Richard Duncan, economist, consultant and author of The Dollar Crisis: Causes, Consequences, Cures where he predicted
the global economic disaster of 2008, along with The Corruption of
Capitalism and his newest book, The Money Revolution, joins Robert and Kim
on the Rich Dad Radio Show.
Give us some background on yourself?
“ Well, as you mentioned, I went to Vanderbilt, and when I graduated, I was
so lucky in that I ended up getting to backpack around the world for a
year, and I saw Asia, and I understood Asia was booming economically. This
was early 1984. So, I realized, go east, young man. And after I finished
business school, two years later, I did move back to Hong Kong, and I moved
to Hong Kong and found a job.
And so, I've spent most of my career working in Asia and working for stock
broking companies, fund management companies. I spent a couple of years at
the World Bank in Washington, but one of the big advantages of being in
Asia, I did work in Hong Kong, Singapore, Thailand, Indonesia, Malaysia,
and India. And so, these were all different economies with different
economic cycles going on. And so, it gave me a chance to see a lot of
different economic cycles all at once. And the thing that I realized, first
of all, that, because of globalization, trade with China, and low wage
countries, this was going to be extremely deflationary for the United
States. All the manufacturing jobs were going to move out of the country,
which would be very bad for the American middle class, but I also saw, from
what was happening in Asia, that their economic booms were driven by their
trade surpluses and by the credit explosion that those trade surpluses
permitted. As the trade surplus money went into their banks, their banks
were able to lend many times more than that, creating great credit booms
that eventually turned into great credit bubbles that eventually all blew
up in 1997. And then, all the pieces came together, and it's became pretty
clear that the same thing was going to happen in the U.S.”
Let's say a U.S. dollar enters a Japanese bank or a China bank or Hong Kong
bank, that dollar booms. They have to lend it out again. Right, Richard?
“That’s right. The money goes into their banks, and those banks are able to
lend it out not just once, but multiple times. That created extraordinary
credit bubbles, Japan being the greatest example of all.”
Richard, a dollar expands when it goes back into their banking system?
“That's right, through fractional reserve banking, exactly as you said, and
all of these Asian countries, normally, under normal circumstances,
laissez-faire, all of the money going into these countries would've pushed
up the value of their currency. As their exporters change their dollars
into yen, for instance, that should have pushed up the yen, but they didn't
want their currencies to appreciate because that would've killed their
export-led growth. So, their central banks created trillions of dollars and
bought all of those dollars with this newly-created money of theirs. And
once the central banks bought those dollars, their central banks invested
them in U.S. government bonds or Fannie Mae bonds or corporate bonds or
stocks. And all of that paper money that these other central banks were
creating, trillions of dollars, came back into the U.S. and blew the U.S.
into a big bubble, and that bubble blew up in 2008.”
Correct me if I'm wrong-China would have the same problem because the lower
price, lower wage countries would then take jobs away from the Chinese,
something like that. Is that correct, Richard?
“Well, China's beginning to experience that now. The more jobs are going
into countries like Vietnam and Bangladesh. And so, China's wages have gone
up, and that's making China less competitive, but, nevertheless, China has
benefited so phenomenally from their trade surplus with the U.S. over the
years, that they've been able to take that trade surplus money and invest
it, not only in Chinese infrastructure, but in things like 5G and
hypersonic missiles. So, they have 5G and hypersonic missiles and we don't
because they've been investing so aggressively in these new technologies.”
Richard, since 2008, when all this blew up, what's the impact today? What's
happening today as a result of all of that?
“Well, so in 2008, when this bubble did blow up, I expected that it would
blow up. It did blow up, but I expected, when it blew up, that there would
be a depression. But what we saw instead was the U.S. government borrowed
trillions and trillions and trillions of dollars and pumped it into the
economy. And the Fed created $3.6 trillion during the first three rounds of
quantitative easing and bought those government bonds, financing that
government debt. If the Fed had not bought those bonds, if the Fed hadn't
created all that money, the government couldn't have borrowed so much money
without pushing interest rates to an extremely high level. All of that
government borrowing would've pushed interest rates up, and the very high
interest rates would've crushed the economy and done even more harm than
the government spending did good supporting the economy. And so, this
combination of trillions of dollars of government borrowing and spending
and trillions of dollars of money creation by the Fed to finance the
government spending, they reflated the bubble. The bubble didn't implode.
It just got bigger.
And then, it's been an exact replay of that again in 2020 and 2021. For
instance, in the last two years, 2020 and '21, because of COVID, the
economy started to collapse again, and in those two years, the government
has borrowed $6.3 trillion, increasing government debt by 27% in two years.
And the Fed has created $4.6 trillion to finance that government debt. In
other words, by creating this money, the governments finance 73% of all the
money that the government has borrowed, the Fed has. And so, that's allowed
the government to borrow $6.3 trillion, and interest rates didn't go up.
They went down. Interest rates are still extremely low. So, this has
created a big boom in asset prices. Stock markets went to record highs.
Property prices went to record highs. All kinds of wild asset classes went
to record highs. So, they kept the economy from collapsing again in the
same way this time, as they did in 2008.”
Richard, the consequence of this $6.3 trillion that they made up and the
asset bubbles all over in the stock market, the property market, what is
the consequence of all this? Where is this leading us?
“Well, it depends on what the government does next because, sadly, all of
the credit that's been created in recent decades, the economy has become
addicted to credit growth. If credit doesn't grow by at least 2% a year,
adjusted for inflation, the U.S. goes into recession. So, we have become
addicted to credit growth, and the amount of total credit in the country is
so large now that only government borrowing can make it continue to grow.
The private sector just doesn't have enough income to service enough debt
to make credit keep growing. So, we've really reached the point where the
future depends on how much the government borrows and how much money the
Fed creates to finance that borrowing. So, that's the bad news. The good
news is there's really no limit as to how much they can borrow and how much
money the Fed can print, except if it results in high rates of inflation.
Now, the reason that they got away with this in 2008 is because
globalization was so disinflationary. They were able to spend trillions and
print trillions. And the highest rate of inflation after 2008 was 3.9%.
That's because of globalization. The problem that we're seeing this time is
that globalization is partially broken down because of COVID. We've got
these global supply chain bottlenecks, and so we're seeing, last month, the
inflation rate was up to 7.1%. And in my view, that's not so much because
the government is spending so much and because the Fed is printing so much.
That has something to do with it, but it's largely because globalization
has partially broken down. We can't get goods the way that we used to
because factories around the world are being shut down because their
workforce is infected with COVID. Now, hopefully this will be temporary.
Hopefully, globalization, won't break down.
And I do believe that, but who knows. I do think that, assuming that COVID
is going to go away, then we should return to what we experienced before,
where we have trade with extremely low wage countries like Bangladesh,
where people make $5 a day. And that should, once again, put a lot of
downward pressure on inflation, but it may not go that way. For instance,
China has a zero COVID policy. If Omicron starts spreading around China, it
would be possible for China to shut down all its major cities, and I mean
shut down tight, so that there are no exports leaving China. In that case,
that would be extremely inflationary. That would be a big breakdown in
globalization, at least for a while. That could cause inflation to spike
much higher than what we've seen so far. I mean, hopefully, that won't
happen, but that's certainly one possibility.”
You’re offering a subscription service now called Macro Watch? Tell us
more.
“Macro Watch is a video newsletter. Every couple of weeks, I upload a new
video, talking about something important happening in the global economy
and how that's likely to impact asset prices, stocks, bonds, commodities,
currencies. And so, I hope your listeners will check it out. They can visit
my website at richardduncaneconomics.com. That's
richardduncaneconomics.com. And if they'd like to subscribe, hit the
subscribe button, and for a 50% subscription discount, then put the coupon
code, RICH, R- I-C-H, and they can subscribe at a 50% discount. They'll get
one new video every couple of weeks, and they'll have immediate access to
the 75 hours of videos in the Macro Watch archives, explaining basically
everything important that's happened in the last eight years since Macro
Watch started.”
Regarding quantitative easing, where they print money over and over, there
looks to be a shift in the opposite direction. They’re still printing, but
at a lesser rate. What are your thoughts?
“So, this is why the stock market had such a bad month in January. Up until
a few months ago, the Fed was still creating $120 billion every month. And
then, in November, they said they would start tapering that, reducing that
by $15 billion a month. But the very next month, in December, they said
they're going to double that and reduce it by $30 billion a month. And that
meant that it's going to come to a complete stop early ... The money
printing is going to end totally, early next month. And then, on January,
no more printing. And then, the real blow came because, in early January,
they started letting it be known that they were planning to do the
opposite. Instead of printing a lot of money through quantitative easing,
they're going to start destroying a lot of money through quantitative
tightening. Now, when they print money, that pushes asset prices up. When
they destroy money, that tends to make asset prices fall.”
How do they destroy money?
“Well, they destroy money because, when they print money, they buy bonds
with that money. And normally, when the bonds mature, they just roll them
over and buy a similar kind of bond. But they destroy money by essentially
selling those bonds. What happens is the bonds mature, and the Fed doesn't
roll them over. Someone else has to buy the bond. So, the Fed gets its
money back, and when the Fed gets money back, that money just evaporates.
The Fed doesn't need to keep any money because it can make all the money it
wants anytime it wants to. So, it's a bit complicated to explain in just a
few sentences, but the bottom line is it's the opposite of quantitative
easing. Quantitative tightening destroys money, and that tends to make
stock prices fall. And we're about to get a heavy dose of quantitative
tightening coming into effect within the next couple of months. And we’re
going to get interest rate hikes.”
Isn’t that going to drive inflation through the roof?
“Well, they think the opposite when they ... Instead of printing money ...
That's the thing that normally causes inflation. It stimulates the economy,
it creates growth. But when they destroy the money, that tends to make
asset prices fall, like stocks and property. So, people are less rich, so
they spend less money, and if they spend less money, then prices tend to
fall. So, that's why they're doing this. They're worried now that the
inflation rate has moved up to 7%, and they're taking steps to bring it
back down. But what they may find is this could cause a significant stock
market crash. And already last month, the S&P fell almost 10% and
NASDAQ fell 15% between the 4th and the 27th last month. And some of the
high-flying stocks got hit a whole lot harder than that.”
And so, Richard, in this whole equation of raising interest rates and
tightening... Are they even talking about the supply chain mess?
“Yes. That is a very big factor, but there's not really much they can do
about that too quickly, but they have, just within, in fact, on Friday,
Congress passed a bill that, among other things, is allocating $50 billion
to building semiconductors in the United States, semiconductor factories.
Now, that's not going to fix the supply chain overnight but it's going to
mean, a couple of years from now, we're going to have a whole lot more
semiconductor capacity in the U.S., which will bring prices back down
again. So, that's one thing that they have done. That's a big ... That's a
very positive step. That's exactly what they need to do. So, I'm happy to
see that. $50 billion for American semiconductor factories is a big step in
the right direction.”
What is your book,The Money Revolution, about?
“So, the book, it is a big book, 500 pages, and it has three big parts. The
first two parts are history, and the third part is a recommendation drawing
on lessons from the history. Part one is a unique history of the Federal
Reserve, the Fed, since it was created in 1913. If you read this, you'll
understand exactly how the Fed operates. It's told from a unique point of
view that I think your readers and listeners will find very useful. The
second part is a history of credit and credit growth and how that has
changed the American economy over the last 50 years.”
Can you explain the relationship between credit and debt?
“Well, so total credit is equal to total debt because one person's loan is
another person's debt, right? So, the two have to equal each other, so one
way of thinking about this, the easiest way to think about it, is all the
debt in the country, government debt, household sector debt, corporate
debt, financial sector debt, all the debt. It first went to $1 trillion in
1964, when I was four years old. Now, it's $90 trillion. From $1 trillion
to $90 trillion during my lifetime, and this credit explosion, which would
not have been possible if we had remained on a gold system where dollars
were backed by gold, but this explosion of credit has transformed the
world.”
Credit is what the Fed and the Treasury allow people to get to the big
banks, like Wells Fargo and all of that. And that credit then allows
people, the banks to send out debt, so the corporations and individuals
come in, and they take credit, and they turn it into debt, but it's the
same thing. So, by creating credit, debt could explode. Am I correct on
that, or am I incorrect?
“I think you put that exactly right. Credit creation means debt creation.
So, the reason I tend to use "credit" is because I say this system that we
have now is not capitalism. It's credit-ism. Instead of our economy being
driven by investment and savings, as it used to be, it's now driven by
credit creation and consumption, and more credit creation and consumption.
And that's been great. The problem is, it requires credit growth to
survive. If credit contracts, we have a depression, and that has made us
dependent now on government borrowing and government spending to keep us
out of depression.”
Can you give us a quick summary of what the solution is?
“Since we must have credit growth, we're reliant on government borrowing
and spending. So, the solution is how to finance the next American century,
is, since we've seen over the last dozen years, it is possible for the
government to borrow trillions of dollars and to finance this through money
creation. We should not waste this money that the government's going to
borrow. We should invest it in new industries and new technologies on a
multi-trillion dollar scale over the next 10 years. And if we do, that will
induce such a technological revolution. It will turbocharge economic
growth. It'll make everyone enormously wealthy, but, more importantly, it
would create such technological miracles and breakthroughs that we really
would have a shot at curing all the diseases and extending life expectancy
and developing limitless, clean energy. So, one thing that's really
important is, people say that's never going to happen. The government won't
do that.”
If the government funds it, that’s called socialism and communism, right?
“No, the government can fund it, but then they can allocate the money to
the private sector, through joint venture companies, so that the private
sector actually manages these projects. And the government is now starting
to do this. Just on Friday, the House passed a $350 billion act called the
America Competes Act that is exactly that. $350 billion for new investments
in new industries and new technologies. And the Senate has also passed a
similar bill. So, this is not pie in the sky. This is something that's
beginning to happen now. And we need this desperately, not only to keep the
economy growing, but because we're about to be overtaken by China.
In the year 2000, the U.S. invested eight times more than China, but, in
2019, China overtook the U.S. in investment. And if current trends
continue, by the end of this decade, China is going to invest 40% more than
the United States. And if they do, we are going to be a second rate, has
been, vulnerable power, long before the middle of the century. We don't
have to let that happen. We can invest. We can make our economy boom. We
can create new technologies, and we can develop artificial intelligence
before China does. And we can lock in ... Book's called How to Finance the
Next American Century. This is how to finance it. We can do this. We can
easily afford to invest on a multi-trillion-dollar scale over the next
decade. And if we do, the first American century won't be the last.”
You can find more from Richard Duncan at richardduncaneconomics.com
.