Richard Duncan (00:03:22):
The money supply growth, which reflects the amount of money that the fed creates, peaked at something like 150% year-on-year growth in 2011. So you would’ve thought that would’ve caused hyperinflation. If money supply growth causes inflation, then that surge in the money supply growth, which resulted from the Fed’s three rounds of quantitative easing, well that should have done it. But the inflation rate peaked at 3,9% in 2011. And then by 2015, we had deflation again, prices were falling in early 2015. So, what’s going on now? The increase in the money supply is less than half of what it was in 2009, but now the most recent number for the inflation rate is 7,1% year-on-year. So what has changed?

Richard Duncan (00:04:15):
Well, what has changed is because of COVID, what we’re seeing is a partial breakdown of globalization. Globalization is the reason we didn’t… Meaning these big trade deficits. Once the US started running large trade deficits, especially with low-wage countries, that put extreme downward pressure on prices in the US. So, we had deflation and we even flirted with inflation, since we were buying so many goods from countries whose workers made less than $10 a day. So, it is globalization that explains why we’ve had very low rates of inflation in recent decades, despite the massive budget deficits and the massive money creation by the fed.

Richard Duncan (00:04:52):
But what we’re seeing now because of COVID is a partial breakdown of globalization. We have extreme global supply chain bottlenecks causing inflationary pressures on things like semiconductors especially. But we’re also seeing domestic disruptions in the US as millions of people have left the workforce because they’re afraid of catching COVID. So, what we’re seeing is higher rates of inflation now because globalization has partially broken down. Now, presumably, this isn’t going to last forever. It may. COVID may go on year after year. It could become much worse. There could be a massive wave of COVID infections across China. China has a zero COVID tolerance, so that could force China to shut down all its major industrial centers. In that case, we would see much higher rates of inflation. But if we go back to a period where similar to what we were experiencing for decades before COVID started, then we’ll once again, see that globalization puts extreme downward pressure on prices. And we’ll probably soon be flirting with deflation again, the way we were up until the time COVID started.

Richard Duncan (00:06:00):
Now, it is true that the inflation rate is higher than… Certainly higher than the fed has expected. But let’s take a look at that. The CPI, the Consumer Price Index, is an index. It’s a series of numbers and the December number was 7,1% higher than it was in December 2020. But it was only 8,5% higher than it was in December 2019. So the two-year average for inflation is just 4,3%. That should be taken into consideration because, in 2020, there was actually deflation in the United States during the second quarter; prices were falling. So 7,1% sounds like a very high rate of inflation, as people like to point out it’s the highest in 40 years. But if you take the two-year average, which incorporates deflation the year before, we’re looking at 4,3%, which is similar to what we had as recently in 2008, before the crisis of 2008 started.

Richard Duncan (00:07:01):
So the hype about inflation, okay, there is… Prices are going up, but this is a far, far cry from hyperinflation. And chances are before long, they will start going back down again. For instance, in the second quarter of last year, used car prices went up 40% year-on-year, and that accounted for one-third of all of the inflation during that quarter. Pretty soon, we’re going to have plenty of semiconductors again. New car prices are going to be down, used car prices are going to fall by 40%, and that will take a whole lot off the inflation number when that occurs. So before long, we’ll be experiencing disinflationary pressures again, and perhaps even deflationary pressures as we were before because we have a global economy now with, probably let’s just say hundreds of millions of people willing to work for less than $5 a day. And that’s extremely deflationary. And assuming that globalization doesn’t break down permanently, then those forces that prevented inflation before COVID will exert themselves again and will be back in a very low inflationary environment before long.

Trey Lockerbie (00:08:15):
As you were saying that, something occurred to me for the first time, which is the idea that globalization and the US reserve currency go hand in hand. So when you’re saying globalization, how much of that is also the fact that the US dollar just needs to get out there into the world because we’re running these huge deficits, which in itself can be somewhat deflationary?

Richard Duncan (00:08:41):
Those things are all tied together. Because China wants to sell things to the United States, they ship their goods to the United States and they sell them in dollars. And so, they take their dollars back to China and that’s why China has so many dollars. The US trade deficit, which is going to hit a record high this year, of close to the trade deficit in goods met last year. We don’t have the December numbers yet for 2021, but the trade deficit in goods will be an all-time record high, more than $1 trillion in 2021.

Richard Duncan (00:09:15):
So what that means, is that foreign companies will sell their goods in the US and their surplus will be at US$1 trillion that they will take back to their countries. And that throws off an extra $1 trillion into the global economy. The trade deficit is the reason why there are so many dollars in the world, and this not going to end anytime soon, because the US is going to continue to have a very large trade deficit far into the future as it has now since the early 1980s. And the US trade deficit, which has probably been, off the top of my head, in the range of $10 to $12 trillion since it started in 1980, that’s made the world grow by not just $10 to $12 trillion more than it would have, but there’s been a big multiplier effect, as those dollars have gone into the banking systems of other countries.

Richard Duncan (00:10:07):
That’s allowed credit creation through the system of fractional reserve banking. This transformed the world. These dollars that have gone into China’s banking system, that’s the reason China’s been transformed from a very poor third world country when I first saw it in 1986 to the point where Shanghai now looks like the Emerald City in the Wizard of Oz with infrastructure across China that’s far better than the United States, and why China’s now threatening… And it’s one of the reasons China’s used this money wisely, invested it. And that’s one of the reasons that China is about to overtake the United States and become the dominant global superpower unless the United States takes radical action immediately to ensure that doesn’t happen.

Trey Lockerbie (00:10:52):
So, I don’t put a whole lot of weight into the CPI numbers personally, but there are things I’m seeing that is taking off, not only asset appreciation, but wage inflation is something that is, I think, much more prominent in the US. At least since we last spoke. How much do you follow things like wage inflation? This thing with the Great Resignation and labor shortages and employment being low. What is this all telling us about where we are in the economy today?

Richard Duncan (00:11:20):
I think what it’s telling us is that the number of people in the workforce, even though the unemployment rate has come down very quickly and very sharply, it peaked at 14,8% in April 2020. Now it’s down to 4%. So, a lot of jobs have been… Millions and millions of new jobs have been created or recreated, but still, there are 4 or 5 million people, fewer people in the workforce now than there were two years ago. Some of them have retired, but some of them have just decided that they’re not risking it. They’re not going to go into the workforce, because they don’t want to catch COVID and die. So, the workforce is lacking 4 or 5 million people. And so that’s shifted the balance between capital and labor for the first time since globalization started.

Richard Duncan (00:12:08):
The share of the profits going to the labor force has been shrinking for decades because corporations have shifted their manufacturing to low-wage countries. So the profit margins or the share of profits that go to capital or to corporations has been very high. Profit margins have been extremely high because the share of the profits going to labor has shrunk and shrunk and shrunk because of globalization, which has the downward pressure on wage prices has been one of the main reasons that we’ve seen such low levels of inflation before COVID.

Richard Duncan (00:12:42):
But now suddenly COVID has changed the balance. The power, temporarily at least, has shifted to labor. There’s a shortage of people willing to work and risk getting sick and the shortage is 4 or 5 million people. And so suddenly, these people can demand higher wages. And so suddenly for the first time in decades, they’re getting a fair share of the deal. They’re getting some upward, I think 4%. This is probably just going to be temporary because once… A lot of people have been receiving subsidies from the government in terms of stimulus checks that went straight into their bank account, others have received extended unemployment benefits. There’s been a moratorium on student loan payments that have been very helpful, and child support payments on a much higher level than ever before.

Richard Duncan (00:13:31):
But all of those things have either stopped or are about out to stop and that’s going to push people back into the workforce. And as it does, as those 4 or 5 million, at least 3 or 4 of those 5 million people reenter the workforce, the advantage they had from the labor shortage is going to evaporate. And once again, as globalization resumes, then this is very likely that their wages will stop going up.

Richard Duncan (00:13:53):
The median income for the American household was roughly flat since the early 1970s. And that’s why we’ve had such discontent among so much of the American public and this sense of pessimism that we’ve changed from an era of high rates of growth and growing prosperity, every generation being richer than the previous one. This has not been true for the last 30 years and that’s really taken a toll on the American psyche. And that’s, I think led to this very bitter partisan divide that we’re seeing in politics today.

Trey Lockerbie (00:14:27):
Speaking on politics just for a second, one other thing that’s been plaguing our economy as of late is the supply chain disruption that we’ve been seeing. And anecdotally living here in California, I’ve heard something that I just found really interesting, which was essential that we have a mandate here in California, let’s say where you can only stack a container too high, meaning 2X, in a storage yard. But if the law allowed for us to stack it 3 or 4X high, we would no longer have truck beds that have abandoned containers sitting on them, which means it would free up drivers to go pick up more containers and best move more containers through the system. I’m just curious, that’s just a California thing perhaps, but how much are you seeing on the supply chain side that is either political or actual disruption in other ways? Are you seeing something similar? Have you come across something similar? If Richard Duncan was president, what would you do to eliminate the supply chain headaches we’re having?

Richard Duncan (00:15:24):
In terms of regulation, we have to learn as we go. And every society does. If what you are saying is correct, and I’m sure it is, then adjustments need to be made. That doesn’t mean that no regulation of any kind is required. For instance, it was under the regulation of the banking system in the lead up to the crisis of 2008 that caused that disaster, which costs the government and therefore American taxpayers trillions of dollars. So, we have to find the right balance. Sometimes there’s too much regulation in certain industries and sometimes there’s too little. I don’t know about you, but I’d like for the pharmaceutical and medical industry to be very highly regulated because people looking for profits can be bad. They will sell you bad drugs if they can. So, we need to strike the right balance.

Richard Duncan (00:16:10):
But in terms of what needs to be done to overcome the supply chain bottleneck here to the extent that we can, the one thing that we can do, and thank goodness we are starting to do this, is we can invest more in the American semiconductor industry. In fact, Congress has recently passed a law, I’d like to elaborate on a bit further later in the conversation, but that law includes $50 billion of investment in new American semiconductor manufacturing facilities. And of course, if you expand the number of semiconductors that are manufactured, then prices will come down. So that government-funded investment is a very big step forward that will ensure security for the US, not only lower prices but the ability for the US to create its own semiconductor chips when it can’t access them from other sources as we’ve been experiencing to some extent over the last two years.

Trey Lockerbie (00:17:07):
All right. So, in our last conversation back in July, you explained how our government needs to continuously grow credit in order to grow the economy. When GDP increased 10% in 2021 to nearly $23 trillion, how much credit was needed for that increase?

Richard Duncan (00:17:26):
Okay. So let me elaborate on that. What we have seen since money ceased to be backed by gold, up until 1968, there was a law that the fed had to own gold to back every dollar that it created. But at that point, it didn’t have enough gold to create any more money. So Congress changed the law and eliminated that requirement. And afterward, a lot of things changed in the world. But one of the most important things that are changed is that credit exploded and credit has grown by a total credit, what I mean is all the credit of the country. And since total credit is equal to total debt, this means the debt of the government debt, the household sector debt, the corporate debt, the financial sector debt, all the debt, it first went through $1 trillion in 1964. By 2007, it had expanded to $53 trillion. So, a 53 fold increase in just 43 years.

Richard Duncan (00:18:20):
And now it’s about $85, $87 trillion. So it’s gone up 45% since 2007. So our economy, because of this credit proliferated to such an extent that it became the main driver of economic growth in the United States, and therefore the world. In fact, anytime going back to 1952, anytime that credit has grown by less than 2%, and this is adjusted for inflation, the US has gone into a recession. That happened nine times between 1952 and 2009. And every time total credit grew by less than 2% adjusted for inflation, the US went into recession and the recession didn’t end until there was another very big surge of credit creation. So, when I say that we need for our government to grow its credit to keep the economy growing, that is a true statement because the private sector is already so heavily indebted that it really can’t take on enough debt to keep the economy growing.

Richard Duncan (00:19:19):
So, you ask how did the economy grow by 10% last year, and this is in nominal terms. Over the last two years, there’s been a big surge in total credit. Total credit increased by $8 trillion in 2020, which was by far more than ever before. And that was driven by a 4… Let’s say a $5 trillion increase in government debt. Last year, the credit didn’t grow as much. It was something closer to pre-crisis levels at $5 trillion. So, we’ve seen $13 trillion of credit growth over the last two years. That explains why nominal GDP grew by 10% last year. So, in percent terms, now I keep talking about we need 2% adjusted for inflation to stay out of recession. I call it the 2% recession threshold. So in 2020 total credit grew by $8 trillion before adjusting for inflation. That was 10,5%. But if you adjust for inflation, then in 2020 total credit grew by a whopping 9,3%. That was very much more than it had grown for a very, very long time.

Richard Duncan (00:20:29):
So that enormous surge in credit expansion in 2020 helped carry it over into 2021 and is probably still supporting the economy into 2022. But things slowed down in terms of credit growth last year. We don’t have the fourth-quarter number yet, but it looks like it will be about $5 trillion of credit growth for the full year down from $8 trillion the year before. So, that’s 6% credit growth adjusted before adjusting for inflation. But because inflation was high last year, that’s only 1,3% after adjusting for inflation. So, that’s well below the recession threshold. And this year based on my estimates, looking ahead for how much credit’s going to grow, it’s not that hard to estimate how much credit will grow by if you just forecast how much it’s going to grow for the government and for the households and the corporate sector; that’s most of it. There are only a few big sectors; you can make educated guesses.

Richard Duncan (00:21:25):
It looks like it’s going to grow by something like maybe $5,5 trillion this year. But since the inflation rate, the average inflation rate for the year, if we assume that inflation is 4% on average for this year, then that’s going to give us only 1,8% credit growth after adjusting for inflation. So we’re looking at two years of credit growth below the 2% recession threshold. So, we’re on a credit high from 2020 when there was a very big surge of credit expansion driving everything. But now that the credit surge is evaporating. And that’s one reason the outlook for the economy is somewhat concerning, one of a number of reasons.

Trey Lockerbie (00:22:12):
Concerning that credit is tapering off a little bit, but we’re still not hitting your 2% threshold, correct? So what would it take to start going over that threshold?

Richard Duncan (00:22:21):
It might have happened this year that’s going to take us above that threshold. It doesn’t look like it’s too late. We had three big rounds of government stimulus that supported the economy and that had to be funded by government borrowing, by increasing government debt. Those occurred in March 2020, in December 2020, and in March 2021, nearly a year ago. We’re not going to get any more big surges in government stimulus. The last big dose of fiscal stimulus was in March 2021. There aren’t going to be any more big doses of fiscal stimulus. The fiscal stimulus is over and there’s nothing that’s suddenly going to ramp up household sector borrowing in and of itself or corporate borrowing. In fact, now that the fed is set to start hiking interest rates as interest rates move higher, it’s going to make it more expensive for people to borrow. So, that’s going to make it less likely that credit will expand.

Richard Duncan (00:23:16):
We’re not only seeing that fiscal stimulus is over. We’re also seeing that monetary stimulus is over. The fed is suddenly and very abruptly switched from a very loose monetary policy for what’s shaping up to be quite a tight monetary policy. It was only in November that the fed said that it was going to begin slowing down the pace of quantitative easing. Up until then, it was creating $120 billion a month. It was then announced that it was to slow that down by $15 billion a month. And only one month later, they doubled that tapering to $30 billion a month. That means that the QE is going to end altogether by early March. So no more monetary stimulus from quantitative ease. And at the same time, the fed has made it very clear that they expect to start hiking interest rates in March, and that they are going to hike interest rates a lot this year, and perhaps more than just 25 basis points each time, perhaps by 50 basis points.

Richard Duncan (00:24:20):
And then the final blow that really floored the stock market last month was on January 3rd, Wall Street Journal reported that fed officials had started talking about launching quantitative tightening. Quantitative tightening is the opposite of quantitative easing. In quantitative easing, the fed creates money and injects it into the financial system by buying bonds. And the more money that gets injected into the financial system, the more liquidity there is, and the higher stock prices and other asset prices tend to go. The quantitative tightening is the opposite. With quantitative tightening, the fed destroys dollars and that removes liquidity from the financial markets. And that tends to drive the asset prices down again. The liquidity is like the tide. When it goes up, all the asset prices float higher. When it goes down, they all tend to sink. So this came as a real shock to the stock market because the fed hasn’t even stopped quantitative easing yet. And now they’re telling us that they’re about to launch quantitative tightening sometime before the middle of this year if things go as they look they’re going to go.

Richard Duncan (00:25:25):
So that’s why the stock market between January 4th and January 27th, the S&P fell nearly 10% and NASDAQ fell nearly 15% with most of the high flying risky asset assets getting slammed much harder than that. We’re looking at now the beginning of what could be quite a severe tightening cycle that occurs faster and more aggressively than the last tightening cycle. So, that is likely to result in asset prices falling further before this tightening cycle eventually comes to an end. And so, if asset prices fall, then that will destroy wealth. And that will be a negative wealth effect. It also acts as a drag on the economy. So, no more fiscal stimulus, a reversal of monetary stimulus. These are adding up to be really bad news for not only the economy but for investors, especially those people investing in the most speculative asset classes.

Trey Lockerbie (00:26:25):
Yeah. I’m curious if you believe if they’re going to do that or not, mainly because to your point, they’ve only continued to purchase assets since coming out with those statements. If you look at the balance sheet, it’s only going up. There hasn’t been any tapering and we’re getting closer and closer to March. So when you see that, it can lead you to a “Watch what they do, not what they say” narrative. Is the fed at risk of losing credibility or even trustworthiness if they continue to say things and not follow through with them? I think in our last conversation, you even mentioned that it took them something like a year, year, and a half before they actually started tapering when they first started the QE efforts back in 2008.

Richard Duncan (00:27:02):
You’re right. So they are still creating more money every month, but they are creating less money every month. They are tapering. They are no longer creating $120 billion a month. It has ratcheted down very sharply and it will end in early March, as they’ve said. The monetary policy is like a supertanker. You can’t turn it on a dime. The fed had led people to believe that quantitative tightening was only going to be reduced slowly, starting in early 2022, and that quantitative easing would continue on all through 2022, but then suddenly in November, they started changing their messaging pretty abruptly. And what has in fact occurred is they started tapering several months earlier at a much faster pace than expected. And rather than QE going on through the end of the year, this year, it now is going to end in early March.

Richard Duncan (00:27:56):
People had expected this to go on until the end of the year, they had expected more and more money creation until the end of this year and investors had placed their bets accordingly. They had a bet because the fed had told them that there was going to be more and more money creation this year until the end of the year. But suddenly the fed is sending out a different message now. They’re saying the money creation is going to stop in March. They tried to spin the supertanker around too quickly, and that’s why we got the stock market sell-off in January. Now, it’s interesting that in the past, for really going back to 2008, every time the stock market started to have a significant correction, the fed would do something to try to support the stock market again. They call this the fed put.

Richard Duncan (00:28:42):
In other words, in the fourth quarter of 2018, there was a pretty big stock market sell-off in the fourth quarter. And at that point, that’s when the fed put monetary policy tightening on hold. They stopped hiking interest rates. They said they were going to stop quantitative tightening, and they did. So every time the stock market wobbled between 2008 and really essentially up until the end of last year, the fed would do something to push it back up again. This was called the fed put. So it made sense to buy all the dips because you knew the fed had your back. The fed put may not exist any longer. The fed needed asset prices to go up. But after 2008, because credit growth was extremely weak, it wasn’t strong enough to drive the economy. It was just barely above the 2% recession threshold. So, the fed orchestrated higher asset prices to create a wealth effect, and that wealth effect allowed more consumption, and more consumption drove the economy. So between 2007 and the end of last year, the wealth of the household sector doubled to $145 trillion.

Richard Duncan (00:29:53):
As a result of this fed policy, the fed needed stock prices to go higher to create this wealth and drive the economy because credit growth was too weak to drive the economy, but that’s not the situation we’re in now. Last year, the US economy, real GDP growth after adjusting for inflation was 5,7%. That was the highest economic growth in 37 years. And so from the Fed’s point of view, the economy is growing very rapidly now, plus inflation is too high, so they don’t need more asset price inflation. And so, they may tolerate a significant correction in asset prices this time, particularly in the things they disapprove of most, meme stocks, for instance, or the other high flying NASDAQ stocks. They don’t have to have asset price inflation now, they think, to support the economic growth. And in fact, if people lose some wealth, that may put downward pressure on inflation, which would be a good thing from their point of view. So the costly error, this time to buy the dips as fed may not have your back. We’ll have to see.

Trey Lockerbie (00:31:01):
Very interesting. One of the reasons you’re on the show today is because you’ve just written this incredible new book that I want to talk a lot about. And one of the coolest things I found about the book is that it walks you through the history of the fed by essentially walking through the changes of the fed’s balance sheet. I imagine you did this somewhat out of curiosity, your own curiosity to some degree. While you were going about this, were there any major revelations that you didn’t know previously or that you uncovered as you were going through the writing of the book?

Richard Duncan (00:31:33):
This is my fourth book. It’s called The Money Revolution: How to Finance the Next American Century. I worked on this book for four years. But of course, four years ago, I wasn’t starting from zero. I had written three other books. I’ve been in the financial industry since 1986. So all of this is cumulative. But I think one of the important contributions in this book, and there are three parts. The first part is a history of the fed, which is a history of the fed told in a unique way. What it does is traces changes in the fed’s balance sheet to tell the history of the fed. Changes on the liabilities side of the fed’s balance sheet that shows you where the fed gets the money that it gets, essentially how it creates money. And changes on the asset side show you how the fed uses the money that it creates.

Richard Duncan (00:32:32):
So by tracking changes in the liabilities and the assets of the fed over essentially 10 different time periods, consecutive time periods from the time that the fed was started in 1913 up until last year, this is a very clear history of the fed. There’s no, “This fed chairman said this or this fed chairman said that.” You see exactly what the fed did and why, and you can therefore understand exactly why they did it.

Richard Duncan (00:32:59):
So for instance, you can see the fantastic contribution the fed made to the United States by helping to finance World War I and World War II. You can see where the fed failed when it failed to take the right steps to prevent The Great Depression. You can see that over time that gold played a less and less role and eventually no role whatsoever in fed policy or monetary policy. And you can see how that liberated the fed afterward to create limitless amounts of money as it has done over the last five decades, and particularly during a crisis, like the crisis of 2008 and other national emergencies like World war II, where the fed jumped in and finance government borrowing on a multi-trillion dollar scale to prevent a new Great Depression from occurring. Or during the pandemic where again, the fed created trillions of dollars to help finance the government borrowing on a multi-trillion dollar scale to prevent the pandemic from causing the economy to collapse into a new depression.

Richard Duncan (00:34:02):
So over the last two years, the government in 2020 and 2021 borrowed $6,3 trillion. The fed created $4,6 trillion effectively financing 73% of all of that government borrowing. That government borrowing was necessary once the pandemic started. This government borrowing and spending is the reason that our economy looks today much like it did at the end of 2019, rather than the way it did in 1933. With e came out this crisis because of massive fiscal stimulus financed by massive money creation. So, by tracing the changes in the FED’s assets and liabilities, this is a very clear history of the most powerful economic institution in the world. And if you understand how the fed works, then you have a much clearer idea of how our economy is going to evolve, how the fed is going to respond to future crises, and how that’s likely to affect asset prices, as well as the opportunities that create for the government to borrow.

Trey Lockerbie (00:35:12):
I love that term, the most powerful economic institution because, in the book, you say that if the fed were a corporation, it would be the most profitable corporation in the world, leading Apple by nearly $30 billion. I’d love it if you could just walk us through how the fed actually makes a profit, certainly of that magnitude.

Richard Duncan (00:35:32):
When the fed creates money, it doesn’t cost the fed anything to create money. After it’s created the money, it then buys government bonds, our mortgage-backed securities, and adds those bonds together, and that is the Fed’s total assets. The fed now has total assets of $8,9 trillion in earning interest. All they have to do is pay for their staff, which is… I’m sure they make reasonably good salaries, not Wall Street salaries, but not bad salaries. After you take out a few expenses, you pay the electricity, you do the repairs on the fed buildings around the country, you end up with a massive profit because all the money that you created costs you nothing essentially. And you’re earning interest on $8.9 trillion of bonds that you bought with the money that you created at no cost. So the fed, last year, would’ve been the most profitable corporation in the world making… What did I say? $30 billion more than Apple did.

Richard Duncan (00:36:28):
There are so many numbers; I can’t keep track of them, but I think the fed’s profits since its creation has been $1,2 trillion. And almost all of that has been since 2008 when it launched the first round of quantitative easing. In 2007, the fed’s total assets amounted to $700 billion. Now, they’re 12, 13 times larger, almost $9 trillion. So all of the money the fed has created has allowed them to buy bonds, and they earn interest on those bonds, and that’s extraordinarily profitable. And so, they have given this money to the government. The fed must hand over all of its profits to the US government every year. So last year, their profits were more than $100 billion. And that reduced the budget deficit by more than $100 billion last year, reducing the burden on American taxpayers by more than $100 billion. And altogether, the US government debt is more than $1 trillion less now than it would’ve otherwise been because of all the profits the fed has made and handed over to the US government.

Trey Lockerbie (00:37:36):
It makes my head hurt to think about it… Cyclical this is.

Richard Duncan (00:37:40):
Well, it’s important to understand that none of this was possible before the US stopped backing dollars with gold. That’s why it’s so important to understand the significance of that change. That change fundamentally changed the nature of our economic system. It would not have been possible for the fed to create $4,6 trillion during the last two years to fight COVID if it had to back those dollars with gold. The fed doesn’t have $4,6 trillion of gold. On the fed’s books, its gold is valued at $11 billion. So by going off the gold standard, that allowed the fed and other central banks around the world to create limitless amounts of money, which they have done, which has allowed the governments to borrow on the extraordinary scale that they have done. Since the fed is buying their bonds with newly created money, this has enabled the government to borrow, well, $6,3 trillion over the last two years without pushing up interest rates.

Richard Duncan (00:38:35):
Just imagine the government debt went up 27% in the last two years. They sold $6,3 trillion of new bonds. How high would interest rates have gone if they had sold that to the public if the fed hadn’t stepped in and bought 73% of it? Interest rates would’ve skyrocketed, and the higher interest rates, the very much higher interest rates would’ve offset much in perhaps all of the benefits that were derived from the increased government stimulus, that stimulus that the government injected into the economy by sending out checks to households, and making loans to businesses, and preventing the banking sector from collapsing. So, this has allowed the governments to borrow much more at very low-interest rates and to stimulate the economy through fiscal stimulus.

Richard Duncan (00:39:20):
And the final piece of the puzzle is that as I was mentioning earlier, once we no longer back dollars with gold, this meant we didn’t have to pay our trade deficits with gold. We could just pay with paper dollars or treasury bonds denominated in paper dollars. So we started buying, the size of the US labor force expanded 23 times. We went from a closed domestic US economy to a global economy where we could buy things from people in Vietnam making $5 a day. And this put such downward pressure on inflation, it was so disinflationary that it allowed the US government to borrow and had $1 trillion stimulus packages, and then fed to create trillions of dollars all without creating high rates of inflation. So, all these things together that resulted from the breakdown of the Bretton Wood system or the end of the gold-backing for dollars in 1968 and 1971, central banks were free to create as much money as they wanted. Governments could borrow much more at low-interest rates and they could all get away with all of that because globalization prevented inflation.

Richard Duncan (00:40:24):
The final step is that all of these things combined allowed credit growth to explode. As I mentioned, going from $1 trillion total credit in 1964 to $88 trillion now. And this credit creation has transformed the world. It has pulled hundreds of millions of people around the world out of poverty. For instance, changing China from a very poor country into a country that’s about to overtake the United States. And none of this would’ve been possible.

Richard Duncan (00:40:51):
So, I like to simplify it perhaps by saying that our economic system evolved at that point. Dollars no longer were backed by gold. When the nature of our monies changed, the nature of our economic system changed. Capitalism evolved into creditism. Creditism has transformed the world, that creditism requires credit growth to survive. If we get less than 2% credit growth, we go into recession. If credit contracts, as it nearly did in 2008, and as it would have in 2020 without the government intervention, the creditism collapses into a depression like the 1930s.

Richard Duncan (00:41:28):
So that’s why I have said we need credit growth government borrowing, because the household sector, the households, and the corporations are already too heavily indebted to borrow enough. For instance, let’s just round up and say, total credit is now $90 trillion. That’s probably about where it will be at the end of this year. And remember, we need 2% credit growth after inflation to stay out of recession. If we assume that the average rate of inflation for this year will be 4%, and you may be thinking 4% is low, but 7% at the beginning of the year, it’s probably going to be much lower at the end of the year. Let’s just assume it’s 4% for the year. We need 6% credit growth before inflation to get 2% after inflation if the inflation rate is 4%, right? So we need 6% credit growth before inflation.

Richard Duncan (00:42:20):
6% of $90 trillion is $5,4 trillion. That’s how much we need the credit of the country to grow but of all the sectors of the economy combined, we need them to grow by $4,5 trillion this year just to get to the 2% recession threshold, otherwise, we will have a recession. Now, the government’s probably going to borrow less than $1,5 trillion this year, let’s say $1,5 trillion. That means the private sector’s going to have to borrow almost $4 trillion, $3,9 trillion just to hit 2% credit growth after inflation. It’s not easy for the private sector to borrow $3,9 trillion. So, that’s why we’re probably going to see the US moving back toward recession far sooner than most economists expect because credit growth is weak. All the fiscal stimulus is over now. On top of that, we’ve got monetary tightening instead of monetary easing. And then, there could be a bigger stock market correction because of the monetary policy tightening. As interest rates rise, mortgage rates will go up, property prices are likely to fall as well. So, we’re looking at a challenging outlook.

Trey Lockerbie (00:43:30):
The fed is loaning the government money by buying its bonds. The government is saying, “Hey, we’re going to pay you an interest saw this bond,” and they do, they pay it to the fed. But then the fed gives all that money right back to the government in profit.

Richard Duncan (00:43:41):
Those bonds are interest-free debt, and interest-free debt is not debt. The fed is essentially canceling the bonds that it buys.

Trey Lockerbie (00:43:49):
So fascinating. So speaking on that, it seems like the fed gets this bad rap because it’s quote, unquote “printing money” seemingly into oblivion. But really, they’re simply monetizing the debt already created by the government, by the fiscal side. So it’s really the treasury that’s driving the money creation. Do you think this is an important distinction to make for us as citizens to change the narrative a little bit, to point our focus away from the fed and more on, maybe something that’s more of a key driver for any benefit, for political reasons or any other reasons?

Richard Duncan (00:44:23):
Well, I think we, as citizens, need to carefully consider the narrative. Americans are so critical of so many Americans. I mean the overall narrative is the government is evil. The fed is evil. Our country is on an evil path. So many people are evil. We’re all freaking doomed, right? And of course, our enemies spread that through social media, and try to infect everyone with that idea as much as possible. Well okay, it’s certainly true; the United States is not perfect. But what we have seen since the United States has been the leading power in the world since 1945 is sometimes called as Pax Americana. It’s been 70 years of the greatest improvement in human prosperity in history by far. And so, while there have been many flaws, there are not a bunch of evil people sitting in the federal reserve building plotting up how to screw the average American. That’s not at all the case.

Richard Duncan (00:45:25):
These people are trying to do the best they can given the situation they’ve inherited so that the economy doesn’t collapse. And the same is true with the government as well. These people who are making decisions to send out stimulus checks to the Americans are not somehow plotting to undermine American freedom. They are propping up American freedom because if the economy were to collapse into a depression as it did in the 1930s, just imagine how extreme US politics would become like during the 1930s. We were lucky we didn’t swing into either fascism or communism, because there were strong pressures exerting in both directions. Franklin Roosevelt seemed to strike the middle accord and carried us on into the time when World War II started. And only when World War II started, then the government started really doing something to support the economy.

Richard Duncan (00:46:16):
Then the government had a massive increase in government spending, and then the fed created massive amounts of money to help finance that government spending. And all of that stimulus from the government, the fiscal budget deficits, the money creation by the fed, that’s the thing that ended the Great Depression. And these people are just normal people. And I’ve never had a very high position in Washington by any means, but I have had a consulting job for just three weeks with the IMF. And I worked for two years in Washington with the World Bank between 1998 and 2000. I saw some of these people. I got to know some of these people. These are just normal people trying to do their jobs as best they possibly can. There is no big conspiracy. The conspiracy is to make America as prosperous as possible for as long as possible. And Americans need to really reconsider the narrative, because we’ve got a really negative mindset that’s uncalled for and debilitating, and it needs to be turned around. If it is, this country will be the first American century. It doesn’t have to be the only one.

Trey Lockerbie (00:47:19):
And that narrative has driven people to this idea that we will resort to hard money. And when you read this book, you start to believe, Hey, that’s really not possible, right? Or just incredibly hard to imagine. Walk us through your views on hard money and why you think it might be a thing of the past.

Richard Duncan (00:47:39):
Well, hard money is a thing of the past. Hard money was gold. When countries backed their money with gold as the US fed was required to do until Congress changed the law in 1968, then gold was money. After 1968, gold was no longer money. So, we went from hard money to what is known as fiat money, where the government can create as much of it as it wants. I guess you would call that soft money. And there is no going back to gold. If we went back to gold, that would mean, once again, that international trade had the balance, because the US would have to pay for its trade deficits with gold. And the US has, maybe at today’s exchange rates, be generous. It might have $500 billion worth of gold in the United States at the government’s disposal. That would cover about six months of the United States trade deficit this year.

Richard Duncan (00:48:32):
Afterward, there wouldn’t be a single penny left in the United States and we wouldn’t be able to buy anything, not one more pair of tennis shoes from any other country. So the US economy would collapse, just as it did in the 1930s, if not far worse. And the global economy would collapse, just as it did in the 1930s. And we all know what happened in the 1930s; Nazis took over Europe. The Japanese took over Japan. World War II started and 60 million people died. So we’re not going back to that. That’s never going to happen again unless there’s some sort of calamity, a Mad Max type scenario where everything breaks down and we revert to barter. And even people who have gold then, wouldn’t be able to keep it because there would be war Lords taking it away from them. So we’re not going there. And if we do, you’ll probably be dead.

Trey Lockerbie (00:49:18):
All right. Well, I want to get to part three of the book, which is talking a lot about the future, because you paint the opposite of a Mad Max scenario, which I just love so much and I want to talk a lot about it. You’re suggesting in this book that we should double down on this new economy that we have, or even 10X down, I guess, on what we’re… Because you’re talking about a $10 trillion investment over 10 years. We’re talking about going really big really soon. What are three reasons why the US should invest in this way?

Richard Duncan (00:49:51):
Okay. So, the book is called The Money Revolution. And the first two parts, the history of the fed and the history of credit, explain how this money revolution occurred. Part three is called The Future and it draws on the lessons from the history explained in the first two parts to explain why we have really what is in a sense a once in history opportunity. What we’ve seen since 2008 is that the government has the ability to borrow trillions of dollars and that the fed can finance this at low-interest rates by creating trillions of dollars, all at low rates of interest, without causing higher rates of inflation. Now, the last part is a little bit hard to justify at the moment. Most of this book was written before COVID started and before globalization started breaking down partially, leading to the higher rates of inflation we have now.

Richard Duncan (00:50:42):
The message was very clear before COVID started. The highest rate of inflation during the three rounds of quantitative easing from 2008 to 2014, fed created $3,6 trillion expanding its total assets, or in other words, expanding the amount of money it had created by 400%. And the highest rate of inflation that caused was 3,9%. And then that didn’t even last. So this new environment that I have described, where it’s possible for central banks to create limitless amounts of money, where globalization means that can occur without causing higher rates of inflation, what this means is that this gives the US the possibility for our government to fund a multi-trillion dollar investment program over the next 10 years, targeting industries and technologies of the future, things like artificial intelligence, genetic engineering, biotech, neurosciences, green energy, nanotech, quantum computing, and the other usual suspects. We can do this on a multi-trillion-dollar scale.

Richard Duncan (00:51:46):
And if we do, this would induce such an extraordinary technological revolution. It would create vast amounts of wealth. And that’s just the beginning, not even the most important part. It would create such technological breakthroughs that we have a very real chance of curing all the diseases, radically expanding life expectancy, stopping environmental degradation, and actually restoring the environment. And certainly, in addition to that, this sort of investment would shore up US national security, which is now under threat from China.

Richard Duncan (00:52:19):
So, there are three reasons I see that the US must invest on this scale over the next 10 years. First, our economic system, creditism, requires credit growth to survive. If credit contracts, we’re going to have a depression with potentially catastrophic consequences. So this sort of investment on the scale I’m talking about would ensure that credit keeps growing. The second reason is because we’re about to be overtaken by China. Now, I don’t know how you feel about that, but I think that’s a very frightening idea. In the year 2000, the United States invested eight times more than China did in investment. Wealth comes from investing. In 2000, the US invested eight times more. By 2017, only 10% more. In 2019, China invested more than the United States did. If the current growth rates continue, by the end of this decade, China will invest 40% more than the US does. That’s why China’s winning. That’s why China has 5G and hypersonic missiles and the United States does not.

Richard Duncan (00:53:24):
This is the United States’ new Sputnik moment. If we don’t act very quickly and very aggressively, China’s going to obtain such a lead over us technologically, economically, and militarily that long before the middle of this century, the United States is going to be a vulnerable has-been, second rate power, no longer in charge of its own destiny. So that’s the second reason we must invest because if we don’t, we are facing an extreme national security threat now that’s getting worse hour by hour.

Richard Duncan (00:53:55):
And the third reason though, and this is the most important one, is that I call this a moral imperative. We must invest because it would be so easy for us to finance this kind of investment. In the book, I don’t put a specific price tag on how much we should invest, but I give… In fact, I say we should invest as much as possible, as fast as possible, judging by trial and error. If the investment overheats the economy and causes too much inflation, then we can slow it down until the bottlenecks that cause the inflation are overcome, and then re-accelerate the investment again after that.

Richard Duncan (00:54:28):
But just to illustrate how a number of things, including how it would impact the government’s finances and the fed’s balance sheet, I use the example that the government could fund a $10 trillion investment using public-private joint venture partnerships to actually carry out the investment over the next 10 years. Now $10 trillion, this sounds like a lot of money, but in the second quarter of 2020 alone, the US government in three months borrowed $2,6 trillion, and the fed created a similar amount of money to help finance that government investment. So, I’m telling you, and in the book, I will demonstrate to you that America can afford to invest. Not only can we, but we also must. We would be stupid not to. And if we do, it’s going to cause such a radical acceleration in innovations, medical breakthroughs, technological marvels, shore up national security and create vast amounts of wealth that all of the tensions that have arisen over the last few decades, because the middle class is no longer becoming more prosperous but less, those tensions will evaporate.

Richard Duncan (00:55:37):
If we don’t act quickly, this political divide that’s tearing the country apart, and China’s growing power, which is going to allow it to establish Chinese hegemony over the greater part of the world before long, those things are going to overtake us and tear us apart. We have the opportunity to prevent that from happening. It would be very easy for the US to fund this sort of investment. And that’s what the book is all about, how to finance the next American century.

Richard Duncan (00:56:03):
Now there are a couple of points. Many people say you must be out of your mind. The government couldn’t possibly do anything right. Well, of course, that’s not true. The government investment won World War II for one thing. Government investment created the internet, for instance, and everything in a smartphone that makes it smart, essentially came out of US government-funded investment; GPS, touchscreen technology, semiconductors, and the internet itself. But perhaps a more acceptable way to structure this sort of investment program would be for the government to set up joint venture companies with the… Let’s say 10,000 most promising American entrepreneurs and scientists in the United States, joint venture companies. The government would fund these companies with vast amounts of money in exchange for a 60% equity stake.

Richard Duncan (00:56:54):
For instance, the entrepreneurs and scientists could keep a 40% equity stake and they would manage the companies. And when one of these companies invents a cure for cancer, it could be listed on NASDAQ for how many trillion dollars? Of which the American public would receive 60%. So this kind of investment would be on a scale that would be too large to fail. And as it became immensely profitable, it would pay for itself many times over. In fact, it could even before long pay off the entire national debt. So this is the opportunity that we have before us. Now luckily, people say, “Well, that’s not going to happen. The government’s just not going to do that. Congress can’t achieve anything.” Well, in fact, the investment program that I’m recommending is already now being implemented.

Richard Duncan (00:57:37):
Just on Friday last week, a few days ago, the US house of representatives passed the America Competes Act, allocating $350 billion for investment in new industries and new technologies. And this follows up a bill passed by the Senate in the middle of the last year, which was called the US Innovation and Competition Act, which allocates $250 billion. Now, these two bills will now be reconciled and they’ll probably meet somewhere in the middle. But these two bills, let’s say the lower number, 250 billion, okay? I’m calling for multi-trillion as much as possible, as fast as possible. Well, $250 billion is a good first step. It’s a bit small, but it’s starting to happen. What we need to see now is for this to happen on a much larger scale, because $250 billion spread out over a few years is not going to do it. China is investing much more aggressively than that. And if China develops artificial intelligence before the United States does, then after that its powers will grow exponentially, thanks to machine learning and artificial intelligence. It will be game over.

Richard Duncan (00:58:46):
So whoever wins the AI race will control the future. And I don’t want that to be China. There’s no reason that it should be. But if we don’t invest rapidly and aggressively with a mindset that says, “Yes, this is a great thing and that America can do it,” we’re going to fail. But if we adopt the right mindset and believe in ourselves and believe in the country, and the opportunities before us, we can make this happen. We can turn the first American century into the first of many. This kind of investment would ensure US national security for generations to come, and make everyone just wildly wealthy compared to what they are now. And more importantly, wildly healthy. So that is what the book is about. The book just demonstrates how a money revolution has occurred and the opportunities that now exist as a result of this revolution. This How to Finance the Next American Century, this is something we can do and we better it, or our civilization’s going to decline and fall.

Trey Lockerbie (00:59:45):
Someone hearing that for the first time, let’s say a skeptic, they’re going to say, “Well, that just sounds way too good to be true.” Even now with the money manipulation we’ve seen, it’s led to price distortions, zombie companies. It’s a lot of malinvestment, right? I think the skeptic would be like, “Well, how on earth are we going to solve for that? How are we going to solve for people who aren’t taking advantage of that, who are stuffing their own pockets?” What is the risk that is not being considered here as far as the program and what risks are you factoring into this?

Richard Duncan (01:00:17):
Well, I would say to people who put forth the argument that we can’t do that because some are going to steal the money, and there’s going to be some misallocation of the money and say that argument is akin to cutting off your nose to spite your face. And so some money will be misallocated. Some people will steal some money, and some people will benefit more than others. Well, I’m willing to live with that if we can cure all the diseases and expand life expectancy much beyond where it is at the moment. That’s a very small price to pay. And of course, when people are caught stealing the money, they should be put in jail for a very long time. That’s why we have laws. That’s what the laws are for. That’s not a good reason not to take advantage of this once in history opportunity where we can so easily invest trillions of dollars in new industries and technologies that will transform the world and make the dreams for a much better future reality in our own lifetime.

Trey Lockerbie (01:01:10):
Yeah, I think the idea about finding 10,000 worthy entrepreneurs is very interesting, because the way our system currently works, you could see how a lot of folks with influence would be vying for that opportunity to put the money to work. And maybe it’s not the worst thing to have BlackRock or, even like Andreessen or somebody like that running this money. But you could see how it could potentially consolidate into a few hands. So, it’s a really interesting point, the idea of disseminating it across a larger volume of maybe smaller entities. I find that really interesting.

Richard Duncan (01:01:44):
Yeah. And so if your concern is increasing income inequality, like your wealth just doubles as a result of that, whereas somebody else’s wealth goes up by 1.5 times if that’s the issue, then the solution is through higher taxes on capital gains or higher taxes on people who earn more than $50 million a year. Those sorts of increasing income inequality issues could be resolved through changes in the tax laws if that’s what society wants. It is a democracy. If people are unhappy that some people are becoming… Had $200 billion, they can vote to change that.

Trey Lockerbie (01:02:21):
In the book, you state that the program would also be at no cost to US citizens, which might also sound confounding, to begin with. So, walk us through exactly how that works.

Richard Duncan (01:02:33):
Okay. So, I use the example in the book of a $10 trillion investment over 10 years. Again, $10 trillion is just four times more than what the government borrowed in the second quarter of last year. So, it sounds like a big number that is not as overwhelming as it sounds. Now, where would the money come from? The government would sell $10 trillion worth of government bonds, and the fed would create $10 trillion of new money and buy those bonds. So, the fed would finance the entire investment program. And since the treasury would be required to pay interest on those bonds to the fed, and at the end of every year, the fed would be required to give all that interest back to the government, because it has to hand over all its profits to the government every year, and that’s how it’s taxed. That’s why it would come at no cost to the American public. Of course, it’s a 500-page book. There are a lot of details. It’s hard to convey in a few minutes here, the idea.

Richard Duncan (01:03:34):
But in the book, I do show how a $10 trillion increase in government debt over the next 10 years on top of is already expected, course the government debt is expected to grow for the next 10 years, the Congressional Budget Office projects out how much the debt’s likely to grow by, I take that number and add $10 trillion to it, and I make this assumption, the absolute worst case possible assumption you can imagine; if every last cent of this $10 trillion is wasted or stolen, whatever you want, and has absolutely no positive impact at all on the US economy, the US economy doesn’t grow by $1 extra as a result of this $10 trillion investment, which of course is absurd, and this investment contributes nothing whatsoever to any benefit at all… In other words, it is a total waste. If we add $10 trillion on top of what the government debt will be 10 years from now, then the ratio of US government debt 10 years from now will be 150% of GDP instead of roughly 120% of GDP, which is what is expected currently by the Congressional Budget Office.

Richard Duncan (01:04:43):
If all the money is wasted, government debt will be 150% of GDP. 150%. Japanese government debt is currently 250% of Japan’s GDP. So 10 years from now, if all the money is wasted, US government debt to GDP will be where Japanese government debt to GDP was 20 years ago in 2002. 10 years from now we’ll be where Japan was 20 years ago. And if the fed finances all of this, these total assets, instead of being $9 trillion as they are now, they’ll be $19 trillion. $19 trillion will be about 55% of… Let’s call it, 60% of US GDP 10 years from now. Bank of Japan’s total assets relative to Japan’s GDP is currently four times larger than that. And in the European central banks’ assets to GDP is also slightly higher than that now.

Richard Duncan (01:05:42):
So 10 years from now, the fed’s assets to GDP would be slightly less than where Europe is now, and one-fourth the size… Japan is four times larger than the US is at the moment. It would be twice as large 10 years from now after this investment.

Richard Duncan (01:06:00):
What I’m saying is that the United States can afford to invest. It would be so easy for the United States to finance this kind of investment. And the payoff would be so extraordinary that we would have to be insane not to do this. And the purpose of this book is to persuade the American public and US policy makers of exactly that; the US can invest. We must invest. Let’s invest. We can make the world a whole lot better place and the United States much safer in terms of national security. And live much longer, much healthier lives with much capitalized.

Trey Lockerbie (01:06:38):
I really enjoyed this discussion. Richard, I love having you on the show. I feel like you and I could just continue to talk for hours and hours. And I also enjoy the birds chirping in the background. You’re in Thailand, for those who don’t know, and it’s given me this great audible experience while talking to you as well. So anyways, Richard, always a pleasure. Before I let you go, tell people where they can find the book, your other books and the video content you put out there, any other resources you want to share.

Richard Duncan (01:07:05):
It’s called The Money Revolution: How to Finance the Next American Century. Hopefully in fine bookstores everywhere, any that still exists. But it’s widely available on the internet through Amazon and Borders, et cetera. And this book, I’d like to thank everyone who has subscribed to my video newsletter over the last eight years, because their financial support has made this book possible. And much of the material that is in this book was previously published in my video newsletters and Macro Watch. So I hope your listeners will also check out my video newsletter, Macro Watch. They can find it at my website, richardduncaneconomics.com.

Trey Lockerbie (01:07:56):
Fantastic. Well, Richard, I can’t wait to do this again. Thanks again for coming to the show.

Richard Duncan (01:08:00):
Thanks, Trey. I’ve really enjoyed it and I appreciate you giving me the opportunity to talk about this book, because it’s so important for the future, not only of the United States but of everyone because the benefits that would be derived would be worldwide. Everyone would be better off with these technological breakthroughs.

Trey Lockerbie (01:08:19):
All right everybody, that’s our show. If you learn something, go ahead and follow us on your favorite podcast app. If you have ideas about the show, definitely hit me up on Twitter at @treylockerbie. And if you haven’t already done so, check out the world of resources we’ve built for you at theinvestorspodcast.com. Simply Google TIP Finance, and it should pop right up. And with that, we will see you again next time.

Outro (01:08:40):
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