In PodCasts
  • Credit is the new money, get used to it
  • Creditism can only survive if we keep borrowing trillions
  • Duncan sees the only utopian hope is through credit

About this week’s guest: 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 global economic disaster that began in 2008 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.


The McAlvany Weekly Commentary
with David McAlvany and Kevin Orrick

Richard Duncan: It’s Too Late To Turn Back Now… So Borrow More!
August 12, 2020 

“We’ve had the longest economic expansion in history through can-kicking. I think it’s a great alternative to depression and war. So if we can kick this can down the road for another 30 years, marvelous, I’m all for it. By then we’ll have artificial intelligence and quantum computing and the next generation, if they can’t solve their own problems with those sorts of tools at their disposal, then they deserve the calamity that befalls them.”

– Richard Duncan

Kevin: David, we talked about the last two weeks as being sort of combined. We talked last week to Doug Noland and he basically says, yes, we’re past the point of no return. Kicking the can down the road is just going to end badly. Today we’re going to have an alternative viewpoint that, yes, we’re past the point of no return, and kicking the can down the road may be the only hope for utopia. I think you love putting these types of things out there for people to think about. It will create some tension. There will be disagreement in the minds of our listeners, but that’s the idea.

David: I’ve loved getting to know Richard Duncan over the years and will always remember sitting at dinner with him at a hotel in Denver many years ago, my wife and I were there, and to this day he asks, “How is Mary Katharine?” He knows her by name. I appreciate who he is. I appreciate how he thinks about things. I appreciate how he analyzes information and the conclusions that he comes to. Many times I find myself in agreement with him, and sometimes I don’t. But it’s always a good idea to mix with people that you not only have intellectual respect for but who challenge your thinking. And Richard Duncan continues to be one of these additive factors, as we assess the world of money and credit, of asset prices, and of where we go next.

David: And both of these men individually have come up with a way of redefining money. What happened in the redefinition of money when we went from 1968 to 1971, that period of time where money was backed by gold and then all of a sudden, money became credit. Now Doug Nolan coined the phrase, the moneyness of credit. That’s almost exactly like what Duncan said when he redefined capitalism as creditism. Both of those guys are looking at the same things. Duncan would say borrow more money and use it wisely. That’s the only hope.

David: Like I said last week, there is a healthy tension between these two points of view, and it’s very beneficial for our listeners to consider, on the one hand this, and on the other hand that. It will be a refining process for your intellectual framework.

Kevin: And it will definitely help with conversations with people who take one side or the other.

*     *     *

David: Well, Richard, thank you for joining us again on the Weekly Commentary. We are two quarters into 2020, and with the second quarter having come to a close we’ve got some interesting numbers to look at, and, quite frankly, some unprecedented trends in the financial markets and in the economy. I’d love to start with just getting your perspective on Covid and the coronavirus up to this point, and where you think that will continue to play a significant role, if any, coming into the 3rd and 4th quarters of this year?

Richard: David, first of all, it’s great to talk with you again. Thank you for having me back on the show. On the topic of the coronavirus, maybe I could begin by mentioning that I live in Thailand, and, of course, the coronavirus started in Asia, and we were exposed to that threat before the United States was. And I began publishing Macro Watch videos on the subject on March 1st. On March 15th I published one called Recession or Depression, and that was before people started calling this a depression.

But what I wanted to say is that the good news from Thailand at least is that there haven’t been that many cases here. And that’s really incredible because in January, at the peak of the coronavirus outbreak in China, there probably were literally a million Chinese tourists in Thailand at that time. And so one would have expected that everyone in the country would have it by now, but in fact there have only been something like 3,500 cases in total with less than 60 deaths. So at first I thought this must mean that the virus didn’t like the sunshine and the humidity, and I hoped that that meant that it would go away in the Northern Hemisphere when the summer came.

But sadly, that’s not the case. So now all I can conclude is that I’m sure the sunshine doesn’t hurt anything, but it must be the mask. The people in Thailand were very quick to wear masks because they had experience with SARS back in 2003. And so everyone here wore a mask, and that must be the factor. If that’s not it, I can’t explain why the number of cases here is so low so. Of course, Thailand’s tourist industry has been devastated. Bangkok is the largest tourist destination in the world over the last couple of years, and now there are no tourists in Thailand. So it has been quite a blow to the Thai economy.

Now, looking ahead in terms of the US, in that March 15th Macro Watch video, Recession or Depression, my conclusion then, and it hasn’t changed, is whether or not this is going to be a severe recession or whether it becomes a protracted 1930-style Great Depression. It really depends entirely on the speed and magnitude of the government’s policy response to the crisis, both fiscal policy and monetary policy. And on March 15th it wasn’t yet clear what that was going to be, but luckily, the government did respond very aggressively. The Fed, I believe it was March 23rd, said, essentially, it would create as much money and buy as many government bonds as it took to get us through this crisis. And that was at the bottom of the stock market. The stock market had fallen about 35% of that point, and that day was the bottom.

And the government around the same time passed a number of rescue bills, taking the amount of government spending to something like $3 trillion. So that was a very positive development. Had the government not responded in that way, the economy would have been completely devastated by now. Just imagine if people weren’t receiving the $600 supplement every week, the unemployment benefits, and the additional support that they’ve received, and the support for medium and small-sized businesses, and to the corporations, all of these individuals would have not been able to pay their mortgages or their car loans or their credit card loans. The small and medium-sized companies would have gone out of business by the tens of thousands, and the corporations would have failed.

So, of course, in that scenario all the banks in the United States would have gone bankrupt. Banks at their very, very best have 10% capital. And that’s looking at things very optimistically. So it wouldn’t take much to wipe out 10% capital when you have a wave of defaults on that scale. Their capital would have been destroyed many times over. So the banks themselves are being kept alive by the government life support that is going out to individuals and businesses.

That has worked so far, but if that doesn’t continue then things were going to take a severe turn for the worse again, and it’s going to be very important to see what Congress does when the Senate returns later this month. They had better come through with another large rescue bill to keep the economy intact, and if they do, the Fed can be counted on to finance that with additional money creation. Already the Fed has expanded its balance sheet by nearly 90% since it restarted quantitative easing in September last year. Just year-to-date alone I think it has created something like $2.6 trillion in the first half of the year. So we need more of that.

We need much more government fiscal spending to support the economy, and we need the Fed to create money to finance that debt that the government will have to issue in order to keep interest rates low. Otherwise, government borrowing on that scale would push up interest rates and that would do extreme harm to the economy. So hopefully that’s what we’re going to get. And if we do, we’re very likely to come out the other side of this crisis with our economy more or less intact. There will be some damage, but we can recover. If we don’t do this, the economy could completely collapse and we would be in a crisis that could extend for a decade or longer like the Great Depression did.

David: In past conversations you and I have talked about the difference between creditism and capitalism, and this is a topic of one of your three books, The Corruption of Capitalism, where you talk about the difference between savings and investment driving capitalism versus credit growth being the dominant driver of growth in the post-war period. And, of course, that accelerated rapidly under Reagan up to the present.

Is this really why we have to see the Fed step in, and fiscal policy measures fill the gap, because if we don’t see sufficient credit growth, we will be in a real world of hurt? Our economy is just geared differently than it used to be. This concept of creditism, in large part, supplanting or pushing out the old version of capitalism.

That’s right. Over the last many decades our economy has evolved from capitalism, which was driven by investment and savings, and more investment and more savings. Businessmen would invest and make a profit sometimes and save that profit, accumulate that profit as capital, hence capitalism, and repeat. This is quite a slow and difficult process, but that’s the way capitalism worked. But our economic system doesn’t work like that anymore since money ceased to be backed by gold in 1968-1971. From that point onward, there were no longer any limits as to how much money the Fed could create. And also the Fed took steps that allowed the banking system to expand ever greater amounts of credit in the broader financial system to create ever greater amounts of credit.

So credit growth has exploded. For instance, the total debt in the country – all the debt, the government debt, the household sector debt, the corporate sector debt, the financial sector debt – all the debt – first went through $1 trillion in 1964. By 2007 it had expanded 50 times in 43 years to $50 trillion. And at that point the private sector was so heavily indebted they couldn’t continue paying interest on their debt and they started defaulting, and creditism started to collapse into a depression. Then the government jumped in with trillion-dollar budget deficits that the Fed helped to finance and that reflated the economy and pushed asset prices to new record high levels and set in motion the longest economic expansion in U. S. history.

Now that wouldn’t have been possible if we had remained on a gold standard, and compare the policy response after 2008 with what happened in the early 1930s. There was a great credit bubble that developed during the 1920s as a result of World War I and the breakdown of the gold standard then. During World War I, all the European countries went off the gold standard. They created a lot of paper money to finance the war expenditures. A lot of that money went into the United States because the United States was selling war materials to all the belligerents up until 1917 when the U. S. went into the war.

So the US obtained a lot of gold during World War I, and that set off a roaring credit bubble during the 1920s, along with consumer credit that became available for the first time to the masses. But in 1930 that credit couldn’t be repaid, and the government really didn’t know what to do. It believed in market forces and laissez-faire, and the Fed wasn’t free to create as much money as it wanted because the Fed was required to maintain gold backing for every dollar that it created. So consequently, when the banks started to fail, the Fed didn’t jump in and create enormous amounts of money and reflate the economy, so one-third of all the banks in the country failed and the economy collapsed.

In nominal terms, GDP shrank by 45% and the Depression never ended until World War II started. And then, at that point, the government came in with massive fiscal stimulus, building up war material to fight the war. And at that point, because of the war emergency, the Fed was permitted to create a lot of fiat money and finance the government debt at low interest rates. It was only that government policy response due to the World War II that the Depression ended. Otherwise it would have gone on who knows how much longer.

So comparing what happened in 1930 with what happened in 2008 and afterwards shows you how radically the nature of our economic system has evolved, as well as how the policy options available to the government now are so entirely different than they were before. So I think people still understand the economy through the framework of classical economic theory or conventional economic theory. But that’s no longer an appropriate way to understand the way the economy works because all of that theory was built around the premise, the foundation stone of that entire economic theoretical structure, that gold is money, and that created a number of binding constraints that limited policy options. Well, gold is no longer money. In 1968 Congress changed the law, allowing the Fed to create as much money as it wanted with no gold backing whatsoever. And in 1971 the Bretton Woods system broke down so the U. S didn’t have to worry about sending gold to other countries, either, in exchange for dollars.

And now we have a different kind of economic system. And thank goodness we do, because if we didn’t, in 2008 the economy would have collapsed into a depression. And again, now we’re seeing exactly the same thing. Policymakers are applying the 2008 policy response playbook to this current coronavirus crisis. If the Fed were required to back the money it created with gold, it wouldn’t be able to create any new money and so it wouldn’t be able to finance the government fiscal stimulus that is keeping the economy from collapsing into a depression at the moment. So it’s very important to get past the economic theory and orthodoxy that was appropriate for a past age when money was backed by gold. But that economic theory is no longer appropriate for the age in which we live now.

David: The challenge would seem to be that with a new orthodoxy comes a new set of threats. We had an asset bubble which burst in 2000-2001. We had, of course, in the late ’90s a complementary wealth effect as NASDAQ went through the roof. But I seem to recall Paul Krugman in the early 2000s saying that what we needed as a response to the collapse in technology was a bubble in real estate. He actually called for a bubble in real estate, and I just wonder if that bubble blowing really is a good idea in terms of being orthodox in any way, shape, or form.

Richard: No, I don’t think it is a good idea. I think there are better options available. Rather than allowing the money to go into, say, the property market and blow it into a bubble as occurred during 2005, 2006, and 2007, our economic system, creditism, requires credit growth to stay out of severe crisis. So going back to 1952, anytime credit in the U. S., total credit or total debt adjusted for inflation, any time it grew by less than 2% the US went into recession, and it didn’t recover from recession until there was another big surge of credit expansion. That happened nine times between 1952 and 2008. So our economic system is driven by credit growth, and now supplemented by asset price inflation, but it needs credit growth to expand.

So how should we manage this? With this understanding, what should policymakers do? They can just pump money into the property market and create a new bubble and it would inevitably implode again, creating a new financial sector crisis. That’s not ideal. A better approach would be for the government to borrow the money and to invest it in new industries and new technologies in order to induce a new technological revolution that would turbocharge economic growth and productivity, and also shore up U. S national security, which is now under threat due to China’s incredibly large investments in new industries and technologies such as 5G and artificial intelligence, and the threat that poses to our national security going forward, once China overtakes us.

David: It’s interesting that the model that Wall Street has adopted is, get as close to the flow of capital as possible. And I wonder if politics doesn’t somehow reflect that, where, if we do what you’re saying and intelligently invest in very critical areas, technology expansion, if we’re willing to use the federal checkbook, how do we guarantee that politicians aren’t doing the same thing that Wall Street loves to do, just get as close to the flow of money as possible? I really don’t see many standout statesmen back in D.C. in this particular era, and the idea or the opportunity to enrich oneself, it seems like everybody would be making a fast track to Washington if that was the case, instead of dreaming of being an NBA basketball player or a rock star.

Richard: So far the government response to this crisis, $3 trillion of extra spending so far, and it looks probable that it is going to be at least $6 trillion of extra government spending by the end of next year, and perhaps as much as 10. Who knows? But let’s just call it 6, and the Fed is going to expand its balance sheet by a similar amount, most likely, another $6 trillion of new money creation. So if we come through this, say, two years from now, and the government has spent $6 trillion, and the Fed has created 6 trillion new dollars to finance that government debt, and the sky hasn’t fallen, we don’t have very high rates of inflation or some other calamity has not befallen our nation for this egregious violation of Austrian economics and prescriptions for how our economy should be run, if we come out the other side of this, then what lessons should we draw?

It would seem to me that if, in fact, that’s what we find, and I suspect that is what we will find, that there won’t be very high rates of inflation, then surely if the government can spend 6 trillion dollars in a year-and-a-half, then I would think that it would be very easy for the government, over a ten-year period, to invest $10 trillion dollars in new industries and technologies such as genetic engineering, biotech, artificial intelligence, nanotech, neurosciences, robotics, etc.

A trillion dollars is an extraordinarily large amount of money. If we did have an investment program on that scale, then, seriously, we could probably cure most, if not all of, the diseases. For instance, right now the National Cancer Institute, the government agency charged with finding a cure for cancer, their annual budget is $6 billion a year. In one week in March, the Fed created almost $600 billion in a week. Now $6 billion is not curing cancer, and 600,000 Americans die of cancer every year. So we have the opportunity to expand that investment multi-fold, and if we do, we are very likely to find a cure for not only cancer but Alzheimer’s and heart disease and all the other diseases that kill us off, and expand life expectancy.

So going back to your point, I don’t care how many rich, corrupt politicians skim off a few million dollars here and a few million dollars there. If we cure cancer and all the diseases and expand life expectancy by many years into the future and shore up our national security so that we continue to be the dominant, pre-eminent economic, technological and military power on Earth for generations to come, then I don’t care how much money is stolen or wasted. It will all be worth it.

David: On that point, I guess you could also argue that one of the unintended consequences of continued asset price inflation is a rupturing within the body politic where you have an increase in social tensions, an increase in the have-nots saying, “We’re not happy with this arrangement. The haves have too much.” And it would seem that there are positive consequences if you have a balance sheet that will expand, rising with the tide of monetary accommodation and fiscal spending. But that’s not the majority. It seems that you might, in fact, undo a democracy in the midst of trying to save it from an economic standpoint. You could be, in fact, creating a situation of political suicide.

Richard: That’s a good point, but I believe that the sort of investment I’m describing would lift all boats. Everyone would benefit. The middle class would benefit enormously. The poor people would benefit enormously, and of course, the rich would become very much wealthier as well. But everyone would be wealthier and therefore I think there would be less social tension.

The problem in recent decades is that everything has been stagnant and only the wealthy have become much more relatively wealthy than everyone else, and everybody else resents it. But even if we did have more increase in income inequality, that should be easily correctable. We could, for instance, impose a billionaire tax. Anyone who has more than a billion dollars, put a wealth tax on it, and also increase taxes on the higher incomes. Anybody earning more than $50 million a year, let them pay 70% tax on it. And capital gains taxes could be raised. So there are certainly ways in a democracy to correct these imbalances. Unfortunately, we’ve gone in the wrong direction recently by cutting taxes to practically zero on corporations and capital gains and the wealthiest individuals. And that’s been the main reason that income inequality has expanded to the extent that it has.

David: We’re in a fascinating spot with Covid because it’s not as if we are in control of the variables driving the economy. We’ve been able to take away some of the pain by distributing funds to people who would not have funds otherwise, but it’s still less in aggregate than people would be seeing as income and spending otherwise. The Fed expects the decline in GDP this year to be 6.5%. The IMF expects a contraction in both U. S. and global GDP. This is an interesting position to be in because we don’t have an economic justification for the stock market to be where it is. Stocks simply shrug off the economic realities and focus more on the liquid courage provided by the Fed. I guess my question to you would be how much more liquidity do we need to see to keep the equity markets moving higher from here?

Richard: I think that the amount of liquidity we will need depends on the size of the government’s budget deficit going forward. The Congressional Budget Office currently projects that this year’s budget deficit for the fiscal year ending September 30th will be $3.7 trillion and that next year it will be $2.1 trillion. But this only incorporates the current laws. In other words, it doesn’t incorporate the new rescue bills that are very likely to soon be passed by Congress. So the budget deficit next year is likely to be very significantly above $2.1 trillion, I would imagine. So if the government borrows a great deal, that would tend to push up interest rates unless the Fed creates a great deal more money and buys the bonds that the government sells. So I expect the Fed is probably going to increase the amount of money it creates roughly in line with the size of the U. S. Government budget deficit.

Now, I think, judging by what we’ve seen in the past, that there is a very good chance that despite the terrible fundamentals, this new liquidity that’s being created is going to potentially push stock prices to a significantly higher level. That’s what we’ve seen in the past. It’s not certain. Many things could go wrong that could cause the stock market to go down sharply or crash. But so far the stock market, as you said, has been inflated by the Fed creating so much money, and that’s probably going to continue.

David: So when we think about debt as the other side of the equation, we’re talking about the budget deficit and what could be added, $3.7 trillion is what is expected for this year. You say that, actually, by the time we get through the new rescue bills, it could be higher than that. What is the worst case increase for US debt, in your view, for 2020, and while we’re on the topic 2021?

Richard: Luckily, the United States is a very wealthy country, and whatever the debt needs to expand by then we can afford it. For instance, the size of the economy last year in 2019 was roughly $21 trillion. So government debt as a proportion of GDP was something like 110% of GDP. So let’s imagine that a dire worst-case scenario, an unrealistically bad scenario where the government actually has to spend another $21 trillion to keep the economy intact. Now that won’t happen, but just as an example, that would roughly double the government’s debt relative to GDP, taking it up to 220%. Well, that’s below where Japan’s government debt-to-GDP is now. The Japanese government debt-to-GDP is already 250%. So even in that extreme dire scenario, we would still have a lower level of government debt-to-GDP than Japan.

So more realistically, the government’s going to have to increase its debt because of this crisis probably somewhere between $6 and $10 trillion. And that’s going to make the government debt-to-GDP higher, but that’s something that the U.S. can easily afford to do. So I’m not concerned about the level of government debt because it hasn’t been a problem thus far and looking back to the crisis of 2008 the government debt has more or less doubled, and the Fed created $3.5 trillion in the first seven years after the crisis.

So to put all of this into perspective from the Fed’s point of view, during the Fed’s first 93 years of existence, between 1914 and 2007, it had created, in total, less than $900 billion. Over the next seven years, it created an additional $3.5 trillion, so it expanded its balance sheet by five times in seven years. As I mentioned earlier, in one week in March the Fed created $590 billion in a week. Compare that with the $900 billion they created in their first 93 years of existence. So, has the sky fallen yet on us? No. Are we suffering hyperinflation? No. Is Japan suffering hyperinflation? No. They have deflation and their interest rates on the 10-year government bonds are zero.

For instance, more examples, during 2009 the U. S monetary base expanded by 116% at the peak. And then in following years, in the year 2011 expanded by 35%. In 2013 during QE3 it expanded by 36%. And so far year-to-date this year it is up 58%. Despite this extraordinary expansion of money, we don’t have inflation. The same is true in Europe. In Europe the EU’s monetary base expanded by 76% in 2012 and by 46% in 2016. They have deflation. The Bank of Japan’s money supply has expanded by 44% and 47% in 2001 and 2014. They have deflation. UK’s monetary base expanded by 76% in 2006, by 204% in 2010, and 79% in 2012. They don’t have inflation. So I don’t think we’re going to end up with high rates of inflation as a result of the increase in government debt and money creation.

And the reason things are different now is because of globalization. In the past, money creation on this scale would have led to extremely high rates of inflation. It just simply wouldn’t have been possible. But now, because our economy has changed from being a relatively closed domestic economy to being a global economy with 8 billion people, the world’s population is approaching 8 billion and two billion of those people live on less than $3 a day, and so would probably consider themselves lucky to have a job that paid them $10 a day. So this has a radically expanded the global labor pool and has pushed down wages and prevented inflation.

So our economy is like a fish bowl. We’re like a gold fish in a fish bowl. The fish bowl has been dropped into an ocean, so the barriers, the glass walls that have confined us in the past by our closed domestic economy no longer confined us. We just need to realize we’re living in a new economic environment and the fish just needs to swim out the top, find a world of superabundance there waiting that allows our government to have much larger budget deficits and to invest in new industries and technologies on a multi-trillion dollar scale with the Fed financing it without creating high rates of inflation, thereby inducing supercharged economic growth and productivity, economic miracles and technological breakthroughs on an extraordinary scale.

David: I agree with you on globalization and the impact that it has had on consumer prices and particularly consumer price deflation. I question the monetary supply growth and the impact in terms of deflation and inflation, in large part because you’re talking about a shuffling of dollars into the financial system and not into the economy. If you look at the velocity of money in recent years, it’s been in decline. So for every dollar that is created, it’s not being used to help the economy, it’s being used to help the financial system, and there is a distinction between the two. So velocity increasing tends to be characteristic of an inflationary environment.

It seems to me that central banks have figured out how to direct the flow of capital, but keep it within banks. We look at Maiden Lane, we look at the various special purpose vehicles, we look at the interventions, even the more recent interventions in the repo market. These are channeled, focused measures which may have an impact on the increase in the money supply, but they have not allowed it to escape into the economy.

So I see the benefit to asset holders. I see the benefit to creditors in terms of stabilizing the financial system. I don’t see the real benefit in the economy because the money is not getting into the economy. If it were, velocity would show it. And yes, we would also have inflation as a consequence. So no, we don’t have inflation, but I think that’s a function of velocity. And no, we don’t have inflation as a function of globalization, but that, too, could be challenged in terms of the current trends, both the trans-Pacific as well as the trans-Atlantic trade relationships, which don’t seem to be improving. In fact, they seem to be in decline.

Richard: A couple of points. I don’t think the velocity of money is really very relevant anymore. It used to be. When we talk about the velocity of money we’re normally talking about M2. M2 is the monetary base, which is the money the Fed creates, plus the deposits that are in the banks, and that makes up M2. So when people talk about the velocity of M2, they’re talking about just that. And in the past, that was significant because the bank credit that was made possible by the deposits determined how much the economy grew by.

But what we’ve seen over the last five decades is that M2 has been completely dwarfed by the amount of credit there is in the economy. There is credit being created through so many different channels that if you look at M2 it’s just a small fraction of C – credit, total credit. Credit now is somewhere around $80 trillion. M2 would probably just be, I’m not sure, I’m guessing $20 trillion. So the velocity of M2 doesn’t really matter very much anymore. And as far as the money not going into the economy, when the Fed buys a government bond and so far this year it has increased its holdings of government bonds by $2.1 trillion, that allows the government to borrow $2.1 trillion and to spend $2.1 trillion. So the government spending does directly inject money into the economy, and it goes into people’s mailboxes, and people get checks for $1,200 each, and they spend it. And businesses get money from the government, and they spend it.

So the money is going into the economy, so it is directly benefiting the economy and is propping up the economy. And it still hasn’t caused inflation because there are three main things that cause inflation. Milton Friedman said that inflation is everywhere and always a monetary phenomenon. But that’s not true. Inflation is also caused by demand shocks and supply shocks. For instance, there are inflationary demand shocks, like wars. In that case, the government spends a lot of money, demand increases, and so there’s inflation. But there are also deflationary demand shocks. And that’s what the coronavirus is. Demand has collapsed because of the virus, and so it’s deflationary.

And there are inflationary and deflationary supply shocks as well. Globalization is the biggest example of a deflationary supply shock because suddenly there’s a massive increase in supply of everything in the world, and so the prices tend to fall. An example of an inflationary supply shock would be the oil crisis of the 1970s when the oil exporting countries cut off the oil exports and that caused inflation. So now there are two dominant deflationary factors at play. One is the coronavirus, which is a deflationary demand shock, and the other is globalization, which is deflationary and a supply shock. Now the deflationary demand shock from the coronavirus won’t last forever.

But next, coming to your final point about the geopolitical tensions, it is not certain whether the deflationary pressures from globalization will persist either. If globalization were to break down completely, then all of that disinflationary pressure would go away, and then this government spending on a multi-trillion dollar scale financed with money creation on a multi-trillion dollar scale certainly would cause high rates of inflation again in the United States and everywhere else in the world. So hopefully, globalization is not going to break down, and I think it’s going to be rolled back some.

But before the virus crisis started, we were already having a trade war/cold war with China. Things are probably going to deteriorate from here between the US and China. They’re bad already, and they’re probably going to get worse. But it’s a big world. There are a lot of people in countries like Vietnam, Indonesia, Bangladesh and India, more than enough people there to allow the U.S. to continue buying things from low-wage countries.

So if we look at a spectrum of 0-100 where 100 is globalization continues the way it was three years ago and zero is where it breaks down completely and trade barriers go up and there is no international trade, 100 means there’s going to be no inflation, there won’t be inflation. Zero means there’s going to extremely high rates of inflation, if globalization breaks down. But where are we going to end up on that spectrum? Probably somewhere closer to 90 or 80, hopefully. And so the deflationary pressures will persist, and that will allow us to continue having high budget deficits and financing them as necessary with paper money creation. I suspect this is what we will find out in the end. And if we do, then we should take advantage of that.

Even before the virus started back in November or December last year, Chuck Schumer, Senate Minority Leader, made a speech in Washington before the defense community at a conference on artificial intelligence, and they discussed the rising threat that China poses to the United States in terms of its technological lead. China now has won the 5G race. The United States is not even in the race. If China wins the AI race the way they’ve won the 5G race, then they are going to dominate the global economy, not only the economy, but they will be the technological and military superpower, as well, long before the middle of the century, and that will leave the United States as a second-rate vulnerable power, not in charge of its own destiny.

And so, at this speech, Schumer said he was going to propose a bill that the U.S. government invest $100 billion over the next five years in the industries of the future. And he listed them, beginning with artificial intelligence and robotics, etc. So I was happy to hear that. I thought that was a small step in the right direction. But $100 billion is not going to do the trick. Last year, for the first time, China invested more in research and development than the United States did. And if current trends continue, by the end of this decade, they’ll invest 40% more than the U.S. will in 2030. And whichever country develops artificial intelligence first, where we reach the point of artificial general intelligence where machines can do anything humans can do, after that, their technological prowess will expand exponentially and there will be no catching up.

So $100 billion is a step in the right direction. It’s a nice idea. But we can invest so much more than that. Just last night, my time, Joe Biden has now announced a plan in which he suggested that the United States will invest, I think, $700 billion, maybe $400 billion of that in research and development. Okay, that’s a bigger number. That’s better. But that’s still not enough. China will still be out-investing us. And therefore, as I’ve said, I believe we could invest $10 trillion. After Schumer’s speech, I said, okay, I’ll see your $100 billion and raise you $9.9 trillion and we could invest $10 trillion in new industries and technologies over the next 10 years. We could easily afford to do that. And if we do, our economy would be immensely more powerful. Our national debt would probably be significantly lower. We would all live longer, happier lives.

David: Does the idea of spending that kind of money, whether it’s $700 billion just to get the game going, but then ultimately getting to $10 trillion, find itself fairly compatible or consistent with the ideas of modern monetary theory, where you can spend whatever you need to, monetize it, if you don’t have the money for it just monetize it, and there is in a period of unsound money because as you say, we’re no longer limited to physical specie? We can create as much credit as much money as we want and it has no consequence?

Richard: David, you and I have been holding these discussions now for, I don’t know, approaching 10 years, I suppose. And ten years ago there was no modern monetary theory that I was aware of, so it has arisen over growth. Now I’m trying to avoid jumping into the modern monetary theory debate. I want to keep my argument very simple. I don’t want to make it complicated at all. Here’s the argument. Over the next 10 years, the government can invest $10 trillion, and it can do that either the conventional way by just simply borrowing the money, the old fashioned way, and running up government debt that way. And based on the pre coronavirus situation, my calculation was that even if America’s best scientists and best entrepreneurs wasted every last cent of that $10 trillion, ten years from now the U.S. government debt would have been 144% of GDP, which is where Japan’s government debt-to-GDP was about 19 years ago, or something like that.

That’s one way they could do it. They could easily afford to do it that way. And, of course, not every last cent would be wasted. This would just, as I’ve said, turbocharge the economy and make the economy grow by 5-7% every year, or more. But they could also do this by having the Fed just simply create $10 trillion and pay for the whole thing at no cost whatsoever to the American taxpayer. Modern monetary theory would probably agree with that. I hope they would.

Now I’m not going to jump into the debate on whether everything modern monetary theory says is right or not. I’ve got enough to defend with my own position. I don’t want to expand it any further. I’m just pointing out that the US could easily invest its $10 trillion over the next 10 years, either the old-fashioned way by simply borrowing the money, or better yet by having the Fed finance much or all of it through paper money creation. And what we’re going through now is probably the greatest economic experiment in history. If the government can spend $6 trillion over the next 18-month period and the Fed finance at all without causing high rates of inflation, and I think that’s going to categorically prove my point.

David: We’ve heard of Keynesianism and Neo-Keynesianism. We don’t want to confuse you with the modern monetary theory. Maybe we’ll call you NMT instead of MMT for Neo-Monetary theory,

Richard: Call it down Duncanomics (laughs).

David: Duncanomics. As long as it comes with a doughnut, I’ll be happy.

Richard: (laughs)

David: It has to be a free donut. I don’t want to pay for it, and I’m sure the government can afford to give me a doughnut out of the $10 trillion in spending.

Richard: I think a lot of people are getting free doughnuts these days.

David: Yeah, not so many cops anymore, it’s very verboten here. That would be to honor the blue and we won’t have that anymore. So QE to infinity – we announced that on March 23rd. It was a little bit like a corpse reviver in the market, and they are getting bolder, that is, the Fed is getting bolder with what they can do. This was a big deal, $3.5 trillion. We don’t really know what the limits are. And I guess when we start talking about large numbers and get into the double-digit trillions, I wonder if we aren’t playing a little bit with catastrophe math, a little bit like building a sandcastle. It all holds together until just one grain, seemingly insignificant grain of sand, hits the castle and it all collapses. There seems to be also a 4th issue when it comes to inflation. You mentioned the monetary component – which probably is not all the story – demand shock, supply shock. It also seems that psychology is a part of the equation and how people feel about what’s happening. Isn’t this the nature of trying to control inflation expectations, that is, the emotional aspect of inflation? What do we think is going to happen? And we change our behavior in light of how we think. That’s a psychological issue.

So again, to me, you combine the psychology within the market, the potential for catastrophe math, and I wonder if somewhere between the current $3.5 trillion and $10 trillion, you don’t have the hot potato event where the dollar today is beautiful, wonderful, great, the currency to have, and maybe tomorrow it is a bit of a hot potato because people lose confidence. Credit is a con game to some degree, and that is the basis of our system today. So it works until it doesn’t. Isn’t that the nature of catastrophe math, it just works until it doesn’t?

Richard: We’ve gone past the point of no return. The sand castle was well built away before 2008. If we had not responded with the government expanding its level of debt and the Fed expanding the money to pay for the debt, the sandcastle would have collapsed then, and we would now be in the equivalent of 1942, at 10 years of depression and probably now in World War III. So I’m glad that didn’t happen. A lot of good things have happened over the last 12 years, and they wouldn’t have happened if our economy had collapsed into a 1930s-style depression because we failed to take advantage of our new economic environment where it is possible for the government to spend and support the economy and the Fed finance it.

As we’ve seen, the last 12 years have demonstrated that clearly. If they stop, yes, the sand castle is going to implode, it is going to collapse. It’s going to go back into the ocean and our civilization will go with it. So I’m not for allowing that to happen. If this is kicking the can down the road … we’ve kicked it down the road 12 years since 2008. That’s worked out really well for me and I’m really glad our economy didn’t collapse into a depression 12 years ago, and I think everybody else is also.

Back in the 1930s and 1940s, hundreds of millions of people wished that the Fed and the government had kicked the can down the road in 1930, and they didn’t, and so they got the Depression. We’ve had the longest economic expansion in history through can-kicking. I think it’s a great alternative to depression and war. So if we can kick this can down the road for another 30 years, marvelous, I’m all for it. By then we’ll have artificial intelligence and we will have quantum computing, and the next generation, if they can’t solve their own problems with those sorts of tools at their disposal, then they deserve the calamity that befalls them.

What we need to do is just keep kicking the can down the road and making the most of this new economic environment so that we can thrive and prosper for as long as possible. And as far as the dollar, losing confidence in the dollar, what are you going to buy? All of the central banks around the world are doing what the Fed is doing. They’re creating money on an enormous scale right now and supporting the government debt that their countries are using to keep their economies from collapsing into depression. So which currency are you going to exchange for your dollars? Which one do you want to own?

David: To some degree, I wonder if that’s not why we’re seeing gold put in new all-time highs in a variety of currencies. If the Japanese have been doing it, they’ve been doing it at some cost. It may not show up in yen relative to dollars or RMB or rupee, but it does show up in terms of the cost of an ounce of gold in yen terms. And you see that in at least a dozen currencies in the last 12 months, where gold has hit all-time highs. There is still an opt-out. And I would think that, to some degree, you’ve got to eliminate the opt-outs for this to continue to work. If you’re gonna play the game, keep people in the financial system, kick the can and have the consequences not necessarily play out in the immediate, you’ve got to make sure that everyone’s forced into the game. And gold is an opt out, always has been, and it appears to me that there’s enough investors today – that could change tomorrow, certainly – but there’s enough investors today that look and say, “Yeah, this whole kicking of the can, I just am not sure that it’s going to end well, and I’m willing to hedge my bets, not by choosing euros, not by choosing pounds, not by choosing any other fiat currency, because there really isn’t a better alternative. As you say, every bank’s doing it. It’s the new game in town. It’s one of the things that we exported most effectively as our monetary policy to the world. But I think that’s why some investors are saying – and you’re seeing a growing consensus among asset managers as well – maybe you should have a few percentage points allocation to the precious metal space.

Richard: I agree, and I own gold. I think everybody should own some gold, and I think it’s likely that gold is probably going to keep going higher. But there are other alternatives as well. You can take your dollars and buy land with houses on top and rent out your house and have rental income. Or you can buy stocks. Stocks are going up for the same reason gold is going up because the Fed is printing a lot of money and pushing them up. So I agree, gold is probably going to go higher, and I certainly hope it does. But I wouldn’t bet the farm on it. I thought it was going to go higher a decade ago, and even though we got QE3, gold fell. So I was wrong. Gold had better keep going higher. If it doesn’t, there are going to be a lot of disappointed people.

David: I agree. It’s not something you bet the farm on. There’s this new idea on this side of the pond, not so new in terms of the policies that the Bank of Japan has been employing for a number of years now, but yield curve control, we have talked about it on our commentary a couple times. I would love for you to, as we wrap up our conversation today, contrast quantitative easing with yield curve control and tell us why you think the Fed is more likely to look at yield curve control as the policy going forward, maybe even to replace QE.

Richard: The difference between quantitative easing and yield curve control is as follows. With quantitative easing, the Fed or the central bank announces in advance how much money it’s going to create every month. At the peak of QE3 that was $85 billion a month. More recently they have hinted that it’s currently going to be $120 billion a month for the foreseeable future, more if necessary, essentially. So they tell you in advance how much they’re going to create. And that’s what the Bank of Japan had been doing off and on since, really, the year 2000. The Bank of Japan has been the pioneer in most of the central bank policies that have been adopted by the other central banks around the world in the aftermath of the crisis of 2008. So back in 2015 or so, the Bank of Japan was using quantitative easing all out. They were buying 80 trillion yen of Japanese government bonds a year, and by that point they owned something like nearly, I think, 45% of all Japanese government debt outstanding. And that’s a lot of Japanese government debt because, as I said, the Japanese government has 250% government debt-to-GDP.

But they had gotten to the point where they were buying up so much Japanese government debt that the people who still owned it, or I should say the institutions like the Japanese banks and the Japanese insurance companies didn’t want to sell their Japanese government bonds to the Bank of Japan because they thought they were safe and they generated some income. So the Bank of Japan ran into resistance. They couldn’t keep buying 80 trillion yen worth of Japanese government bonds every year. So they announced yield curve control. And instead of saying that we’re going to continue buying 80 trillion yen a year worth of Japanese government bonds, they said we’re going to buy whatever amount of Japanese government debt we have to, to hold the yield on the 10-year Japanese government bond at 0%, or very close to 0%. And if we have to buy more than 80 trillion a year to keep the yield at 0%, we will. If it’s less, then it’s less. That was in 2016. As it turned out, it was a great deal less than 80 trillion yen a year. By the end of last year, the Bank of Japan was only having to buy 20 trillion yen a year, and they were still able to keep the yield on the 10-year government bond to 0%.

That happened because once everyone understood in the bond market in Japan that the yield wasn’t going to move very much from 0%, they just stopped resisting because the Bank of Japan had the power to hold it there. There was no point fighting the Bank of Japan. So what this meant was that the Bank of Japan was able to achieve its objective, 0% interest rates, at a much lower cost than it had been through quantitative easing. So the Fed is now talking about adopting yield curve control, although they probably are not going to do it immediately because they’re very uncertain about how much money they’re going to have to create, because they’re very uncertain about how large the U.S. government budget deficit is going to be.

But once things become more clear on what the government budget deficit will be, and after they have financed a significant amount of that, they, too, may adopt yield curve control because, in that way, for instance, let’s say right now the 10-year government bond in the U.S. is yielding 0.6%. For example, if the Fed wanted it to be 25 basis points they could announce a yield curve control plan and say we’re going to hold the 10-year bond yield to 25 basis points. We’re going to create as much money and buy as much government debt as we have to to keep it there. They may find that they could do that with a much lower amount of money creation than $120 billion a month, which is what they’re doing at the moment.

And if that occurs, then on one level the Fed would be very happy about that because they’re not crazy about the idea of expanding their balance sheets so radically. If they could meet their interest rate target at a low level by creating less money, they would probably prefer to. And that would probably prevent the stock market from blowing into as big a bubble as it might if the Fed continues to create as much money as it is doing at the moment.

So that would be one advantage because you don’t want to have a huge stock market bubble and then the bubble blow up. But on the other hand, if the Fed really did adopt this yield curve control policy and the market participants came to understand that the Fed wouldn’t be creating as much money as the market now expects them to create, that could cause a stock market selloff, perhaps, because, of course, the stock market likes it when the Fed creates a lot of money. If it became clear that the Fed would create less money than currently expected, that could cause the stock market to throw a tantrum again and sell off again, as it has done so many times in the past.

David: Just for clarity’s sake, the YCC, or yield curve control, seems to hold a lot in common with price controls. Yield is a price of the other side of the equation for them. And I’m stuck in this old-fashioned mindset again, maybe it’s with an affinity for classical economics or things of that nature, that prices are supposed to convey information. It doesn’t seem like that’s possible in a world of yield curve controls and price setting.

Richard: That’s a good point, but looking back to the past, this is not the first time the U.S. has used yield curve control. During another national emergency the Fed also had yield curve control. Starting in the beginning of World War II and going up to 1951, during all those years the Fed had yield curve control. They didn’t allow the yield to move at all. They set the yield on a couple of different government bonds and bills and held it there between 1940 and 1951. So it’s not as though this has never been done before. When there is a national emergency, that’s why we have central banks. Central banks were created to prevent financial crises.

When – typically, economies go through cycles – there’s too much credit created, some of the credit can’t be repaid and it snowballs, and it ends up very frequently wiping out the banking sector or causing a severe banking sector crisis. The Fed was created to provide short-term liquidity to extend to creditors who were viable so that they didn’t all collapse in a market panic. But also the Fed is absolutely essential in times of national emergency. It was necessary for the Fed to help finance World War I, and for it to help finance World War II, and it’s now necessary for the Fed to help the country through this current national emergency. If we didn’t have it, we would be in dire, dire straits.

David: I see your point. The capital markets also went to sleep from 1940 to 1949 in that bear market, at least in equities. I guess it started to peak back up in 1949. It had a great run from 1949 to 1968. But it seems like investors weren’t sure what to do with an environment where there was no conveyance of information so the capital markets just kind of dried up. It seems like if you’re going to propose the same thing for investors today, the only people left in the financial community are no longer investors, they’re merely speculators.

Richard: Government debt expanded by five times in the four years that the U.S. was in World War II, and as the government invested enormously in expanding industrial capacity to fight the war. And the Fed helped finance that by its holdings of government debt increasing by 11 times during those four years. And that enabled the U.S. to finance and win the war. And afterward that massive government spending set off a 25-year long economic boom, not only in the U.S., but around the world. So I think things all worked out very well.

David: Was it the government spending, or was it the fact that people knew what they could then buy and what the information was again that was being conveyed by prices. We did have a huge boom, but to see the causal factor being government spending that preceded it as opposed to investors seeing opportunity and being willing to put capital to work in the markets, I probably would lean towards the latter interpretation, not the former.

Richard: I would suggest that it was the government spending that created the opportunities that the investors saw, because without the government spending, we would have still been stuck in the Depression.

David: That’s an interesting perspective. Certainly something that has blown my mind, and this goes back to perhaps a lack of imagination. I remember sitting around the dinner table with my dad, and he was very upset during the Reagan administration that there was a tripling of debt and it would not be sustainable, in his view. It was the end of the dollar, it was the end of everything. And clearly you’ve put it in terms of, we can afford it. Well, at that point we could afford it, and in fact, it was what allowed us to bankrupt the Russians. I’m not sure why they couldn’t afford it, but we could, and they couldn’t. I’m not quite sure how to draw the lines of distinction between who can afford debt, who can’t, and what the limitations are. We’ve played in conversation today with what those limitations might be. If 110% of GDP is not a limitation, and 250% is not a limitation, what were the limitations for the Russians? I’m just asking that rhetorically. But it has worked in some instances, à la the Japanese. It’s been unavailable in other instances. In an all-out cold war, the Russians would have liked to keep up, but we outspent them. And you’ve made a very important point, Richard, and that is that the numbers that we think are the determining factors may not be the numbers that are the determining factors. We don’t know what the limits are. So here we are in a strange world of creditism, meeting Covid-19, meeting yield curve control, meeting a stock market boom or a stock market bust, meeting gold getting to levels we haven’t seen since 2011. All these things factor in, and we’ve got to kind of sort out what happens next? It seems to me, as you mentioned a moment ago, one of the most prudent things you can do as an investor is spread things around, whether it’s money in land, in rental properties, in the stock market, in gold and silver, in cash. It does make sense with the amount of craziness in play, to not bet the farm on any one thing, because there’s knowledge that no one has in terms of what the next steps are from a policy standpoint, what the reactions are in the market, and what the consequences are to those reactions

Richard: Well put. That’s exactly right. It’s very difficult to know what will happen next.

David: Richard, I remember reading The Dollar Crisis many years ago, and have loved reading the various bits of research that you put out, The New Depression, The Corruption of Capitalism, and I can’t wait for the next published book, whenever that may be, whatever the topic may be, but we’d love to have you back on the program to discuss it. I have a great deal of respect for the amount of time and energy that goes into researching and writing. It’s not an easy task. It’s hours and hours and hours. So we thank you for your past contribution in the books that you’ve written, in your comments on our commentary, and would encourage our listeners with more interest in the analysis that you do on a regular basis through Macro Watch to spend some time at and take advantage of that discount that Richard has for all of our listeners.

Richard: Thanks, David. Yes, I hope your listeners will visit my website,, and take a look at macro watch. Macro Watch is a video newsletter. Every couple of weeks I upload a new video of me making a Power Point presentation, discussing something important happening in the global economy and how that’s likely to impact the asset classes. They can find that at, and if they would like to subscribe to Macro Watch, I’d like to offer them a 50% subscription discount. If they hit the subscribe button, they’ll be prompted to put in a discount coupon code. If they use the code commentary, they can subscribe at a 50% discount. That’s commentary at And at the very least, they could sign up for my free blog to find out the sort of work time doing on an ongoing basis.

David: Richard, thank you for that generous offer, and for your time spent with us today. I would encourage listeners to look at Macro Watch, going to Richard Duncan’s website. This is a video report, done very well, giving you charts, graphs and a verbal explanation, both audio and video, on a routine basis, sometimes a couple times a month. It is a very helpful resource. Macro Watch is something you should definitely include in your staple of information. We wish you good health and well­being and great success in all your endeavors there in Thailand and look forward to being in touch.

Richard: Thank you, David. It’s always a pleasure talking with you.

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