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Richard Duncan, "The Money Revolution: How to Finance the Next American Century" (John Wiley & Sons, 2022)
00:55:06
An interview with Richard Duncan
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- [00:04]
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Richard Duncan
Welcome to the New Books Network.
- [01:34]
Caleb Zakrin
I'm Caleb Zakrin, assistant editor of the New Books Network. Today I'm speaking with Richard Duncan about his latest book, the Money how to Finance the Next American Century. Richard has had a long career in both public and private finance and now works as the publisher of Macrowatch, a video newsletter that analyzes the global economy. The Money Revolution is a synthesis of banking history, an analysis of the evolution of money, and an overview of the United States current capital structure. In addition, he's also offered a detailed argument in favor of investment in critical infrastructure and resources. Richard, thank you for joining me today on the New Books Network.
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Richard Duncan
Caleb, thank you for inviting me.
- [02:09]
Caleb Zakrin
Of course. This is a really interesting book. You cover so much. There's so much meat in this book. But before jumping into that, I was wondering if you just tell us a little about yourself and your background.
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Richard Duncan
Sure. Okay. I'm an American. I grew up in Kentucky, went to Vanderbilt, and afterwards, through a great lucky break, I was able to backpack around the world for a year. And during that year I got to spend a couple of months in Thailand and Malaysia and Singapore in early 1984. And already the great Asian economic Boom had begun. So I realized this was the new land of opportunity. I went back to the US and went to business school at Babson for a couple of years. And when I finished that with an MBA in 86, I flew to Hong Kong and found a job working as a securities analyst for a Hong Kong stockbroking company, a local Chinese Hong Kong stockbroking company for a couple of years until I got some experience. And then I switched companies and started working for James Capel securities which at that time was the oldest and the largest UK stockbroking company. And so for the next many years I moved around between working in Hong Kong and Singapore. In 1990 I moved to Thailand and started running a research department for James Capel. And then after a few years Solomon Brothers came to town and they hired me and I worked for them for a couple of more years. And so I was in Thailand from 1990 until 96. And that was a really interesting experience because Thailand, Thailand's economy was growing at about 9% every year in terms of GDP. It was just really on fire. It was the Asian miracle spread spread out in front of me and it was so interesting to watch. But by 94 it was becoming very clear that Thailand was blowing into a big economic bubble. And it was very difficult to see how this was going to end. Well, and of course a few years later it didn't. The Asia crisis started. Thailand's economy contracted by GDP contracted by 9% in 98 and the Thai stock market fell 95% in dollar terms from peak to trough. And it still hasn't returned to its peak level of late 1993. So that was my education in bubblenomics, living in Asia and the buildup of the great Asian economic crisis. And once the crisis started, I started calling up the IMF and the Treasury Department and the World bank, harassing them and asking them to hire me. I managed to get a three week consulting job with the IMF in Thailand in May of 98. And then later that year I joined the World bank in Washington in a full time position for a couple of years working on issues related to the Asia crisis. And then when the Asia crisis did wind down, I moved back to Hong Kong and started working as a banking analyst again, this time on the on the buy side doing research, working for ABN AMRO Asset Management. And around that time, 2002 I wrote my first book, the Dollar Crisis that came out in 2003 with perfect timing. The dollar was plunging for, for months and months and years, even afterwards. So I had Perfect timing with that book. And soon after that I was promoted into being the head of global investment strategy for ABN Amro Asset Management, based in London, looking at all asset classes globally. And so I did that in London for a couple of years and then moved back to Singapore to work for a hedge fund. And now for the last 10 years or so, I have developed this business called Macrowatch, which is a video newsletter that I sell on a subscription basis. Every couple of weeks I produce a new video discussing something happening in the global economy and how that's likely to impact the financial markets and asset prices around the world. And along the way I've written three more books for a total of four. The most recent one, the one we're going to discuss tonight as you mentioned, is called the Money Revolution, how to Finance the Next American Century.
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Caleb Zakrin
And yeah, let's, let's get right into that book where it starts off. You know, the first part of your book offers an examination of the United States monetary system, its long ranging history. And I was wondering if you could just tell us about the creation of the Federal Reserve. How did we end up with such a powerful central bank in 1913?
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Richard Duncan
Right. So the United States didn't have a central bank through most of the 19th century, and as a result they suffered through some really very serious financial panics. The worst was in 1907. And after that banking crisis, the business leaders, the banking leaders and the political leaders all realized that they needed to have a central bank. But there was such opposition to the idea of having a central bank in the United States that they had to strike a compromise. And rather than calling it a central bank, it was actually, they set up 12 branches around the country with the, the board would meet in Washington. But it was a decentralized central bank and its purpose was to be a lender of last resort in times of banking crises. So in other words, in 1907, if, when all banking panics are quite similar, you have a number of good years, credit expands, everything's going great, and then you end up with too much credit, too much industrial capacity and excess production of things, falling product prices, and a couple of companies get in trouble, they fail. That causes panic to begin to spread through the banking industry. The banks begin calling in their loans. The next thing you know, no one has available credit anymore and otherwise viable companies begin to fail because their credit lines have been cut off. And suddenly there's a widespread banking panic that results in a significant portion of the banking system being wiped out just due to fear. Whereas if A country has a central bank, then that central bank can step in at that point and provide funding to viable borrowers against sound collateral. And that stops the panic in its tracks. So after the panic of 1907, they decided to create a US central bank and they created the Fed. But as soon as it did, the circumstances changed quite radically. Just a few months later, World War I started. The U.S. didn't enter the First World War until 1917, but nevertheless, World War I disrupted the global economy. All of the European countries went off the gold standard and they didn't have enough gold to fight the war. So they began creating lots of fiat money. And the fiat money, the governments borrowed that fiat money to finance their war efforts in Europe. And they bought a lot of things from the United States and the United States insisted on being paid in gold. So a great deal of gold entered the United States during the first few years of the World War I, before the US got into the war. And all of that money, all of the gold that flooded into the United States in that way, ended up creating a base for an enormous amount of credit extension in the following decades. And that was really the, the foundation of the roaring twenties. All the gold that entered the US during the early years of World War I ended up providing the foundation of an enormous amount of credit that was subsequently created all during the roaring twenties. And then in 1930, a lot of that credit couldn't be repaid. And at that point, the policymakers, the Fed had only been in existence not that long and had never been tested before. And the policymakers in the US in general believed that, they believed in laissez faire and market forces, and the government really didn't do very much. They more or less stepped back and let market forces work. When the bank started to fail in 1930 and the market forces worked, a new market determined equilibrium in the economy was re established. And unfortunately, that was at a level of economic output that was about 40% less than it had been in 1929. And the unemployment rate shot up to 25% and fluctuated between 25% and 15% for most of the 1930s. And the Fed really didn't do what it was created to do. It didn't step in and provide enough liquidity to prevent that very serious banking panic from turning into a depression. Now, they made excuses as to why they were unable to do that, they said, based on the laws that had created them and the confines that they were limited by as a result of those laws. They claimed they didn't have the power to create money on a large enough scale to prevent that banking crisis of the 1930s from turning into a Great Depression. And so the economy collapsed, the world economy collapsed and we went into a Great Depression for the entire 1930s. And the depression didn't end until World War II started. And only then did the US government begin having very, very large budget deficits to as a result of building war materials to fight World War II. And then all of the government deficit spending at that point, which was financed by the Fed, the laws had been changed by then to allow the Fed to create money more freely. And it was only that combination of massive fiscal stimulus to fight the war, financed in large part by monetary stimulus supplied by the Fed, that ended the Great Depression and allowed the United States to have the financial resources to win World War II.
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Caleb Zakrin
I was wondering in this Fed World War II experience, you know, if there's anything about it beyond, you know, what you've said that you think you know is interesting as far as just like what it can teach us about the powers of the Fed in emergency scenarios. Because obviously like we have the examples of COVID you know, the 2008 financial crisis. But was there any lessons from World War II that you think are still relevant today?
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Richard Duncan
Well, so the, the Fed did learn an enormous amount from their mistakes in 1930. So something very similar occurred beginning when the Bretton woods system broke down in 1971. Up until 1971 the world was functioning under the Bretton woods system which was a quasi gold standard. Dollars were backed by gold and all the other currencies in the world were either pegged to dollars or pegged by pegged to gold. So it was a fixed exchange rate system with gold at its core. But by 1971 the US simply didn't have enough gold to remain on that gold backed monetary system. And Nixon took the US off the Bretton woods system and that suddenly changed everything. But to our point here, it allowed a great deal of credit creation to begin to occur, much more than would have been the case otherwise. So over the following many decades we had an extraordinary credit boom. The for example total credit in the United States, which is the same thing as total debt. Two sides of the same coin. Total credit in the US at the end of World War, or say 1950, the ratio of total credit to GDP was around 150%. By 1980 it had increased to 180%. But after 1980 it really then took off. And by 2007 the ratio had increased from 180% of GDP to 380% of GDP. And that credit growth was the, became, it was so extraordinary that it became the main driver of economic growth in the United States. And as the US bought more and more things from other countries, it became the main driver of global economic growth. So it created a big credit bubble, much like the credit bubble that occurred during the 1920s following the breakdown of the classical gold standard in World War I. But in 2008, just like in 1930, suddenly this debt couldn't be repaid. The private sector no longer had enough income to, to finance all of the money it had taken out in mortgages that they had used to buy very expensive homes. And so they started defaulting. And that led to a wave of bankruptcies across the banking industry. In fact, practically every bank was in trouble. And at that point, this, this was the 1930 moment. Ben Bernanke, the Fed Chairman, had studied the Great Depression and he was determined not to allow it to be repeated. So he launched three rounds of quantitative easing starting in late 2008 and altogether by 2014 had increased the total size of the Fed's assets from less than $1 trillion to four and a half trillion dollars within just seven years and used that money to buy government bonds that allowed the US Government to run trillion dollar budget deficits for four years in a row, providing an enormous amount of fiscal stimulus to pull the economy out of the crisis and to reflate the economy. So it was a combination, a really very impressive show of force combining massive fiscal and monetary stimulus. The complete opposite of what was done in 1930. And this time it worked. We didn't have a Great Depression that began in 2009 and lasted for a decade. Very quickly the economy recovered and it was growing, asset prices increased very sharply and we were back off to the races again without having to suffer through a decade long depression with, you know, who knows what the geopolitical consequences of that would have been. And things were fine until, roughly fine, more or less fine until Covid hit us from out of the blue. And once again we were on the verge of collapsing into a new Great Depression because as you can imagine, with people being required to stay at home, they would not have had any income and they would have very quickly begun defaulting on their car loans, their credit card loans and their mortgages, which would have meant that all the banks in the country would have failed had the government not intervened. But once again, at that point, the government had two examples to choose from. The 1930s example, where they do nothing and we collapse into a Great depression or the 2008 example where they do an enormous amount and we don't collapse into a Great Depression. It's easy to understand why they chose the 2008 model instead. So, as a result of the pandemic, the government debt increased by $5 trillion over the next couple of years, just due to pandemic related reasons. And the Fed again doubled the size of its balance sheet, increasing, creating roughly another $4 trillion and taking its total assets at the peak up to about $9 trillion, ten times more than, or nine times more than it had been in 2007. But that worked. We didn't have a Great Depression despite the lockdowns, and now the economy is larger, 5% larger, 6% larger than it was when the pandemic began. So we, you know, over the last 15 years we've got, we have avoided two great depressions, but the cost has been a very large increase in U.S. government debt and a very radical expansion of the Fed's balance sheet. And part of the cost that has stemmed from that has been the high rate of inflation that we have experienced, particularly last year when the CPI peaked at just over 9%. But now it's coming back down. The numbers reported this morning for me, inflation was back down to 4%. And it looks likely that the economy is going to go into recession, which suggests that there'll be even more disinflationary pressure. So it's likely that the inflation rate will be be back down at or even below the Fed's 2% inflation target before too long from now, within the next year or so, year and a half.
- [19:18]
Caleb Zakrin
Yeah, I definitely want to ask more about inflation, but I think before jumping in there, I also want to talk a little bit about part two of the book which covers credit. And I was wondering if, just for listeners that are learning about all this stuff for the first time, if you could just most basic level, talk about the relationship between credit and money and what credit creation looks like in the central bank, the US Central bank, for example.
- [19:46]
Richard Duncan
Okay. I would say that in the past there was a real difference between money and credit. Money was gold and credit was the promise to repay money that you borrow. Essentially there was a difference, but after 1971, when the, when the US stopped backing dollars with gold, actually it was 1968. Up until 1968, the Fed by law was required to own gold to back every dollar that it issued. But in 1968, it no longer had enough gold to allow it to issue one more dollar. So Congress at the Behest of President Johnson, changed the law so that the Fed was no longer required to own any gold to back the dollars that it created. And that entirely transformed the powers of the Fed. Afterwards. It was in the position to create effectively limitless amounts of credit. And I would say I would no longer call that money creation because it was no longer backed by gold. It's credit creation. If the, in the past, if you took a dollar to the Treasury Department, they were required to give you some gold. Now they're only required to give you another paper dollar in exchange. So there's really no difference between dollar bills and ten year treasury bonds. They're both credit instruments created by the government. So there used to be a relationship between the amount of money in the economy, initially gold, and how much credit could be created. And this becomes a bit complicated. But the banks were required to hold a certain amount of bank reserves, either in cash at the bank or on deposit with the fed. In the 19th century, for instance, it was not unusual for banks to have 20% reserves. And the purpose of requiring them to have the reserves is so that the banks would have plenty of cash available if depositors suddenly all decided to withdraw their cash at one time, the banks were required to have a lot of cash on hand so that they could return the cash to the depositors when they wanted it. And when the Fed was created, and up until, well, for many years, decades afterwards, there was a legal requirement. The banks had a required reserve ratio. They were required to hold a certain amount of their deposits as bank reserves, either in cash or on deposit at the Fed. And so this is, this is what bank reserves are. But as the decades passed, and so the, the higher the level of reserves that they were, the banks were required to hold, the less credit they could create. But if the required reserve ratio was reduced, they could create more credit. And this is called money or credit creation. Through the system of fractional reserve banking, there is a money multiplier. In other words, if the required reserve ratio is 10%, then the money multiplier is one divided by 10% or 10 times. But if the bank required reserve ratio is reduced to 5%, then the money multiplier is one divided by 5% or 20 times. So meaning that with the required reserve ratio Moving down from 10 times to five times, the banking system could expand the amount of credit that it created from 10 times to 20 times the amount of deposits that came that entered the bank banking system. And what we saw over time, especially in the 60s, 70s, 80s, the required reserve ratio was steadily cut by the Fed and by Congress to the point where the required reserve ratio was so low by 2007, something like 1%, that the money multiplier was moving close to infinity. In other words, there were no longer any constraints on how much credit the banking system could create. And that's why we had this extraordinary credit explosion that peaked in 2007, as I described before, with the ratio of total credit to GDP in the country moving up to 370%, 360 or 70%. So in the book I describe this, the first part of the book is a history of the Fed. The second part of the book is the history of credit over the last 100 years. And I really believe that when we stopped backing dollars with Gold in 1971, that fundamentally changed the nature of our economic system. It changed the way the economy works. And one part of that was that it allowed credit to explode. So much so that I suggest that capitalism evolved into what I call creditism. Capitalism was an economic system where businessmen would invest, some of them would make a profit, they would accumulate that profit as capital. Hence capitalism and repeat, investment saving. Investment saving. That was the dynamic that drove economic growth under capitalism. But that's not the dynamic that drives our system anymore. Our system is driven by credit creation and consumption and more credit creation and more consumption. And that's created very rapid economic growth. The problem is, is that this system, creditism, requires credit growth to survive. And from time to time we get to the point where the private sector, households and businesses simply don't have enough income to continue to borrow and keep credit ism expanding. That's when we tip into crisis and the government has to step in and borrow massively to keep the system expanding and growing. So credit growth drives economic growth in our age, in this age of creditism.
- [25:59]
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- [26:28]
Caleb Zakrin
Tonight on NBC, Jimmy Fallon and Bozma St. John host the.
- [26:32]
Richard Duncan
Incredible new competition show.
- [26:34]
Caleb Zakrin
I hired 10 creatives from all walks of life. They will be battling it out to see who can apply impress the world's biggest brands. This is a huge opportunity.
- [26:43]
Richard Duncan
This is the battle for the next big idea.
- [26:45]
Caleb Zakrin
This is not play play.
- [26:46]
Richard Duncan
We're spending millions of Dollars.
- [26:48]
Caleb Zakrin
I'm so excited to embark on this adventure with all of you. The best idea on Brand with Jimmy Fallon tonight on NBC. In 2021, as we saw inflation began to surge, you know, do you see creditism and other factors as, you know, especially the borrowing that went, that occurred during the pandemic? Do you the principal causes, what do you think? Obviously, it's very hard to know exactly what the causes are, but what are your general thoughts on the cause of the inflation surge?
- [27:21]
Richard Duncan
Okay, so let me give you a little bit of background information here. When dollars ceased to be backed by Gold in 1968, 1971, a number of things changed in very fundamental ways. Most obviously, the Fed was afterwards free to create as much money as it dared. But something less obvious is this. Up until, let's say, 1971, when the Bretton woods system broke down, trade between nations had to balance. The United States could not run extraordinarily large trade deficits as it does today, because if it had a big trade deficit, that would have sent US Dollars overseas to other countries. And at that time, the other countries had the right to convert those dollars into US Gold. And the US Couldn't afford to lose a lot of gold because it had to have that gold to back the dollars that the Fed created. And if it was suddenly started losing a lot of gold, the Fed would have had to contract the money supply. And you know, taking things to the extreme, ultimately the US Would have run out of gold. And obviously then it wouldn't have been able to buy anything else from any other country. So there was an automatic adjustment mechanism under the classical gold standard, and that carried on into the Bretton Wood system that ensured that trade between countries balanced because they had to be concerned about losing gold. But once the Bretton woods system broke down, it didn't take the US Very long to discover that it could begin running very big trade deficits with other countries. It didn't have to pay with gold anymore. It could just pay with on credit by giving the other countries U.S. government Treasury bonds or other dollar denominated assets. So suddenly, this really radically changed the way the global economy worked. This ushered in the new age of globalization. By the mid-1980s, the US current account deficit had blown out to more than 3.5% of GDP, which was entirely unprecedented. But by 2006, the current account deficit had hit 6% of GDP. The US current account deficit was $800 billion in 2006 in that one year alone, meaning that the rest of the world had an $800 billion trade surplus that year, allowing the rest of the world to produce and sell to The United States $800 billion more goods than they otherwise would have been able to do, employing countless millions of people to do that in the process. And so as the US current account deficit became larger and larger, this had very important implications for the global economy, particularly my part of the world. By then, Asia, Asia began to boom because it had enormous. It pursued a policy of export led growth, exporting to the US So this created initially the economic boom and bubble in Japan, followed by the boom and bubble in Taiwan and Korea and the one I lived through in Thailand, which also included Malaysia and Indonesia and South Korea. And later on China joined the club and now Vietnam. So that was all great for Asia. It literally pulled hundreds of millions of people around the world and particularly Asian people, it pulled them out of poverty. But it also was very beneficial for the United States in very important ways. Because once the United States started buying things from other countries, and especially things from countries with very, very low wages, what this meant was that the US economy was no longer constrained by domestic bottlenecks. It was no longer constrained by the size of the US workforce or by the size of US industrial capacity. Suddenly, instead of having to rely just on the American workforce and on US industry, we had a global economy that we could draw resources from. And the, I think the global population is about 25 times larger than the US population. And most of those people earn far, far less than the Americans do. For instance, when I got to Hong Kong in 1986, I very quickly started making trips across the border to China. And in southern China, as far as the eye could see, there were factories full of 19 year old women earning $3 a day. And so this turned out to be extraordinarily disinflationary. In the United States in the early 80s, we had 15% inflation and double digit interest rates. But as we started running trade deficits with the rest of the world, the inflation started plunging and the interest rates followed the inflation rate down. And so by the time the turn of the century, from 2000 until the time Covid began, the average inflation rate in the United States was very low, you know, roughly 2% a year. And sometimes it was negative. We occasionally flirted with deflation. And that's despite the government running very large budget deficits and the Fed creating money on a very large scale, particularly after the crisis of 2008. After 2008, even though the government was running trillion dollar budget deficits and the Fed was creating trillions of dollars through quantitative easing. The highest rate of inflation we got then was in 2011. The CPI peaked at 3.8% in 2011. And a few years later, by the early months of 2015, we were actually back in deflation again for a couple of months. So there was no inflation. So this, this changed the parameters within which the US Economy could function. It meant that the US Government could run big budget deficits and stimulate the economy and create more growth than would have been possible otherwise if they'd done this back in the 1960s and 70s, as President Johnson and President Nixon did. When Johnson and Nixon ran big budget deficits, it overstimulated the closed domestic US Economy and led to high rates of inflation. But fast forward to the 1980s, when President Reagan tripled US government debt with massive budget deficits during his eight years in office. And inflation came down all through the 80s instead of going up. And the difference was these incredibly large trade deficits. The US Was now running with low wage countries. So that allowed interest rates to come down. And as interest rates in the US Came down, that made credit more affordable. So not only could the government afford to borrow and spend more, but the household sector and the business sector could also afford to borrow and spend more. And as they did, that created an upward spiral in consumption demand. And it also drove asset prices very significantly higher until they grew to such a high level that it was a bubble. And the bubble popped in 2008, requiring government intervention to keep us from spiraling into a new depression. So the difference this time between 2008 and the pandemic. Well, there are a couple of differences. One, of course, is when the pandemic began, people were locked at home. They couldn't go out. They couldn't go spend money in restaurants and bars and on vacation and at the movies. So they stayed home and ordered iPads and laptops and running machines and many other goods, most of which were made in Asia. But because of COVID the Asians were shutting down their economies as well. And so we had big bottlenecks. Not only there was a surge in demand, but supply was disrupted. So that naturally caused inflation in actual goods, Goods inflation. And then, just as there was beginning to be some hope that that was going to abate, Russia invades Ukraine, and that creates a wave of food and energy price inflation. That was a second blow. And these things combined started to build on themselves, and people began to fear that the inflation was going to become entrenched. And so this is, in other words, those two things represented A severe blow to globalization, a partial reversal of globalization. And it was globalization that had driven down the inflation and the interest rates in the United States to begin with. Now with these supply chain bottlenecks and war, it represented a partial reversal of globalization and we got a spike in inflation. But also it is true that with the government sending out large stimulus checks to practically all the Americans, that gave the Americans a lot of spending power that they wouldn't have had otherwise. And it ended up, ended up giving a big boost to demand for these goods. And that demand also contributed to the higher rates of inflation. But I think, of course, the government didn't know how the pandemic was going to play out. In retrospect, they overdid it on the stimulus side, but. And the cost was a spike in inflation for a year or so that's now coming down. But I think it's better to err in being too aggressive in providing stimulus than it would have been to provide too little stimulus and end up in a very serious depression as we were in, in the 1930s. Or even something 25% as bad as the 1930s would have been quite horrible. So better to err on the side of overdoing it, in my opinion, than underdoing it. The costs are less to overdo it than to overdo it. I mean, than to underdo it.
- [37:10]
Caleb Zakrin
If you're thinking about just different schools of thought surrounding government debt, we can put modern monetary theory on one side and then monetarism on the other, or maybe even further gold standard. But let's, we can table that for now. You know, where would you sort of place yourself on the spectrum? Would you put yourself a little bit closer towards the sort of Keynesian modern monetary theorist camp?
- [37:33]
Richard Duncan
I would consider myself a pragmatist. I think different economic philosophies are appropriate for different economic times and conditions. There have been a lot of wise economists who've developed a lot of very brilliant economic theories that were appropriate for, for their age. For instance, Ludwig von Mises, you know, that that was all really brilliant stuff in 1912, when money was backed by gold and there was a limited amount of credit that could be created. And Milton Friedman's theories were appropriate for the 1960s when we had a closed domestic economy and too much government spending would lead to high rates of inflation. But in the post, in the, in the, in the post Bretton woods era, when money was no longer backed by gold and when we had a global economy that created a new economic environment which created new possibilities that had not existed before. So this book was, was conceived and largely written. It was conceived in the year, in the decade, in the years following the 2008 economic crisis. And what we learned from that was that it was possible for the government to run trillion dollar budget deficits and for the Fed to finance those with, by creating trillions of dollars of fiat money without leading to high rates of inflation. So my conclusion from that was, well, if that's the case, then I believe we should have the US Government borrow and invest very aggressively in new industries and new technologies on a very large scale. Industries and technologies like artificial intelligence and quantum computing, biotech, genetic engineering, renewable energy, robotics, nanotech and so on. And if we were to do that on a large enough scale, this would induce a new technological revolution that would turbocharge U.S. economic growth. And instead of the economy growing as it is now very weakly at 1 to 2% a year, we'd be looking at something more like 5 or 7% a year. And this sort of investment would result in technological breakthroughs and medical miracles and marvels that would radically enhance human well being. And that's really the underlying theme of the book, and it appeared when I was writing the book, that the US Government could get away with this without causing high rates of inflation. Now in the book, I don't put a specific number on how much the government should invest, but I argue that the government should invest as much as possible as soon as possible and find out by trial and error over a decade. And if it turned out that the investment overheated the economy, then they could slow it down for a while.
- [40:23]
Caleb Zakrin
So, you know, we've seen the CHIPS act and the Inflation Reduction Act. You know, there's been some of that, some money, you know, I think 20 to 40 billion dollars has been put aside for investment in green technology and renewables. You know, I think, I take it that you think that this is just, this should just, just be the beginning, that we're just on our way to maybe considering these sorts of investment. And a lot of people have sort of framed this in the terms of, you know, of a renewed focus on industrial policy, but also in the context of rolling back some of the, you know, the globalization that we've, that we've talked about, you know, setting up factories, you know, do you think that, you know, even though there were certain, certain great, you know, benefits to, you know, like, like deflationary effects of globalization, that we're going to need to move back to more of an industrial policy focus?
- [41:21]
Richard Duncan
So this book was largely written and almost ready to go to the printer when Covid hit. And then suddenly Covid, of course changed everything. Whereas I was recommending a multi trillion dollar government financed investment program with the government financing the private sector to make these investments over a decade, suddenly the government is spending trillions of dollars just within months. And at the same time, the Fed was creating trillions of dollars as well. So I had to put the book on hold just to wait for a good year or more to see how much the government was going to spend and to see how much the Fed was going to create. And it took a lot of time before the dust settled. So it more or less set the book back by two years and it caused very unpleasant development with inflation, which sort of pulled the rug out from under the book as well. So unlike my first book, which had perfect timing with the dollar, the dollar crisis, the dollar was falling and falling really put the wind in the sails of that book. This was just the opposite. With inflation high and the government spending so much money, suddenly my proposals didn't look so realistic. But over time, as the dust did settle on, it was rewrote a few chapters, added a new chapter, and it did go to print. And a couple of good things have happened. I think one was in the second quarter of 2020, the US government increased its debt by $2.8 trillion in three months. And the Fed at that time created $2.8 trillion of fiat money to finance that government borrowing at low interest rates. So whereas, you know, that's multi trillion in a quarter, I'm not calling for a multitrillion dollar investment in 90 days. I'm calling for a multi trillion dollar investment over a decade. So just the fact that the government could pull that off without the sky falling, I think really demonstrates how easy it would be for the US Government to finance a multi trillion dollar investment in new industries and new technologies over a decade. And then as you mentioned, the next very positive development was the Chips and Science act, which allocates $380 billion for investment in new industries and technologies. All of the same ones that I described a few minutes ago, with 50 billion of that going into the development of semiconductor manufacturing facilities in the United States, which the country very desperately needs. And the remaining part of the 380 billion going into other high tech industries like quantum computing and artificial intelligence and all the other things that I reeled off. So that was great. $380 billion. That is a big step in the right direction. And I've been talking about these ideas for A number of years. And some people would say, okay, that sounds like an interesting idea, but you know, the government is never going to make an investment like that. It's just never going to happen. Well, the chips and science acts shows that it can happen. In fact, it has begun to happen. But as you pointed out, I don't think that's enough. That is not enough. We need that every year. And here's. There are a number of reasons why. But one pressing reason that I think will strike a chord with most people is because we're about to be overtaken by China, technologically, economically, and therefore militarily. So national security is at risk. If China develops artificial intelligence before we do, for instance, they will rule the world. In the year 2000, the United States invested eight times more than China did in research and development. By 2017, the US was only investing 10% more in R and D than China. And last year, China overtook the United States in research and development at investment. And if current trends continue, within a decade, let's say 10 years from now, China, if current growth rates persist in both countries, then in that 10th year, China will invest 40% more in R and D in that year than the US Does. If that happens, then China will leapfrog us technologically and maybe China will be a benign ruler. But history suggests that countries with vastly superior technological power rarely treat inferiors kindly. So I believe it's of the utmost national interest that we don't allow that to happen. And the only way we can prevent that from happening is for the government to finance a very aggressive investment program in new industries and technologies. And I would propose that they do this in joint ventures with the private sector. Now, many people believe that the government can't do anything right. I don't share that belief. I mean, for instance, almost everything that is in your smartphone that makes it smart was the result of US Government funded research such as semiconductors and gps, touchscreen technology, and of course the Internet itself. But leaving that aside, many. What I suggest in the book is that the government could borrow the money and set up joint venture companies with, let's say, America's 10,000 brightest and most talented entrepreneurs and scientists and creating joint venture companies with these private sector entrepreneurs and scientists, with the government keeping a 60% equity stake in each of these companies and the entrepreneurs and scientists getting a 40% equity stake, and with the entrepreneurs and scientists managing these companies so that when one of them invents a cure for for cancer, a cancer vaccine and a cure for Alzheimer's and diabetes, and all of the other diseases and cheap fusion. All of these companies can be listed on NASDAQ with trillion dollar value valuations with the government, I. E. The US taxpayers keeping 60% of the gains. And thereby this investment program would pay for itself many times over. And the level of US Government debt would fall rather than rise and the ratio of debt to GDP would become very much smaller because the GDP would grow so quickly and we would cure all the diseases and have cheap limitless energy and could renovate the reverse the damage that we've done to the economy, to the environment. Right.
- [48:11]
Caleb Zakrin
I definitely see how the need, especially in some of these critical areas, to invest. My last question is just more of a general kind of going on the China US Looking at the differences between the economies. Obviously the, you know, the US Runs a huge trade deficit with China. You know, is this something that you see? You know, the US Needs to maybe move away from its consumption driven economy and China needs to develop more of a consumer economy base. Do you think that that's going to be something that is going to need to happen or can they still continue to chart these, these different paths?
- [48:51]
Richard Duncan
We have the post Bretton woods international monetary system is known as the dollar standard. One time we had a gold standard, then we had the Bretton woods system. Today we're on the dollar standard. And the way the dollar standard works is the US Consumes and has very large current account deficits. So last year the US current account deficit hit a new record of $944 billion. And that threw out $944 billion into the global economy. In that one year alone. The total cumulative current account deficit since the Bretton woods system broke down in 1971 has been $14 trillion, meaning the rest of the world has had a $14 trillion trade surplus. And this has been the thing that has pulled hundreds of millions of people of the world around the world out of poverty. So the US Current account deficit provides the liquidity that the global economy runs on. It provides the dollars. You often hear people these days say that, oh, the dollar standard is going to collapse or the dollar is going to collapse because China is going to begin buying oil from Russia and they're going to pay in yuan instead of dollars. But that's just nonsense. China has a big trade surplus with the world. So it's not throwing any Chinese yuan out into the global economy to finance the growth of the global economy. It's the dollar and the US Trade deficits that are the fuel that create global economic growth. And everyone wants this system to continue. Because if some people suggest that China would like to see the US Lose this privilege of being able to buy things on credit, but that's not true. Just imagine if we went back to something like a gold standard where we once again had to back dollars with gold. Well, our trade deficit with China last year and for the last many years for that matter has been more than $1 billion a day. So we're talking a trade deficit, an annual trade deficit with China of about $400 billion a year. Well, if we had to actually pay for that with gold or some hard asset, then within a matter of months we would run out of gold and we would not be able to buy one more pair of tennis shoes from China. And consequently China's economy would collapse into a great depression within a week and so would all the other countries around the world. So the last thing the world wants is for this dollar standard to end because the world, the global economy is built on the dollar standard is built on dollars. And that's not going to change. Right.
- [51:34]
Caleb Zakrin
Well, you know, Richard, this is such a long, you know, this book just spans so much, so many topics. So I definitely recommend listeners check it out. It's also just, I think for anyone who is completely new to this topic, it's a great introductory text. You know, I was wondering, you know, before, before we sign off, if you could just talk a little bit about Macro Watch and some of the other stuff that you're, that you've been working on.
- [51:56]
Richard Duncan
Yes, thanks so much. I've had this Macro Watch business Now for nearly 10 years and every two weeks I upload a new Macro Watch video. Describing is essentially me making a PowerPoint presentation discussing something important happening in the global economy and how that's likely to impact asset prices, stocks, bonds, properties, currencies and commodities. The one two weeks ago was a discussion of how tightening lending in the US Banking system was likely to force the Fed to pause its rate hiking cycle, at least at the Fed meeting which occurred yesterday. And in fact, they did pause the they didn't hike this time. And the one that I just produced today was a discussion of the dollar standard. I made a trip to Vietnam last week which was interesting and it was fascinating to see Vietnam's economy. I've been more than a dozen times. But Vietnam's trade surplus, Vietnam's economy and its great economic boom that is enjoyed during this century is a direct product of the dollar standard system. Vietnam's before we started having our trade agreement with Vietnam in 2000, they didn't have a trade surplus with the US last year, Vietnam's trade surplus with the US was $116 billion. And the cumulative trade surplus since 2000 has been nearly $700 billion. And all of this money has gone into the Vietnamese banks, allowing extraordinary credit creation through that process of fractional reserve banking that I described and led to an extraordinary economic boom. This caused the GDP per capita of Vietnam to increase by nine times since 2000. So these are the sorts of topics that I discussed. This one was really intended to refute the idea that the dollar is going to collapse or that the dollar standard is going to go away sometime soon, because it's not. But most of them are focused on it. A lot of it is focused on the Fed and government policy and how changes there are likely to affect stocks and other asset prices. So, yeah, I hope if your listeners are interested in that, they can visit my website at Richard Duncan, economics.com and check that out.
- [54:17]
Caleb Zakrin
Yeah, I'll definitely. I'll put a link in the show notes to that in addition to anything else that you think listeners should check out and of course, a link to the book as well. Well, Richard, thank you so much for being a guest on the New Books Network. It was great speaking with you. The book is the Money how to Finance the Next American Century from Wiley.
- [54:37]
Richard Duncan
Thank you, Caleb. I enjoyed talking with you.