1980s you could see factories into the distance as far as the eye could see full of young women earning about three dollars a day and it was clear that this was going to create extraordinary global imbalances resulting in the deindustrialization of the developed economies the US in particular and a political backlash sooner or later. And so that is now arrived and it doesn’t surprise me that it has, but this has transformed the world, the emergence of Asia during the last few decades.
Buck: But certainly an interesting perspective to have as an American watching everything unveil as an economist, but not looking at it from within the United States.
Richard: I was fortunate to be able to look at several different economies rather than only the US economy. So while being in Asia, I had the opportunity to analyze what was going on in Hong Kong, Singapore and larger economies Thailand, as well as India, Indonesia, Vietnam. So they have all moved in somewhat different cycles, but the thing that I believe I’ve learned from watching these big booms and big bust is that they’ve all been driven by credit expansion.
Buck: Yeah let’s pick up on that part because I think just going back from you know watching a little bit, reading a little bit about what you write. You talk about a major shift in how the economy works that occurred after the US came off the gold standard. Can you talk about that and exactly kind of how that shifted and presumably that’s where credit really became the the driver.
Richard: Right I do believe the way the economy works fundamentally changed once the US stopped backing dollars with gold. That happened in two stages. In 1968 Congress changed the law so that the Fed no longer had hold any gold to back the dollars that issued and then three years later in 71 President Nixon ended the Bretton Woods system by reneging on the United States promise to allow other countries to convert their dollars into US owned gold. And afterwards the global economy began to change in extraordinary ways. First of all of course the central banks were then free to create as much money as they dared, let’s say, up until that point they actually had to have gold to back any additional currency that they issued. And so afterwards that was no longer a constraint, so they were able to issue much more money for instance we’ve seen in the last ten years this extraordinary paper money creation by all the central banks around the world. The Fed created three and a half trillion dollars through quantitative easing. So none of that could have been possible had we remained on the gold standard. But from an international perspective, the most important thing perhaps was that trade between nations cease to balance. When we were on the Bretton Woods system the United States did not have a large trade deficit with the rest of the world nor did other countries. That’s because under the gold standard or the quasi gold standard Bretton Woods system, if the country had a large trade deficit with a different country, it had to pay for that deficit by handing over its gold. And since every country only had a limited amount of gold, they couldn’t afford to have big trade deficits with other countries and so trade between countries balanced. That’s the way things worked up until the Bretton Woods system broke down in 1971. Well trade continued to balance more or less until the early 1980s, but starting in the 1980s it seems the United States suddenly discovered that it could buy things from other countries and it didn’t have to pay for those things with gold anymore. It could buy things from China and or I may just say Japan and Germany and run very large trade deficits with those countries and it didn’t have to pay with gold. It could pay with US dollars which it could create or more commonly US government bonds denominated in dollars which of course it could also create. So suddenly the United States started running these extraordinarily large trade deficits. By the mid-1980s, the US trade deficit was roughly three-and-a-half percent of the US GDP which was completely unheard of and thought to be extraordinarily destabilizing. So at that point the leaders of g7 met at Plaza Hotel in New York and struck the Plaza Accord to try to bring things back into balance and under that Accord the dollar was devalued by about 50% against the yen and the Mark and that did move trade back into balance temporarily within China into the global economy in the early 90s and by 2006 the US current account deficit had blown out to 800 billion dollars that one year alone, that was six percent of US GDP. So as long as the US trade deficit became larger and larger, this provided the fuel that drove the entire global economy. Naturally with the US by an eight hundred billion dollars more from the rest of the world and the rest of the world was buying from the US this was extremely good for the global economy and it fueled a worldwide economic boom that was all great. In fact it pulled hundreds of millions of people out of poverty around the world. But in 2008 we reached the point where the American private sector, and in particular the US households had become so deeply indebted that they were no longer able to take on any more debt and they began defaulting on the debt that they had already. At that point the US trade deficit contracted very sharply when the world went into the worst economic downturn since the 1930s.
Buck: Richard let me back up a little bit. For those of us who may be not really as well-versed in in the macroeconomic issues, let me ask you a very basic question. Why do trade deficits matter?
Richard: Well they matter because they have to be for many reasons. On one side, there is a trade deficit on one side and there is a trade surplus of course on the other side. Now the countries with the trade surplus, what they find, let’s take Japan in the 80s is an example, it was really the first country to experience the massive trade surpluses. So Japanese manufacturers would sell their goods in the United States, Honda’s etc., and be paid in dollars. They would take those dollars back to Japan and that was foreign wealth that was exogenously the Japanese economy. That foreign wealth would go into the Japanese banking system and cause rapid deposit growth in Japan so that banks in Japan with so many deposits but encourage them to have rapid loan growth. From the very rapid loan growth in in Japan fueled very rapid economic growth. And this went on for so long in Japan that Japan was blown into enormous economic bubble as a result of the foreign capital entering the Japanese economy. So by the end of the 1980s they say the gardens around the Imperial Palace in Tokyo were worth more than California. It had been blown into such an enormous bubble and the stocks were all trading on 100 times p/e multiples, people had to have three generation mortgages just to be able to afford to buy a tiny flat, ninety year mortgages. So Japan was blown into an extraordinarily large bubble. So what we’ve seen again and again is the countries that have large trade surpluses, those countries are blown into economic bubbles. That’s what I witnessed firsthand in Thailand from 1990. I lived in Thailand from 1990 until 1996 and at first it truly was an economic miracle. But pretty soon so much capital was flooding into Thailand and going into the banking system. The banks were lending it out but there was such an extraordinary boom, buildings were popping up, skyscrapers were popping up like mushrooms everywhere you looked and that was just the most visible sign of what was happening. I was managing a large research department there and we were doing research on all the listed companies. So we could see that all the industries were expanding their capacity very dramatically. Steel companies, cement companies, every industry quadrupled its capacity and quadrupled it again, but at the end there was simply not enough purchasing power in Thailand to absorb all of the condominiums that have been built. And so and to absorb all the excess capacity that had been created…
Buck: And then now obviously it sounds a lot like what’s going on with China now.
Buck: Now tell us, I mean it was a great explanation on the sort of the surplus end, but us as the givers, as the buyers of all of these exports, how did that affect us and I’m still trying to break down something that’s probably very obvious for an economist, how a trade deficit actually affects both sides.
Richard: Right. So yes it had very important consequences, numerous consequences for the United States for instance. So as the US began buying more and more goods made with extremely low cost labor, the cost of manufactured goods fell in the United States. So there was disinflation, it’s downward pressure on prices and as the inflation rate fell from double digits in the 70s down to basically zero a few years ago, then interest rates also fell. And as interest rates fell then credit became more affordable. And the Americans began borrowing a great deal more. So credit as a percentage of GDP in the US increased from 150 percent in around 1980, up to three hundred and seventy percent by 2007. So and so I dragged down interest rates, it fueled a credit boom, and also as the interest rates fell, it also fueled an asset price boom. The stock market rose, property prices rose, now at the same time it hollowed out US manufacturing. Manufacturing as a percentage of GDP became very much smaller. And so many of the people who had been employed in the manufacturing sector lost their jobs and wages have been stagnant for a very significant part of the population now since the 70s. Now there’s one of the way in which it affected the United States. Every country’s balance of payments has to balance. So what that means, it’s like a family. If the family spends more money than it earns, then it has to either sell something or it has to borrow the money. And it’s the same with the country. So when the US has an 800 billion dollar trade deficit as it did in 2006, it has to borrow 800 billion dollars from the rest of the world or sell goods, or sell assets to the rest of the world. So that means that if there’s an 800 billion dollar trade deficit, there will be 800 billion dollars of capital inflow into the country. Now so the bigger the US trade deficit becomes the more capital from abroad flows into the United States and the capital that is still flowing into the United States that is invested in things like US government bonds and that pushes up the US government bond prices and that pushes down interest rates. And so back in 2004, in 2005, the Fed was concerned the US economy was overheating and it started increasing the federal funds rate. It increased it from I think one percent to five and a quarter percent over I think an 18-month period. But in other words the Fed was tightening very rapidly, but the 10-year bond yield didn’t move higher, it didn’t budge. And so the Fed was not able to cool down the economy because the interest rates that mattered the 10-year bond yields and the mortgage rates they weren’t responding to the Fed rate hikes. And Mr. Greenspan was asked by a senator, why is that Mr. Greenspan, you’ve been hiking the federal funds rate again and again but the 10-year bond yield isn’t going up. Why? And Greenspan said I don’t know, it’s a conundrum. But I think he must have known that the explanation was before in central bank’s foreign countries were pumping so much money into the United States in buying US government bonds that it pushed up bond prices and it held down the bond yields despite what the Fed was doing and therefore it caused the Fed to lose control over interest rates and therefore over the economy. And the Fed was unable to cool down the economy and consequently the US economy was blown into the bubble that blew up in 2008.
Buck: Just as a just as a quick clarification I think just for listeners, the ten-year is basically reflective of inflation right? So presumably if increasing the feds fund rate was not having an effect on the tenure then that’s what you’re saying is that basically you were unable to slow down the economy because you’re unable to slow down inflation?
Richard: Well no they wanted to slow down the economy. The Fed wanted to push frame it higher. The higher interest rates it would then result in businesses being less profitable.
Buck: Oh no I get that part, but I’m saying with the tenure that you’re talking about, the the tenure Treasury, you are saying that it was not being affected by the increase in the feds fund rate, right?
Richard: Right simply because the supply and demand for tenure government bonds, one country buying so many government bonds that it was driving up their price and driving down their yield. And the Fed just simply lost control over the interest rate structure because of foreign buying. Now it’s also interesting to point out here where the foreigners were getting the money that they used to buy the US government bonds. So let me step back again. This time let’s use China as an example. China now has the largest trade surplus with the United States, it’s more than 1 billion dollars a day. So this is how it works: Chinese manufacturers sell their goods in the United States, they get paid in dollars, they take these dollars back to China, and they want to convert the dollars into the Chinese currency, the RMB. If they were allowed to do this in a free market, if those Chinese exporters converted all of those dollars into RMB, it would push up the Chinese currency to a very high level, and that would make China’s exports no longer competitive. So to prevent that from happening, China’s central bank, the People’s Bank of China the PBOC, they intervene and they buy all of the dollars coming into China at more or less a fixed exchange rate. So whoever brings the dollars in, they get to convert their money into RMB and do anything they want with it. But sooner or later it goes on deposit causes rapid deposit growth rapid loan growth and the economic boom. But the point of this story is the central bank. Where did China’s central bank get enough money to buy all of these dollars coming in to China? Well the answer is they are a central bank, they have a magic wand. They can wave it around and create money out of thin air. So China ended up creating the equivalent of 4 trillion dollars of Chinese RMB in US dollars and they use that to buy 4 trillion dollars to hold down the value of their currency, in spite of market forces that would have driven the value of their currency very, very much higher. So it was paper money creation by the People’s Bank of China that’s where they got the money to buy the dollars and once they owned the dollars they needed to invest those dollars somewhere in order to earn income on them. And so they bought normally typically US government bonds or bonds issued and guaranteed by Fannie Mae and Freddie Mac. And they bought them on such a large scale that they pushed up the price of these bonds and drove interest rates down to a very low level, and this fueled this, you could say this foreign money creation, ended up fueling the economic bubble in the United States.
Buck: And so, where are we in terms of, obviously now we’ve got asset bubbles everywhere globally. What next? I mean, we we’ve been talking about this on this show, we’ve been talking, you hear it on other shows and there’s a lot of generalized doom and gloom about this thing’s gonna bust and zombie apocalypse. But they say that almost a little bit tongue-in-cheek, but it’s sort of like you almost get kind of tired listening to people talking about what’s next and this thing’s gonna blow and it’s gonna be ugly. Is that is that your take? And if it is, it’s okay. I’m curious sort of on what your take is, what’s happening right now, particularly we live in times that are a little bit unusual. I had a guy on from ITR economics Alan Beaulieu, they do a lot of predicting since the 50s, they’ve been getting things right with uncanny type of accuracy. and I asked him about Trump administration and tariffs and all this stuff and he said, you know we haven’t figured out exactly how to factor in the Trump factor into our algorithms because it’s kind of hard, we sort of live in a fairly unprecedented political times as well. Sort of on the precipice of either trade wars or at least the threat, maybe it’s just, some people say it’s just negotiation tactics whatever, interest rates continuing to climb, although it looks like Chairman Powell might have been spooked a little bit and put down on that as well. Where are we and where do you see us headed over the next 12 months or so?
Richard: alright well there is certainly cause for concern however I think many of the people who believe that there is no way out are trapped in an old way of thinking and need to look at the world as it is today and come up with solutions that are available to us today that weren’t necessarily available to us ever before. So let me begin with the concerns. So yes there are asset price bubbles and the most crucial factor that will determine what’s going to happen to the economy in the years immediately ahead, but a factor is interest rates. Which way will interest rates go. So if we look back to the early 1980s the interest rates on 10-year government bonds were 15% well they came down and down because globalization pushed down inflation and interest rates and as I mentioned earlier as the interest rates fell, the Americans borrowed more and more. So credit growth expanded in an extraordinary pace. It increased from 150 percent of GDP up to three hundred and seventy percent of GDP and the credit growth drove the economic growth. Anytime, going back to 1950, anytime that credit in the United States grew by less than 2% adjusted for inflation, then the US went into recession. So let me repeat that. If credit grows by less than 2% in the US total credit, and by that I mean government debt, household sector debt, corporate debt, financial sector debt, all the debt and total debt is equal to total credit. If it grows by less than 2% adjusted for inflation, that happened nine times between 1950 and 2009. Every time it happened the US went into recession. So now the danger is if interest rates move higher, then credit is going to contract. And if credit contracts that’s going to throw the US into severe recession. Next, also as Rates moved down then asset price has moved much higher so if stocks moved higher and property moved higher, now household sector net worth in the United States, in other words all the assets of the Americans minus all of the liabilities, is now skyrocketed to 107 trillion dollars that’s more than 50% above where it was in 2007 before the crisis. And so if you compare this wealth to disposable personal income, if you take household sector net worth as a percent of disposable personal income, I call this the wealth to income ratio, then it’s far more stretched than it has ever been before. The average since 1954 this wealth income ratio was 540 percent. In 2000 with the Nasdaq bubble it hit 614 percent and then it popped and went back to the average. In 2007 it went to six hundred and sixty percent and then it popped and went back to the average. Now it’s six hundred and ninety percent it has never been higher. And so that’s telling us that asset prices are very stretched relative to income. That’s possible because low interest rates and quantitative easing pushed up the asset prices. So if now, if interest rates move higher, and it’s very likely there’s going to cause the asset prices to crash and this wealth to income ratio moved back down to its average, and if that would occur, that would literally destroy tens of trillions of US dollars of wealth. So there is certainly cause for concern. There are lots of reasons to worry that a US interest rates will move higher. First of all the US government is borrowing much more now than it was before. The budget deficit’s becoming much larger because of the tax cuts and the increased government spending that Congress passed about a year ago, it’s making the budget deficit higher, the debts is likely to be more than a trillion dollars this year, which is startling given the economy’s strong. And next trade war is a very real concern. President Trump when he was running for office promised to put 45% trade tariffs on all Chinese goods, and so far he’s already started to do that. Well if the administration puts large trade tariffs on Chinese goods, then that’s going to make products sold in Walmart considerably more expensive. And that will cause the inflation rate to go up. And if the inflation rate goes up, then interest rates will go up. No one will lend you money for 3% if the inflation rate is 5%. They might lend you money for seven or eight percent. So higher so there again there’s a danger that US interest rates will rise. And finally, one of President Trump’s main goals is to bring down the US trade deficit. Well as I mentioned earlier, the balance of payments has to balance. The larger the trade deficit is, and more capital flows into the United States. That means if the trade deficit shrinks, then the capital inflows into the United States will also shrink. If there are fewer capital inflows buying US government bonds, then that’s also going to put upward pressure on interest rates. So there are a number of reasons to worry that interest rates will rise, and if that occurs, then credits likely to contract and asset prices are likely to crash in the US is likely to spiral into a very severe recession. So people are right to be worried, but they’re not right to wring their hands and say we’re doomed and we might as well just crawl into a cave and wait for the inevitable doom to descend upon us. We need to look at the world as it is today and find solutions to our current problems.
Buck: What are those solutions? What are some of the solutions? Because when you described everything that’s going on, the thing that strikes me is there’s obviously a web here that is very difficult to untangle and trying to, can it, with rates going up well they kind of have to go up after a while, right? And you can’t have near zero interest rates forever, that’s going to continue to increase asset prices if they stay there, you don’t want that to encourage overall inflation over time, so you’re gonna have to raise rates, but on the other hand if you’re raising rates, you’re gonna hurt the economy and we’ve already got asset bubbles that are ready to pop and if we don’t pop them now they’ll just grow and we’re kicking the can down the road a little bit further for even larger asset bubbles, is that a fair assessment or am I seeing something wrong there?
Richard: So I think that would be a fair assessment and if we were living in the 1960s when the US government spent too much money, it tended to over stimulate the economy, for example under Lyndon Johnson and President Nixon, the Vietnam War and the social welfare spending that over stimulated the US economy and at that time we had a closed domestic economy. We didn’t have a trade deficit. And so we very quickly reached full employment and full industrial capacity utilization and afterwards that led to rapidly increasing wages and prices and to rapidly increasing inflation and that’s the way the world used to work but we’re not living in that world anymore. In the world where we live, we have a global economy and we are not confined to a closed domestic US economy where they work with a population of 300 million people. We have a global economy with nearly 8 billion people and 2 billion of those people live on less than three dollars a day. So what this means is that it is possible for the US government to spend more, to have larger budget deficits without over stimulating the US economy and leading to an inflationary spike similar to what we saw in the 1960s and 70s and furthermore because a globalization is so deflationary, what we also now have witnessed over the last 10 years is that not only is it possible for the government of the US to borrow much more money, it is also possible for the central bank to create literally trillions of dollars to help finance that budget deficit. So what we’ve seen over the last 10 years is the US government debt has increased by 11 trillion dollars. I think that’s an increase of 175 percent and of that 11 trillion dollars, the Fed has financed nearly a third of it by creating money from thin air. Now in the past it was not possible for central banks to create money. Traditional economics, it’s very well understood the greatest taboo for a central bank is to print money, very much money, because it always leads to higher rates of inflation, and even hyperinflation. But that hasn’t occurred this time. The Fed has been printing enormous amounts of money and so has the European Central Bank, the Bank of England, and the Bank of Japan, and no where have we seen even moderately high levels of consumer price inflation. So we are now living in a different world. In our global world, the lessons of the last 10 years are that it is possible for the government to have much larger budget deficits and to finance a significant amount of those deficits with paper money creation without causing high rates of inflation. So what is the lesson we should learn from this? I think what we should learn from this is truly a unique moment in history. This combination of globalization with paper money creation by central banks, this combination has never occurred before. And the paper money creation should be inflationary, but the globalization is extremely deflationary, and the two forces are completely offsetting one another. And this means that it would be possible for our government to borrow literally trillions of dollars over the next decade and invest that money in new industries and new technologies and completely restructure the US economy. The US over the next ten years could invest a trillion dollars in, let’s say genetic engineering, a trillion dollars in biotech, a trillion dollars in nanotech, and a trillion dollars in green energy, and induce thereby a technological revolution that would allow us to grow our way out of the predicament we’re in at the moment and also retrain the workforce and the younger generation and as a by-product create technological miracles and medical marvels that would extend life expectancy and solve much of our social security and medicare problem.
Buck: Sounds like a new deal, kind of.
Richard: A new deal for the new age perhaps. The new age where globalization has changed the parameters in which our economy works. You can think of it like this: in many ways most economists and particularly Austrian economists I would say, they think of us as being a fish and a glass fishbowl. We have certain parameters within which we can operate, but they don’t realize that the fishbowl has been dropped into a very large lake and now all the fish has to do is swim out the top and it has much wider scope than it ever had before. What this means is that we can, at the government, level borrow and invest much more aggressively than we ever had before. And now the alternative seems to be given that people are not considering this option, all back option now it looks like is going to be protectionism. We’re going to put up trade barriers, we’re going to crash globalization, and if we do, then that’s going to cause interest rates to spike in the US. Of course if we put up 25% trade tariffs on Chinese goods, China’s economy is probably going to implode, but it’s also going to cause a very high rates of inflation and much higher interest rates in the US, which will throw the US into severe recession. And between China and the US being in extreme recessions that’s going to crash the world economy. So rather than having trade wars, there’s an alternative. If the President Trump is concerned that China is overtaking the United States economically because China has policies like made in China 2025, well the solution is not to crash the global economy in trying to bring down China, the solution is for the United States to invest as well in new industries and technologies. We need a Invest in America 2025. We can dominate 2025 and 2035 and 2075. We can invest on such a scale that it would result in truly miracles. We could solve, we could cure many of the diseases. We could extend life expectancy. So this is a once in history opportunity, if we just take advantage of this new environment we are living in where it is possible for the government to borrow and deficit spend without causing inflation and where it’s possible for the central bank to finance much of the borrowing paper money creation without causing inflation. But that’s only possible so long as globalization persist and continues to be deflationary.
Buck: Do you think that there’s political will or that kind of program in the US? I mean certainly cannot see that necessarily and in this administration.
Richard: Well after your listeners absorb this interview, I’m sure there will be political will on the country to bring about such an obvious solution with such tremendous benefits to not only our country but the entire world.
Buck: Well I think one of the the challenges with what you’re talking about is it’s a little bit counterintuitive. The the so-called fiscal conservatives who were no longer conservative fiscally are not really thinking in terms of, You know they they used to be concerned about the debt. They’re not really concerned about the debt now but then the spending is really not something they they want to do in terms of infrastructure, right? They’d rather just do tax cuts, which benefit people like me, but don’t really seem to necessarily do much for the for the country. And so I wonder how much political will there really is to do what you’re talking about?
Richard: I think that the trick here is to persuade those people, the wealthiest classes in the United States, that they would become enormously wealthy as a result of the programs I’m proposing. These sort of investments programs would generate so much wealth for the wealthiest that it would be much more beneficial to them than mere tax cuts. Furthermore, they might discover that a large US investment in genetic engineering and biotech could come up with a cure for cancer and extend their life expectancy by decades, for instance, and Alzheimer’s. So the trick is this could benefit all segments of the American public and the world in general. It would make the global economy grow, it would make everyone much more prosperous. People at the working level, working-class level, the middle class and the wealthiest but as always of course the wealthiest would benefit most. Now this could be done in two different ways. I suppose the least popular way, the people don’t like is the idea of just the government investing directly in these programs. In the sixties President Kennedy, early 1960s, said we’re going to send a man to the moon. And the government invested very aggressively. It was more or less done all, NASA was done more or less you could say under one big roof that the government managed everything. Okay so that worked out pretty well. We sent a man to the moon, what was it ’68, ’69, and private sector still hasn’t sent a man to the moon. Well out of that program, it not only strengthened the US economy during the 60s, but it generated extraordinary technologies, perhaps the most important of which was it radically enhanced the United States intercontinental ballistic missiles which ultimately helped bankrupt the Soviet Union. But on a smaller scale, created things like handheld calculators. Well so that’s one way these investment programs could be carried out under one big roof with the government doing it all. People don’t like that idea so here’s another way: the government could act as a giant venture capital company. So the government sales government bonds, the Fed finances some of these bonds with paper money creation, and then the government chooses, the let’s say the ten thousand most promising American entrepreneurs and Starts subjoined venture capital company, sets up joint venture companies with them in which let’s say the government keeps a 60% stake, the entrepreneurs who manage the company keep a 40% stake. The government funds these joint venture companies lavishly and the managers manage the companies and when one of them comes up with a vaccine that prevents cancer, you’re listed on NASDAQ for ten trillion dollars with the taxpayers keeping 60% and we pay down the national debt and we drive the global economy and everyone is better off.
Buck: Are you hearing anybody talking about this in the government?
Richard: Not yet. But I hope that they will see the consequences of the alternative, the trade war. It seems to me that President Trump blinked in his dinner with Beijing a few days ago. I don’t think Beijing gave him anything they had not offered before, but he was afraid to go ahead and put up trade tariffs perhaps on the first of January to 25% because this is going to obviously do not only damage to China’s economy but to the US economy with the US stock market. And it’s not at all certain that if he goes ahead with these trade war policies that he will be reelected. He would like to be re-elected of course and he’s beginning to see that it’s not going to be easy for him to be re-elected if he goes ahead with the trade war. So there’s a much better alternative.
Buck: Tough to play chicken with the Chinese, right?
Richard: Well that’s right. But I mean the Chinese would lose more than America I think.
Buck: But I know they know very well that that’s probably not something that we would actually self-inflict.
Richard: So it would be a much better idea for President Trump to do what he said he would do the night that he was elected president. I watched, but the night he was elected, he made a speech he said we are going to invest in infrastructure. We are going to have airports and highways and bridges, second to none in the entire world. Well that was a very good idea. And we should also have government investment in all the major technologies that are going to drive the world forward this century. So let’s do that. That’s where you can make your “make American economy great again” come true. That’s the way to do it. You’ve discussed it, so now deliver. Let’s have investment in the US. I mean after all, President Reagan is a hero to many of the the conservative side. What did he do? He invested, on a very large scale, in the US military. And as a result, today we still Have the greatest military in the world. So he believed in investment, government investment. Now we just need more government investment in the industries of the future. And we can afford this because we can now do this without creating inflation. It is a once in history opportunity we need to make the most of it. We don’t have to crawl into a cave and wait for doom to descend on us. If you’re worried about Medicare going bankrupt and Social Security going bankrupt 30 years from now, let’s not just sit back and wait for that to happen. Let’s invest and let’s cure all the diseases.
Buck: Richard this has been really good stuff. Now tell us a little bit about Macrowatch. What’s the newsletter? What does it focus on? Who’s it available to, etc.
Richard: Okay thank you. So Macrowatch is a video newsletter that I publish. Once every two weeks or so, I upload a new video onto the website. It’s essentially me making a PowerPoint presentation, each one is generally 20 minutes long and has 30 or 40 downloadable charts. Now Macrowatch, I believe as you can tell from our conversation, I believe that credit growth drives economic growth. And I also believe that liquidity, in other words the amount of money sloshing around in the economy, that determines which way asset prices move up or down. And the government attempts to control both credit growth and liquidity, so it’s important to focus on government policy. Now for instance the government is reversing quantitative easing. That’s one of the reasons its quantitative tightening out there destroying fifty billion dollars a month, that’s one of the main reasons the stock market is now struggling. So Macrowatch looks at the most important forces driving a global economy, not only in the US but China and all the other large economies. And your listeners if they will, they can check out Macrowatch by visiting my website at RichardDuncanEconomics.com. And I’d like to offer them a 50% subscription discount if they will click on the subscribe button, they will then use the discount coupon code Formula, they can subscribe to Macrowatch at a 50% discount. So that’s RichardDuncanEconomics.com and the discount discount code is Formula.
Buck: One thing I wanted to point out too for those people who are listening to this thinking well Richard might be a little bit too smart for me, and you actually have a bunch of videos that you use as sort of a core curriculum to kind of get people caught up.
Richard: Yes that’s right. So there when someone subscribes to Macrowatch they have immediate access to the archives. The archives now have nearly 50 hours of videos. Subscribers can begin watching immediately. And included there, there are two courses that I made at the beginning. One is called Capitalism in Crisis and the other is called How the Economy Really Works and that provides a foundation for understanding everything that I discuss afterwards. But really I think I make things very clear. Great thing about having a video newsletter is you can include lots and lots of charts. And charts make all my points I think very easy to understand.
Buck: again that’s RichardDuncanEconomics.com and the discount code is Formula. And I’m definitely going to subscribe myself, Richard, so I’m eager to start following you. This is stuff I think that we all need to understand better. It’s hard as investors to kind of predict the future without having some sort of sense of what’s going on in the world around us and so I think the most sophisticated investors, the people who really, really do well and can kind of get a sense of where the economy is going, I really need to have some sense of macroeconomics and I think your newsletter would provide a very good place for me and for others in this group, so thanks again for being on the show.
Richard: Thank you Buck, I’ve enjoyed it.
Buck: We’ll be right back.