Occasionally, I will do a piece on a Palisades piece I find particularly interesting. This was one of them. However – spoiler – I don’t agree with a lot of his findings, but this was TREMENDOUSLY enjoyable to listen to as a “big idea” piece. This is the kind of dialogue I like for our country. Fully developed ideas which can be debated and discussed. So – the below is a commentary on some of his ideas, but make no mistake, I really enjoy this type of dialogue with people.
The link to the interview is here.
I am also dying to eventually read his book. He mentioned a few times how COVID and the Russian war sort of gunked up some of the findings in his book – and it’s completely understandable, to an extent.
Below, I’m going to touch on some of his bigger ideas….
History of Fed
Fed does not own gold. He discusses that a change in the Fed occurred in 1968 where there was a law that the Fed needed to hold gold for the dollars it created. He might be citing some law I have no idea about, but from my understanding, the Fed hasn’t held gold since 1934. He then says from this point it was an explosion of credit creation. One can argue he’s right overall with the credit creation but “why” he might be off. But this guy researched this book so I’m probably way off here. Anyone can see that from about 1971 with the gold window closing that we just started printing money from there. So perhaps it might have been the treasury and the congress had fiscal restraints on spending with the gold peg, and when that went off – so did the spending rails.
You can also see that with steadily declining interest rates for 40 years, this has led to cheaper and cheaper credit. Cheaper credit then allows for more dollars in the system to bid things up. Consider a house bought in 1980 for $20,000 could be worth $200,000 now. Did the value of the house go up 10x, or did the cheaper and cheaper credit add more dollars to the system and dilute the dollar by 90%? The house intrinsic VALUE did not change, but the number of dollars introduced into the system has.
Of interest though, Dr. Hanke is all about the money creation causing the inflation. And, he walks you through it. The 2009 stuff seemed to not cause much of the inflation anticipated due to the money created may have been intra-bank money and never left the contained system. When you have massive government spending today, this then goes to the orgs/employees who pay the personnel – and this money hits Main St. I believe THIS is what is missed here with Richard Duncan and inflation – he is still under the 2009 spell where money creation doesn’t cause inflation. To me, I believe it is a Keynsian “trick” meant to try and gaslight people into this belief. But all one has to do is go back 110 years to the beginning of the Fed, track the dollars created, and realize that more and more dollars has led to 99% devaluing of the US dollar over that time. What causes inflation? More dollars in the system which bids things up. I can teach this to a 5 year old in 5 minutes, yet the greatest PhD minds on the planet fail to see this. Or rather, their text books convince them otherwise. They may argue that we are 100x more productive today. No doubt efficiencies happen with improved technology, but the nominal dollars needed to buy an ounce of gold may be 100x than it was 100 years ago. Despite the technology created to extract gold out of the ground and the implications the less labor has. Why? Because gold has a scarcity. With this, you have increasing dollars competing for less and less. This drives up the bid.
Gold is THE Inflation barometer. Which is why they fight so hard to suppress it with futures. Which is also why the Fed fights so hard not to recognize gold as anything other than a pet rock.
However, there’s a difference between intrabank money (from 2009) that provides liquidity and is paid back versus trillions in government spending which then hits main street and THIS money supply, ALONG WITH banks creating more money with lending are a 1-2 punch to bolster the idea that – inflation is the increase of the money supply, that consumers have access to. This critical element will be brought back later when we discuss $10T in spending.
While he has done research on the recessions, I believe he is not really in camp Hanke, who has a PhD and was a presidential economic advisor – and may be THE worldwide leader on inflation. I side with Hanke.
Creditism versus Capitalism – this might be one of the most profound things to come from this interview. And – probably his best argument to go away from a Hanke line of thinking. I don’t know if he coined the term, but he put a label on something most of us have seen with our own two eyes, but perhaps could not have defined it so nicely. Where we feel capitalism is the growth and preservation of capital – saving up to buy something, he says that creditism has taken over. Meaning, growth is now measured as a means of lending. Before, you may think of growth with a company as a means of growing sales – but if all of those sales are being funded now via credit as opposed to cash, does it really matter to the company as to the source of the funding? One can argue it matters to the long term health of a nation.
Full stop here. I believe this is the ROOT of MMT vs sound money arguments. This also lends to later in this post. The MMT people think money creation doesn’t cause inflation, and with this, governments can spend at will (because they can afford it?) and banks can lend at will with cheap credit. The sound money people want you to borrow as well to do things like buy a house and a car, but have collateral and save up for most things. Buy the TV with cash, and not credit card.
That being said, he does score a lot of points here for observing that the sound money people are losing in a sense because credit is so easy to get, in abundance, relatively speaking. To me – I see decreasing yields on things and it makes investment that much harder to do. Why? Because when you own rentals like me, and more and more people are borrowing cheaper and cheaper, it drives asset prices up. Then, if you are to buy rentals and rent out – you need to significantly increase rents in order to make the yield necessary to make being a landlord worth it. I’m seeing these stupid high asset prices and know that these have to come back down to earth because one of two things will happen:
- You will price out renters to the point where homelessness goes up
- Landlords will not be able to get that yield and lower rents or sell.
Stock prices – you park your money there because “stonks only go up” and you see Tesla at 390x P/E ratio. Earnings are a joke on a majority of stocks.
The thing with capitalism is this – if you are not growing, you are dying. This is why McDonald’s needed to go into Russia. I watched a nice documentary on it in grad school – how they had to build supply chains of russet potatoes there to support their stores. I once read a book for grad school at Nova in like 2001 called “The McDonaldization of society” – it was profound in two areas
- It talks about how everything is consistently trying to get more efficient with processes, quality control, logistics, and materials – constantly driving down costs are needed at all times.
- How we never bombed a country with a McDonalds – our military doesn’t attack countries with American companies in them.
The second bullet there was profound in that when you get to your marketing classes in your MBA, you then tinker with ideas like market saturation. Imagine you make a lemonade stand on your corner and make a killing of $25 a day. Other kids see it, and while there’s a $25 market for lemonade, they then take $5 and you have $20. More kids make stands. Soon – there’s too many lemonade stands and you have to lower prices to stay relevant. OR – perhaps you expand to the next block over. When markets become saturated with participants AND 100% maximum efficiencies have been found….you grow or die.
With this, we have seen “capitalism” try and reach emerging markets, the middle East, etc. What you have with this is world-recognized brands like, “coca cola”, “McDonald’s”, and even the NBA is broadcast in China.
But you then come to a point where you have expanded to all markets you really can. We are actually running the risk now of losing markets – Russia, China, and other BRICS+17 countries may eventually go away from American products.
What is left? Well, now we need you to buy more of what you normally buy. If you do not have the cash, you can borrow it on credit card. You have a TV? Great, buy 5. Have a cell phone? Great, now buy 6 for your family. 5 laptops. 4 cars. Borrow to fix up your house and expand it. Buy a camper. Buy a timeshare. Finance a $200,000 Brown education in gender studies.
Borrow…borrow…borrow…all at cheap rates. For now.
Richard hits the nail on the head with creditism. None of us really consented to it here in the United States, but we, over time, migrated from a savings country to a credit country.
My main findings here are that I can see any move to sound money in THIS environment brings the whole goddamn thing down. I can clearly see it now. Oh my God. What have we done.
What do I mean? Consider if we now did “sound money” and went back to the gold standard, or a form of it. Think about what that might mean towards spending? It would be almost the elimination of credit overnight. I believe we are mostly ok with banks at a 10:1 fractional reserve with lending, but I had heard with the global financial crisis it was at 30:1, and during COVID – I thought I heard them take the restrictions of this off. I may be way out of my swim lane here, but to me, the obscene amount of money the government is creating/spending into the economy ALONG WITH the obscene amount of credit the banks have created….may have just crossed the Rubicon.
Meaning, if we go to sound money, that’s all she wrote. This may be why Russia is flashing the gold. If you think about it, deeply, Russia may be more capitalist than us at the moment. They have the ability to either go 1:1 to gold with their money supply (if MacLeod is right about 12,000 tons of gold) or 1:6 if the 2,000 tons of gold is correct. Translated is the Russians could be THE ONLY capitalist society left, who hasn’t gone crazy with a credit card. They have commodities everyone needs – and now the ruble is under attack, they are slashing prices to attract more buyers. Something a capitalist would do.
Could America be the MMT creditism and Russia be the sound money capitalists?
That will bake your noodle.
Globalism is deflationary
I loved his discussion on this – it’s true and false both at the same time. You could see that in the 1980s, jobs started going from the US to other countries for cheaper goods. We had a strong dollar, and with this, you had places like China who could have people work for $5-$10 a day. Electronics got more and more efficient, increasing productivity. But at the same time these forces were deflationary, they changed the CPI in 1980 and 1991 to drive down inflation measures. Why would this be needed IF globalism was truly deflationary? I want you to consider the below…
Imagine you have a workforce of 5,000 people at a factory in Detroit in 1985. These 5,000 people were making $20,000 per year union wages (perhaps “good money” at the time). If you can imagine this plant closing down, you had $100m in wages in this community that would spend that money, buy housing, etc – and the community would suffer. Some of those people may work in other factories, but you then have less velocity of money here, and less tax receipts. AND – less demand for housing as many people would leave to take jobs in other cities/states. This aspect of globalism was extremely deflationary at the worker/city level.
But I want you to then look at the corporation of perhaps GM who outsourced those jobs. The profits would increase, and the white collar people at that company kept their jobs, got bonuses. Think of the millions of Americans who had GM in their Vanguard Index funds or 401ks. I worked at Vanguard for 4 years early in my career, and part of my IT work was in the Victory Building where Jack Bogle sat, and he’d come down and eat lunch with us. They were sort of the grand daddy of the 401ks – but the point is while it was deflationary for those 5,000 workers and the community, it was inflationary for GMs stock price (profits) and those who invested in them. This had millions across the country benefitting while those 5,000 got hit.
Meanwhile, perhaps half of those people took open jobs at other plants in the area, but perhaps some could not find work in factories. Maybe some of them went back to college and learned other skills. Some may have gone into other industries making about the same, maybe more, maybe less. My point here is the globalism was an EFFICIENCY that had a loser (worker) but big winners (stock holders). So to call this deflationary is errant. You can also see that the cost of the cars may only increase at 5%, but because of the more bells and whistles with electric windows, more fuel efficiency, cushy seats to save your back and medical costs – this hedonic adjustment seems to tell you that you get more car for your buck.
“Deflationary” is not accurate to describe globalism. It is a way to find efficiencies with input costs and labor costs, but the losses are concentrated on a few in the workforce but the winners are those who invested in the company’s efficiencies.
Let’s look at Berkshire Hathaway, which might be the poster child for this. Look at all of the “quality” American companies.
What is Berkshire’s secret sauce? Investing in companies that find efficiencies. Had you taken $2,000 in 1985 and put it in them, today it would be worth roughly half a million. That’s a 250x. So if you were that Detroit worker in 1985 who made $20,000 a year and had bought 1 share of Berkshire each year for 5 years, yeah – you lost your job, but you’d be sitting on $2.5m in stock right now.
Make no mistake, globalism gets you cheaper products – which is of course inflationary – but the companies providing these goods get the inflationary pop in earnings/profits/market cap. Think about the partial owners in these companies (shareholders) making massive money during globalization.
And with this, the reverse of this globalism may also be true. Products will start to cost more, and the earnings/profits/market caps of companies may drop as they lose efficiencies and market penetration (think about McDonald’s leaving Russia). So with this, the CONSUMER is getting hit with price inflation of goods AND their stocks are shrinking. Wages will go up as companies have to come back on-shore to produce and competition for employees heats up.
To the point of creditism – IF globalization is somewhat dead, this means that US companies by nature will lose market penetration and contract. There would be less demand for credit to expand. To me, this leads to a consolidation of corporations. Zombie companies to die. Creditism relies on constantly blowing up the bubble and enticing consumers to borrow more to buy more goods. BUT – if the stock market is imploding, people will tighten the belts, layoffs will happen – and creditism will die.
Meaning – globalism is good for creditism. Massive expansions, scales of economy, diverse and cheap labor forces. IF Russia is tearing the globalist model apart, it then stands to reason that the opposite is now true IF Russia wins the de-globalization movement. Massive contractions, less scale of economy, one nation labor forces locally that are more expensive.
What you may be seeing is MMT/globalists/WEF progressives/creditists are at war with sound money/nationalists/anti-progressives/sound money people.
Government should fund a multi-trillion investment program to set up the US for generations. How it would be “easy”. How with this, if we just funded cancer research more, we could cure cancer. He talks about money towards biotech, etc. Essentially, he argues the Fed can bankroll this, expand their balance sheets, and do QE to infinity.
I like how he discussed things like government funding with NASA, and how a lot of those breakthroughs were then given to the private sector. No doubt that some of this stuff in R&D can benefit the public – consider the implications of GPS which started with the military, and now is on everyone’s everyday gadgets.
First, there’s some logic issues here –
- These programs actually result in benefits. For example, I can argue that 100 years ago, 1 in 30 got cancer, and today, 1 in 3 get it. It can be argued that processed foods and specific diets may statistically lead to cancer. Obesity can be the gateway disease to others. Likewise, proactive measures of diet and exercise is the “cure”. Once you get to a point in time, you are screwed. So spending a trillion over 10 years may result in someone telling me I need to eat more apples. Duh.
- That this money creation won’t cause inflation. Remember, this would be money hitting main street. These programs would hire tons of scientists that need tons of supplies/tools/resources to research – this is a Keynsian situation on steroids. Could it be something that is done in response to the next Great Depression? Consider the Tennessee Valley River Authority in the US in the 1930s. My great grandfather also worked on the PA turnpike getting built in the 1930s. The concept here is this will cause inflation.
- That we can finance these items at near zero rates. The Fed appears to be sick of gov’t spending, and is in the process of trying to do QT. The Fed is “private” and financed by member banks and shareholders. What appetite/incentive do they have to add $10T to their balance sheet at 0%? How are we paying for this, other than inflating into this?
He talks about semi-conductors here. Tom brought up a good point about all of the items that are needed to then get supplies for the semi-conductors – like rare earths.
To me, it does make sense for the US to invest in some things – AI is one, of course. But for me, it’s battery tech (above all) which would then power any future research and development and this would eliminate our needs for a lot of fossil fuels worldwide. This also potentially solves Steve St. Angelo’s energy cliff dilemma. I also believe my country needs to invest a lot more in resource extraction – uranium, rare earths, fossil fuels, precious metals, etc. IF we had battery tech which was a lot more dense, perhaps all of the trucks/mills we need to extract these items could run off of these batteries powered by solar, wind, hydro, and nuclear.
He talks about how we have to do this as an imperative because we CAN afford it. $30T in debt is staring us down, and he acts like it doesn’t exist. It stands to reason to me he is an MMT guy. Money is a construct and digits, not real.
While I invest in grass fed, grass finished farm-bought steaks (which are expensive), I feel that is an investment in my health with cancer prevention. On the flip side, I see excessive spending today as gluttonous. Consider my 2 year old, for his birthday coming up. A few months ago, the wife was talking about renting a bouncy house, gifts that totaled $500, tons of people at a party. I love my 2 year old, but if you really think about it, I can take a $2 ball and go in the back yard and get hours of smiles, then on a rainy day give him an empty box and he plays with it for hours. TIME with my children to me are what is important to me. I am finding a lot of my culture as obsessively trying to outspend the neighbors and trying to attach large amounts of spending with love. I abhor this notion. I want sound money. I want to plant a garden. I want to SAVE for my child’s education, not blow that money on a bouncy house.
Today – these types of philosophies are at great odds with the culture as a whole. I SEE with my own two eyes a possibility of a great collapse. I’m fighting tooth and nail between maintaining what I have, proactively repairing things, and preserving capital for a downturn. Could I lose my job? Could the stock market drop by 90%?
Could Russia’s de-globalist push win? If so – what happens to the west in respects to prices of things, jobs, and sourcing of materials? Could the west go back to capitalism from creditism or does it mean the system would die with a debt jubilee and many getting stuck with the bills?
I have great concern for our nation, and with this, I cannot see $10T spent to cure cancer, or biotech, or anything else. It stands to reason the great credit expansion may be done, and now it’s time to pay the bills for 40 years.
Overall – while I disagree with many of his findings, I could have a great discussion with this guy for eternity. This is the kind of dude in college I’d get hammered with at a bar and just talk about shit like this for hours. Many of the things he talks about started firing off ideas in my head – which led to me wanting to write down some thoughts on it.
Yes, I was up at 2:30AM today. Coffee done. 5AM now and soon time to get the kid up.