The Money Revolution

Release date: February 9, 2022
Duration: 48min
Guest(s): Richard Duncan
Richard Duncan
 
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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 .

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