American Consequences

You've reached your click limit.

You're approaching your click limit.

Subscribe to American Consequences to keep reading completely FREE, and get access to exclusive articles and our monthly magazine.

Please provide a valid email address.

American Consequences logo
Rolling sheet of $100 Bills

Inflation: Turning America Into a European Economy

Episode #34  |  May 5th, 2021
Listen Now

In This Episode:

You know inflation’s a genuine concern when even Warren Buffett’s worried. Everyone seems to acknowledge that prices in America are rising except Team Biden. The Fed thinks they’ll wave some magic wand, and inflationary measures will disappear — but their only real option is raising rates, which will have a disastrous effect on our nation’s finances. Daniel Lacalle, Chief Economist at Tressis, discusses the lessons learned from the European Union on how big government and massive spending are toxic for economic growth — and how to avoid their missteps. The two also discuss demystifying FDR, the rising corporate and capital gains taxes, and China’s bid to succeed us as home to the world’s reserve currency.

Guests:

Daniel Lacalle

Daniel Lacalle, Chief Economist at Tressis
Daniel Lacalle, PhD Economist and Fund Manager. Holds the CIIA (Certified International Investment Analyst) and masters in Economic Investigation and IESE.

Episode Extras:

Inflation Insights

  • The British pound lost its top spot as the world’s reserve currency nearly a century ago — if the U.S. keeps pushing the limits of monetary policy, the dollar may suffer the same fate.
  • Politicians and central banks always follow the same pattern regarding inflation: denial, dubbing it “transitory,” and ultimately scapegoating companies for the price hikes.
  • The S&P 500 looks wildly different than it did twenty years ago, unlike the stagnant STOXX Europe 600 across the Atlantic, a testament to America allowing new businesses to grow and thrive.
  • Europe has its version of Biden’s misallocated trillions in stimulus, Next Generation EU. The measure is a public-private package that’s supposed to strengthen the digitization of their economy, green energy, and gender equality. Good luck.
  • China’s cementing relationships with African, Euro, Latin economies right now, waiting for the American financial system to stumble and hoping for a world where we’re all paying in digital yuan.

Transcript:

Trish Regan:               Inflation is here. I keep saying it over and over again. I’ve been warning about it from the beginning of the year and sure enough, well, Warren Buffett’s worried about it, too.

                                   

                                    Hello, everyone. Welcome to this week’s edition of American Consequences With Trish Regan. I am Trish, and I want you to hear the Oracle from Omaha talking about how prices keep on going up.

 

Warren Buffett:           “We’re seeing very substantial inflation. It’s very interesting. We’re raising prices, people are raising prices to us, and it’s being accepted. I mean if we get – well, you know, take home building… We’ve got nine homebuilders in addition to our manufactured housing, and operation which is the largest in the country. We really do a lot of housing, and the costs are just up, up, up.”

 

Trish Regan:               So Warren Buffett knows prices are going up. I know prices are going up. I think you know prices are going up. But you know who doesn’t know the prices are going up? The Biden team. Let’s go to cut three: Janet Yellen talking about inflation.

 

                                    [Video playing 0:01:10 to 0:02:05]

 

                                    Yeah, “We can fix it. No big deal. We’ll just implement our tools. It’ll all be fixed. We will all live our merry lives.” Except that it doesn’t actually, really, and truly work that way because I think Paul Volcker could tell you just exactly how difficult it was to curb inflation once it took off – thank you, 1970s and Jimmy Carter.

 

                                    In other words, once the Fed realizes that there’s too much inflation out there and it has to do something about it, the only thing it can do is raise rates. And that has a massive effect – pullback effect – on the economy.

 

                                    And so as we look at this increasingly asset-bubble-like market, you have to wonder: At what point does that bubble pop? Well, you’re not supposed to ask these questions. Apparently, it’s political to ask these questions these days. Poor Larry Summers. He dared to say the unthinkable, and they’re like, “Wait a second. I thought he was on our team,” the former treasury secretary for Bill Clinton as well as the former head of the National Economic Council for Barack Obama. He’s recently come out repeatedly, saying, “Look, inflation is a real, solid risk.” And yet Senator Brown, Democrat from Ohio, says, “What’s he talking about?” Listen.

 

                                    [Video playing 0:03:25 to 0:03:30]

 

                                    Yeah, right, well you know what? I may not be a trained economist, but I’ve covered the economy for 20 years. I’ve traded sovereign debt. I know a thing or two about this. I’m concerned about inflation. Warren Buffett is noticing inflation. Larry Summers is noticing inflation. And my next guest, the chief economist at Tressis, Daniel Lacalle, is worried about it, too.

 

                                    Daniel, welcome to the program. It’s good to have you here.

 

Daniel Lacalle:           Thank you so much. Thanks for having me.

 

Trish Regan:               Well, apparently, you and I are like strange people because we worry about these things. But I don’t see how one cannot be worried in an environment where we’ve got the Federal Reserve keeping rates historically low for so long – combined with their bond buying that they’ve been doing for so long, combined with all the stimulus that they have spent and that they’re looking to spend. I don’t know, call me crazy. Maybe you’re crazy, too. But I kind of think this is going to catch up with us. Your take?

 

Daniel Lacalle:           Absolutely. The comment that no serious economist is worried about inflation is simply farcical. Everybody that is actually independent and really understands the inflationary pressures we’re seeing – not after the COVID-19 crisis, that we were seeing before. Because remember – and you’ve mentioned it a few times, how education, health care, rents were going up significantly above the headline Consumer Price Index.

 

                                    What we’re seeing right now is even more concerning because it’s a correlated increase in prices that comes at the very moment in which what we have seen is a concerted effort from central banks that have increased money supply massively above the real demand of money, which is what generates inflation.

 

                                    So the problem here is that politicians and sometimes central banks use always the same subterfuge: They start by saying that there’s no inflation, then they say that it is transitory. And once it balloons, then they blame businesses, then they blame companies for raising prices. And politicians – you will see this if this continues this way, particularly on the Left – will want to present themselves as the solution with price controls. It has happened before in the United States.

 

Trish Regan:               Walk us through that history. I mean it did happen, and I think you’re getting back to FDR, right, and the price controls that were put in place then is to try and deal with the Great Depression, which was a total disaster. I keep talking about this book, so I hope somebody’s out there reading it. But my friend Amity Shlaes, brilliant financial historian, did a really good analysis on this. She wrote one of my most favorite books ever, called The Forgotten Man. And she looks at everything that we’ve ever learned on the Great Depression.

 

                                    And by the way, you didn’t grow up in the U.S. I did. And you were spoon-fed this stuff in school and also in pop culture. I mean Annie was my favorite play as a little kid. And they really teach you Herbert Hoover was bad, and FDR was good. And it was thanks to FDR that America was able to move forward. But in actuality, the policies were not that helpful to the economy. And sadly it was World War III – forgive me, that’s some kind of… I don’t even mean to even go there. It was World War II that got us out of it. But sometimes I worry that they’re looking to some kind of World War III to potentially pull us out of whatever we’re going into. But walk us through that economic history because I think that’s really important, Daniel.

 

Daniel Lacalle:           Absolutely. You have very important papers written about how FDR’s policies actually prolonged the Great Depression by introducing price controls, by introducing excessive regulation, and by introducing protectionist measures. And we constantly hear that the solution is more government spending. What very few people tell us about when they talk about the New Deal as a comparison to what is happening today is that, in FDR’s time, the size of government and the economy was not even close to 25% of the GDP of the economy. So it was a very small government.

 

                                    What we’re talking now is a massive increase in government size added to an already-large increase that we have seen particularly since the financial crisis. And the lessons that we should have learned from the Great Depression is that you don’t solve protectionist and interventionist policies that prolong a crisis with a war. That’s not a solution. That is a subzero effect, and we should not aim to get to that situation. I don’t think we’ll get to that situation anyhow because the level of debt globally is so high at a nation level in the developed economies that there’s not even money to finance that kind of war effort.

 

                                    But going back to your point about the FDR policies, what very few people understand is that it was not until the government started to curb the spending and take more rational measures and liberalize the economy that the economy started to come back. Throughout the period that is the so-called “New Deal,” the crisis that was already very, very negative was actually prolonged.

 

Trish Regan:               It was. And you would think we’ve learned from these mistakes. However, this is sadly the politicization of economics that’s come into being right now. I think in the current environment, given the politics of this moment, there is a desire from people that are in the administration now to really see a bigger government role in the United States’ future. The thinking is, if we can tax people more, then we can provide services for others in a better way.

 

                                    My hesitation with that – and the listener knows because I was born and raised in “Live Free or Die” New Hampshire where Democrats and Republicans agree on one thing: Don’t let the government get too big. Keep them on a short leash and make sure you don’t give them any money to spend because as soon as you give it to them it’s gone. It’s gone to places that maybe it shouldn’t go to because it’s just not the best use of capital.

 

                                    That’s become, sadly, a politicized kind of moment. I mean, I like the idea of states that balance their budgets like New Hampshire. I like the idea that they have zero sales tax and zero income tax and somehow they still manage to make things work. But we are now in a situation where there is a desire to tax more. There is a desire to go after corporations. And I guess I would just ask you, Daniel, what do you think the intended consequence of that will be? I worry that you’re going to see more of these shotgun marriage deals where all of a sudden a U.S. company has relocated, through a merger, to Ireland where it’s 12.5% tax because guess what? Makes a little more sense to be headquartered in Ireland than the U.S. if there’s such an onerous tax rate.                              

 

Daniel Lacalle:           We saw that already and think about this: Ms. Yellen has announced a corporate tax marginal rate that would put the United States at the highest level of marginal corporate tax rate in the OECD. She says that she does not believe that this will generate negative consequences. However she, at the same time, is demanding a global minimum corporate tax. Why? Because she knows that it has negative consequences. There are numerous papers from Dr. Carvalho, numerous PhD economists showing the negative impact of these tax increases, which are fundamentally tax increases that hurt small and medium enterprises. You put the corporate tax rate at 28%, and none of those small and medium enterprises can actually find legal ways to circumvent the challenges of that taxation.

 

                                    And again, the debate is farcical because they’re talking about the corporate tax rate as if it were the only tax that businesses pay. The corporate tax rate is what they pay after making a profit. And that comes after paying taxes on property, on labor, on investment, etc.

 

                                    The point I’m trying to make is that these tax increases, in my opinion, have three negative effects. The first is that it will have – and this is not debatable. It’s already been seen in history. It will have an impact on investment, it will have an impact on job creation.

 

                                    The second important point is that it does not target the multi-mega-cap companies. Those can manage their taxes with big lawyers and with great teams of tax experts.

 

                                    And the third, more important, is that even from the perspective of Ms. Yellen about trying to pay the maximum of the increase in spending they’re announcing, it does not even scratch the surface of the structural deficit that the government is incurring into. The structural deficit, the one the United States generates in growth or in recession times, the one that is generated no matter what happens with the economy is going to balloon above $1.5 trillion.

 

Trish Regan:               Whoa. OK, so we’ve got the corporate tax thing going on. We’ve got the individual tax thing going on – that they want to raise taxes on anybody making more than $400,000. And then we’ve got the cap gains tax thing going on. And so this is like a triple whammy. It’s coming at you from all sides. It’s the triple threat of taxes. I guess I would just – I think it would be disastrous. It actually pains me to see it, makes me sick to my stomach because so much of what has made America the success it’s been has been the engine of capitalism. And I worry that this kind of onerous taxation would really destroy that.

 

But we talked about corporate tax. Let me get now to the cap gains tax because they’re talking about doubling it. And they’re like, “Oh, it won’t matter. It’s just people making more than a million bucks a year.” But I think it’s far more complicated than that. I do worry that a lot of people will take their money out of U.S. equities, maybe diversify into other things because there would be a tax reason to do so. How would that affect, Daniel, the overall market environment?

 

Daniel Lacalle:           Obviously the idea of having such a large capital gains tax has much larger ramifications than what the administration is talking about. To start with, it massively affects the engine of financing and capital improvement of small and medium enterprises, which is private equity in the United States. So private equity firms are going to have an incentive to look for investments abroad.

 

                                    There is a reason actually why even in the European Union, where taxes are so elevated, capital gains tax has been reduced in order precisely to incentivize private equity investment. So those that say, “Oh, this is only going to affect people that make more than $1 million, therefore I don’t care,” fail to understand the history of these types of taxes. It starts by saying, “Oh, it’s only going to affect those that make more than a million,” “Oh, it only affects those that make more than $500,000” “Oh, it only affects those that make more than $100,000” because the taxation machine is always lowering the bar of who is rich.

 

                                    We know that in the European Union – I work between London and the European Union – in the European Union we know precisely the effect of massive taxation and huge government spending. And it’s the reality that if you copy the policies of the European Union, you get the employment and the growth of the European Union, which are extremely poor for an economy like the United States that prides itself on recovering faster from crisis and suffering less when there’s a recession.

 

Trish Regan:               That’s such an interesting point. I’ve joked in the past about if we’re not careful, one day we’re going to wake up and become France. China is going to become the new USA. Lately, I’ve changed the joke to something a little more gloomy and scary, which is if we’re not careful, we could very well wake up and one day be Venezuela. But in all seriousness, your point about the European Union not having the same ability to grow is well taken. And I worry that if you put these onerous taxes onto investors – by the way, it’s not just investors. It’s small business owners too that, you know, you could be toiling away, working your tail off for 30 years to build some business, and you kind of expected you’d be able to get a certain kind of yield out of it, right? Well now, the government is going to double what they initially were going to take. I just find that – I’m speaking to a European here, but I find it un-American.

 

Daniel Lacalle:           Well it is. The reason we all understand is that there is an entire system that works in the United States that has allowed small and medium enterprises to become large multinationals, that has allowed the S&P 500 to look completely different from what it was 20 years ago, something you don’t see, for example, in the STOXX 600 in Europe. People take for granted the capital allocation machine that leads to improvement in productivity and improvement in job creation. People think that those things just happen, and that in some cases the rhetoric is that government actually does that. Well, it doesn’t.

 

France has not had a balanced budget since the late ’70s, has been doing exactly what I hear in the political discourse coming from some of the Democrats for decades. It’s been in stagnation for two decades now, more than decades, actually. And its level of unemployment is twice in the good times that of the United States.

                                    Also, the average per capita income and the real disposable income of a poor American family is higher than what is considered middle class in many European countries like southern European countries, for example.

 

                                    So Americans need to understand – and I say this with all the admiration to the United States, coming from somebody that lives between the U.K. and Europe – is that they need to understand that large government and high taxes have not delivered either the care and the management of the health care crisis that people would have expected. The European Union has done worse in terms of vaccination, has done worse in terms of the health care crisis, is doing worse in terms of the recovery, and it’s doing worse in terms of jobs.

 

                                    So people need to think that what seems like a measure that is only going to affect 0.3% or 0.1% of the population, which is always the bait that interventionism uses to accept further taxation, is exactly what we have been hearing for decades in the European Union, in which they started by saying that high taxes would only go to people who made more than a million euro. And now they consider that somebody that is “rich” is somebody that makes 50,000 euro, which is a little more than $55,000.

 

Trish Regan:               Yeah, it’s like the sliding scale. We’re talking to Daniel Lacalle. I would recommend people follow you. They can follow you on Twitter @dlacalle_IA. He’s an economist, an author, and chief economist at Tressis.

 

                                    I want to turn for a moment – you mentioned France. I’m hearing a lot through the grapevine, through some sources that are actively trading these things and putting basically insurance, so to speak, by way of CDSs onto some of these European countries, that they’re looking at places like Italy right now. And they’re looking at places like France because they’re not convinced that those economies and administrations are going to be able to really weather this storm. Any sense of how Europe is doing right now?

 

Daniel Lacalle:           Well Europe right now is obviously suffering from two things. The first thing is that the vaccine rollout has been much slower than in the United States and the United Kingdom. The second one is the very aggressive lockdowns that have been implemented.

 

So now the European Union is leveraging and hoping to get the level of growth that it didn’t have prior to the COVID-19 crisis, with a very large government spending package, which is called the Next Generation EU. It’s a public-private sort of package that is supposed to strengthen digitalization, green economy, etc., very, very similar to the Biden administration infrastructure plan.

 

Unfortunately, the history of the European Union, from the 2009 Jobs and Growth Plan to the Juncker Plan, shows us that the effectiveness of these programs is extremely low. But obviously there will be a sort of bounce back from the reopening, and the question is whether this approach to higher spending and mutualized spending, with the money that the European Commission will borrow, whether that will work. I’m skeptical. I’m skeptical.

 

I’m happy to give it a little bit of sort of a vote of confidence, but I’m skeptical fundamentally because every time that you say to governments that you have a lot of money to spend and very little time, and that they have to spend it on things like green economy, digitalization, and equality of rights, things like this, a lot of money goes into things that will not generate a real economic return.

 

I think there’s a lot of support for what Italy is doing. I think that at least from the perspective of taxes, Mr. Draghi in Italy is saying that he will not increase taxes, which is at least a good position. But there are a lot of question marks because we have to remember that before COVID-19, in the fourth quarter of 2019, when the U.S. economy was growing at more than 2%, when unemployment in the United States reached a 45-year low, the eurozone economy was close to recession. Germany was almost in technical recession. Italy and France grew 0% in the fourth quarter of 2019. So there are a lot of structural problems that have absolutely nothing to do with the health care crisis.

 

Trish Regan:               That makes a lot of sense.

 

                                    Turning back to what the Feds should do here in the U.S. I mean already Jerome Powell – he’s admitting we’re getting some increase in inflation. It’s out there. I want to go to cut four, here is his take on it.

 

                                    [Video playing 0:25:35 to 0:26:15]

 

                                    So do you buy that? I mean “transitory”? Again, I’m just looking at March’s numbers, I’m looking at February’s numbers. We don’t have April’s yet, but I mean this like CPI is off the charts, right? Just keeps going up, up, and away. I think the latest read showed an increase of 2.4%. That was March. We know it’s going up in April. Warren Buffett even said so. At what point do they ever get nervous?

 

Daniel Lacalle:           I think the problem at the Feds – Judy Shelton mentioned it in an article in the Wall Street Journal today – is that there are no dissenting voices, that there’s no difference of opinion. This is a very concerning factor because the concept “transitory” is very loose. What does it mean? A year? Two years? What is transitory for a family that has seen its real disposable income fall and that lives month to month because of the stimulus checks, you see what I mean?

 

                                    And also, transitory – we know that there will be a base effect that will be reduced in the official inflation index. We know that. Now the problem that I have with that is that the issue we already had in the United States and many of the developed economies before the COVID-19 crisis in 2019 remained, is that the price of non-replicable goods and services is rising much faster than real wages.

 

                                    So to me, the idea of inflation in itself from a CPI perspective… the way the Fed talks about it is irrelevant if I’m not talking about how much my or a citizen’s real wages are going up because think about it… If real wages are flat and inflation is up 3%, and within inflation, food prices are up 10%, I guarantee you that families are not going to be happy about the situation. I think that is what the Fed is unwilling to recognize, that there is a much stickier effect in the things we purchase on a daily basis.

 

                                    Think about this: CPI, the headline inflation. If food prices go up 10% and hotel prices go down 10%, the impact on inflation is going to be maybe 0.5%. But you still see food prices going up 10%. See what I mean? Because you pay for food every day. You don’t go to a hotel every day.

 

Trish Regan:               Yeah, look, gas prices have been going through the roof, up 6% and change in February and up another 9% in March. I suspect energy prices will continue that upward trajectory. I think Goldman Sachs made a call of $75 a barrel for the summer. I think we’re well on our way to that because as things start to heat up, as people start to travel more, as people go back to work more, the prices for all those things will go up. We’re seeing the same thing with food. So food and energy prices, the things that people consume, are definitely going up in price, and you feel that as more of a sticker shock.

 

                                    Here’s the other question: What happens to wages? I’m fascinated by this. Right now, we have a government that doled out $1.9 trillion. They put in all kinds of unemployment benefits that are in effect until September. So a lot of small-business owners are dying. They’re like, “We can’t hire anyone because nobody wants to come off the unemployment.” It’s feeling very European all of a sudden… And nobody wants to come off the unemployment because you get $300 a week from Uncle Joe, plus your state may be giving you $200 to $300 a week. So if you’re in an entry-level position and you’re making $600 a week washing dishes, it’s a rational decision to say, “I’m going to stay at home because I can make as much or almost as much money not going back to work.”

 

                                    So my question to you is does that mean businesses will have to pay more? Does that mean that we’ll see some wage support? Otherwise, I don’t know how people go back into the workforce.

 

Daniel Lacalle:           Let’s start by the check effect. What people need to understand is that the government doesn’t give you anything. The government is giving you a check that is paid with the goods and services and the growth of the economy in the future. And the fall, the impact on inflation on that check, is much larger than what people may realize. That’s why I come back all the time to the point of real wages, not nominal wages. I don’t care if you get $600 if what you’re going to be able to pay with the $600 is 10% less than what you got last year.

 

                                    The other problem is what you just mentioned: that you displace people out of the workforce artificially, thinking that that will lead companies to pay more for those workers. But as companies are feeling the pinch of inflation in their input costs, their margins don’t go up. As such they don’t actually pay more to their workers in real terms, they actually pay less.

 

This is the fallacy of inflation. Inflation, in the Keynesian world, will tell you, “Oh, inflation goes up. Companies then have to hire at a higher price. They have to elevate the wages with inflation. Then people have more money, and then they spend more. The economy grows.” Well that doesn’t happen.

 

I come back to your point about the late ’70s with Jimmy Carter, etc. We know that inflationary pressures don’t translate to real wages, and we know also that they don’t translate to the margins of companies. Therefore that is the big challenge.

 

Trish Regan:               It is a challenge. What would you say about the U.S. economy then right now? You can probably tell I’m worried. I said I’m sick to my stomach with all these policies. All these taxes go against my “Live Free or Die” upbringing. And the idea that they just want to tax and tax and tax, I worry that that is really going to act as a suppressant on the creation of new things, of new technology and more manufacturing, of all these wonderful things we can produce here in the U.S. But I’m curious on your take because the truth is they still have to get it through Congress. I keep saying Joe Manchin’s the only adult we have nowadays, the Democratic senator who’s not willing to just roll over and do whatever Joe Biden wants. We still have a system that’s set up to work. And I don’t think personally that the country’s there. I don’t think everybody’s “Oh sure, tax everyone” because I think people are still pretty aspirational in the U.S. and they want the opportunity to succeed and they don’t want these roadblocks.

 

                                    With all that in mind, we have an election in 2022. And we have an election coming up in 2024. Do you think Biden’s going to get any of this stuff through?

 

Daniel Lacalle:           I think it’s going to be very difficult. One thing that is always a positive surprise about the U.S. economy – and I truly believe it – is that in reality, the level of interventionism that we talk about as a risk is much more difficult to implement. There’s a lot more in checks and balances and independence in the way in which states work, etc., that make it a lot more difficult to go into the aggressive level that we mentioned of some of the European countries.

 

                                    So I think that that is a possibility. I think that obviously, on the positive side as well, what we’re seeing in the United States is how the productive machine is working much better. We’ve seen it in the manufacturing side. We’ve seen it in the services side more than in other developed economies.

 

                                    But we should not take that for granted. That’s what I want to convey to our friends in America. You should not take that for granted. You should not think that that is it and that therefore government can’t spoil it because the formula will continue to work. The next elections are going to be critical in terms of making people decide whether they want to go down the route of the eurozone or whether they want to continue to pursue what has been a history of phenomenal success, the history of America.

 

Trish Regan:               For sure. You’re talking to somebody who really is so proud of what our country has been able to accomplish in a relatively short amount of time. There’s a desire right now to turn our back on that, to say capitalism is bad because it’s associated with these pretty dark periods in history, going back to slavery, etc. And so there’s a willingness to shun it all, and I think you have to have a bigger lens than that and take the good and run with that. But there’s so much the rest of the world in many ways really envies of the U.S. because we’ve been able to have this success.

 

                                    I think about it with China right now as it’s still increasingly emerging as a force, and it wants to be a force. Let’s not kid ourselves, it has very big aspirations to be a major player, probably the most significant player on the world stage.

 

                                    Let me ask you this: The fact that we’re the world’s reserve currency here in the U.S., how much does that play into our continued ability to borrow and to be sort of the hegemonic power in the world today?

 

Daniel Lacalle:           Absolutely everything – oh, well, not everything, but it’s a very, very important factor. I don’t think any government in the United States should underestimate the importance of having the world reserve currency, and therefore they should not play with it. The idea that you can consistently and constantly push the limits of monetary and fiscal policy, believing this is something that will not go away, is a huge risk because the U.K. used to be the world reserve currency and outlasted so many others. And it’s a very thin line between strength and lack of confidence, very thin line. So right now, what the government of the United States, the Federal Reserve, every conservative Democrat, and any economist that has a real understanding of the monetary risks should be doing is to warn every day against those siren calls of MMT – Modern Monetary Theory, in which you hear people say that the government can borrow endlessly, that it can raise deficits forever, and the Federal Reserve will purchase it all. That is not endless. It’s a temporary – it might look endless from our very limited time frame and perspective. But if you look at the history of money, all empires crumbled, almost all of them, because of a monetary disaster.

 

Trish Regan:               You know what? I’ve actually said that many times. Daniel, it’s like I’m talking to myself on that one because I really do. I go back to – you look at the fall of the Roman Empire, and it really was a monetary disaster. It was that massive debt and too many people living off the dole and too many armies all over Timbuktu that they were trying to – they just really bled themselves in terms of their finances. Ultimately, that’s what costs a society.

 

                                    I had Dr. Ron Paul on the program just a couple weeks ago, and he has a similar yet vastly different take than you. What he would argue is he wished we were never the world’s reserve currency in the first place because he feels it’s kind of emboldened us in a way to spend and to borrow in ways that we wouldn’t otherwise be able to do. And he’s very, very, very against all this debt we have and quite concerned about it.

 

                                    I suspect I’m a little more with you because I’d like to have the flexibility, right? I like being the world’s reserve currency. I understand what that means and the flexibility it gives us in terms of our economy.

 

                                    The point I think you’re making, and I would agree with, is you do not abuse that.

 

Daniel Lacalle:           I would point out to Dr. Paul one thing: The idea that by being the world reserve currency, you do crazy things with the currency, you borrow too much, destroy the purchasing power of the currency, and if you weren’t the world reserve currency, that would not happen… is unfortunately disproven by history: Venezuela, Argentina, Iran, Turkey, Spain, Greece, Portugal, Italy before they were in the Euro. All of them did, and do, all the crazy things that the United States does. And some of them are vaster and a lot worse without being the world reserve currency. So the idea that government is going to be somehow constrained by not having a strong currency is actually the opposite. You see, for example, what they do in Argentina is they consistently destroy the purchasing power of the peso, and then they come back in the next election and blame it on the previous government.

 

Trish Regan:               It’s wild. And you think about those economies down there – great stories. Some of my friends who are from there or live there, the restaurants are changing their prices by the hour. You don’t know how much an omelet’s going to cost you because they don’t know how much the cost of the eggs are and they’re constantly changing them. That’s really no way to live. It’s hugely problematic. Let’s all say a prayer that we’ve got some sensible enough people there and that Jerome Powell doesn’t allow this to get too out of control.

 

                                    Back to reserve currency. If I’m China and I have these big aspirations, I’d be doing my darnedest to court the Europeans and a whole bunch of others and say, “The U.S. is a fiscal mess. Come hang out with us. We’ve got the digital dollar, or rather the digital yuan.” I think the problem with that, still, is that people don’t necessarily trust China, so it’s still a pretty long haul for them to get there. But do you think China would like to be the world’s reserve currency if they could?

 

Daniel Lacalle:           Absolutely they would. I think what makes it impossible for China to become the world reserve currency right now is that they maintain capital controls. You cannot be the world reserve currency and bring capital from abroad massively like the United States does while at the same time having a daily fixing on the yuan and having capital controls that don’t let citizens move their yuans and dollars out of the country.

 

                                    But of course they would, and I think one of the things China is doing right now is cementing their relationships with African, Latin American, European economies to wait and see if the United States slips into the siren call of print-to-death modern monetary theory… because then is when they, even with capital controls, could actually make a dent on the position of the U.S. dollar.

 

                                    So it’s not a surprise that China is actively supporting all those economists you hear out there, that deficits don’t matter, everything can be printed, and the government has no problem because it’s basically a great tool to destroy the U.S. dollar as a world reserve currency. I think it’s very far away, but obviously, they would be extremely interested.

 

Trish Regan:               Such an interesting conversation with you, Daniel. I want to remind people they can find you in Twitter @dlacalle_IA. Daniel Lacalle, economist, author, and he’s chief economist over at Tressis. And he has such a fascinating take on everything. And certainly, you’ve helped verify a lot of things in my head right now. I wish that more people would warn of this. You’re doing the right thing. I realize how politicized it’s become, but nonetheless, people have to speak up because otherwise, we could be heading for the days of the Roman Empire if we’re not careful.

 

Daniel Lacalle:           Absolutely. I think we need to speak up and say that that is an important risk.

 

Trish Regan:               Daniel, thank you so much for your time today.

 

Daniel Lacalle:           Thanks so much and thanks for having me. It’s been a great pleasure.

 

                                    [Musical interlude]

 

                                    I’m laughing because I thought I was talking to myself there. I completely agree with Daniel, full-on agree with everything he said. I’m really concerned right now. I think this is getting out of hand. We do not have enough people that are warning about the dangers of the future. You just cannot spend and spend and spend indefinitely. You really will run into problems. And he’s right: Great societies have fallen because of too much debt. Go back and look at the history of the Roman Empire. That’s exactly what happened. We cannot let that be the United States of America. And it’s up to every one of us right now to think smartly about our future – both politically, but also in terms of the economy and also in terms of our own safety, your own portfolio. You’ve got to be thinking through how you’re going to manage this inflation. As I’ve been saying, you want to be invested in the markets because if you’re there for the long term, if you’ve got 20 years until you need that money out – well if in 20 years, a cost of coffee at Starbucks is going to run you $35 instead of a dollar, then you may have been saving all those dollars diligently in your bank account. But if you don’t actually have investments that will rise alongside inflation, you’re going to be in trouble. So you want to be invested.

 

You want to look at also some inflation hedges. There are some oldies but goodies, right, like gold which continues to be interesting, at least to me, in this environment as well as cryptos. Go and listen to last week’s podcast because I talked to Greg Foss, and he explained his valuation. He’s a guy who’s spent 30 years trading fixed income, basically junk bonds, and he has a theory that you need to be prepared for a potential disaster with a fiat currency – meaning either here in the U.S. or possibly in Europe, a G7 country that has a significant hurdle in terms of its own debt budget scenario. And in his view, that’s where something like a bitcoin very much could come into play. So go back and listen to that. He has a massive valuation – $2 million! And he said it would not be unrealistic to see $2 million dollars per coin on bitcoin. He thinks it’s more fairly valued right now at roughly $150,000. So again, listen to that one.

 

And you should listen as well to Ron Paul, who was on the podcast recently as well, talking about the dangers of all this debt because it’s very serious. Anyway, thank you again for listening. I’m going to see you back online, trishintel.com, where I am every single day on my podcast. We’re right there, every single week, for you on americanconsequences.com. Make sure you read my pieces, and my long-form magazine pieces are there as well as everyone else’s. We’ve got a terrific team there for you, everyone. And I’ll see you right back here next week.

 

Recording:                  Thank you for listening to this episode of American Consequences. Want more Trish? Read her weekly articles Thursdays in our magazine at americanconsequences.com and subscribe for free to get all of our daily articles and the monthly magazine. We’d love to hear from you, too. Send Trish a note, [email protected].

 

This broadcast is for entertainment purposes only and should not be considered personalized investment advice. Trading stocks and all other financial instruments involves risk. You should not make any investment decision based solely on what you hear. Trish Regan’s American Consequences is produced by Stansberry Research and American Consequences and is copyrighted by the Stansberry Radio Network.

15
30
{{ episode.title }}
Episode #{{ episode.episodeNumber }}
/

Close