Podcast: Play in new window
- Labor Costs To Spike Worldwide
- Inflation Higher For Decades
- Long-Term Interest Rates Higher For Much Longer
“The rise of China and demography created a sweet spot that has dictated the path of inflation, interest rates, and inequality over the last three decades. But the future will be nothing like the past, and we are at an inflection point. As a sweet spot turns sour, the multi-decade trends that demography brought about are set for dramatic reversal.” —Charles Goodhart, as quoted by David McAlvany
Kevin: Welcome to the McAlvany Weekly Commentary. I’m Kevin Orrick, along with David McAlvany.
Dave, before we get started on the book that we’ve been reading, I was over at your house a couple of nights ago. Big party for your son, graduation. Congratulations. I don’t know if you and your wife are happy or sad.
David: Thank you. It’s both. Definitely both.
Kevin: And you spent most of the night before cooking a brisket. You looked like you were pretty tired a couple of days ago.
David: Up at two, up at four, up at six, up at eight. It needed nursing, it needed care.
Kevin: Have you ever cooked in a wok? You know those curved pans?
David: Oh yeah.
Kevin: Well, when my wife and I first got married, back in 1983, for whatever reason, that was the inexpensive wedding gift. They were about 20 bucks back then, and we got five woks for our wedding. And so after we got back from our honeymoon, she and I were talking and we said, “You know what? Let’s keep one of them and let’s go return four.” And that’s what we did.
So we had 80 bucks in our pocket as we were leaving Southwest Plaza, a shopping mall in Denver, and we walked past the pet store. And sure enough, we fell in love with a dog that was about 250 bucks. Well, my wife had good credit. Of course, she pulled the credit card out. We bought a dog. We get the dog home. He’s so cute. We realized that we had to have a video camera. I mean, back then they were the gigantic VHS—
David: Capture the memories.
Kevin: Oh, of course. So for a month, all we did was video camera our dog, and we realized, until we have kids, that’s a waste. So we took the video camera back, and I remember this was at Sears, and we said, hey, can we return this and swap it into what was then considered the biggest big screen TV.
Now, these are the old days. These are the projection TVs where you have the different colors, the red, the blue projecting, and everybody in the room had to sit sort of single file to see the screen because if you got even an inch or two either direction, it faded out. But that was about 2,500 bucks. So by the time we went from the woks, which was 80 bucks, to the dog, which was 250, to the camera, which I think was a couple of grand, to the big screen TV, if you want to call it that, 2,500 bucks—things were even expensive back then. Dave, the phenomenon, since our wedding, 1983, has been a big screen TV. Right now, twice that size would be a quarter of the cost.
And there’s a reason I’m telling this story because we have lived through, over the last 30 or 40 years, one of the most amazing periods of time where, because of China and other influences, we had low wages, okay? We were able to build things for cheap since the time that my wife and I got married. We also had relatively low inflation because we had a deflationary effect. Things started getting cheaper and cheaper because we didn’t have to pay for them to get built. So we were printing money, but we really didn’t experience high inflation, and we were in a period of time of falling interest rates. And so wages, inflation and interest rates, it really was the perfect combination of being able to see a large amount of growth worldwide without having to pay for it.
David: It’s not a surprise to me that all those things were moving down at the same time. I mean from the ’80s to the present, consumer electronics are cheaper, interest rates are down, inflation is down, asset prices are up, and there is a relationship between those things. We’ve said it a thousand times if we’ve said it once, context matters.
Market behavior occurs in an environment. That environment is set by a variety of things, whether it’s public policy or financial liquidity, investor sentiment, domestic or international conflict. These are all the sort of externalities that impact. Sometimes those contextual externalities are suppressed or they’re ignored in favor of subjective desires. You want the TV. Or think even bigger picture about what’s on the horizon, projected retirement date or a particular vision of the good life. I heard a really unique vision of the good life just last week, an argument about a handicap of six or eight. I mean, it was a really presidential golf game.
Kevin: Ouch. I saw that too. And in fact, I saw Kamala afterwards. She said, “Well, he had a slow start, but he finished well,” and that’s probably what she was talking about was the handicap part of the conversation.
David: Oh.
Kevin: The handicap part of the conversation.
David: Well, investors create their own version of an investment policy statement, and it’s full of goals. It has expectations embedded in it. And even sort of penciling out the needs that you might have in the future, a retirement plan. When they want to retire, how much are they going to need to pay the bills, if they’re going to travel, if they’re going to leave a bequest to the next generation, I think it’s a great exercise.
Those are great conversations to have to conceptualize what you have, where you’re at, where you’re going, if there’s gaps that need to be filled. If you don’t know where you’re going, any train will get you there. So it is important to do that. But if you don’t adequately account for the context you’re in, you may find that you get disappointed expectations. That’s likely, not just possible.
Next week, we’re going to take a bird’s eye view, sort of a 36,000-foot view on the global economy and several of the key drivers or constraints to growth.
Kevin: And I was reading the book that we’re talking about. Okay, you’re be talking to Charles Goodhart, which, you’ve talked to him before. Very interesting guy. The name of the book that we’re reading is The Great Demographic Reversal.
And so as I was reading the book, I was thinking, “Okay, what indeed is he saying is being reversed?” And actually what we were talking about from the time my wife and I got married to now, what he’s saying is those three elements, wages, inflation, and interest rates, all three were in what he called the sweet spot. That sweet spot’s going to reverse. All three are going to reverse. And if we plan for retirement based on the last 30 or 40 years, and we use those same models, like you said, we could be looking toward disappointment.
David: He’s an authority on central banking. Wrote a book called The Evolution of Central Banks, and then textbooks like Money, Information and Uncertainty. And I could list at least a dozen books. And in preview, I think this was actually his most readable, if you’re talking about just a general audience, The Great Demographic Reversal, most readable. There’s compelling evidence to support the case for higher interest rates, higher rates of inflation, lower real growth, and he makes the case that this is going to be the state of affairs for decades to come.
And so, again, think about your setup of consumer electronics getting cheaper, interest rates coming down, inflation coming down, asset prices going up. He’s basically saying, get ready for the grand flip. It’s going the other direction.
Kevin: I remember, Dave, you had a very expensive financial planning tool over at McAlvany Wealth, and it was not something that you all necessarily use, but you wanted us to get used to it and try it, and just basically project plans over the next 10, 15, 20 years, whatever retirement was going to look like. And I remember sitting there and inputting information and realizing this program really was based on low inflation, low interest rates and growth. The model continuing is what I’m saying, and it actually scared me to death because I’m thinking most financial planners, this is what they use.
David: Well, the assumption’s built into the Monte Carlo simulations for programs like that. The assumptions are based on a finite amount of data. They feel like it’s generous to look back 10 or 20 years, and that’s adequate if you’re looking for tail risk or the things that can go wrong, if you want to stress test a portfolio. And so you really have a lot of conventional wisdom built in.
If conventional wisdom applies under ordinary circumstances, and your understanding of ordinary is based on recent market conditions, the context of the last 40 years, for instance, I think you’re going to find your conventional wisdom will lead to trouble going forward. Big trouble. And that’s Goodhart’s argument. So any financial planning document is, if you wanted to sort of connect these dots, likely flawed because you’ve got old assumptions, which may not apply.
Kevin: Some of the people that you’ve interviewed in the past, Dave, Andrew Smithers, Kotlikoff, some of these guys are very well-versed in their areas. Kotlikoff as far as demographics, Smithers as far as corporate payouts and actually the stock market. As I was reading Goodhart’s book, of course, Goodhart’s law, if someone looks it up, that’s who created that. As I was reading that, I was realizing this is a community that you’ve talked to on the Commentary in the past.
David: When you read a little economics, you will eventually run into Charles Goodhart. Certainly he’s in the footnotes of most books, and he served as a monetary economist at the Bank of England actually before I was born. Another three years he spent as a member of the Bank of England’s Monetary Policy Committee. Spent about 17 years as a professor of banking and finance at the London School of Economics, and then a number of years as an economic consultant at Morgan Stanley. A variety of other posts leading and consulting the most powerful policymakers on the planet.
The Morgan Stanley stint he did until 2016 when he retired at the age of 80. He retired, actually one of his many retirements. But he hasn’t stopped writing. He writes constantly, adding to the countless books and journal articles which have influenced the field for decades. You eventually run into Goodhart because he is everywhere.
Kevin: When we were at the party the other day for your son, I had a great conversation with a man really that I only see at your son’s parties, from the time he was born on. They’re always invited. He was a hospital administrator, very, very thorough reader, and we were both talking about how much we appreciate it, Dave, the fact that on the Commentary and in the circle of friends that you have, you don’t try to find people who necessarily parrot or echo the things you believe. You actually try to look for a diversity even if you don’t necessarily agree with their political or monetary views. I would say Goodhart is a central banker that riles up my skin sometimes, but—
David: Sometimes. It depends on the central banker, it depends on the policy.
Kevin: But he’s a sharp cookie, and you don’t have to agree to gain some insight, do you?
David: We’re always learning and occasionally we agree. In fact, sometimes we agree with most of what our guests bring. We really enjoyed having Steph Pomboy on and the conversation we had just very wide-ranging across asset classes and looking the economy as it is today.
Kevin: Carmen Reinhart was a surprise, too, for me because she had a central banking background and it’s like, wow, you’re telling me things that are so truthful and so present at the time, it actually changed some of my own behavior.
David: Sure. Head economist at the IMF, and very candid conversation. I love that. Goodhart has been on the Commentary previously. As you know if you’ve listened in for any time at all, our guests reflect an assortment of viewpoints. It’s a variety of schools of thought, varying—sometimes even contradictory—ideas to our own.
It’s not an attempt on our part at sort of a fairness doctrine or some sort of a multicultural buffet. I think truth is like gold. A gram of high-value product comes from a ton of throwaway material, and it’s labor-intensive to discover the good stuff. The podcast provides us with a venue to explore and to mine for high-value truth. I’m curious about various issues, and I’m looking at the best explanations for how to understand those issues and to respond with actionable decisions, as we must as asset managers and as risk mitigators. So insight, clarity, context, we critically engage in hope to get all three.
Kevin: Something that struck me, Dave, was the year that it was written because this book was written in 2019 and 2020, yet what he’s talking about is higher interest rates. He’s talking about higher inflation and slower growth. We’ve gone through COVID since then, so in a way reading the book, it really is as if he wrote it today.
David: Charles Goodhart and Manoj Pradhan—that’s the co-author—they were cooperating together back in 2019 and 2020 on a book, which I think is hugely important. The Great Demographic Reversal, it’s worth reading. If I hadn’t told you the date of writing, you’d have thought the pair completed the text for immediate release this summer. In retrospect, it reads like a crystal ball. No generalized platitudes, very specific things that they think will happen, and behind it what are the things that are triggering it. These are sort of the balance sheet, brute facts, political realism showing up in policy preferences, economic consequences flowing from birth rates and improvements to longevity. The crystal ball I guess you could say without the spiritual or mystical element. It’s fresh, it’s relevant, and it’s unfolding just as they predicted prior to the pandemic.
Kevin: The pandemic just accelerated things, didn’t it?
David: Yeah, absolutely. The pandemic has accelerated the time frames, increased system-wide stress. Obviously, debt is a part of that because post-pandemic the world is awash in IOUs, and that’s of course on top of what already existed in terms of system-wide stress.
The issues they address have implications not just in the short run, but with lingering effect for decades to come. That is a keen insight, and I think it’s unpopular or underappreciated by most economists, by most practitioners, who very rarely are trying to prognosticate past a 12 or 24 month time frame. These are trends with some durability. You’ll be 20 to 30 years older by the time they’re resolved, if they’re resolved. If that time frame encompasses any critical life events for you, whether—for me—sending kids to college, or perhaps it’s sending yourself into the golden years of retirement, paying attention to these themes will pay dividends.
Kevin: Yeah, well, something that really caught my attention too, a lot of times when you’re reading economics books, you can drone yourself to sleep, and in these cases, this was good economics, but there were two things he talked about that just kept catching my attention. He would talk about the sweet spot of declining labor costs, basically because of China, interest rates declining, and inflation being kept in check because everything was cheaper to make. But he said that we are at—this is what caught my attention—we’re at an inflection point of this great reversal. In other words, that stuff we can’t count on anymore.
David: Their most stark conclusion is the future will be nothing like the past. And I’ll quote him. He says that, “The rise of China and demography created a sweet spot that has dictated the path of inflation, interest rates, and inequality over the last three decades, but the future will be nothing like the past and we are at an inflection point. As a sweet spot turns sour, the multi-decade trends that demography brought about are set for dramatic reversal.”
Kevin: You do your team meeting at least twice a week, Monday and Wednesday, when you’re analyzing the portfolio and just talking about economics with Doug Noland and Morgan Lewis and others. Wouldn’t you say that Doug and Morgan would align with a lot of the things that Charles Goodhart is saying?
David: Yeah, I mean, whether you read Hard Asset Insights or read the Credit Bubble Bulletin or just a routine listener to the Commentary, our team sees a similar turning of the tide, and the way we’ve constructed a portfolio is with many of the conclusions that this book points to, we just arrived at the conclusions in a different way. I’ve talked about long-term interest rate cycles in the US ranging from 22 to 42 years. Routinely we’re discussing structural or secular bull and bear markets in equities lasting years and sometimes a decade or more. The resurgence of inflation and the adoption of inflation and repression as tools for dealing with the excess levels of debt in the financial markets and on the balance sheets of households, corporations, and the government. And that goes back to the Carmen Reinhart conversation. That was the first time I think we talked about financial repression, and she explained it for us.
These are common discussions for us over the years, and the years are stacking up. Goodhart flips the script and says these are not merely a reflection of monetary policy or central bank decision-making. These are obviously areas that he knows something about. Those would be more or less coincidental in his view, again, monetary policy decision making. Yes, you can give credit where credit is due, but in fact too much credit has been given to policymakers for trends that are coincidental, not causal.
So, like so many things in economics, you can delve deep into complexity. The reality in the end you can summarize quite simply. Let’s do that. It’s supply and demand. Supply and demand reign supreme. The supply of people, the demand for goods, the life cycles which promote savings and consumption, there it is. Count the participants in a trend and guess at their choices, rational or otherwise, and there you have market trends, market prices reflecting those trends.
Kevin: Yeah, something that he brings up, and you have to think about this. China has a lot of people in it, but it doesn’t have as many people as it did in the past. They’re getting older, and there’ve been various policies that whether you agree with them or not, they have a demographic effect that we have to look into.
David: Aging has an impact. So there are challenges that the Chinese face as their population ages which don’t stay localized, in large part due to their successful integration into the global economy. They are the world’s largest exporter and the second-largest importer.
The importance of the supply of labor from China has defined many of the realities we take for granted over the last three to four decades. And China is now in a pickle not solvable by policy. You’ve got the working age population which is in decline, with the demographic issues coinciding with a global debt problem. Their trade surplus peaked in 2007. Nominal GDP growth peaked in 2012. In the ensuing period, we’ve got: The global financial crisis marked a turning point in global trade and cooperation. COVID then codifies the trend of on-shoring and friend-shoring, which has left China with lots of spare production capacity and fewer destinations for finished goods in the quantities that they were previously selling.
Kevin: So we’ve been talking about the years from 1983, when I got married. In 1983, Dave, our debt was a trillion dollars. We were able to work with China because we could go further and further into debt, not 35 trillion.
David: Reagan took it from 1 trillion to close to 3 trillion. And again, we think about that number today. Three trillion would be—it’s more than one year’s deficit, but 2 trillion is the current run rate for our deficit.
Debt is a part of the story as debt service becomes a factor. You could have ignored that for decades, but today it’s putting more strain on national budgets. And again, this is because inflation is rising and interest rates are rising.
Kevin: One of the things I liked about Goodhart’s book is he said, “Where could we be wrong on this?” And he would analyze areas where, well, maybe we could be wrong, or he would look at an alternative. He says, “Look, China is working its way out of the picture as far as reduction of labor costs.” He looked at Africa, he looked at India, and he questioned, could that possibly replace it?
David: Yeah, that reduction in labor costs, it’s fascinating because that is probably the largest deflationary input that the globe has experienced, and it’s covered over a lot of the inflationary consequence of monetary policy. And he says that not all countries face the same headwinds, not all countries could have or can now deliver the same benefits that we received from Chinese labor integration. So Goodhart and Pradhan, they highlight that yes, there is a mathematical possibility of India and Africa filling the working age demographic void, but they go on to explain that in China you had a really unique set of cultural ideals, a heritage which is not something you find in other parts of the world. And of course you also had a unified political objective set by the CCP,which doesn’t exist, whether it’s across Indian states or across African countries.
Kevin: Well, and you talk about unified political objectives. We were in a period of time of huge globalization as far as cooperation worldwide, and I remember, Dave, early on, I mean this Commentary has been going on 17 years, and you said we have to get Harold James on this program because he’s talking about the end of this cooperation, this globalization.
David: Yeah, and many of these discussions on the Commentary are a rehash from earlier podcasts. Harold James, classic case in point, going back well over a decade, discussing the end of globalization. And that is a core theme within The Great Demographic Reversal. That is a consequence of what we’re seeing. Yes, it is a shift away from benefiting capital and more towards the benefit to labor, so there’s the part of the subtitle, waning inequality. We will see waning inequality, we will see an inflation revival as we see aging in our societies. So many of these issues we do routinely cover.
But to find Goodhart’s latest book, similar conclusions, again coming from a different vantage point, the issues we’ve identified as critical and timely, they’re explored by the two authors from a viewpoint that suggests we’re going to be dealing with these things for decades to come.
I think about the way we look at our portfolio construction. I think about the assumptions that we have and the way we manage risk and the way we try to look for where we are wrong. We’ve tended to see inflation as a 5 to 10 year problem. We’ve tended to see higher rates as potentially a multi-decade stair step to higher levels, particularly in the US. But this book is interesting because it argues we’re talking about very long-term trends. And this is not just about the US. This is global in nature.
Kevin: And we talk about the yield curve, and sometimes that can be hard to understand for the person who doesn’t really look at things on a daily basis economically. But the yield curve just simply says that long-term rates should be higher than short-term rates. And we’ve played around with it being opposite that here this last year or two. But what Goodhart is saying is that if you want a strong prediction, he really believes that the yield curve is going to be very steep going forward.
David: Well, that’s right, that would be perhaps an example of the market getting it wrong, of expecting inflation and interest rates to resume the downtrend. His highest conviction predictions are, number one, we’ll have a significant rise in inflation and wages, and secondly, we’ll have a rise in interest rates. Those are his two highest conviction predictions. And you might say, “Well, that’s already occurred. Get on with it.” He wrote it back in 2019, so okay, he was great, he nailed it. But again, what he’s suggesting is that what we’ve seen is just a warmup. They’re not talking about a COVID-induced fiscal helicopter drop of money into the economy, ginning up growth and sparking the inflation we’ve just seen. They’re not just talking about the Fed or the ECB as interest rate jockeys. We’re talking about market-driven rates globally. And when he talks about an inflection point, you’re talking about a turn, which again is set to last for decades.
Kevin: Well, talking about market driven interest rates, central banks—and he’s a central banker, Bank of England, right?—central banks can control the short end of the curve. They can say short-term rates are going to be this, boom, boom, boom. Long-term rates they don’t really have as much control over. The other thing they don’t control, Dave, is the labor force, which, again, there’s that sweet spot that is going away.
David: It used to be predictable, birth rates and death rates and things like this, and we’ve extended life, so on that side of things, we have a requirement to continue to pay, the countries that have social safety nets, for even longer than was anticipated or originally penciled in, assumed. We are talking about the largest factor in 40 years, and this again goes back to where he would say in the ’70s, ’80s, and ’90s, what set up this mega trend was the inclusion of the Chinese and the Eastern European workforces, and that held inflation rates in check. We’ve had the benefit, in the West and globally, of subsidized costs of living via cheap Asian labor and cheap goods that we’ve all imported from China, which as they describe, this is not even a once in a millennia event. It’s never been seen before in the history of the world. And that is now reversing.
Kevin: So if I were to oversimplify this, if the cheap and cheaper big screen TV effect has worked over the last 30 to 40 years, we’re going to see that reverse for all these reasons.
David: Well, I mean, if you just said, look, you increase wages going forward because there’s not as many workers vying for the same jobs. You’re going to have to pay them more. Again, this shift from capital being the beneficiary of the last 30 or 40 years to the new trend of labor being the beneficiary, that is an input cost that is going to impact the price of everything. So based on the slow moving and often overlooked issue of demographic decay, you’ve got growth and reversal, you’ve got exceptionally low interest rates reversing, you’ve got low to non-existent inflation reversing. These are the trends that we’ve grown accustomed to over the past three decades, reversing because of a great demographic reversal. These are factors that are not often considered by asset managers or by financial firms. It’s a new context. There are fresh assumptions for how to invest if your personal investment policy statement is going to be relevant. So run your Monte Carlo simulations for a financial plan, stress test a portfolio allocation, but be aware that your assumptions, if conventional, will land you in trouble.
Kevin: And this is a good question for each of our listeners to ask the person who’s actually giving them financial advice, what are you counting on going forward? And if they’re counting on the same things—what we’ve seen in the last 30 or 40 years—going forward, then they definitely need to listen to the interview with Charles Goodhart, but they maybe need to find a new financial planner.
David: Let’s pick three dates and chart the positive changes that we’re saying are reversing now. 1976, 1992, and the year 2000.
Kevin: You’re thinking China here?
David: Yeah. ’76, ’92, and 2000.
Kevin: Didn’t you go to China with your dad in ’92?
David: I did.
Kevin: I think your dad was ahead of the curve on this.
David: Oh, absolutely. And this was the place to be putting money then. Not so much now. In ’76, Deng Xiaoping introduces post-Mao reform to agriculture, and he creates special economic zones for foreign investment, and the dollars flow in. And actually the authors argue 1978, that’s probably more when those economic zones were in motion, but we’re in the same zip code. I’m saying ’76 because Deng, that’s when he started the reform process. Traction probably by ’78. That was early but critical change. 1992 marked the beginning of privatization of state owned enterprises. You’ve got monopolies on everything owned by the Chinese government, and now you’ve got privatization. The private sector grew dramatically thereafter. Coincidentally, 1992 was the first year I traveled with my dad to Asia. We took more than a hundred investors to look at what we saw as cutting edge investment opportunities. Taiwan, Thailand, Hong Kong, mainland China, Japan, South Korea, Singapore. They were phenomenal trips.
The third date was 2000, when China began the process of membership into the World Trade Organization, concluded December 11th, 2001. So between 1992 and the present, Chinese labor has changed the world as we know it.
Kevin: So what you’re saying is those three dates actually are what created the greatest supply shock in history.
David: Yeah, between privatization and the entry into the WTO came a mass migration from countryside to cities and one of the greatest ever supply shocks in history, a labor supply shock which changed the strategies of multinationals, which altered corporate profitability via offshoring, which brought mass consumption to the multitudes throughout the global population and crushed costs. This was broadly deflationary for consumers. So if the demography is changing, what was deflationary for consumers, and again, this is his most high conviction prediction, we have inflation as far as the eye can see.
Kevin: And we had this amazing symbiotic relationship. We did this with oil, with Saudi Arabia and OPEC. We bought oil with our dollars. They recycled those dollars back to us, and so we could go into almost unlimited debt because we could print money and borrow and just get this cycle going. They would actually support our debt. China was the same thing. The shock that you’re talking about, the supply shock, it was paid for with borrowed printed money and we got away with it for a long time. A quote from early in the book, “the integration of China into the global manufacturing complex by itself more than doubled the available labor supply for production of tradable products among advanced economies.” So Kevin, the benefit to you is instead of paying $2,500 for a flat screen, you can buy three times the size at one-third the cost today.
Kevin: Right.
David: Right? So this has been a three-decade long subsidy for global consumption, a sort of deflationary factor to offset central bank activism and the tendency towards monetary policy-driven inflation. Let me say it one more time. This was the largest labor supply shock in world history.
Kevin: And we’re talking a couple of hundred million people at working age.
David: A surge of 240 million 15 to 64-year-olds ready and able to work between 1990 and 2017. The US and Europe, by comparison, increased their workforce by less than 60 million across those same years. Here’s a part of the crux of their argument. Between 1991 and 2018, the world labor supply doubled. That’s it. An enhanced consumption boom in the period of globalization brought more products at cheaper prices to more people everywhere. This demographic wave, it’s reversing, and with it, subsidies to consumption and the shift in the ratio of workers to retirees, or basically the consequences of an aging population with increased dependency.
Also slipping away is the deflationary factor which has kept inflation from being a concern for three to four decades. Takes us to the second strong prediction of the book, the rise in interest rates.
Kevin: One of the things that other economists have not done with these same types of issues is looking at it on a global basis, but Dave, you know you’ve moved, I’ve moved. When you have friends come over to help you move, you box everything up, you rent the U-Haul, and you really count on those people showing up, but what I’m thinking is, on a global basis, this is a little bit like having the luxury of everybody showing up for the first hour and then just about everybody leaving before the pizza gets there. What are we going to do now? At this point, we’re going to have to pay a lot more money to buy everything.
David: Well, these two trends are not a US concern only. We are talking about global inflation pressures and rising rates on a global basis.
Kevin: Right.
David: There are countries that are impacted more dramatically by one or the other. Certainly with the quantity of debt that we carry and its short-term maturity bias, the US is under increasing pressure from an increase in funding costs. We’re losing our dollar recycling partners—you mentioned it used to be the petrodollar—and then we’ve got the traded goods sector, which took their trade surplus and recycled it into Treasurys. We’re losing that dollar recycling partner to fund our over-consumption. We run a trade deficit which is financed by our vendors, China, Japan. And all of these things have helped keep a lid on interest rates, as I mentioned earlier. China’s trade surplus peaked in 2007. Is it a coincidence that our trade and budget surpluses were in the manageable category back then, but are no longer so?
Kevin: I think it would be safe to say this great reversal will affect everyone, even if they’re not interested in monetary or fiscal policy or economics.
David: Well, absolutely. This is where you have to be a little bit of a geek to pay attention to monetary policy and fiscal policy. Most people only pay attention when Congress is again sort of taking us to the brink and it looks like we’re going to default on our debt, and that happens, I don’t know, a couple times a year as they go back and forth, and there’s partisan bickering over what’s going to be approved in the spending programs for the year or not approved.
Virtually everyone is interested in navigating life skillfully and with success. Getting to the end of it successfully engaging the factors that either help or hurt you. So context does indeed matter. And while we tussle over domestic political concerns, sometimes we even get lost in that on the two to four-year partisan cycle, there is a broader world which our world is impacted by. We can forget the conditions. The conditions which enabled the growth story of the last 30 to 40 years are changing. The argument of the book is that they have changed, and we may need to pivot or the new conditions will set us up for disappointment.
Kevin: So we probably shouldn’t count on the cheaper, cheaper, cheaper big screen TV trend? So what we’re talking about here is, if labor costs are going up, inflation is going up and interest rates are going up. Man, I really still like gold, Dave. I really like gold.
David: There are as many opportunities as there are pitfalls when you get to inflection points like this. In an age of inflation and higher interest rates, nominal interest rates I should say, precious metals have a place, hard assets have a place, humility has a place. What we must bring is full engagement and curiosity. Those things have a place. And for that, I thank you for joining us in the endeavor we have here, this podcast.
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Kevin: You’ve been listening to the McAlvany Weekly Commentary. I’m Kevin Orrick, along with David McAlvany. You can find us at mcalvany.com, and you can call us at (800) 525-9556.
This has been the McAlvany Weekly commentary. The views expressed should not be considered to be a solicitation or a recommendation for your investment portfolio. You should consult a professional financial advisor to assess your suitability for risk and investment. Join us again next week for a new edition of the McAlvany Weekly Commentary.
