219: Macrowatch with Richard Duncan!
Buck: Welcome back to the show everyone today my guest, well he’s become sort of a regular somewhat regular on the show as well as some other shows in the podcast arena like Robert Kiyosaki’s Rich Dad radio. He also has a video newsletter which I have become a big fan of called Macro Watch and I really do like his approach to macroeconomics and so please welcome back, Richard Duncan Richard. Thanks for joining us back from Thailand, right?
Richard: Right Buck, thank you. Thank you for having me back.
Buck: Yeah how are things over there right now, I mean is there much disease, Covid 19 etc going on and we’re in your neck of the woods?
Richard: So in Thailand there have not been any new locally transmitted cases for something like thirty five days now. The total number of cases is reported to be something like 3,200 in total and the number of deaths is less than 55.
Buck: Yeah it’s interesting because you know one of the things we thought preview before when I talk to you is maybe you had something to do with the weather but obviously we’ve got this big big spike here in the US and it’s coming in the summer months so that’s probably not the reason you know but but whatever the case is they’re doing something right there and we’re doing something not as right.
Richard: Well one thing that the Asians have all done right from the beginning is they’ve all been wearing masks quite religiously and so yes I’ve been too optimistic that the virus would die out when the summer came to the northern hemisphere sadly yeah so I can’t explain why there have been so few cases in Thailand other than the possibility that is due to a combination I think the sunny weather certainly doesn’t hurt and the humidity that the mask must perhaps also plays a very important role in reducing the number of cases.
Buck: Didn’t they also have some kind of mass vaccination for the MMR or mumps measles rubella at some point?
Richard: You may be right about that but that’s not something I’ve ever heard of, I’m not aware of anything like that
Buck: There was some Asian country that had this mass adult vaccination which we don’t usually do in the US and there have been some reports of protection from that. At any rate listen welcome back. You’ve been again Richard you’ve been kind enough to update us on this crazy Covid economy that we’ve had and every time we talk it’s like we haven’t talked in three years because the changes that ensue in the interim so you know at the macro level what’s the latest and you know how bad is it?
Richard: So you’re right we the last time we spoke it was four months ago at the beginning of March and I just listened to that interview again a couple of hours ago and boy has the world changed since then. Luckily the policy response out of the US government has been remarkably aggressive and that is limiting the damage that the virus is doing to the economy and of course to society. So let’s review. As of today I think a hundred and thirty thousand Americans have died from the virus and so when this started exploding it really was right around the time in the US it really was right around the time that we spoke in early March. Well since then the stock market fell very sharply and the government responded extremely aggressively. On March 15th I published a macro a watch video called recession or depression and I argued then that not the US went into only a recession or a new Great Depression would depend entirely on the speed and the magnitude of the government’s policy response in terms of fiscal and monetary stimulus. So fortunately the government has responded very aggressively the government has passed rescue bills amounting to something like three trillion dollars and consequently largely due to that the government dead this year year today has increased by three trillion dollars and the Fed has created roughly the same amount of money on something 2.8 trillion dollars so far today and so this combination of very aggressive fiscal and monetary stimulus is the reason that we still have an economy that it all resembles the economy we had last year and before.
Buck: Well what I gonna ask you though that it really isn’t reflecting the economy we had and maybe the stock market reflects it right but underlying this there’s a lot of I mean ugly numbers isn’t that fair?
Richard: Yes I mean the second quarter is certainly going to be a disaster and a third quarter is increasingly looking tough as well but let’s think about what would have occurred without this. The government has been sending people who are unemployed an extra what is it six hundred dollars a week and on top of that they sent out the checks for $1,200 and in addition small and medium sized businesses are being able to borrow money from the government as well as large corporations. And so without that support tens of millions of Americans would have defaulted on their mortgages, their rent, their credit cards, their car payments and and the probably the majority of the small and medium-sized businesses would have failed and that goes for the large corporations as well at this point. And so that means that all of the banks in the United States would have already collapsed by now because you know in the rosiest possible scenario the banks have capital in theory of 10%. Well that means that if they if 10% of their loans default they lose all of their capital and you know this is being very optimistic about their true capital levels, so we’re talking about mass defaults on a scale that we would you know 40 50 60 % defaults they would have been bankrupted multiple times therefore destroying all the savings and all those deposits and entirely destroying our economy.
Buck: No doubt but I guess the question I have is related to the idea that you know we have a phenomena which I think is really unusual you know there’s always been some discord in this in recent years but probably more now than ever where you have businesses okay they’re surviving but they’re certainly not thriving and if you look at the equity markets what you’re seeing is okay well for a while we had when it was almost looking like a bull market again it slowed down a little bit but it certainly has not corrected to the point that might reflect you know some of the realities in the economy and presumably that’s just a function of the Fed’s monetary policy. Can you explain sort of what’s going on there and you know and what some of the net effects of that might be?
Richard: Yes so a little history. In the first 93 years of the Fed’s existence between 1914 and 2007 on the eve of the crisis in 2008, in those 93 years the Fed created in total something around 900 billion dollars. Now just since this crisis started in the last well this year today the Fed has created 2.8 trillion dollars. So in a year today they’ve created three times as much money as they did during the first 93 years of their existence. And that has resulted since they started QE four in October last year, the feds total assets have expanded by 90 percent since the 1st of October. So that gives you some idea of the scale at which the Fed is creating money and pumping it into the economy helping to finance the government’s gigantic budget deficits which support the stimulus payments. So this money that’s being pumped into the economy the new money being pumped into the economy by the Fed that is the reason the stock prices rebound the stock market hit a low on March 23rd that’s the day when the Fed rolled out what some people call QE infinity when they started printing creating limitless amounts of money. Over the next week that last week of March the Fed created something like five hundred and seventy billion dollars in that one week. Now again to put that into perspective by comparing it with the total amount that they created in the first 93 years of 900 billion, 900 billion versus 570 billion in a week. So the Fed has responded just with tremendous firepower backing up the government’s fiscal stimulus programs and rescued programs and that’s the reason you know sooner or later we will recover from this virus, the virus will burn out one way or the other either we get a vaccine or if else everyone will get it sooner or later and we’ll have heard immunity and at that point when we come through this on the other end whenever that is 18 months from now two years from now whenever, whether or not we have an economy left is going to depend on how much the government continues to support the economy in the meantime. Once we’re through this then there’s no reason we can’t return to the same sort of economy we had before. Whereas if they don’t continue to support the economy on such an extraordinary scale than the economy that we have on the other side of this virus will look nothing at all like it did when we went into this crisis.
Buck: It certainly seems like we’re going to continue down the route that we are at on both sides of the aisle politically it seems like there’s certainly the will for that. So getting back into this idea of printing money though one thing I want to ask you and I think a lot of people you know who are not economists wonder, you know conventional wisdom is that if we print a lot of money that the net result should be inflation, yet we didn’t really see that much in 2008 despite you know multiple rounds of QE and I always wondered why that was the case and I heard you on another interview pointing out why printing money doesn’t necessarily result in inflation in the US but you described a paradigm where we essentially export our inflation to other countries because of our trade deficit. Can you explain that a little bit cuz I think that’s a really important concept that sometimes I don’t think most non economists really think about.
Richard: Right well conventional wisdom grows out of economic orthodoxy that developed in the 19th century and during most of the 20th century. But that orthodoxy is no longer appropriate for the world that we live in today because that orthodoxy was built around the premise first of all that gold was money and that the Fed couldn’t create money unless it had gold to back up the money that it created now this created a set of circumstances that are no longer in existence for instance under those circumstances where money had to be backed by gold countries had to have balanced trade they couldn’t have very large trade deficits because if a country had a large trade deficit it would have to pay for that deficit by sending its gold to the country they had the deficit with and so that would mean that the money in the country would contract the money supply would shrink and that would throw the economy into a severe recession people would lose their jobs and they’d stop buying so much. And so it was just impossible for countries to have very large trade deficits. But once the Bretton Woods system broke down in 1971 and even before that the United States has stopped backing dollars with gold entirely in 1968 the Fed was no longer required to hold any gold to back the dollars that it issued. And so afterwards at first if the US was a little bit slow to catch on but starting in the 1980s the United States discovered that it could run huge trade deficits with other countries and it didn’t have to pay it with gold anymore it could just pay by creating money and printing or creating selling Treasury bonds so in other words this time when the US had a big trade deficit with Japan or Germany, it didn’t send them gold it just sent them dollars and since those countries accumulated dollars they had to do something with the dollars. And what they did with them was typically buy Treasury bonds. So by the mid-1980s the US trade deficit was three and a half percent of GDP this was entirely unprecedented in history and it corrected after the Plaza Accord the the dollar was devalued by 50 percent against the Yen and the Mark and the trade deficit did correct back to practically nothing in 1990 but then China entered the global economy and by 2006 the trade deficit had grown to six percent of GDP that was eight hundred billion dollars in that one year alone in 2006. Sso this changed everything. In the past when trade balance that meant that the United States economy and the other countries in the world they had relatively closed domestic economies that generally worked fairly close to full capacity so for instance if a government had large budget deficits and the Fed created a lot of money that would tend to over stimulate the US economy and pretty soon everyone would have a job and also all of the factories would be working at full industrial capacity. And so with the extra government stimulus that would lead to upward pressure on wages since we had full employment already and also it would lead to inflation because the factory simply couldn’t produce enough goods to satisfy all the demand that was being created by the government stimulus. And so that led to high rates of inflation such as we saw in the early 1970s and throughout the 1970s. But once the US started running these enormous trade deficits with the rest of the world we circumvented those domestic bottlenecks. We no longer had to rely just on the US workforce or US industrial capacity. Suddenly we could buy from everywhere in the world and we very quickly learned that we could buy things in countries where the workers made five or seven dollars a day instead of two hundred dollars a day in Michigan including benefits. So globalization has been extremely deflationary and by allowing us to have to produce within a global economy and the global population is approaching eight billion people and out of those eight billion, two billion of them live on less than three dollars a day. They would probably count themselves lucky to get a job paying ten dollars a day. This supply of labor is practically infinite. These low-cost labor will be around for generations. And so this is putting this is the reason US wages haven’t gone up for decades and this is the reason why the Fed and the first of all while the government has been able to run trillion-dollar budget deficits and the feds been able to finance them with creating trillions of dollars without causing any inflation at the consumer price level.
Buck: Globalization essentially allows us to export our inflation.
Richard: Well I wouldn’t say export the inflation. I would just say it’s like think of our economy as a fish, a fish bowl. We’re a fish in a fish bowl our economy is a fishbowl our fish bowl has been dropped into the ocean we’re no longer constrained by the walls and the boundaries that once contained us, we now have a vast global economy where we can make goods and hire workers who are on for less than $10 a day. So we’re not so much sending other countries our inflation as we’re just buying from them and importing deflation.
Buck: The other interesting aspect of that in my view is the global trend toward Deglobalization and the implications of that.
Richard: True. So right now we have been able to for example compare 1930 and the depression of the 1930s with 2008 and what happened afterwards, in the early 1930s dollars had to be backed by gold and everyone believed in economic orthodoxy and that balanced budgets and that sort of thing. So the government really didn’t do very much and the economy and all the credit that had been created during the roaring 20s, people began to default on that and they were just stuck, the banks failed, a third of the banks failed destroying people’s deposits and life savings, the economy went into a depression, it never recovered from that depression through any sort of natural market forces. It only recovered when the government undertook incredibly large budget deficits to finance and fight World War II. During the four years of World War two the US government debt expanded five times and the Fed’s holdings of US government securities expanded eleven times. So that ended the depression, not any sort of return to market forces or lays a fair now compare that with what happened in 2008. We had an enormous credit bubble it started to pop the private sector couldn’t repay their debt they started defaulting but this time rather than allowing them all to default and allowing all the banks to fail the government jumped in with trillion dollar budget deficits and the Fed was free to create as much money as it wanted and finance those deficits by buying government bonds and therefore keeping the interest rates at extremely low levels and consequently we didn’t collapse into a Great Depression we had a 12 year expansion of the economy that was the longest in history and that brings us up to the present. Now suddenly we’ve been hit by the coronavirus crisis and they are following a 2008 playbook, but even more aggressively as I mentioned three trillion dollars of new government debt so far this year and almost that much money created by the Fed so far this year.
Buck: And then multiple rounds of QE and then now I guess some discussion about this concept of yield curb control right.
Richard: But first you were asking about the rollback of globalization knob, that’s the real risk because it worked in 2008 all this money creation and fiscal stimulus because it didn’t cause any inflation because we had globalization. But now, globalization is a risk. Even before the crisis started we had the trade war going with China which was quite serious even before the crisis and looking ahead it’s going to probably become worse now but is globalization going to be rolled back completely probably not. Now even if we do much less business with China going forward it is still a very big world Vietnam has something approaching 90 million people 80 90 million people in Indonesia far more than that. Bangladesh, India there’s still a very large world full of low-wage workers that US companies could tap into in order to continue manufacturing their goods at very low prices. So yes I mean we do need to grow back globalization to some extent this has been a real lesson force in the coronavirus showing that we were the United States was not even capable to produce a sufficient number of surgical mask or ventilators or medicines domestically in the United States leaving us very vulnerable. Just imagine if we were suddenly attacked by some foreign power we may not be able to produce the weapons we need to fight the war. So yes we should do we should really very carefully rethink what is manufactured in the US and what we import from abroad but still at the end of the day we’re still going to have a great extent of globalization. Now if you look at a spectrum of ranged between no change in globalization and the complete end of globalization so taking it from zero to 100% we may roll this back to 90 percent from where we are now or where we were a couple of years ago, but we’re still going to have a big extent of globalization. The less globalization we have the more inflationary we’ll have. If we have inflation then we’re going to be back in the environment we were in the 1960s and 1970s where the government won’t be able to have large budget deficits and the Fed won’t be able to create a great deal of money without causing consumer price inflation and if there’s a lot of consumer price inflation that’s very bad for the economy and for the stock market because when inflation goes up then interest rates will go up as well and if interest rates go up of course it’s bad to the housing market it’s bad for the property market it’s bad for gold because people can put money on deposit in the bank and earn a good return whereas if they hold gold they don’t necessarily they don’t earn any yield on gold so in any case it is going to be a very important question for everyone as to how much globalization is rolled back but I think at the end of the day what we’re going to find is that it’s not going to be rolled back all that much and that all of the money creation that has occurred so far and that is going to continue to occur hopefully over the rest of this year and into next year we may find say 18 months from now that we still don’t have any inflation despite this extraordinary expansion of money creation by Fed and if we find that we still don’t have any inflation even after that then there are very important lessons we need to learn from this whole experience. You can really think of what is occurring now is perhaps the greatest economic experiment in history. Never before certainly not in peacetime has there been such an extraordinary expansion of government debt and the central bank’s balance sheets. Well if we get through this with no inflation then what does that mean? What should we learn from that? Well what it what I think we should learn from that is that we are indeed now living in a very different economic environment that the economic orthodoxy of the past is no longer appropriate for the environment in which we’re living. The economic orthodoxy which taught that budget deficits are bad and central bank money printing is bad will have to be considered it will have to be reconsidered start-finish, in other words I believe what we will probably find out a year and a half from now or two years from now is that we’re not going to have very much inflation yeah and therefore you know if we can so far the government debt is expanded by three trillion as you said the Congress is likely to pass more rescue bills pretty soon and the government debt will probably end up expanding by at least six trillion and maybe ten trillion before this thing is over and the Fed’s balance sheet is likely to expand it could expand almost as much as the government debt. So if we find out that the government can increase its debt by six trillion to ten trillion dollars over a two year period and the Fed finances that with a similar amount of money creation and we still don’t have inflation, then I think the thing we should learn from that is that we are in an environment now that would enable the US government to borrow and invest in new industries and new technologies on a very aggressive scale without and having the Fed pay for that investment, without having to fear inflation giving us the opportunity to induce a new technological revolution that would supercharge the US economy, vastly expand productivity and create technological miracles and medical marvels and secure US national security for generations to come. So what I’d like is the government invest ten trillion dollars over the next ten years in the industries of the future.
Buck: I’ve heard you talk about this often or and before the Covid before this you know this current Covid era that we’re in I always said well gosh that would be interesting but there would never be any political will for that. That I think is is changed I think that that there very well may be especially if there’s a really sluggish recovery from this there could and there’s a you know a different administration that very well seems within the realm of possibility to me.
Richard: Well it’s changing very quickly yes they say there are moves in Washington to advance this sort of agenda now and also Charles Schumer even before this crisis started back in December he had advocated in front of a defense community at a speech in Washington in December, November/December that he said he was going to propose a bill for the United States to invest 100 billion dollars over the next five years in artificial intelligence and genetic engineering and robotics, neurosciences the industries of the future in order to secure our national security against the rising threat of China dominating the future. China has been the first to develop 5g and their government is investing very aggressively in new technologies and new industries. If they win the AI race the way that they have won the 5g race then they control the future. We will be a vulnerable second rate has been power 15 years from now if China gives AI before we do and it’s very possible that they will because they’ve overtaken the United States in their research and development investment last year and if the current rate of growth continues for both countries by the end of this decade they’ll invest 40 percent more in research and development than the United States does by the end of this decade and that one year alone. So our national security is at risk we are going to lose control of our own destiny if we don’t begin investing much more aggressively in the industries of the future. And so the big lesson from this greatest economic experiment and history that we’re living through now may very well be and I hope it is, that we can easily afford to invest ten trillion dollars over the next ten years since we just managed to spend six trillion dollars over a year and a half.
Buck: It’s certainly certainly controversial and a some economists would consider it heresy but it who knows who knows you know we’re in completely unchartered territory now so it’s anything that sticks I think is probably the right team.
Richard: Well it’s certainly heresy for the Austrian economists. I can hear myself an Austrian heretic because I do but you know I do believe that what Ludwig von Mises wrote in 1912 was certainly appropriate for 1912 when dollars were backed by gold. But if you don’t spend too much money and if the central bank’s created too much money it led to high rates of inflation was unsustainable and was damaging. But that’s not the world we live in anymore, it’s no longer appropriate for the age in which we live. The sooner we’re past that orthodoxy the better off we’re all gonna be.
Buck: Let me ask you this though, because this is you know any necessary any leanings when we’re just like listening and learning but isn’t there a sort of a moral hazard to this you know idea that we can print forever and it’s not a big deal and there’s no accountability, I mean if there isn’t there isn’t but it’s hard for me to believe that we can just continue to do that and not have any repercussions.
Richard: Well so I don’t know if we can do this forever you know I’m not saying we can do this forever I’m just saying let’s do it for as long as we can do this. It’s been 12 years since two eight and has the roof, has the sky fallen? Has there been any cataclysm from completely ignoring economic orthodoxy? We haven’t collapsed into the Austrian economic hell that they said was coming because we’re living in a different economic environment now. So if we can do this for another ten years and we can invest ten trillion dollars over the next ten years in new industries and technologies, these investments will completely transform our economy it will supercharge our economy it will mean for instance we could cure all the diseases with that sort of investment. If we cure all the diseases we expand life expectancy if not just by years but perhaps by decades and that resolves all our worries about Social Security and Medicare going bankrupt. And also it will secure our national security well into the future. So this is an opportunity it won’t last forever nothing lasts forever but as long as it lasts we need to grab it, grasp it, make the most of it and not let it slip away.
Buck: Let me ask you one last question on this, which has I’ve been thinking about because so far you know monetary and fiscal policy has has worked to you know to a degree where you know despite the you know this seismic event that we’ve gone through now things have been relatively controlled right and is it possible in your opinion that we kind of just get through this without any significant major tsunami from what’s already happened if we continue to just keep pumping money into the economy? In other words is it to me you know my initial thought on this whole thing has always been I mean there’s just no way we can have a completely soft landing. In your opinion could we have a soft landing?
Richard: Well look at the United States is an extremely rich country and the size of the economy last year before the crisis started was roughly 21 trillion dollars and the government’s debt relative to the size of the economy was something like 110 percent of GDP. So even if the government had to spend 21 trillion dollars keeping our economy intact, that would double the size of the debt relative to the GDP, so then we would have government debt to GDP of something like 220 percent ,that’s less than Japan has now. Japan’s government debt to GDP is 250 percent so yes the government the US can spend as much money as necessary to keep our economy intact and to keep people in their homes and to keep people from falling into hunger and yes there’s I think we’re not going to spend anywhere near 21 trillion dollars, we may end up spending no it could be 10, if it’s 10 well that’s unfortunate but so be it that’s just the price we’ll have to pay because it’s so much better than allowing the economy to implode because if the economy and close the debts the debt is going to explode anyway because if the economy shrinks by 25 or 30 percent or more as it would without the government support then tax revenues would collapse and also the government spending on welfare payments and unemployment insurance would explode. So the deficit would become very much larger in mean way it’s far better to spend the money keeping the economy intact and then when the crisis is passed the tax revenues will resume and the unemployment will fall back to very little hopefully low levels again.
Buck: So yeah bottom line is you think it is possible which is which is interesting and and and as we move further down the down the road here to me that sort of the thing that I would have really not believed but as the government keeps pitching in and the Fed keeps pitching in it seems to be more and more realistic that we could actually come out of this without too much more pain. So Richard I have been watching, I’ve been a big fan of Macro Watch the newsletter. Tell everybody about that again and remind us how we sign up.
Richard: Great thanks Buck. So yes Macro Watch is my video newsletter. I’ve launched macro watch in 2013 so it’s been going quite a long time now and essentially every couple of weeks I upload a new video, it’s basically me doing a PowerPoint presentation on something important happening in the global economy and how this likely to impact the stock prices, bond prices, commodities, currencies commodities, interest rates, financial markets in other words and so I hope your listeners will visit my website which is which is RichardDuncanEconomics.com and take a look. And if they would like to subscribe I’d like to offer them a 50% subscription discount if they hit the subscribe button and when prompted if they input the discount coupon code formula they can subscribe at a 50% discount discount code is formula. And so then they’ll get one new video every couple of weeks and they’ll also have immediate access to the Macro Watch archives where there are more than well more than 50 hours of macro watch videos including four different courses on subjects like monetary policy and how the economy really works and China’s economic crisis and capitalism in crisis. So I hope they’ll check that out and at the very least sign up for my free blog there, RichardDuncanEconomics.com
Buck: And I highly recommend it and and I’ll tell you one of the things Richard I’m talking to Richard about is the fact that you know it’s especially in the investor world, and in the podcast fear we listen to different people and you know their opinions but it sure would be nice to to have a better foundation, to make your own decisions what you’re talking about you know Austrian economics and that sort of thing but you know right now it’s like you listen to a podcast you listen to a speaker and you know all you all you get is their perspective, you don’t really understand necessarily the underlying concepts and you know your ability to agree or disagree with stuff and one of things I really like about Richard’s newsletter is not only the up-to-date stuff but as you mentioned there’s this back content that gives you sort of your crash course in macroeconomics at least you know the functional stuff that we need to listen to an interview like this or to listen to some of the others in the area in the podcast sphere and actually you know make it meaningful rather than somebody just telling you something that you don’t have enough information to think about. So thanks again for Richard I’d really enjoyed that and again I highly recommend that people check out that Macro Watch newsletter.
Richard: Buck, look thanks. So it’s really important that people understand how the economy works now as I was saying earlier. It doesn’t work the way that it used to. The orthodoxy that was appropriate for the age when dollars were backed by gold is completely inappropriate for the world we live in. The economy works completely differently now than we did before and so Macro Watch will teach you how the economy works now and the financial implications of that.
Buck: Richard thanks so much for being on the show again and I would love to have you again in the next, it’s almost like the world is moving right now in dog years so you know well so the next year or something like then I’ll end up being in about three weeks.
Richard: Well hopefully the next time we speak much better at that point.
Buck: Thanks Richard. We’ll be right back.