Richard Duncan (00:04:15):
That first went through $1 trillion in 1964. Over the next 43 years, by 2007, a total credit or total debt had expanded 50 times, a 50 fold increase. It hit $50 trillion in 2007, and that explosion of credit completely transformed our world. It ushered in the age of globalization, for instance, because the United States trade deficits became so large. But in 2008, the private sector couldn’t repay all of this debt, and credit started to contract. At that point, creditism requires credit growth to survive. If credit contracts significantly, the economy will collapse into a depression, because it is driven by credit growth, and it must have credit growth to expand.

Richard Duncan (00:05:01):
In 2008, credit started contracting, and the US and the world started tumbling into what was going to be a new Great Depression. But at that point, the government of the US responded with trillion-dollar budget deficits for four years in a row, and all together, between 2008 and 2014, government debt in the US doubled from $8 trillion to $18 trillion, or… Sorry, from 9 trillion to $18 trillion. Also, during that period, the Fed carried out three rounds of quantitative easing, in which they created three-and-a-half trillion new dollars, which essentially expanded their total assets, or the amount of money in the country, the amount of what we would call high powered money, by five times between the end of 2007, and when the third round of quantitative easing ended, in October 2014.

Richard Duncan (00:06:03):
So by creating three-and-a-half trillion dollars, the Fed effectively monetized roughly a third of all of the government debt that the government incurred as it struggled to prevent the new depression from occurring. So the private sector couldn’t take on any more debt after 2008, but luckily for us, the government sector could. By the government taking on a great deal of more debt, which stopped total credit from contracting. By the second half of 2009, credit was expanding again, on the back of this massive government borrowing.

Richard Duncan (00:06:37):
So credit, once again, started expanding, and the economy reflated, and we didn’t collapse into a new Great Depression as a result of this combination of very large fiscal stimulus supported by very large monetary stimulus in the form of money creation through quantitative easing. That’s how we survived the crisis in 2008. Here we are, what, more than a decade later. It’s interesting that if we look back as far as 1952, anytime that total credit in the United States grew by less than 2%, the economy went into a recession. This is 2% adjusted for inflation. We need to adjust for inflation because we need to compare apples with apples.

Richard Duncan (00:07:21):
So anytime total credit growth in the United States, adjusted for inflation, grew by less than 2%, the US went into recession. Again, that’s because our economic system must have credit growth to expand. So that happened nine times between 1952 and 2009, and every time credit grew by less than 2%, we had a recession. The recession didn’t end until there was another very large surge of credit growth. So I call this 2% credit growth level the recession threshold, because if credit grows by less than 2%, then we go into a recession. That’s where we were.

Richard Duncan (00:07:59):
In 2008, credit started to contract, and the economy started to go into a depression. But because of massive increase in government borrowing, total credit then started to expand again. After 2009, we did have credit growth that was just a little bit above 2% every year, but not very much. It ranged between 2% and 3% credit growth a year, adjusted for inflation. That was really not enough to generate strong economic growth, because, in earlier years, credit grew much more rapidly than just two or 3%. So this was just enough to keep us out of recession.

Richard Duncan (00:08:35):
In fact, it really required the Fed to act, to provide an additional supplement to credit growth. The credit growth really wasn’t strong enough, after 2008, to generate significant economic growth. So the Fed intervened, initially through quantitative easing, money creation, and lowering interest rates to 0%. They intervened in order to push up asset prices. So the Fed felt it needed to make asset prices expand if the economy was going to grow. So the Fed, time and time again… Anytime the stock market started to wobble, the Fed would do something that would make stock prices go back up again.

Richard Duncan (00:09:17):
So, what we have seen is massive asset price inflation since 2009. Since the bottom, the second quarter of 2009, the total wealth of the American public, this is all of the assets of the Americans, minus all of their debt, which is largely comprised of property, and their assets are comprised of property and stocks, and their pensions, which are largely comprised of stocks, the net wealth of the Americans has doubled from $70 trillion dollars in 2000. This was the pre-crisis peak, 2007. Net worth in the country then was $70 trillion. It’s now doubled. In the first quarter of this year, it was $140 trillion.

Richard Duncan (00:10:00):
So, the Fed orchestrated higher interest rates, and anytime the stock market started to fall, the Fed would do something to ensure that it didn’t, and push stock prices back up again. So we had the three rounds of quantitative easing, and that ended in October 2014. The next thing that happened is the Fed increased interest rates for the first time in December 2015. But the global economy and the US economy were not so strong at that point, they didn’t hike the second time until one year later, in December 2016.

Richard Duncan (00:10:34):
And then after that, they gradually increased the federal funds rate until it had moved up to a range between two and a quarter percent and two-and-a-half percent toward the end of 2018. Also, even more restrictive in terms of monetary policy, was the Fed launched quantitative tightening. At that point, they started reversing quantitative easing. Rather than creating money, they were actually destroying money. So they started destroying dollars through quantitative tightening.

Richard Duncan (00:11:07):
Quantitative tightening is the reverse of quantitative easing. With quantitative easing, the Fed creates money and buys generally government bonds. But with quantitative tightening, they do the reverse. They allow the bonds that they own already to mature, and when they do, they take payment on those bonds. In that process, it actually destroys the amount of dollar, it destroys dollars, to the extent that they do quantitative tightening.

Richard Duncan (00:11:32):
So they started quantitative tightening in the fourth quarter of 2017, and they increased it gradually every quarter through the end of 2018. By that point, they were destroying $50 billion dollars a month, and this was too much for the stock market to take. At that point, the stock market started wobbling and going through a number of corrections. At one point it, was down 20%. That forced the Fed to announce that it was going to end quantitative tightening. And then in May 2019, there was another wobble in the stock market, and the Fed announced that it was going to end quantitative tightening even sooner. So they did end quantitative tightening, altogether, in August 2019.

Richard Duncan (00:12:16):
The very next month, they relaunched quantitative easing because of some dysfunction in the repo market. In September 2019, suddenly, for some really unexplained reason, there were problems in the repo market that caused the interest rates that were being charged on repos to be roughly four times higher than they should have been, and so the Fed began pumping enormous amounts of new quantitative easing, they started creating money on a very large scale again in September 2019. And then in October, they announced that they were going to create $60 billion every month and use that money to buy treasury bills.

Richard Duncan (00:12:57):
That’s what they were doing. They were creating $60 billion a month, starting in October, and that’s where we were when the pandemic started. The pandemic really hit the US, let’s say in February, it really hit the economy in March 2020, and that’s where we were, that’s where the economy was then. The economy was relatively growing, but not very strongly, and already, the Fed had been forced to relaunch very loose and accommodative monetary policy through relaunching what was effectively the fourth round of quantitative easing, even before the pandemic started.

Trey Lockerbie (00:13:33):
So, with all of that money printing, it’s frequently looked at like a great experiment. But printing money is nothing new, per se. Maybe talk to us about how the government approached the Great Depression, and what’s different from then with today, because I think it ties in really great with how we’ve come to have all of this liquidity sloshing around.

Richard Duncan (00:13:54):
It is very informative to compare what happened in the Great Depression. But let’s say, first, what happened in 2008, and then we can talk about what happened last year with the pandemic. So, here’s what caused the Great Depression, in my opinion. The origins of the Great Depression occurred in World War I. In World War I, starting in 1914, all the European nations went to war with one another or most of them. Of course, they didn’t have enough gold to fight the war. So they all went off the gold standard, and they started creating large amounts of fiat money, government money, and they incurred enormous amounts of government debt to fight the war.

Richard Duncan (00:14:36):
So, all of the government debt, and all of the fiat money that was created during World War I… And by the way, the United States entered the war in 1917. All of this fiat money created a worldwide credit bubble during the 1920s. That’s why the roaring ’20s roared, because of all the credit that was created when the gold standard elapsed in World War I, and all these central banks created enormous amounts of liquidity.

Richard Duncan (00:15:04):
So we had the roaring ’20s, but then in 1930, all the credit that was borrowed during the ’20s, suddenly, the private sector was unable to repay it, and banks started failing all around the world. In the United States, between 1930 and 1933, early 1933, effectively, a third of all the US banks failed, and that caused credit, of course, to contract, and the economy contracted by 45% if you don’t adjust for deflation, and the unemployment rate shot up to 25% in the US.

Richard Duncan (00:15:40):
And this depression, the government really didn’t know what to do. They believed in capitalism and laissez-faire, and they more or less stepped back and didn’t do very much of anything. They let market forces work, and market forces worked, and market forces did reestablish a market-determined equilibrium. But sadly, that equilibrium was at a level of economic output that was 45% less than it had been in 1929. This depression went on and on and on for a decade, and during that decade, Nazi Germany took over Europe, and a militarized Japan took over Asia, World War II started, and only when World War II started, and the United States ended the war, then the government had massive government spending to fight the war.

Richard Duncan (00:16:27):
During World War II, in just four years, the government debt expanded by five times in four years, and the Fed’s balance sheet expanded by almost 100% to help finance the government borrowing. That’s what ended the Great Depression, the government spending. Suddenly, people had jobs again, the factories were full, prices were going up, and we got out of deflation. That was the end of the Great Depression, after 10 years of depression, massive government spending into the depression.

Richard Duncan (00:17:00):
But, of course, during the war, World War II, 60 million people died. So, in 2008, we had had a very big credit bubble going on, really, for decades, but accelerating during the early 2000s. When that bubble popped, this time, the government decided to do everything in its power to prevent market forces from reestablishing a market-determined equilibrium, as had occurred during the early 1930s. This time, the government did everything it could to prevent the bubble from deflating, and they succeeded. Through trillion-dollar budget deficits and three-and-a-half trillion dollars of quantitative easing, they managed, not only to keep the bubble inflated but to make it inflate even larger. As a result, we didn’t collapse into a great depression after 2008, and we didn’t experience World War III, as we might have done if we had replayed the 1930s.

Trey Lockerbie (00:17:54):
They had to sell those bonds to somebody. I guess what I’m leading into is globalization a little bit, and just wondering how that picture looked different from around the Great Depression timeframe.

Richard Duncan (00:18:04):
There’s a very important difference between the 1930s, and there were a number of differences. But one of the most important was that the world was a very different place in 2008. Because back in the 1930s, we were in a world where trade between countries still was expected to balance. Under a gold standard, trade between nations had to balance. Because if one country had a big trade deficit with another country, it would have to pay for that trade deficit by sending its gold to the other countries. Since gold was money, if the country lost gold, its money supply would contract, and the economy would go into a severe recession, and unemployment would go up, and there would be deflation.

Richard Duncan (00:18:48):
In the other country, the opposite would happen. The country with a trade surplus, would get more gold, so their credit would expand, and their economy would boom, and they would have inflation. Before long, the country with the trade surplus would boom, and they would begin buying more things from the country with a trade deficit, which was in a depression, and trade would balance again. There was an automatic adjustment mechanism under the gold standard that ensured the trade between countries was balanced.

Richard Duncan (00:19:16):
But once the Bretton Woods system, which was a quasi gold standard and worked more or less the same way, once broke down in 1971, it didn’t take the United States very long to discover that it could buy a lot of things from other countries, and it no longer had to pay with gold. They could just pay with dollars, or, more realistically, treasury bonds denominated in dollars, and there was no limit as to how many of these the United States government could create. So starting in the 1980s, in the early ’80s, the US started running very large trade deficits, initially with Germany and Japan.

Richard Duncan (00:19:51):
By the mid-1980s, the US trade deficit had blown out to something like three-and-a-half percent of GDP. Nothing like that had ever occurred before. This so frightened global policymakers, that they met at the Plaza Accord and deal, whereby the dollar would be devalued by 50% against the German Mark and the Japanese Yen. That succeeded in bringing the US trade back into balance by 1990. But at that point, China entered the global economy, and many other emerging markets around the world started supplying US demand. So the US trade deficit then started growing very much larger, and it became larger and larger and larger, and by 2006, it was $800 billion, in that one year alone. That was roughly $2 million a minute, that the US was effectively going into debt to the rest of the world.

Richard Duncan (00:20:46):
Of course, this was fabulous for the rest of the world. The US had a $100 billion trade deficit that year. That meant the rest of the world had an $800 billion trade surplus, meaning that they were able to buy, produce and sell $800 billion of goods more than they would have been able to do, otherwise. But the importance of this shift was that it meant that the United States was no longer constrained by domestic bottlenecks, as it had always been in the past.

Richard Duncan (00:21:15):
In the past, before the Bretton Woods system broke down, for instance, in the 1960s and 1970s, if the government spent too much money, and if the Fed created too much money, that would overstimulate the US economy, and pretty soon, there would be full employment, and industrial capacity would be working at 100%, and that would lead to inflationary pressures. Wage prices would begin to rise, steel prices, car prices.

Richard Duncan (00:21:41):
This is what happened in the 1960s and 1970s, and it eventually led to wage push inflation of the 1970s, resulting in double-digit consumer price inflation. But once the US started running these large trade deficits, that effectively meant that the United States could circumvent these domestic bottlenecks. Suddenly, we no longer depended only on the US labor pool, or US industrial capacity. Suddenly, the United States found it can buy things from other countries, and increasingly from other countries where the wage rates were up to 90 or 95% lower than in the US.

Richard Duncan (00:22:16):
So suddenly, this meant that the US could run very large budget deficits and create much more… the Fed could create much more money than it ever had dared to in the past, and it could do all this and still not encounter any inflation. That’s why inflation peaked in 1980, and afterward, as globalization began to kick in, we had disinflationary pressures due to globalization and importing things from ultra low wage countries. So the inflation rate fell and fell, and fell and fell, and since…

Richard Duncan (00:22:46):
In recent years, we’ve flirted with deflation. Deflation has been at least as much of a risk as inflation in recent years, and that’s entirely been due to the fact of globalization. So, that wouldn’t have been possible for the US to do in 1930, because then, trade between countries balanced. But in 2008, it was possible. So because of that, globalization prevented inflationary pressures. If the government was able to get away with running trillion-dollar budget deficits for four years in a row, and the Fed was able to monetize a third of that by creating three-and-a-half trillion dollars between 2008 and 2014 without generating very much inflation at all. I think the inflation rate in 2011 peaked at around three-and-a-half percent.

Richard Duncan (00:23:33):
That surprised everyone, including me, because I had expected that… First of all, I had never imagined that the Fed could do anything like quantitative easing, create three-and-a-half trillion dollars in such a short period of time. We had all been taught that that would certainly lead to hyperinflation. At first, it looked like it was going to lead to very high rates of inflation. Commodity prices spiked, food prices spiked, they were very high in 2010, 2011. In fact, the high food prices led to the Arab Spring in North Africa. Food prices were going up so rapidly there, people just couldn’t… the poor people couldn’t afford to pay the prices. One man set himself on fire in protest, and this sparked off what’s known as the Arab Spring, which ended up toppling a number of the North African leaders, including the president of Egypt.

Richard Duncan (00:24:27):
It looked like this was going to have very destabilizing consequences for the whole world. But pretty soon, within the next year, in fact, after that, high food prices resulted in the farmers planting more crops. The next year, there was a surplus of food, and food prices came back down. Food prices always tend to be very volatile, commodity prices all tend to be very volatile. They go very sharply one year, and they come crashing down very sharply with deep falling prices the next year. So there was no significant inflation after the policy response resulting from the policy response of 2008.

Richard Duncan (00:25:04):
This forced me to completely reevaluate what our options are in terms of government policy. At least in that case, well, we saw, the fact was the government did double its government debt in between 2008 and 2014. $9 trillion of new government debt, financed with three-and-a-half trillion dollars of paper money in creation, with no significant inflation.

Trey Lockerbie (00:25:30):
When you’re talking about inflation, you’re referring to the CPI, as I understand it. But obviously, there was asset price inflation, and a lot of that has to do with, I think, the way that that new liquidity is entering the economy, or in a way that doesn’t trickle down, you can tell just by the velocity of money in that way. So, taking what you said, it’s easy to understand that to get inflation, the demand has to far exceed the supply. Since we have globalization, the supply can come from all over the world, and it can keep up with that demand, which makes sense. But are you concerned at all, I guess, with the inflation in other areas; real estate, the stock market, healthcare, a number of others? Is that a concern to you?

Richard Duncan (00:26:16):
Well, yes and no. We have to weigh our options. On the one side, the option was collapsing into a new Great Depression, in which case, unemployment may have gone up to 25% again, as it did during the 1930s, leading to severe geopolitical strains around the world. You saw what happened in the 1930s. Given just the weak economic growth that the US has experienced since 2008, and the political repercussions of that, just imagine what would have happened if the economy had really collapsed into a depression.

Richard Duncan (00:26:50):
So, our option was, which is better? Having home prices go up a lot, making it difficult for young people to buy homes and increasing income inequality? Is that worse than having a complete collapse, where the unemployed would be hungry, and government revenues would be so depressed, that we may no longer have been able to afford Social Security or Medicare? So you have to take your choice. Which would you prefer? A 1930 style Great Depression, potentially followed by a world war, or increasing income inequality?

Richard Duncan (00:27:26):
In my view, increasing income inequality is a small price to pay, particularly given that if this is a very large concern, and I think it should be, it can be addressed through increasing higher taxes on billionaires on capital gains taxes for people earning more than, let’s say $20 million a year. So it could be easily addressed through legislative changes. Whereas a great depression could not be alleviated in any way whatsoever, as we saw in the ’30s, barring a new war, resulting in massive government spending, which is exactly the thing that so many people were opposed to, to start with. So, if we’d had the massive government spending in 1930 instead of 1941, we could have avoided the decade of depression, and perhaps war, entirely, and that’s what we did in 2008.

Trey Lockerbie (00:28:15):
Well, you say it’s a small price to pay. I’m not sure I disagree with you there. What I’m curious about, though, is, it’s becoming clear, I think, that it’s set us on a certain trajectory. Austrian economics, as you said, is, we should eventually have to pay for our sins. Whereas now, there’s this philosophy about modern monetary theory, where the government can effectively reflate this bubble into oblivion. At a certain point, that wealth inequality does start to matter, I think, where people get so disenfranchised and left behind, that there is risk of revolution. In your opinion, what you just said, I think, is that this can be somewhat reversed just through policy. Is that correct?

Richard Duncan (00:28:56):
That’s true. But also, keep in mind that we have enjoyed 12 years of relative prosperity since 2008 that we would not have had. We would have probably experienced 12 years of depression, potentially by a global war. Everything would have collapsed, it would have been horrible, just as the 1930s and 1940s were. So we’ve avoided that. People say we’ve just kicked the can down the road. Well, hurray. Let’s keep kicking because the alternative is just too horrible to contemplate. Meanwhile, we need to understand our new economic environment and make the most of it. What does it mean that it’s possible for the government to run trillion-dollar budget deficits?

Richard Duncan (00:29:40):
So, last year, the budget deficit was $3 trillion, and this year, it’s expected… 3.1 trillion last year. This year is expected to be another three. So, just over the last 16 months, during this pandemic, the government has increased its debt by $5.1 trillion. In just 16 months, from the end of February to the end of June, government debt has increased by $5.1 trillion, and the Fed has created $4 trillion of new money, effectively doubling its total assets. In other words, by creating $4 trillion, the Fed effectively monetized 80% of this increase in government debt.

Richard Duncan (00:30:22):
Now, this has been an extraordinary economic experiment. Of course, the circumstances are always different from any one period to the other, and they’re not always… they’re never directly comparable. But this is the economic environment that we find ourselves in. Has this led to hyperinflation? No. The most recent CPI number was up 5.4% over one year. That’s a pretty high number. But if you look at that index relative to two years ago, it’s up only 6%. That means if you average the inflation over the last two years, it’s been 3%, which is partly something that could be categorized as hyperinflation.

Richard Duncan (00:31:05):
Furthermore, it now looks like we’ve hit peak inflation. Inflation is soon going to begin to abate because the massive peak in government spending has already passed. You’re not going to see the big spikes in government spending that occurred after the CARES Act was passed in March last year. Then there was a $900 billion stimulus in December, and then the $1.9 trillion stimulus, again, in March this year. There are no more big, massive spending plans that are going to hit the economy. Peak spending, peak government spending is behind us, and that means peak growth is behind us. Peak credit growth is behind us, peak economic growth is behind us.

Richard Duncan (00:31:49):
So pretty soon, demand is going to begin to fade, and it’s going to begin fading at exactly the same time that these supply bottlenecks that we’re currently experiencing, they’re going to be overcome. Just as we saw the farmers plant more food in response to the high food prices in 2011, they’re going to do the same thing this year. Also, the problems with the semiconductors are going to be sorted out. So, that means there will be plenty of new cars for people to buy next year, and that means the used car prices are going to plunge. Used car prices are up 40, nearly 50% year-on-year, and that’s resulted in about a third of the inflation that we’ve seen over the last few months. Well, next year, at this time, they’re probably going to be down 40%, and that’s going to be knocking off a third of the inflation that we would have otherwise been experiencing a year from now.

Richard Duncan (00:32:43):
We’re going to move. Of course, unexpected events could happen. If globalization were to break down, then all bets would be off. We would experience very high rates of inflation. Or if we have a war with China, for instance. Not likely, but it’s something that has to be considered a possibility at some point in the future, or at least a bad scenario. If that were to occur, then we would have very high rates of inflation.

Richard Duncan (00:33:08):
Assuming that things persist, as they probably will, then these deflationary forces that kept the inflation rate at very low levels before last year are likely to reassert themselves, and within a year-and-a-half or two years from now, we’re probably going to be flirting with deflation again. So suddenly, the market realizes this, and that’s why gold sold off, and that’s why the 10-year government bond yield has fallen so much. Bond yield moved up from 93 basis points, the 10-year bond yield moved up from 93 basis points at the end of last year, to almost 1.75% in March. But now, it’s dropped, 1.3 this morning, even it’s been as low as 1.25 earlier this week or last week.

Richard Duncan (00:33:55):
So that’s one indication that the market is now accepting that we’re not going to have massive high rates of inflation. So, this is a second… If that proves to be true, and we’ll still have to wait and see, but I expect that that’s what we’ll see, inflationary pressures will abate, and we’ll no longer be talking about inflation a year from now. If that proves to be true, then that will be the second time in a dozen years where we’ve seen trillion-dollar budget deficits and trillions of dollars of money creation by the government and the central bank keeping the economy from collapsing, and not resulting in any significant rates of inflation at the CPI level. That’s the new economic environment we have to understand that we’re living in today.

Richard Duncan (00:34:36):
If that’s the new economic environment we’re living in, we have to understand this creates completely different options than the economic environment Ludwig von Mises was living in at the beginning of the 20th century, where the gold standard limited how much credit the government could create, it ensured that trade between nations had to balance, and that imposed a series of restrictions on the economy that was true.

Richard Duncan (00:35:01):
When Ludwig von Mises was writing Austrian economic theory, there were constraints then that no longer exist now. So different economic philosophies are appropriate for different times. The best ones are accurate for the time in which they are developed. But what we have to understand is Ludwig von Mises’ philosophy of 1912, or Milton Friedman’s philosophy of the 1960s, when we were still on, effectively, the gold standard, are not the philosophies that are appropriate for the environment we find ourselves in.

Richard Duncan (00:35:35):
In the environment we find ourselves, suddenly, we no longer have any domestic bottlenecks causing high rates of inflation. The global population is roughly 23 or 24 times larger than the US population, and many of these people… They say 2 billion people are living on less than $3 a day? We have a near-infinite supply of low-cost labor. So this is why we haven’t seen high rates of inflation this century, and it’s likely to continue to be the reason we won’t see high rates of inflation anytime decade ahead, barring some very bad scenarios.

Richard Duncan (00:36:11):
So, what we need to do, our society, our generation, we need to evaluate the current economic environment we find ourselves in and make the most out of it. Because of course, nothing lasts, everything always changes. These conditions won’t last forever. But while they last, we should make the most of it. So, what I think we should learn from this is that it is, in fact, possible, as we have seen twice now in a dozen years, for the government to run trillion-dollar budget deficits, and for the Fed to monetize very significant parts of these budget deficits without resulting in very high rates of inflation at the CPI level.

Richard Duncan (00:36:50):
So, what I would like to see, what I think makes sense… and this is something I’ve been talking about for a long time, in fact, long before the pandemic started. What I would like to see is the US government finance a multi-trillion-dollar investment program in the industries of the future over the next 10 years, targeting industries like artificial intelligence, quantum computing, genetic engineering, biotech, nanotech, all the usual suspects in the high tech world.

Richard Duncan (00:37:21):
If they invested on that scale, this would induce a new technological revolution that would turbocharge US economic growth, benefiting all classes of society, and at the same time, result in such technological breakthroughs and medical miracles, that it would greatly enhance human wellbeing, not only in the United States but all around the world. On top of that, it would shore up US national security and lock in another American century. Because as things are going now, the United States is soon going to be overtaken by China technologically, economically, and militarily long before the middle of the century.

Richard Duncan (00:38:01):
If China develops artificial intelligence before the United States does, then it’s game over. It will be the 21st century equivalent of China having a nuclear monopoly. From the point they reach artificial general intelligence, from there, their intelligence capacity will expand exponentially, leaving all of their rivals in the dirt, including the United States, which will mean that by mid-century, and we will be a second rate vulnerable has-been power. There’s no reason for us to accept that we have the ability to invest on such a large scale, that China just can’t keep up, just like President Reagan had the government invest in the US military during the 1980s. That government investment in the military spurred US economic growth and created very high credit growth during the 1980s, which created very high economic growth, and the Soviet Union couldn’t keep up, and they collapsed. That’s what we need to do again this time, now that…

Richard Duncan (00:39:01):
China’s rise is our new Sputnik moment. When Russia launched Sputnik in the late ’50s, the US responded by a very large increase in US government investment in new industries and technologies, space. By the end of the ’60s, we will put a man on the moon, and we… Very large government investment created all kinds of spin-off technologies. People say things like the handheld calculator, and of course, later, government investment was responsible for developing the internet. Almost everything in a smartphone that makes it smart was developed as a result of US government investment. GPS, touchscreen technology, the internet itself, semiconductors.

Richard Duncan (00:39:44):
But since the ’80s, government investment in research and development has plunged, has collapsed by more than half, relative to GDP, and that largely explains why the economy has been so weak in recent decades. Conversely, China has been doing just the opposite, and that explains, to a large extent, why their economy has grown rapidly, and more importantly, why they’re about to overtake us in every respect. This is something that we desperately need to reverse, and we have the means of doing this.

Richard Duncan (00:40:13):
So this investment program that I have in mind… Now, first and foremost, I think we need to do this because we can. This is something that is possible for us to do. If we do it, everyone is going to be greatly better off. We really have the potential of curing all the diseases over the next 20 years with investment on this scale. So rather than sitting back and waiting for Social Security and Medicare to go bankrupt 30 years from now, well, how about this? Let’s cure all the diseases and expand life expectancy by a decade, and people then get to work longer. That would shore up Social Security and Medicare, and we would never have a crisis on that level.

Richard Duncan (00:40:54):
Of course, the more important thing is that by curing all the diseases, everyone will be so much better off in every respect. But furthermore, our economic system must have credit growth. In the private sector, we know total credit or total debt in the United States at the end of the first quarter was up to $85 trillion. That’s how much the US has in total. Not government debt, but all the debt, $85 trillion. It’s hard to make that grow by 2% a year after you adjust for inflation. The private sector is already quite heavily indebted. We need the government to take on more debt to keep creditism growing, to keep credit as a matter of crisis, because if credit contracts, the economy will go into depression. So that’s the second reason we need government investment on a very large scale. It will keep credit growing and keep our economic system healthy.

Richard Duncan (00:41:41):
The third reason, then, is the threat that China poses to us in the future. Now, China may be a very kindly master, but on the other hand, it may not be. History teaches that countries with vastly superior technology rarely treat inferior countries kindly, so we shouldn’t forget that lesson. We’re going to very quickly find ourselves in a position where we won’t be able to defend ourselves if we don’t begin investing on a much more aggressive scale than we’re doing at the moment.

Trey Lockerbie (00:42:13):
Right. So when you talk about total credit peaking, and therefore, inflation peaking, you mentioned that’s happening because there’s not really anything to go spend on. This is one idea which I love that you just mentioned, by the way. I like it even more than a birth dividend, and some other things we’ve talked about before. But you mentioned a few things that, to me, seemed like perfect examples of what we should continue to spend on. One is the military, as you were mentioning, the other is more government bonds. Because if the government allows the bond yields to start creeping back up, then the government’s interest payments on an annual basis go up. At some point, that interest payment is going to become a larger and larger part of our annual budget. I’m curious, do you see an incentive on the government side to keep that interest payment low? Do you agree with that narrative?

Richard Duncan (00:43:07):
Yes, there is an incentive for the government to have the Fed continue monetizing enough of the government debt, creating money, buying government bonds in order to push up their price, and drive down or hold down their yields at relatively low levels, so that the expense of the government’s debt will remain low relative to GDP, as it is now. For instance, in Japan, Japan’s government debt is roughly 260% of Japan’s GDP, and US government debt now is roughly 130% of GDP, if you take the gross debt. This is the broadest estimate of the debt. It’s roughly 130%.

Richard Duncan (00:43:51):
So Japan hit 130% government debt to GDP about 20 years ago, maybe 25 years ago. Since that time, the Bank of Japan has been really setting the example of what other central banks have later done. The Bank of Japan has been creating enormous amounts of Yen and using it to buy Japanese government bonds. At first, they were doing… Really, they were the first to pioneer quantitative easing. Up until a couple of years ago, their policy was to create, I think, 80, 85 trillion Yen a year and buy that many government bonds with it.

Richard Duncan (00:44:29):
But what they discovered was that they didn’t really need to create that much money, so they shifted in order to hold interest rates at very low levels. So they shifted their policy from a fixed amount of quantitative easing every month or every year, and they just adopted what they called yield curve control. They said from now on, we’re going to buy as many Japanese government bonds as necessary to hold the 10-year Japanese government bond yield at 10 basis points. What they discovered is that the Bank of Japan no longer had to create 85 trillion Yen a year to do that. They were able to do that with much less money creation.

Richard Duncan (00:45:07):
So all this time, despite these very large Japanese government budget deficits, now Japan, The Bank of Japan’s total assets, which represent how much money they have created, that is the equivalent to 130% of Japan’s GDP, whereas the Fed, the Fed’s total assets, even after doubling over the last 16 months, the Fed’s total assets only equal 30% of US GDP. So Japan is so much further down this road, decades further down this road than the United States is, and they still have… A 10-year government bond yield in Japan is very close to 0%. Despite Japan having 260% government debt to GDP, the interest expense that they’re paying on that debt, the interest expense that the government is paying on that debt is lower now than it was in the 1980s because interest rates are so much lower.

Richard Duncan (00:45:58):
This is probably something that the Fed is going to try to copy. But it’s necessary for inflation to remain low. If it were to spike up, then it would be very hard for the Fed to justify a lot of paper money creation and quantitative easing. They would be under immense pressure to tighten monetary policy by stopping quantitative easing all together, and hiking interest rates to cool the economy down and stop inflation. But if inflation proves to be transitory, as they expect that it will be, and as I expect that it will be, then they will be able to continue to keep interest rates very depressed and cheaply borrowing on the government debt. The borrowing expense on the government’s debt, very low, potentially, for decades to come.

Richard Duncan (00:46:45):
Again, nothing is going to last forever. So we need to take advantage of this window of opportunity, this unique moment in history, where it is possible for our government to create trillions of dollars and for the Fed to monetize that through trillions of dollars of money creation, and invest this money wisely in order to induce a new technological revolution that will supercharge our economy and yield tremendous benefits that will rain down upon us during the decades ahead. We need to do it now because these conditions are not going to last forever. Nothing lasts forever. But we’ve already been in this world now for a good dozen years since 2008. If we have another dozen or let’s create two dozen, it would be completely transformative.

Trey Lockerbie (00:47:30):
So, a couple of questions there. One question that comes to mind right now is, who is buying these bonds? Now we’re seeing the CPI actually starting to increase to five-plus percent. One joke that I love is, how do you get a good annual growth rate? Well, you have a really bad year before. So, I understand this base effect of sorts that might be misleading the CPI numbers a little bit. But now, investors clearly understand that they’re losing money. There’s a 5% inflation, so if you’re getting a 1.3% yield, you’re getting a guaranteed negative yield. You mentioned Japan yields even lower. Who is buying these bonds besides the Fed? What incentive do people have, at this point, to continue to purchase bonds?

Richard Duncan (00:48:16):
Well, first of all, the Fed is buying the bonds, they’re creating $120 billion a month. So times 12, that’s 1.4 4 trillion. That’s roughly half of this year’s budget deficit. So, the Fed, you can say is buying half of it. That’s a lot. Who is buying the other half? Well, foreigners are going to have to buy a lot, because… here’s why. The US trade deficit now has blown out again to a very high level. I haven’t seen the latest numbers in the last month or so, but it’s roughly nearing $800 billion, the trade deficit.

Richard Duncan (00:48:50):
So every country’s balance of payments has to balance. What that means is when the US has an $800 billion trade deficit, it will also have $800 billion of capital inflow from abroad. Now, why is that? Well, it’s like a family. It’s not always appropriate to use the family analogy. But in this case, it is. If a family spends more than it earns, then it either has to borrow or sell something in order to make accounts balance, and it’s the same with the country in this respect. If a country has an $800 billion trade deficit, it has to either borrow from abroad or sell things to other countries.

Richard Duncan (00:49:29):
So that is, in fact, the case whenever the capital inflows are an exact match to the trade deficit. So if we’re going to have an $800 billion trade deficit this year, that means we’re going to have $800 billion of capital inflow. A lot of that money is… It doesn’t really matter where in the economy that money goes, because money is fungible. Some of it may go into buying government bonds, a lot of it will, some of it will be going into buying corporate bonds, or even stocks or other things. Some of this foreign money goes into buying corporate bonds. Whoever they buy the corporate bonds from, they’ll have cash, and they’ll have to do something with it. Some of that cash is going to go into treasury bonds.

Richard Duncan (00:50:10):
So in other words, the Fed, for instance, is buying $80 billion of government bonds every month, and $40 billion of bonds backed by Fannie Mae and Freddie Mac, mortgage-backed securities. But it’s correct to count the total, $120 billion a month, they’re creating and pumping into the economy, because that money is going to squash around every corner of the economy and drive down the level of the overall interest rates. So this is the same with the foreign capital coming in. So you got all those people, all that foreign money is coming into the country, as well, and another, say 800 billion. So that’s already 2.2, 2.3 trillion of the $3 trillion budget deficit.

Richard Duncan (00:50:52):
I think what we’ve seen over the last month or so, is a lot of people were expecting the 10-year government bond yields to go higher. A lot of people were banking on high rates of inflation lasting for a long time. When, suddenly, they realized that wasn’t going to happen when they understood that inflation was indeed transitory, the market turned against them, and they had to, very quickly, square those positions. So a lot of people were forced to buy. People who were short treasury bonds suddenly had to cover their short and buy treasury bonds, and that probably explains why the 10-year bond yield fell so rapidly over the last couple of months. There was, to some degree, a fore-selling. That’s where we’ve seen a lot of buyers in the last two months, from people who were just forced to cover their shorts.

Trey Lockerbie (00:51:36):
Well, let’s talk about the Fed’s tapering. They’re now just barely starting, I think, to introduce some language to set the stage for future tapering, and I think a lot of people are already reacting to that, just the simple change in language, just very nuanced. Is your expectation that the stock market will ultimately ignore the Fed’s tapering of buying bonds and mortgage-backed securities?

Richard Duncan (00:52:04):
I don’t think they will ignore it, but we have to keep in mind what happened last time. So when the Fed started tapering last time, which was in 2014… Tapering means the third round of quantitative easing went on through 2013, and then at the beginning of 2014… During most of 2013, the Fed was creating $85 billion a month. Now the Fed is creating $120 billion a month. But in 2014, at the beginning, they started tapering the amount that they were buying. So in January 2014, they bought 75 billion, instead of 85 billion. The next month, they bought 65 billion, and then 55 billion, and 45 billion, and 35 billion until near the end of the year, they were down to zero. In October, they were down to zero, in 2014. That was the end of quantitative easing

Richard Duncan (00:52:54):
So that’s what we’re talking about with that tapering. So now, the Fed will begin tapering at some point. The market seems to think it will be early in 2022, it could be a month or two before then. Let’s assume that it’s in January of 2022. That means during August, September, October, November, December, the Fed is going to still create $120 billion a month and pump it into the financial markets. And then only gradually, next year, will they begin reducing this perhaps by 10 billion a month. So that means that the Fed is still going to create an enormous amount of money between now and the time that quantitative easing actually ends, sometime near the end of 2020.

Richard Duncan (00:53:39):
The Fed’s total assets now are roughly $8 trillion. The last time I looked at these numbers, it seemed that total assets could climb as high as $9.8 trillion by the end of next year, assuming tapering begins in January and is done by the end of the year. So that’s a huge amount of new money creation that’s going to continue to go into the financial markets between now and the end of next year, and particularly between now and the end of this year, with QE still going on at $120 billion a month. So that’s going to be a force likely to continue to put upward pressure on stock prices and asset prices, barring unforeseen developments, which will always, unfortunately, pop up. But just on that assumption, looking at that, there could still be a great deal of upward pressure on stock prices before this all ends.

Richard Duncan (00:54:32):
So what we saw when the Fed started tapering in 2014, the first thing that happened was they started dropping hints. The markets always move in advance, because when the Fed… I think the first hint of tapering occurred in May 2013, well before it started. The tapering didn’t end until October of the following year, nearly a year-and-a-half later. So what we saw with stocks is that stock prices just kept moving higher through this whole process. They didn’t react very much when the Fed started dropping hints that tapering was coming, they didn’t react when the Fed actually started tapering, and they kept going on right up until… In fact, they kept rising even after the Fed started hiking the federal funds rate in December 2015, and they kept rising after the second increase in the federal funds rate in December 2016, as well.

Richard Duncan (00:55:26):
So the stocks completely ignored tapering. It was not the same story with bonds or with gold. Bonds, we’ll recall, experienced a taper tantrum the second that the Fed started hinting that there was going to be tapering in May 2013. Bonds had a big sell-off. That became known as the taper tantrum, and bond yields moved up very sharply between the first hint and when tapering came to an end. But interestingly, when the time taper ended in October 2014, after that, the bond yields started falling again. By December 2015, they had fallen from above 3% back to 1.5%.

Richard Duncan (00:56:12):
So the bond market reacted very suddenly. Bond yields spiked up, basically doubling between the time taper was announced and the time it was finished. But then once it was finished, the bond yields fell again, because the global economy was beginning to weaken, and inflation was weakening. By the end of 2015, inflation in the US actually turned negative again. There were a few months of deflation. So that’s the main reason bond yields fell. So this time, it seems like we may have had the taper tantrum in advance of the first hints of tapering because bond yields fell as low… last year, it was below 50 basis points.

Richard Duncan (00:56:51):
At the end of last year, there were 93 basis points. Then suddenly, we had the preemptive tantrum, and bond deals moved up very quickly, I think, much more than most people anticipated, more than I anticipated, to 1.75% in March. So it was a preemptive tantrum. People expected higher rates of inflation, strong economic growth, and eventually, monetary policy tightening. But now, they seem to be looking through all of those things. Even though the Fed hasn’t even begun tapering, yet, as we’ve discussed, the 10-year bond yield’s fallen from 1.75% in March to as low as 1.25% last month.

Richard Duncan (00:57:32):
So it doesn’t look like the bonds are probably going to have a taper tantrum again, maybe they’ve already had it. Because the Fed is now hinting, they’ve dropped the first hence the tapering is coming at some point, but the bond yields have moved down since then. So it looks like the bond yields have already probably responded to tapering well in advance in hopes of avoiding the taper tantrum that occurred last time.

Richard Duncan (00:57:56):
And then gold… Gold is an interesting story, because back in… The last time, before the last tapering, gold was actually falling well before the taper started. Last time, gold peaked in August 2011. This is a monthly number, at the end of the month, but it was $1,850 an ounce in August 2011. It fell 25% between the peak and the time that the Fed even started hinting about tapering, in May of 2013. And then by October 2014, it fell another 11%.

Richard Duncan (00:58:33):
So between the peak, in 2011, August, and October 2014, gold fell more than 40%. Why did that happen? It happened because inflation peaked and started falling, and that’s why I fear that the price of gold is vulnerable now, because we’re hitting peak inflation. If inflation begins to fall now, as seems likely over the next year to 18 months, then I’m afraid, there could be a repeat of what we saw last time. August 2011 was the peak. What’s most striking about the last time, that was even before… the peak was before the third round of quantitative easing. The third round of quantitative easing was the largest round, and that was in 2013 and 2014. So gold was falling even while quantitative easing was going on in a very large level because the inflation rate fell.

Trey Lockerbie (00:59:29):
So, I’m curious, on that note, to hear what you think about the possibility that people might begin to shift how they look at inflation. So just take me for example. I live in Los Angeles, and real estate here is insane. I think there should be a show called million dollar teardown. That’s what I have. All over the city, there’s these two bed, one bathroom homes for a million-and-a-half dollars. People are getting priced out. You have extrinsic forces, like BlackRock, entering the real estate market, buying up real estate. Just because at the park this liquidity somewhere, I’m wondering if you see those forces potentially driving people to reevaluate something like gold or Bitcoin, or any other store of value, where they start to say, “Well, it’s not the CPI, it’s not that my groceries are going up so much, and I can’t afford them, it’s that my living expenses, everything that I aspire to spend my money on, is going up.”

Richard Duncan (01:00:31):
I suppose that’s not impossible, but we haven’t seen that in the past. What we’ve seen in the past is that the gold price responds to the CPI number. At the peak, in September 2011, CPI peaked at 3.8%, and that’s roughly where gold peaked. But by July of the next year, the inflation rate had fallen by half to 1.4%. By January of 2015, the inflation rate was negative, and gold had fallen 42%. Well, I own gold, and I never plan to sell it. But I just think people should be aware that there were so many voices, up until recently, suggesting that gold was going to go to the moon, and I was concerned that people would believe that gold would go to the moon, and I raised the possibility, more than a year ago, that gold was not a sure bet. Well, we’ve gold has effectively not moved since I published that video more than a year ago. It went up, and then it came back down.

Richard Duncan (01:01:34):
Now, looking ahead, I worry that there could be considerably more downside for gold. So for people who feel that gold is going to go to the moon, I think that because there’s going to be very, very high rates of inflation, I think they need to re-examine all of those assumptions and be more careful because there’s a real possibility gold will fall. It’s fallen many times throughout history, recent history, more than 40%, and it’s not impossible that that could occur again.

Trey Lockerbie (01:02:03):
So, given your macro outlook, and the fact that you own gold and will never sell it, it begs the question, what else do you own? You’ve mentioned the opportunity at hand, obviously, on the spending side, the government spending side, but how should investors… Where can we find opportunities in today’s market?

Richard Duncan (01:02:21):
What I try to do in my work is to teach people how the economy really works, about the forces that are driving the economy and driving asset prices, so that they can make better investment decisions for themselves. I’m pretty reluctant about giving specific investment advice because of course, every individual has different circumstances. So, individuals, it is true they do need to consult with a qualified investment advisor about their particular circumstances. But just generalizing, it is true that stocks are expensive. If the Fed does taper next year, and the government budget deficit does drop a lot, as is expected, generally, and credit growth slows sharply, we’re going to be in a much less favorable environment, probably, for stocks a year from now than we are at the moment.

Richard Duncan (01:03:12):
There is a risk, of course, to stocks. There are always risks to any kind of investment. But a broadly diversified investment portfolio does make a lot of sense. But for just the average American, I have always thought that buying a piece of land, not in LA, perhaps, but a piece of land with a house on top of it, that they can rent out, is a good investment strategy for the long term because the land is as good as gold. If macroeconomic forces occur that drive up the price of gold, that’s going to drive up the price of land, as well.

Richard Duncan (01:03:45):
Meanwhile, if you have a house, you can rent it out and earn cash flow. Gold doesn’t have cash flow, rental property does. Mortgage rates are very near historic lows, so it’s possible to borrow 30 years mortgage at very low-interest rates, lock that in, and build up a residential investment portfolio over the next decade or two that will ensure that young people would have a very comfortable retirement 30 years from now, for instance. So I’m a big believer in owning rental property. But by that, I don’t mean condos. There is no limit as to how many condos can be built in the air. Insist on land with a house on top, because the land is a very important asset in and of itself.

Trey Lockerbie (01:04:33):
Awesome. Well, Richard, this has been incredibly enlightening. I know that our audience is going to really enjoy your perspective. If they’re interested in following along with what you’re up to a little bit more, talk to us about where we can find you, and any other resources you’d like to share.

Richard Duncan (01:04:50):
Thanks. So my business is called Macro Watch. It is a video newsletter. Every couple of weeks, I upload a new video. It’s essentially me making a PowerPoint Presentation, discussing something important happening in the global economy, and how that’s likely to impact asset prices during the quarters ahead. I believe that credit growth drives economic growth, I believe that liquidity drives asset prices and that the government attempts to control both credit growth and liquidity to make sure the economy keeps growing. So those are the big themes that Macro Watch focuses on. Your listeners can find Macro Watch at my website, which is richardduncaneconomics.com.

Trey Lockerbie (01:05:33):
Well, Richard, always a pleasure. Thank you so much for coming on the show, and I can’t wait to do it again soon.

Richard Duncan (01:05:38):
It’s been my pleasure. It’s been terrific meeting you. Thanks a lot.

Trey Lockerbie (01:05:41):
All right. That’s all we had for you this week. I’d like to give a shout-out to Roger on Twitter, who recommended that we have Richard Duncan back on the show. If you would like to do the same, reach out to me on Twitter at Trey Lockerbie to recommend the guests you want to hear. And with that, we’ll see you again next time.

Outro (01:05:56):
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