Richard Duncan: Creditism Has Replaced Capitalism

Weekly Commentary • Jul 27 2016
Richard Duncan: Creditism Has Replaced Capitalism
David McAlvany Posted on July 27, 2016

About this week’s show:

  • China’s hard landing is now happening
  • 0% rates: debt can’t get much cheaper
  • High asset prices are floating on a sea of fiat money
  • Receive 50% OFF Macro Watch from Richard Duncan. Promo code: commentary CLICK HERE

The McAlvany Weekly Commentary
with David McAlvany and Kevin Orrick

“Everyone is trying to understand what we have to do to prevent our economy from collapsing, and hopefully, be able to return to growth. But it’s important for everyone to understand that there is no real past experience for us to draw on. This is a new period. And we’re going to have to come up with our own solutions to this crisis of ours if we’re going to avoid disaster.”

– Richard Duncan

Kevin: David, what if John Law was correct, in the long run, that you could print as much money as possible, that France could go through an amazing expansion, and when it came time to pay the debt back you didn’t really have to, you just went further into debt?

David: It’s a good question. What if? There are certainly things that exist today that didn’t exist then. Part of it is that the mechanisms that central banks have in place, I tend to think of it in terms of sleight of hand and sort of magical arts of redirection. Nothing really has changed except the sophistication of presentation.

Kevin: Let me ask you, though. Has the law of gravity changed, or the law of debt repayment changed? I was thinking about the cavaliers. The cavalier of past times believed that everyone was going to die, so the best thing to do would be to have the best time you can while you can, so eat, drink and be merry, for tomorrow we die. Have we gotten ourselves so far down the road of debt that at this point the only thing we can do is be cavalier?

David: This is really the question that we’ve wrestled through and talked about on a number of occasions with our friend, Richard Duncan. He wrote the book, The New Depression, to explore a particular concept, and it really is this idea that we went from a capitalist system to a system that is not capitalist and hasn’t been since the breaking of Bretton Woods in 1971.

Kevin: He calls it creditism, which is just living on debt.

David: That’s right. So, instead of the old model of capitalism where savings and investment led to economic growth, since 1971 he would argue that, no, it’s not savings and investment that leads to growth, it’s an increase in debt that leads to growth. Now, arguably, we’ve gotten past the point where the private sector can participate and support that debt structure.

So, we’re left with this cavalier notion that the only way forward is to increase debt, but to do it on the shoulders of government. And government has the ability to do that. Of course, government has something that you and I don’t have, would like to have, perhaps, which would be a printing press in our garage, but that would not be legal. However, they can create as much credit as they want, and resolve these problems magically, it would appear. The question is, is this a game that can continue indefinitely?

Kevin: I think of Higgs – the leviathan concept, where, how big can the leviathan get. I think one of the points that Richard Duncan has made in the past is, he realizes the leviathan is so large at this point that if it pops, if this bubble pops, if this leviathan actually dies, everyone dies with it. And so, in a way, I think he is recommending, and I don’t know that I agree with it at all, but I think he’s recommending, gosh, this thing got too big on us – we can’t let it die.

David: And so this is the challenge I have. As you know, we lost a good friend, Ian McAvity, the beginning of this year. He had been a chain smoker for 40 years. My dad knew him as a young man, smoking several packs a day. His doctor, a few years ago, said, “Ian, I understand, I’ve been encouraging you to quit smoking for a long time. But I’m going to change my recommendation to you. Your body is so hooked that if you were to quit, you would be dead within days.”

And there is that sort of sense in which we’re so addicted to debt today that if we did quit we would die within days. Now, what’s the alternative? Abusing a substance, as we have, our creditism, since 1971, we can also face heart attack at any moment, and that’s ultimately what caught up with Ian this year. And not to make like of it, but there is a strange sense in which we must move forward with the system the way it is because there is no alternative. But there are two things that may happen. One, it either collapses on itself, as in a heart attack, or it collapses, just not unexpectedly, but perhaps we’ve bought enough time and sort of pushed it out, one year, two years, three years, four years hence.

Kevin: Yeah, listening to Richard – Richard really knows his economics. He knows his Austrian economics, he knows his Keynesian economics. He has a great background with history. I hate to agree with him, but you know, what he’s doing is what many economists won’t do, and that is saying, “Look, this is a mess. This entire situation is a mess. Get used to it. We need to ask the question, since we’re now in a creditism economy, and not a capitalist economy…”

David: And they’re facing crisis.

Kevin: And they’re facing crisis, what happens if it doesn’t collapse and they start spending a lot more money?” That’s a question that we probably have to analyze.

David: So, what he is proposing, essentially, is, given very few options, what is a politician going to do – a policy-maker going to do – in this environment?

Kevin: Right. And if you’ve got investments, you’d better be paying attention to that possible option.

David: That’s right, which is not to say that I necessarily like the options, or like the circumstance that we’re in, and as an idealist, would say, “Well, it could have been very different. It could have been very different, if we had the opportunity to start over, or roll the clock back.” In fact, maybe it should have been different. But again, that’s would have, could have, should have. What we are faced with is a growing debt crisis in China, here in the United States, a very limited number of options, and those options will be very relevant to the outcomes of how people invest and what the consequences are of how they allocate assets in the years ahead.

Kevin: The point that Richard has been making here recently is that China is probably the tipping point to the decision that we’re talking about.

David: A regular contributor to the McAlvany Weekly Commentary is Richard Duncan, and my early exposure to Richard was The Dollar Crisis, a book that he wrote many years ago. And, of course, subsequently, The Corruption of Capitalism, and a number of other books that have been formative in not only reflecting on what’s happening in the world, but creating something of an interpretive grid. A little bit later in the program we’ll visit about debt and the debt dynamics which we have done before here in the U.S. but we’ll also look at the global implications of credit or debt treated the same here, growing or needing to grow a certain percentage per year, and at the current time, not doing so.

One of the other things that is in a major transition is China, and the contribution to growth that we’ve seen in recent years, really, in the last several decades. So, it’s significant to know when transitions are occurring, which may have a major effect, not only in this year’s performance of global GDP, but perhaps for the next several decades.

So, with that said, I would like to look at a number of things, Richard, that you’ve been thinking about and writing about in your macro-watch program, an excellent service on a quarterly basis that you have, and when we look at the Chinese boom we can say that, really, things began to change in 1979 and there was a cooperative effort between the U.S. and China. We were interested in changing the relationship to some degree. And under Deng Xiaoping they were, too. And then, of course, at the end of the Cold War, we were able to change our perceptions of who they were as a communist country a little bit more, and really accelerate trade with them. So, why don’t we start with the boom that we’ve seen, one of the greatest in world history? It was financed. Where did that boom come from, who financed it? Give us the genesis, if you will?

Richard: First of all, it’s great to be back on the show. Thank you. It’s always a great pleasure talking with you. So, as you mentioned, I’ve written three books in the past. The last one was in 2012. But what I’ve been doing since then is something I call Macro Watch, which is a video newsletter, and with Macro Watch, now I upload a new video every two weeks or so, and so this allows me to get the information out much more quickly than writing a book. A book takes a year to write, and then the publisher takes six months to get it into the bookstores. So this is what I’m doing now instead of writing books.

And over the last couple of months I have made five Macro Watch videos on China. China has become the second-largest economy in the world. It is now almost 65% the size of the U.S. and it is really, after the U.S. went into crisis in 2008, China stepped on the credit accelerator, starting pumping out more and more credit to drive China’s economy. And China became the driver of global growth. So, what’s going on in China is enormously important for the entire world, and all of the financial assets within the world.

And what really matters – we’re told last year that China’s economy still grew at 6.9%. That’s the official number. That may or may not be the case, but what matters for the rest of the world is not how much China’s GDP is growing. What matters for the rest of the world is how much China’s imports are growing, how much more China is buying from the rest of the world every year. And last year, China’s imports contracted by 17%, so China wasn’t a driver of global growth – just the opposite. It became a very big brake on global growth.

So, it seems, in my opinion, that China’s hard landing has already started, and it started last year, and it is already having enormous global repercussions, because with China buying so much less, that’s why global commodity prices crashed last year, and therefore, that’s why all of the commodity producing countries had either severe economic slowdown or else went into severe recession. Brazil, for instance, is in the worst depression for 100 years, and all of their currency has crashed. So, what is going on in China is enormously important for everyone in the world, and for their investment.

So, that’s why I’ve come up with these five videos, essentially, a book’s worth of material, two hours’ worth of videos but something like 200 charts. So, there’s so much to discuss about China. Their strategy for success was an economic development strategy based on export-led and investment-driven growth.

So, as you said, once the Berlin Wall came down, the United States stopped viewing China as an enemy, a communist enemy, and we started trading with China and we allowed China to sell more and more Chinese goods into the United States. So, in 1990 China’s trade surplus with the U.S. was zero. Last year it was a billion dollars a day. It was a 367-billion dollar trade surplus that China had with the United States last year. And so, that cumulative trade surplus between 1990 and now was roughly four trillion dollars on their surplus on their current and financial accounts, and so that’s where the core money came from, by having such an enormous trade surplus with the United States, in particular. That’s where they got the money to develop with.

Now, this money went into their banking system, and as with all modern banking systems, through fractional reserve banking, credit creates more credit, and so they ended up with 20 trillion dollars of credit growth since 1990 and with that credit growth their level of investment increased 50 times between 1990 and 2014, so a 50-fold expansion of investment. Investment in things like factories, residential building, office towers, and all kinds of infrastructure.

So, we’ve hit the point now where the level of investment in China is far greater than the level of investment in the United States. In 2014, investment in China was 4.6 trillion dollars, whereas investment in the United States was only 3.2 trillion. So, China is far out-investing the United States since 2008, and this has enormous repercussions from any angle you care to look at it.

David: So, following a 50-fold expansion in investment, we’re really saying that the money came from the West, went to the East, and was put into a banking system, multiplied by credit growth from four trillion to 20 trillion, into a 50-fold expansion in investment, and that represented a boom for a manufacturing base for the development of roads and infrastructure, and ultimately led to what we have today, which is over-capacity. We have, in China, the ability to create almost anything, but in quantities that the world really can’t swallow at this point.

Richard: That’s right. At this stage, China’s economy has become wildly unbalanced. They have so much more investment than they do consumption. For instance, in a normal Western developed economy consumption, personal consumption, how much normal people spend, normally makes up something close to 70% of the entire economy. In the U.S., it’s 68% of the U.S. GDP, as personal consumption. In China, it’s only 38%, whereas investment, on the other hand – GDP is made up of personal consumption, plus business investment, plus government spending, plus trade – exports minus imports. Those four things added together amount to 100% of GDP.

So, in the United States, investment only makes up 18% of GDP, but in China it’s 44% of GDP, honestly, probably not since the Pharaohs built the pyramids with slave labor has any country witnessed such a high level of investment to GDP, and such a low level of consumption to GDP. So, they are investing and producing goods far and above what they can afford to consume, themselves. And that was fine for a couple of decades, they just exported all the surplus to the rest of the world through exporting, primarily, again, to the United States. But in 2008 the U.S. went into crisis and now Japan is in and out of recession, Europe is in and out of recession, the U.S. economy is weak, and not only are they not growing, but they’re already saturated with Chinese imports, and this is resulting in a growing political backlash around the world against free trade and against globalization, and really, quite a political upheaval.

One of the videos on China recently was called One World is not Enough, because the world doesn’t have enough purchasing power to allow China to continue pursuing this strategy of export-led and investment-drive growth. At this stage, China has so much excess capacity that prices are falling for their industrial goods, so their corporations are increasingly loss-making. That means the banks who financed the investment, their non-performing loans are beginning to skyrocket, which essentially means that deposits in those banks are being destroyed.

So, at this stage, the more China invests, the more money it’s going to lose. So that’s why China has hit a tipping point now, and that’s why they have tried to shift their economic growth strategy from one based on investment-driven growth to one based on consumption-driven growth. But that’s very difficult because the consumption that they have now has resulted from the very high rates of investment that they have conducted over the last many decades.

If you begin laying off people working in the steel industry, or people working in coalmines, those people may be able to find jobs in the service sector, but as we’ve seen very clearly in the United States, service sector jobs, by and large, tend to pay a lot less than manufacturing jobs do. So, you slow down on the investment, you don’t automatically somehow speed up the consumption. It’s just the opposite. You slow down the investment, you slow down the consumption, as well. So, China is now struggling, and it’s already beginning to hit the global economy.

Now, there are some really fascinating stories. One statistic that you may have heard, that in just three years, 2011-2013, China produced as much cement as the United States did during the entire 20th century, and it’s just mind-boggling. Now, think about that. If they do that for the next three years, then once again, of course, that will mean as much as the entire 20th century in the United States. But that would represent zero growth in China, in terms of their cement industry. That would just be flat, no growth at all.

Here’s another story. I recently was in Seoul to take part in a conference called the Asian Leadership Conference. I was asked to go there to debate, to take part in a debate about China’s economic future. I was a bit worried, to tell you the truth, because normally I make speeches, but I’m not asked to debate. And the person on the other side of this debate was a well-respected Chinese professor from one of the more well-known Chinese universities. So I wasn’t quite sure what I was going to face, but honestly, he didn’t up much of a fight, at all. They asked me to make the negative case, and he was making the positive case.

This is the story he told. He said he had recently been taken to one of the many large cities in the middle of China and his host showed him two recently completed bridges – very nice, big bridges. The thing is, these bridges, which were already completed, built, didn’t cross anything. The river was still planned. There was no river. These bridges went across a river that didn’t exist yet.

We hear of the ghost cities that have been built where no people live, all to keep the Chinese work force employed and happy, happy with the communist leadership and the communist party running the country. So, China is facing very serious challenges and it’s going to be enormously important for the rest of the world whether they succeed in preventing China’s economy from collapsing into a Great Depression kind of scenario.

Now, I think they will be able to avoid a Great Depression scenario in the same way that Japan has. Japan’s bubble popped 26 years ago, and Japan hasn’t had any growth, but they haven’t had a Great Depression either. The way they have managed that is through having very large amounts of government debt. Every year Japan has had a very, very large government budget deficit and that has taken Japan’s government debt from a ratio of debt-to-GDP from 60% of GDP in 1990 up to 250% of Japan’s GDP now, and by borrowing and spending on a very aggressive level, they have managed to keep Japan’s economy from collapsing into a depression.

So, that’s probably what we’re going to see in China, as well. The only option really available to them will be for the central government to borrow and run very large budget deficits and keep the economy propped up that way. But even then, even if things go perfectly, it will be very difficult for them to manage to have 3% GDP growth a year going forward, whereas up until recently, almost everyone expected China to continue growing at at least 7% or 8% a year, almost to infinity. So, this slowdown in China is going to change everything. Now, how are they going to respond to this crisis that they are confronting? What we have seen is, they have begun to devalue the currency.

David: I was just going to ask the question, if you are looking at a scenario similar to the Japanese, of an increase in government spending, increase in a budget deficit and just financing that, what are the currency implications?

Richard: Right. The Chinese currency – it’s called the RMB – has been pretty closely pegged to the U.S. dollar for a long time, and quite a few years back it started appreciating slowly against the dollar, as it should, because China has such an enormous trade surplus with the U.S. But the Chinese government has kept it very tightly pegged, or nearly pegged, to the dollar. Back in August last year that all changed. They suddenly had a 2-3% devaluation, which really caused shock waves around the world. That’s because if China’s currency becomes weaker that means all of China’s exports become more competitive against the exports of all of their trading partners, and it also means that China would have less purchasing power to buy things from the rest of the world.

So that would mean that commodity prices would become weaker. And it means that if Chinese goods become cheaper, that exports deflation to the rest of the world. And it’s also bad for the corporate profits – all the mining and metal and energy companies around the world. So the stock market also took a big hit on that news. So, at that point, that was when the Fed was actively discussing, and preparing for, increased U.S. interest rates. If the Fed had increased interest rates as much as they had intended to – at that point the dollar was appreciating because the market expected the Fed to hike U.S. interest rates. And as the dollar appreciated, that pulled up the RMB along with it, because the two are so closely pegged.

So, in August, this little devaluation in China – I think that was a warning from the Chinese central bank, the Chinese government, that if the Fed hiked U.S. interest rates, China would devalue, and if China devalues significantly, that’s going to export deflation to the United States, and last year we were verging on deflation anyway, and that would make it impossible for the Fed to meet one of its mandates of close to 2% inflation. So, it was a kind of Chinese blackmail, and I think this is really, probably, the main reason that the Fed has not increased interest rates. There was one 25-basis point hike back in December, but since then the Fed has backed away from further rate hikes and they have become very dovish. One of the reasons is China threatening to unleash a wave of deflation into the U.S. and around the world by devaluing the currency if the Fed does hike.

David: If they don’t devalue, we have a pretty significant issue in China, and that is, you need to continue to bring people out of the countryside and into the cities. You need to continue to increase income. You need to continue the growth trends that have been in place for the last several decades. We’re talking about, really, a stalling of that trend. So, if we could draw a chart of Chinese growth and you see the arrow move from the upper left-hand corner and move to the upper right-hand corner, it’s stalling, maybe even in 2017-2018 moving lower. That creates all kinds of implications for Chinese leadership from a political standpoint. You’re dealing with the raised expectations of an entire country.

How do you meet those expectations? If you don’t meet them, what are your options? It seems to me that devaluation is still a pretty critical option – devaluation, or perhaps military adventurism, where you, as you’ve seen with the Scarborough Shoal, the issue raised at The Hague, with the Philippines protesting that as being within the nine-dash line, all of a sudden there is this growing sense of, “We can always flex our muscles, if not in the world of rates and devaluation,” as you suggested, what they did in August of 2015, “but perhaps with a little bit of military hardware.” What are your thoughts?

Richard: Those are all good points. The Chinese leadership doesn’t have a lot of good options to choose from. The choices available to them are not ideal, to say the least. There is this special U.S./Chinese economic relationship that Niall Ferguson coined a term for – Chimerica. This was back in 2006. Niall Ferguson is a famous historian. A great historian, I would say, not such a great economist, but he said perhaps we shouldn’t think of the U.S. and China as two separate economies, but really, think of them as just one economy, where people in West Chimerica – in other words, the United States – do the spending and the consuming and the East Chimericans – the Chinese – do the manufacturing and the saving.

And this relationship – it’s useful to look at it that way – really did transform the world because you can’t look at China in isolation. What has happened in China over the last 25 years has only been possible because of what has happened in the United States during the same period. Much of the work that I’ve done in the past has been focused on what I call the dollar standard, in other words, the global international monetary system that came after Bretton Woods collapsed. Under Bretton Woods, trade between countries had to balance, just like it did under the gold standard.

But once Bretton Woods broke down, the United States discovered it was possible for the U.S. to begin running very large trade deficits with the rest of the world, first with Japan, and then after 1990, particularly with China. As I mentioned, China’s surplus went from zero in 1990 to 367 billion dollars last year. So, as long as the U.S. trade deficit with the world became larger and larger every year, then of course the rest of the world’s trade surplus became larger and larger, making their economies grow. So you can look at, really, this entire global crisis that we’re experiencing now should be thought of as the great dollar standard economic boom and bust cycle. As long as the deficit became larger, the global economy boomed. But after 2008 the U.S. deficit became very much smaller and now the world is experiencing the dollar standard bust.

David: So let me just restate that in a different way. If we’re saying that this relationship between China and America is something of a symbiotic relationship, we’re saying that the Chinese growth story was part and parcel to a U.S. consumption story and the U.S. consumption story is really about our ability to spend more than we have. So, the U.S. consumption story is really a growing credit or debt story, and to the degree that we don’t see growth in U.S. credit, we don’t see over-consumption, and we don’t see Chinese growth. So, it’s either promoting growth, or if we’ve reached a tipping point in terms of the credit markets, then we have to look and say, “This same healthy symbiotic relationship could actually work in reverse, and just as the dominos fell one direction, set up again, they might fall the other direction just as easily.”

Richard: Exactly right. China was the main beneficiary of the dollar standard global boom, but after 2008 this relationship became seriously strained, and it remains seriously strained because the U.S. is no longer able to keep up its end of the bargain. The Americans are so heavily in debt that they can’t continue borrowing at the rate that they did up until 2008, so they’re no longer consuming, their consumption growth is much slower, import growth into the United States is much less, and it’s no longer adequate to keep China’s economy booming.

So, China had to rethink its entire strategy after 2008, and all they could do to prevent their economy from going into severe recession at that point was to allow – or force, however you’d like to look at it – the Chinese banks, which are controlled and owned by the government, to radically extend the amount of credit every year. So, credit started growing, in absolute dollar terms, in China, more than it was growing in the United States, not just in percent terms, but in dollar amount, Chinese credit growth has been far greater over the last eight years than U.S. credit growth has been.

The thing is, this investment that they’re doing with this credit is becoming increasingly unproductive, more and more mal-investment. And it’s requiring greater and greater doses of credit to achieve lesser and lesser amounts of GDP growth. For instance, last year the total credit in the country grew by something close to, let’s say, 12.5%, but the GDP only grew by 6.5%. That’s bad enough to start with, but the amount of credit is twice as much as the amount of GDP. So in other words, it took something like six trillion RMB, worth 16 trillion of RMB in credit, to make the economy grow by four trillion, so it’s requiring more and more credit growth to generate economic growth.

That tells us that these investments are not profitable, and increasingly loss-making, which means they’re destroying the deposits that are funding the credit. So economic growth that destroys deposits is really not economic growth at all, so they’re spinning their wheels trying to stay out of severe recession. So far they have, and up until last year their efforts played a very big role in driving global economic growth after 2008, up until last year. But as I said, the Chinese hard landing started last year. Chinese imports contracted by 17%.

David: You’ve said that, basically, one world is not enough, that there is not enough purchasing power to take on the amount of goods being produced by China, and they haven’t made the transition to China buying their own goods because there is not enough income to do so. But when we’re talking about debt, we’re also talking about a similar dynamic where, within the private sector, there is not enough income to service the debt that is being created.

Now, if you take that one step further and say, “Yes, but government can,” just as the Japanese did, as you suggested earlier, “government can continue to increase the amount of debt and they can service that debt ad infinitum because they also run the printing presses. What are the implications for China going the route of the Japanese and allowing government debt to be that source of credit creation on an ongoing basis, and at what point does the Chinese economy not generate enough revenue to keep up with that debt? Do you just begin to write off the debt? I guess what I’m getting at is, where do you see a crisis of confidence with the RMB as an ultimate failure, or as an ultimate signal of a failed policy?

Richard: Last year already, there was a great deal of capital flight out of China because of this devaluation that occurred in April, and rumors that preceded it, and fears afterward that there would be more. And there has been further devaluation since. So, you can see that there was a great deal of money leaving China because China’s foreign exchange reserves have fallen from a peak of about 4 trillion dollars in mid 2014 to something closer to 3.2 trillion now. So one way or the other, 800 billion has left the country. That makes it increasingly difficult for China to fund the massive amounts of credit that is required to keep China’s economy growing. So, there is a growing possibility that China will have to resort to quantitative easing of its own.

In the West, we’ve seen the Fed and the Bank of Japan, the Bank of England, and the European Central Bank have all done quantitative easing. The ECB and the Bank of Japan are still doing it on a very large scale. Now, it’s one thing for these developed economies to do quantitative easing. Normally in the past, if a central bank prints a lot of money, it would have led to high rates of inflation. But that hasn’t happened this time, because all of the four countries that have done it are developed economies, with high levels of wages.

But globalization is extremely deflationary and it’s been pushing down the wage rates in the United States, England, Europe, and Japan, because it’s no longer necessary to hire manufacturing workers in Michigan, for instance, and pay that person $200 a day to build an automobile, when instead, you can hire someone in China and pay that person $10-15 a day. So, globalization has been driving down wages in the West. That has been deflationary, and that deflationary pressure has offset all of the inflationary pressure that would have come about because of quantitative easing, the quantitative easing that has already been conducted, and that is still being conducted in Japan and Europe. The story, though, is not the same in China. China is not experiencing wage depression.

David: Richard, one point on that. Beyond wage depression, wouldn’t you also say that the transmission mechanism within the financial system is not operating optimally, where if QE is supposed to create inflation, and ordinarily you would see an increase in the amount of credit in the system flow through the banking system into the larger economy, it hasn’t flown into the larger economy, we haven’t seen an increase in wages, and so something has fallen apart between QE and an expansion of credit and its actual footprint in the economy. It has stayed within the financial system and not actually flowed through. That’s a transmission mechanism problem as much as it is a wage problem, is it not?

Richard: It did flow through to asset prices. The reason it didn’t flow through to wages is because suddenly we have a global economy with 7.5 billion people, three billion of whom are living on less than $3 a day. So, suddenly we have a massive excess supply of very cheap labor. So, the transmission mechanism didn’t flow through to the labor market because we’re glutted with ultra-cheap labor now that we have globalization and the ability to manufacture anywhere in the world. But where it did transmit through to the real economy was, it pushed asset prices up to all-time record high levels. The net worth of the American household – household sector net worth – is now practically 90 trillion dollars. It’s up 60% from the 2009 low.

So, what we saw, we had a big economic and asset price bubble going into 2008. That popped, asset prices fell sharply, and then because of the Fed printing 3.6 trillion dollars and using it to buy financial assets, that reflated those asset prices to all-time record high new levels, so the assets are floating on an ocean of fiat money. And by reflating asset prices, and just so many people who were able to not lose their homes in the immediate aftermath of the crisis, they have seen the value of their homes go back to very high levels again. They have seen their stock portfolios reach record highs, and their pensions now are replenished.

So, QE certainly had the effect of pushing up asset prices and creating a wealth effect that supported the economy and allowed it to grow to the extent that it has. Nevertheless it has been very weak. But without it, things would have been disastrously worse.

David: You’re also arguing that there is a difference between quantitative easing and its effects in the developing market as opposed to a developed market.

Richard: Yes, so in China, it’s not at all certain they would be able to get away with doing large-scale quantitative easing there because their wages are already rising, sharply. They have been rising for quite a long time. So, they don’t have the deflationary forces of globalization pushing down their wage rates the way the Western world does. So, there is a risk that if China resorts to QE to fund the massive credit expansion that it requires to make its economy continue to grow, there is a risk that that will spark off very high levels of inflation in China, and that is an extreme concern to the leadership of the communist party, because back in 1989, the time of Tiananmen Square, it wasn’t just a pro-democracy movement. Those riots, those demonstrations, were largely demonstrations against the high levels of inflation that China was experiencing then. So, there is a risk that QE would cause high rates of inflation again in China, which could be politically destabilizing.

David: There is this unfortunate relationship between domestic political disturbance, which may have an inflationary source, or some sort of monetary policy choice, and the political choice to deal with that by shifting blame and creating a context where current policy-makers aren’t responsible, but someone else outside your borders is. And it seems to me that the Chinese choosing quantitative easing, if they were to, and tempting fates with high levels of inflation, may subsequently be faced with very difficult international relations problems, or geopolitical conflict.

Because again, when you’re dealing with inflationary pressures, either you take the hit as a politician and say, “Sorry, we did this to you, we tried our best and it made a mess of things.” Or you say, “Look, the only reason this is happening is because of unfair treatment from XYZ, or from the tariffs that have been put on our businesses, and the extreme measures which have been leveled against us from Europe, or from the United States, or from our neighboring Asian countries. Is that a low-level probability? Is that a risk that you think I would overplay in my mind, or is that a real possibility in the coming years?

Richard: I think we’ve already begun to experience what you have just described, not just so much, necessarily, within China, but around the world. Look at this election cycle in the United States. There is a big backlash against free trade and globalization. Donald Trump has stolen the Republican party away from the Republican establishment because the majority of the Republican members are not in favor of free trade, they’re not benefitting from free trade. These white people living across middle America have lost their manufacturing jobs and they’re opposed to free trade, they are opposed to further immigration into the U.S., they don’t want their Social Security cut, they don’t want their Medicare cut, and Donald Trump has pointed out all those things to these people, and that’s why they are behind him.

That’s pretty much in complete opposition to what the Republican establishment had been promoting – increasing free trade, more immigration, reduction in Social Security and Medicare. So, we’ve had a political revolution, and we’ve nearly witnessed exactly the same thing on the Democrat side. After all, it was Bill Clinton who pushed through NAFTA, despite Ross Perot’s warning that there would be a giant sucking sound of jobs leaving the country as a result. And so, Bernie Sanders almost stole the Democrat party away from the Democrat political establishment for exactly the same reason. The majority of the people in the United States have not been benefitting from globalization and free trade, they are opposed to it.

And so, if China were to have a very large round of quantitative easing that caused the currency in China to devalue, or if it devaluated for any other reason, this would just exacerbate all of the trade tensions, because China is already flooding the world with excess production of steel and everything else that you can imagine, driving wages lower, causing factories to shut down in Europe, England and the U.S. And so, that is why we’re seeing such a political near-revolution, not only in the U.S., but we’ve seen the same tendencies with Brexit in the U.K., and for many of the same reasons, across Europe, as well. So, life is much easier when the economy is booming.

Paul Samuelson, the famous economist, once said – I’m paraphrasing, but something along the lines of – “Democracy really needs economic growth to work,” and we can see, even, we haven’t had a depression, we’ve managed to avoid a depression thus far after 2008. As a result of running trillion-dollar budget deficits and printing trillions of paper dollars we’ve kept the global economic bubble inflated. The growth has been weak – weaker than in the past – but you can see, even with this level of economic weakness, the sort of extreme political backlash that it has produced so far when times have been relatively good, you can just imagine what politics must have felt like in the early 1930s when the U.S. had 25% unemployment and global trade completely broke down, and the banking system failed.

There was a strong socialist/communist movement in the U.S. at that point, as well as a strong fascist movement in the U.S. Of course, we know what happened in Europe, where fascist Germany took over Europe and militaristic Japan took over Asia, and then World War II started. So, this great dollar standard economic boom and bust cycle that we are experiencing, now on the bust side, and there is a very real danger that it is going to become considerably worse if any policy mistakes are made.

David: We talk about printing of trillions of dollars and that having sort of filled the gap and smoothed things over post 2008/2009 and part of that, whether it was TARP or TALF, our specific projects, or more generally, QE, which has been employed here, in Europe and the U.K., with the Bank of Japan, etc., we see that the printing of trillions did not trickle down to labor, but did benefit capital. That’s what we talked about earlier where we saw asset prices increase in value, but no real traction in the larger economy. The hope was that there would be some sort of wealth effect and that it would trickle down. But nevertheless, monetary policy, in the form of QE, has gone a long way to creating this backlash against globalization and free trade, in part because labor has suffered, capital has done well. And so, this difference between labor and capital is still before us.

Now we’re in the awkward position of looking at, on a global basis, the need for expansion of credit, and it’s not happening. You’ve made the case that global debt approaches, today, if you’re counting the entire world, close to 300 trillion dollars. And of course, in past conversations, you and I have discussed how, just looking at the U.S. and the U.S. market, we need a certain percentage growth in credit in order to say out of a recession because, as you well argue, economic growth has become, in a post Bretton-Woods period, dependent on credit growth.

So, we have this mountain of debt – 300 trillion dollars globally, 63-64 trillion dollars in the United States alone, and we have to see growth in debt in order to avoid stepping back into a recession, or even a depression. I think it is very interesting, by the way, if you look at the numbers – maybe this is just a simple irony or coincidence, but we went from one trillion dollars debt in the United States in 1964, now we have 64 trillion dollars, or thereabouts, here in the United States.

1964 was when we began the demonetization process. We took silver out of our coinage. Only pre-1965 coins had silver in them. We went from 90% to clad, and then from there. Almost, as sort of a historical reference, it reminds me of what happened with the Roman denarius. You start taking silver out of the content and all kinds of chaos follows, including the destabilization of what had been a growth trend for several hundred years for an empire.

So, we had a change with the dollar standard in 1964. Ultimately, we came off of gold altogether in 1971. It looks to me as if we have not only a coming crisis of confidence with our currency system, but as you point out very well, we moved away from capitalism and to creditism, a totally different way of operating in 1971. So, not only was there a change in the dollar standard, and the value of our stuff, moving to an entirely fiat system, as opposed to a gold-backed currency, but in that moment we transformed ourselves from a capitalist economic system into a totally different system altogether, which is that of creditism. So yes, we now depend, different than any other period of time on growth in credit.

So, walk us through our dependence on credit, where global debt levels are today, and what you see, not only transitioning from 2015 with a negative growth rate in global debt, but as we anticipate 2016, 2017, and beyond.

Richard: It was in my last book, The New Depression, that I coined this term, creditism, to describe the way our economic system works now in contrast to the way it used to work under capitalism. Capitalism was an economic system driven by investment and saving. Businessmen would invest, some of them would make a profit, they would accumulate that capital in capitalism and reinvest it, and that was the economic growth process.

Things don’t work like that anymore. Once we went off the Bretton Woods system, once we stopped backing dollars with gold, suddenly credit became the driver of economic growth. Suddenly, it was no longer investment and savings that drove the economy, it was credit creation and consumption, more credit creation and more consumption, and increasing levels of debt. So yes, as you pointed out, total debt, all types of debt in the United States – government debt, household sector debt, corporate debt, banking sector debt, all the debt – first went through one trillion dollars in 1964 and now it’s 64 trillion, a 64-fold increase since 1964. And it was that expansion of debt in the U.S., in the growing U.S. trade deficit, that allowed the global economy to prosper and boom. It ushered in the age of globalization, transformed China and many other developing economies, into a much higher level of prosperity, all built on debt and consumption.

And that was certainly beneficial to everyone who had taken part in it over the last many decades – all my life, essentially. The thing is, now it looks like that, on the private sector side, the people are just already too heavily indebted to be able to take on more debt. The debt level is too high relative to the income level of the people, even with interest rates at these historic low levels. So, we’ve hit the point now where, the reason it’s clear that credit growth has been driving economic growth instead of the other way around is because the ratio of debt-to-GDP has been expanding. In the U.S., for instance, for a long time the level of debt-to-GDP was about 150%, but starting in 1980 that started climbing, and it went from 150% of GDP all the way up to 370% of GDP in 2008, and now it has corrected a little bit, but not much. It’s back to 350% of GDP.

And exactly the same thing is happening, essentially, in all the other major economies. The ratio of debt-to-GDP skyrocketed over the similar period of time and that drove those economies. But now everywhere around the world we’ve hit the point where that sort of expansion of debt was only possible because interest rates have come down so radically from 1980. Back in 1980 the U.S. treasury bond yields on the ten-year government bond was at one point 14% or more, and now it’s yielding something closer to 1.4, I guess, actually 1.6 today. So, we’ve had this extraordinary drop in interest rates, which have made debt more affordable, and that drop in interest rates occurred because there has been a drop in inflation. There has been extreme disinflation because of globalization. But now we have gotten to the point where interest rates are pretty much at zero, or in some cases below zero, and that doesn’t allow any further increase in affordability of additional debt.

So, we’ve gotten to the point now where the private sector just can’t take on any more debt to drive the economy, and if we don’t have debt growth, then we’re not going to have economic growth. Going back to 1950, every time debt in the U.S. grew by less than 2% a year – and this is adjusted for inflation, to compare apples with apples – if the debt grows by less than 2% a year, then we have a recession, and the recession doesn’t end until we have another surge of debt expansion. So this is an economic system that depends on creditism, on credit expansion, to survive. And right now we don’t have the credit growth. So, that’s why the world is in recession.

David: It also seems that we’ve seen this massive economic boom from 1980-1982, say, its inception, to 2008-2009, as you say, massive expansion of debt-to-GDP, the global economy has been growing at very impressive rates in that time frame commensurate with lowering of rates. So, capital got cheaper and cheaper and cheaper and cheaper – now we’re at zero, or near-zero, or in some instances, negative rates. But it seems that we are now required, or I should say, central banks are now required to control the rate of interest at these levels indefinitely because the total stock of debt is barely affordable with a zero, to negative, interest rate, and with the rise in interest rates, it goes from being barely affordable to being catastrophic in terms of the requirements, fiscally, just to service that one line item.

So, we’re really talking about being at the end of a credit cycle, yes, being at the end of an experiment with creditism, but also being in this place in the cycle, central banks are likely to implement things that have never been done before. In your opinion, the change in central bank policy to control rates at these levels indefinitely – how does that change the nature of the financial markets?

Richard: I think it changes it fundamentally, and entirely, because if we look back 100 years, the central banks, if they existed at all, certainly didn’t try to manipulate asset prices. But in terms of the broader economy, and the broader economic implications, the world has really never experienced the sort of conditions that we now are facing, where we have such high debt levels globally, and where we, at the same time, have a global economy with enormous excess capacity, not only across all the industries, but even more importantly, in the labor market. In India, you could easily find 300 million people who would work for $5 a day, so we have massive excess capacity in labor, which means there are no inflationary pressures.

Everyone is trying to understand what we have to do to prevent our economy from collapsing, and hopefully, to be able to return to growth. But it’s important for everyone to understand that there is no real past experience for us to draw on. This isn’t 1776 and the age of Adam Smith, nor is it the early 1900s when Ludwig von Mises was writing about the consequences of credit expansion. This is a new period, and we’re going to have to come up with our own solution to this crisis of ours if we’re going to avoid disaster, and look at things, not using textbooks that are 50 years, 100 years, 250 years old, which don’t apply to our age. We’re living in a different period, and we have different tools available to us that we’re going to have to use if we’re going to avoid disaster.

So, in 1930, when a similar credit bubble popped, there was a credit bubble of the 1920s that resulted from World War I. In World War I all the European countries went off the gold standard and they printed a lot of paper money to finance the war. They issued a lot of government bonds to finance World War I, and that created a global credit bubble called the Roaring 20s and that popped in 1930, and the governments didn’t know what to do. They believed in economic orthodoxy and they didn’t do very much of anything, and the global economy completely collapsed, and it collapsed for ten years. And it never healed itself. That depression only ended when World War II started, and at that point, government spending in the U.S. increased by 900% during the war. That ended the depression.

We’re in a similar situation now, except in 2008 probably the bubble was even larger than in 1930. This time, when it popped, rather than doing nothing, they acted very aggressively. They haven’t solved the problem, but we’ve had eight more years of prosperity that we wouldn’t have had. This would be 1938. Looking ahead a couple of years ahead of us would be World War II, if we make the analogy with the Depression. Instead, we’ve had relative prosperity for the last eight years because of the government intervention, this trillion-dollar budget deficit and this quantitative easing.

And now we find ourselves in the situation where, remarkably, what the last eight years has shown us, has proven, is that it is possible for the U.S. government to borrow and spend trillions of dollars that it doesn’t have, and to finance it with paper money creation without creating inflation. So, the sensible thing to do, of course, would be for the government to borrow more, and to invest it, and rebuild our rotting infrastructure.

I live in Asia and, increasingly, when I moved to Asia 26 years ago, it looked very third world. Now when I come back to the United States, relative to Asia, the U.S. is looking third world. The infrastructure is rotten. The airports are ancient. Trains don’t stay on the track. But we can fix that. If Donald Trump wants to make America great again, then he should spend a couple of trillion dollars and fix all the infrastructure in the country. He could finance this, at worst, at 1.6% interest for the next ten years. And at best, actually, what we’ve seen is, the Fed has already printed 3.6 trillion dollars, and it now owns something close to 3 trillion dollars of U.S. government bonds, which it has effectively cancelled. QE is debt cancellation, if you think about it at all.

The Fed has bought these government bonds, and the government still must pay interest on those bonds to the Fed, but at the end of every year the Fed takes all of its profits which come from the interest on those bonds and gives it right back to the government, meaning the government is not really paying interest on that debt, meaning that those bonds have essentially been cancelled, so with every month that passes we hear more and more about helicopter money and perpetual debt, issuing perpetual bonds, meaning bonds that will never be repaid. That would make it possible for the government to spend more on infrastructure in the short term, and ideally, on investing in new industries and technologies over the longer run, investment in things like genetic engineering, biotech, nanotech, green energy, to restructure the U.S. economy, creating new jobs and inducing a new technological revolution.

But people are terrified, because like generals fighting wars, they’re always fighting the old wars and reading the old economic textbooks and I would say the majority of people are under the impression that since debt got us into this problem, how can debt get us out of it. Well, that sounds logical enough, but if you understand that the alternative is collapsing into a great depression, then it makes a lot more sense when you realize that by borrowing and spending and investing, we could grow our way out of this crisis, or at the very least, prevent a collapse for many more years into the future. After all, Japan has been doing this for 26 years so far.

So, many bright and well-meaning people advocate balancing the budget, reducing the debt level, banning the Fed, but that’s just like someone who has gone up in a hot air balloon, far up in the sky, suddenly looking down and becoming frightened and advocating cutting off all the hot air. Well, our balloon has been inflated by massive amounts of credit for more than half a century. If you cut off the credit now, our hot air balloon is going to crash to the ground and we’re all going to die. So, we need to keep the credit flowing.

And the private sector can’t because private sector income is not growing because globalization is pushing down wages, but the government can. The U.S. government debt is roughly 100% of GDP. Japan government debt is 250% of GDP. U.S. GDP is 18 trillion dollars. That suggests the U.S. government could borrow and spend another 18 trillion dollars before we even hit 200% government debt-to-GDP, and that’s assuming zero percent GDP growth. So, if we spent that kind of money, the U.S. economy would grow by 10% every year and we would never hit 200% government debt-to-GDP.

So, in other words, if you want to look at this black or white, we can cut off the credit and collapse into a great depression and have our civilization collapse, or we can have the government do a lot of deficit spending financed by the Fed, and grow our way out of this into an age of unprecedented prosperity.

David: I think, a couple of things that come to mind are, one, that I’m not opposed to Schumpeterian growth, the idea of creative destruction. The notion that debt can carry us forward does allow for perpetuating corporations, financial entities, to carry on, and actually squeeze out real innovation and change, as we have seen in Japan for 20 years. I think that’s one point of response.

The second would be, it doesn’t seem that we’re discovering a new Eldorado, it seems that helicopter money and perpetual debt is not a new economic model, it’s just flogging the old model in order to buy us some time because we don’t want the experience of pain. And better to buy time and have the impression of economic well-being than pay the piper.

Richard: Yes, and the crucial question is, how much pain would there be? Would it be a couple of years of acute pain followed by a return to the garden of Eden of laissez-faire? Or would it be death? If it’s death after 50 years and a 64-trillion dollar expansion of credit, or something resembling a ten-year depression followed by World War III with nuclear weapons, that would be pretty much end of our civilization. So, that’s the question that we have to decide. Can we take the pain? Can we endure 25% unemployment? Who would be elected president if we had 25% unemployment? Where would the trade tariffs go?

David: There may also be a philosophical difference here, just in terms of what is created in the context of pressure, because clearly, as long as we perpetuate the financial system that we have, there are certain kinds of innovation which will not be allowed. We’re essentially perpetuating the old monopolies that are ineffective, bloated, and unable to grow except with new debt. I believe there are different kinds of leadership and different kinds of corporate structuring that would be growth-oriented, if allowed to exist, but in the context of monopoly, simply can’t exist.

So, I think, one of the things we may assume is that in the context of economic and financial chaos, it goes from bad to worse. And it may, but it also opens up the opportunity for creativity, and the human spirit to solve problems in a way that it is not being allowed to today, and there is risk involved.

Richard: Yes, I think creative destruction certainly was the way things used to work. That ended sometime around 1940 when the government took over complete control of the economy to win World War II, and then to defeat the Soviet Union. They’ve been managing the economy at the macro level ever since, and they’re not going to stop. It’s just a matter of, are they going to manage it well enough to prevent it from collapsing. We don’t have to talk about monopolies. The government, for instance, could fund a government/Elon Musk joint venture, and fund it with, let’s say, ten billion dollars, or 25-billion dollars, or 100 billion dollars, and see what kind of innovation you get out that. It would mind-boggling. It would induce the most incredible technological revolution you can imagine.

Now, pick out the 10,000 most promising entrepreneurs and scientists and have the government fund them and set up joint venture projects with them where the government funds it, keeps a majority stake, and therefore shares in the profits. But let the entrepreneurs run them. And we would usher in an age of technological miracles and medical marvels that would certainly take us far, far from the brink of collapse where we are at the moment.

But in any case, in terms of your listeners and their real interest in terms of their investments, and what’s going to happen next, that’s really what I focus on in Macro Watch. And however the listeners feel about the government’s intervention in the economy, which in my view, has been going on for 76 years, since World War II started, the thing I think that is important for them to understand is, the government is not going to stop intervening any time soon, regardless how much your listeners might wish for that to occur. The government has been managing the economy, and they’re going to continue to manage the economy.

So, if your listeners want to understand how to make money, it is crucial for them to anticipate what the government is going to do next. Are they going to issue perpetual bonds and finance fiscal spending on a big scale? Are they going to launch QE-4? How much bigger is QE going to become in Europe and in Japan, and what are the Chinese going to do? These are the players who drive the macro-economy, and it’s the macro that drives the asset prices as a group. So, my focus at Macro Watch is, I believe that in this new age of fiat money, starting from around 1970, it is credit growth that drives economic growth and its liquidity that determines which way the asset prices move, up or down – stocks, bonds, commodities, currencies.

And the government has been doing, and will continue to do, everything in its power to make sure that credit and liquidity continue to expand so that the economy won’t collapse. So, I focus very much on trying to anticipate the government’s next move, because there will be one, and whether it succeeds or fails will determine whether the stock market goes higher or lower, and gold prices, whether they go higher or lower. So, that’s what Macro Watch is all about.

David: There’s no doubt that creditism has replaced capitalism, and as you say, the long arm of the government involved in the economy since 1940, or thereabouts, has been very, very significant. Will that continue? It’s a politically contentious issue. Who gets what? How? Who are the winners and losers? And these are political choices determined by the politicians that are elected. So, we’ll know a lot more as we head into 2017 just how the spoils are apportioned, so to say, and what the outcomes are.

I look forward to seeing every one of your releases from Credit Watch. I think it’s an invaluable service. I think it’s something that if folks are interested in tracking credit growth, and if you like this idea – you don’t have to like the idea, but are fascinated by the idea – of converting from capitalism to creditism, and being debt-dependent going forward, I think you do the best analysis out there, Richard, and I would encourage our listeners to take advantage of the research and thoughtfulness that you put into those video series.

I have one last question for you, and this is just of a historical, economic, monetary nature. There came a point in the 1918-1924 period in Germany where the logic that Havenstein used in Germany was that there was not enough income in the system and the people needed more income to be able to make payments on debt and to operate in the economy, and so the printing presses started whirling. We look at the requirements of debt service today and I just wonder if that’s not a part of the implicit logic – we’ve got to continue to create more credit so that there is growth in the economy, so that there is growth in income so that we can service debt and continue that expansion. Aren’t we awfully close to the Haverstein logic?

Richard: It’s always difficult to compare different ages, and I think, the answer to your question is, yes, we’re quite close to the point where we need to have more credit expansion, even if that means a lot more fiat money creation. But the difference between Germany then, and where we are now is, Germany was a closed national economy pre-globalization, capable of quickly getting to the point where they had full capacity utilization and full employment leading to high rates of inflation. But with our global economy and all of the excess industrial capacity, combined with the massive excess labor capacity, it doesn’t look like we could hit capacity constraints for decades, which means that, I don’t know about decades of quantitative easing and massive fiscal spending, but the next five years should be a breeze. If you did that right, we’d have a whole new layer of infrastructure, plus a big head start on all kinds of new industries and investments.

David: I agree with you, there are huge benefits to the fiscal spend. My concern is that we really don’t know the capacity of the debt sponge when we’re thinking about central bank balance sheets, and we know that they’ve been able to expand several trillion dollars. We’ve seen it with the ECB, we’ve seen it with the U.S. Fed, but we really don’t know how large the sponge is, and once you reach that capacity limit, you’re faced with the same issue. How do you finance without there being a detrimental effect to the currency?

So, today we can do it, and there has not been a massive detrimental effect to the currency. But we don’t know what that limit is, and am I wrong to believe that that is something that the market determines, in terms of a perception? “Okay, that’s too far, now we revolt,” going back to the bond traders taking control of what right now is being controlled and manipulated by governmental bodies and the levers at the Fed and the ECB, and the BOE, and the PBOC, etc.?

Richard: Look at what’s going on in Japan now. The government has 250% government debt-to-GDP, but the Bank of Japan is printing so much yen, buying so much government debt, and effectively cancelling it. Japan still has a very large budget deficit. I haven’t checked lately, but it’s probably 6% or 7% of GDP. But the Bank of Japan is printing twice that much of GDP. So, not only are they financing the entire large budget deficit, but they are financing twice as much, meaning they’re retiring with every month that passes, they are accumulating and essentially cancelling government debt.

So, Japan – I don’t know the latest figure, but I think the Bank of Japan has probably bought up something like 50% of GDP worth of Japanese government bonds, which means they’ve cancelled 50%. So, Japan no longer has 250% government debt-to-GDP, it has 200%. And if Japan keeps doing this for the next five years, they’ll be down to 100%. Maybe that’s a bit of an exaggeration, but essentially, they’re cancelling the debt. And the more the central bank prints, the more government bonds they buy, the more debt they cancel, meaning the less government debt there is. Do you follow that?

David: I follow that, I just – as they continue that activity, is it possible to see the end go from 105 to 120, that range, to 250 to 500, vis-à-vis the dollar?

Richard: Well, so far, it keeps getting stronger rather than weaker. Japan is worried because the yen keeps getting stronger.

David: And this is where I have to pinch myself, Richard, because I look and I think, that seems insane, but that’s exactly what’s happening. So, is there something in this economic construct that I don’t understand, and need to understand, or is it, in fact, insane, like a con game. You realize, “Okay, I see it, but nobody else sees it, so maybe it’s not real. Maybe I’m just crazy, myself.” And yet, one protest leads to five protests, and the whole con game ends. What am I missing in terms of the infinite expansion of a Fed balance sheet, or a Bank of Japan balance sheet, that seems Ponzi-esque. What the missing variable that helps me make sense of that not being Ponzi?

Richard: Well, the greed of it – well, not just greed, but you know all of the investment managers, if they underperform for two quarters, they lose their jobs. So, they’re hardly going to stage a revolution and stop buying stocks. If the Fed prints money and pushes the stocks up, they’re all going to buy, too. So, there’s not going to be any vigilante bond revolt or we would have seen it already. Bill Gross can scream and shout and do whatever he wants, but if the Fed buys bonds the prices are going to go up, and all the other bond buyers are going to buy them. We don’t have any choice. And the real risk, fatal, ultimate destroyer of this world, is the possibility that inflation does come back, and that could happen very suddenly if Japan, for instance, went to war with China over some sort of naval accident, or whatever. The U.S. would back Japan, put up trade barriers against Chinese goods, so suddenly there would be very high rates of inflation because the U.S. buys half a trillion dollars’ worth of Chinese consumer goods every year, and then we would have inflation and the whole game would be over. But as long as there is no inflation, there is no end in sight. It’s been going on for eight years now, I see no reason it can’t go on for another eight. And it looks like it’s going to. I think after the next presidential election we’re going to have a globally coordinated fiscal stimulus program on a big scale because there is no other alternative, and this path is so easy. Japan is ready to rock now Abe’s got this majority.

David: Right.

Richard: [Unclear] must be humbled with the consequences of its experience with austerity. You would think the Republican party would also have learned a lesson about what their priorities should be. Should it be defeating the president, or should it be undertaking policies that benefit the rank and file.

David: So, here’s a problem for the rank and file. The pig in the python, so to say, demographically, here in the United States, is that we’ve got how many millions of people retiring every day in the baby boomer generation. The expectation has been that they could create income, and it’s almost impossible to create income.

Richard: So they have to keep the stock market going higher.

David: They have to keep the stock market going higher. They have to.

Richard: And they have. And they will continue to. It seems easy to do that. Just drop a hint of QE, or just say you’re not going to hike interest rates and the stock market goes up 5%.

David: Is my internal sense of frustration that I still want to believe that the markets are markets, and they haven’t been for a long time, or that the markets are free?

Richard: I think it’s logical to have all of the concerns that you have, but again, I think there are two sides. On the one side, I really believe that if the thing collapses that it’s death. It’s not pain, it’s death. So, I’m all for postponing death as long as possible. Now, people who are kind of mean and say that the people who put out the argument that the bubble is going to have to pop someday, therefore the sooner it happens the better, for me, that’s just like saying, well, we’re all going to die one day, so we may as well kill ourselves today. No, I want to live. If we can live another eight years, I’m all for it, because the alternative is death today. That’s one thing.

And then the other thing is, we’re all indoctrinated by the very persuasive arguments of Austrian economists, and it just seems sensible. And perhaps Christianity – the wages of sin is suffering, and you’ve got to go to hell, you have to suffer for your sins, and if you print money we’re going to get inflation. But no, this is not that age, this is a different age where we have deflation because of globalization. And so, a whole new school of economic thought is possible, and correct, and applicable, and urgently required.

David: Unless globalization moves in reverse and we’ve already entered into a 1914 scenario, in which case we’re on the cusp of a massive inflation.

Do you know Ian McAvity? Or did you know Ian McAvity?

Richard: No.

David: He was a technical analyst, a friend of my dad’s, and very involved in the gold sector for many years, one of the board members for the Central Fund of Canada, which is a trading vehicle you might be familiar with. His doctors told him, probably five years ago, “You’ve been a chain smoker for 40 years. If you quit smoking now, you’re as good as dead. He died of a heart attack in January. We can’t escape death. I don’t think we can escape market corrections, either. I very much appreciate your opinion, and I very much appreciate your sense of, if it goes the direction of deflating 300 trillion dollars’ worth of assets, you’re talking about – you’re talking about World War III, that you can’t avoid World War III as people protect their interests and try to claw back some sort of means of existence.

Richard: Yes, or let’s spend a couple of trillion dollars more and keep this party rocking. Get some new infrastructure. And if you want to fix Medicare, let’s just cure all the diseases and triple the lifespan and people can keep working until they’re 150, and that solves the Social Security and Medicare problem. That’s what you could do with a couple of trillion dollars invested in biotech and genetic engineering and nanotech.

David: You’d probably have to do away with K Street lobbyists that are there to protect the interests of Big Pharma because curing diseases would bankrupt them. But again, see, here’s the beautiful thing. I 100% support what you’re saying. We should do that. But that’s Schumpeterian. It means Big Pharma is gone – gone.

Richard: Well, we have to bribe them, we have to give them a cut of the cancer cure revenues – cancer vaccine. They can have a 20% stake, as long as they don’t block it. And oil can have a 20% stake in American [unclear].

David: Clean energy.

Richard: And we get them all on board and this benefits poor people, it saves the middle class, and it makes the wealthy people enormously wealthy.

David: Well, I hope we’re having this conversation eight years from now.

Richard: (laughs)

David: And we’re still buying more time, and we have that option. If we are not able to buy more time, I’ll be grateful for having a few krugerrands in a safety deposit box, both here and in Switzerland (laughs).

Richard: Right. Here, here, I agree with that. David, thank you. I would like to offer your listeners a coupon code that would give them a 50% subscription discount. If they visit my website, which is, that is where Macro Watch is posted. If they click on the orange Subscribe button, they’ll be asked if they have a coupon code. If they type in the code, commentary, then they will have a 50% discount. That will allow them to have a one-year subscription to Macro Watch for $250 a year instead of the normal price of $500. And with that, they will have immediate access to the Macro Watch archive, which contains 26 hours of video covering, I would say, almost every aspect of what is the global economy, and how it really works now.

And in addition, there will be a new Macro Watch video uploaded approximately every two weeks covering some new development. We’ve been talking a lot about China today. There have been five new videos recently on China’s hard landing. And then, the most recent Macro Watch video is on the world of debt, focusing on the global economy’s nearly 300-trillion dollar debt level now, and how that’s going to play out from here. So, I hope at the very least they will visit the website,, and they can, at the very least, sign up for my free blog.

David: That’s a very generous offer. That is very inexpensive tuition for what are very valuable insights, and we appreciate your generosity in that.

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

David: And I look forward to seeing you, whether it’s in Asia or here in the United States. I hope our paths cross again soon.

Richard: I hope so, too.

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