Welcome to another episode of Passive Real Estate Investing. I’m your host, Marco Santarelli. Well, today I have a returning guest. This is his third time on the show, Richard Duncan. He’s an amazing guy, famous economist, and he writes some incredible books. Every once in a while, I like to do an episode on economic trends and what is going on in the global economy and how that impacts you as an investor, even though you are an individual here living in the United States or wherever you may be. But everything that happens on the world stage has an impact on you. Whether it be interest rates, whether it be the labor market, whether it is, you know, quantitative tightening or easing the impact of protectionism on interest rates, even the stimulus that has come out of many events in the past, including more recently covid and what happened, you know, since March, 2020.
But even the events prior to that, as far back as the housing crisis of 2006, 2007, which led to the great recession of 2008. I mean, all these have an impact both immediately and the trickle effect from that as the years go by in terms of inflation, housing prices, commodities, and you know, the cost of goods, whatever it may be. So I think this is a very interesting topic and you know, it’s not something you want to necessarily listen to all the time or every day or every week, but every once in a while it’s good to have a lay of the land and understand what’s happening big picture wise, because that ultimately trickles down. And when you see the big picture and the trends that are going on on the world stage, you can better understand what you’re doing and what you’re investing in or make better decisions in terms of what investments you should be focused on getting into or getting out of.
And so I want to share this interview I did with Richard today, and I think you’ll enjoy it. It was a little long, but bear with us. Everything was understandable, but the audio wasn’t all that great all the time, only because he happens to be an American living in Thailand. And sometimes the internet connection there is a little bit flaky or sketchy. And that’s not a criticism, it’s just the way it is. We cleaned it up as much as we could, but overall it came out great. So enjoy it and thank you for listening and remember to subscribe if you haven’t done so already, because it only takes you three seconds and you’ll never miss an episode. So enjoy the show. Well, it is my pleasure to welcome back one of my favorites. I’ve had Richard Duncan on the show twice now as far as I remember.
And this is the third time. Lemme tell you a little bit about Richard. Richard is the author of 4, 5, but at least four books that I know of on the global economic crisis. Well, that’s actually one of his books. But he’s got four books on the global economic crisis, including the International Bestselling book, The Dollar Crisis, which forecasted the global economic crisis of 2008 with extraordinary accuracy. His latest book, which is what we talked about about two years ago on the show, is The Money Revolution, How to Finance the Next American Century. Very interesting book. I highly recommend it. So Richard has served as the Global Head of Investment strategy at ABN AMRO Asset Management in London. He’s worked as a financial sector specialist for the World Bank in Washington DC and he is headed the equity research department for Solomon Brothers in Bangkok. He’s also worked as a consultant for the IMF in Thailand during the age of Crisis. Now he publishes a fantastic newsletter, a video newsletter that I’m a subscriber to called Macro Watch, and it can be found at his website richardduncaneconomics.com. So plenty of information there, I suggest you go and check it out. I think you’ll like it.
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Richard, welcome back to the show.
Marco. Hello. Thank you for having me back. It’s been a while.
It’s great to have you back. I actually miss talking to you, even though I hear your voice all the time on Macro Watch, <laugh>, <laugh>. But you know, you’ve got all kinds of great content. Sometimes people wonder, well, why should I be interested or follow macroeconomic factors or news or events or even trends? And I always say, look, you can be focused on all the micro stuff, you know, how your property’s performing or how the stock market’s performing or anything like that. But everything happens within the context of a bigger picture. It’s on a global stage, as I like to call it. So if you have an idea or an understanding of what’s going on globally, economically in the big picture, you can maybe see down the road to see where things are headed and make decisions, smarter decisions about your investments, your finances and all that stuff. Do you believe that true? Is that, is that true? Is that your philosophy as well?
Absolutely. Macro developments definitely drive the economy at the micro level. So if you understand the big macro picture and the trends at the macro level, you’re going to be in a much better position to make wiser investment decisions. And on top of that, it’s extremely interesting also just to understand what’s going on at the macro level.
Very, very true what I did for today, as you already know. But just for our listeners to know, you know, I kind of broke today’s episode down into essentially six topics or six categories that we can maybe hit on for about five minutes plus or minus each, depending on, you know, how long you want to go. ’cause We can go down a rabbit hole on all this stuff. But I think all of these things are not only very interesting, but they kind of play into what’s going on in the US economy and how it might impact us today and down the road next year and the years to come. Before we do that, I just wanna touch on something else that I know you’ve mentioned several times, and I, I get the sense you have a passion for because you brought it up even years ago, but that is, you know, the establishment of a US sovereign wealth fund and how that could potentially benefit all Americans, maybe people all around the world, but help Americans, you know, increase their wealth aid in the US national security, whatever it may be. But a lot of people don’t understand what it is. It’s still a relatively new topic. Maybe you can talk about what it is, how it would impact the US and Americans and where we are with it and where we’re going with it, because I know it’s now becoming more and more of a topic of conversation.
Marco. Things are looking so much better now than the last time we spoke. We, that was June, 2022. My book had just come out and we were really much of what we discussed at that time was, was my book. It was called The Money Revolution, how to Finance the Next American Century. And the whole theme, the entire objective of this 500 page book was to persuade the American public and US policymakers that the United States could and should and really must undertake a very large scale government financed investment in the industries of the future. Things like artificial intelligence, developing things like fusion, investing in quantum computing, biotech, nanotech, genetic engineering, and all of the industries of the future. And I argued in this book that the government could easily afford to do this. And I explained how it could be financed at really no cost to the American public.
And I also argued that all of this could be done without causing high rates of inflation. Lo and behold, my book had come out in February of 2022. Inflation started spiking to the highest level that we had seen since the 1970s as a result of first the covid pandemic and global supply chain bottlenecks. And then just a few months before we spoke, back then Russia had invaded Ukraine and that drove up oil prices and food prices and metal prices again. So we had this huge spike in inflation, and that was really bad news for my book. And so I was quite down heartened at that point, and not just because of my book of course, but the outlook for the economy was very bad. The stock market had plunged something like 25% from its earlier peak. The Fed was hiking interest rates aggressively, inflation was moving up rapidly.
Everyone was expecting a recession and things were looking really quite dire in the middle of 2022. But luckily now things have greatly improved. The inflation rate has moved back down to 2.5%. Most recently, the fed’s now starting to cut interest rates, and it’s a very different environment. The stock market has, has soared. The, the low, I believe was around October of 2022, and now it’s been going up and up and up and then three weeks ago so let, so let me tell you how this evolved for me. Things were not looking at good at all when we spoke, but a few months later in August, Congress passed the Chips and Science Act, which allocated $280 billion of government funding for investment in new industries and technologies with 52 trillion being directed at developing semiconductor factories within the United States and the rest being allocated to other high tech industries that I recommended in my book.
So that was a very big step forward in the right direction, and I was pleased to see that. But $280 billion was just not large enough for many reasons, but perhaps most convincingly to your listeners because China’s investing so much more than that. And China’s overtaking us now technologically and therefore soon economically, and consequently soon militarily. And so we’re really facing a, a grade national security threat, and we need to invest on a much more aggressive scale. And $280 billion, which was due to be spread out over five years, is just simply not enough to, we need much more than that the next. But that was a big step in the right direction in August of 2022. Then in a few months later, I was invited by a congressman to come to Washington and make a speech at a policy dinner to about 15 members of the House Ways and Means committee explaining the ideas in my book, trying to persuade them that this is what the US really needs to do and we could easily afford to do so.
And so that I was thrilled to have that opportunity. That was a real honor for me to have that chance to, to share my ideas with congressmen and congresswomen. And then three weeks ago, the, the greatest thing happened just back to back two days in a row. First former President Trump, and then following day, the Biden administration both came out saying they now support the establishment of a US Sovereign Wealth Fund, which is exactly what my book was calling for. So this, I was jumping up and down at that news <laugh>. I mean, this is exactly what I’d been calling for in the book. The last, when we first spoke most recently about the book, it didn’t look like it had very good prospects at all. And now it seems to be a bipartisan agreement that this is the direction our country needs to go in.
And that’s exactly right. This is the direction our country needs to go in now. So what is a sovereign wealth fund? Other countries have sovereign wealth funds, many countries do. The largest is Norways. It has $1.7 trillion and it’s sovereign wealth fund. But Singapore has very successful sovereign wealth funds. Mm-Hmm. <Affirmative>, you can think of China’s economy as just one giant sovereign wealth fund since the government owns and controls everything and it’s all directed at them becoming the most powerful country in the world. But some people have asked, well, why does the US government need to have a sovereign wealth fund when the government already makes investments in various technologies and developing technologies? Of course, the government invest in things like darpa. DARPA’s focused on developing future technologies. The government makes a lot of investments in military technology and invests in a lot of things.
So what’s the need for a sovereign wealth fund? Well, the difference between what the government is doing now and a sovereign wealth fund, but the Sovereign wealth fund, the government would actually make investments in existing companies and in startup companies in these industries of the future. But they would actually keep an equity stake in these companies so that when these companies create extraordinary technological breakthroughs, which they would do if funded on a large enough scale, then the government being an equity shareholder would keep its share of the profits. In other words, the American public would actually be the owners of these companies. Whereas now what the government does, it makes an investments. And then the private sector more or less just adopts the investments, adopts the, the outcome of the investments. For, for instance, you know, almost everything in your smartphone that makes it smart is the result of government funding in basic research.
Semiconductors came from government funding GPS touchscreen technology. Mm-Hmm. <affirmative>. And of course the internet itself, all of those things came from basic US government in investment in basic research and development. But the government didn’t actually directly profit from that, right. With the Sovereign Wealth Fund, when the government invest in biotech companies, for instance, and one of them invents a cure for cancer, then this thing is worth a trillion dollars on NASDAQ. And the government is an owner of this company. In other words, the American public is an owner of this company. When the government backed company develops fusion and we have cheap limitless fusion, then that’s such a complete game changer that would be extraordinarily valuable. And the, the American public would be the owner of these companies. And so the American public would actually expect to receive dividends or free electricity, free cancer vaccines. And the income, these sorts of investments would be so extraordinarily profitable that they would pay for themselves many times over in a relatively short space of time.
And when they did, then we could bring down tax rates or even begin to pay down the national debt. So rather than these large scale investments in new industries and technologies driving up the national debt, I actually think that they would be so phenomenally successful that they would result in being able to reduce the government debt they would pay for themselves many times over. So that’s sort of been the big news in my world recently, is that now both political parties are calling for this, the establishment of a US sovereign wealth fund. So I think it’s really very important for the public in general to understand what this is and to understand why it is such a great idea and to understand that they, they will benefit enormously as a result of these investments that the government will make in a sovereign wealth fund.
What you’re describing could potentially have massive, like almost unbelievable economic impact on the country, especially in terms of the ever-growing and what seems to be spiraling outta control national debt and the cost of servicing that debt. But yeah, what you just described makes a whole heck of a lot of sense in terms of having a wealth fund that’s US-based, that’s an equity owner in emerging and cutting edge bleeding edge technologies that could be massively, massively profitable. It would be great for, you know, the us the public, the humanity at large. I mean, it would benefit all countries. So yeah, it’s, it sounds like a huge deal.
Yeah. So in the book, I stress how easy it would be for the US government to fund this sort of investment on a very large scale. I use the example of $10 trillion over the next decade. Now that sounds like a very large amount of money, and of course it is. But during covid, when covid started US government debt increased by $2.8 trillion in the second quarter of 2020. So a $2.9 trillion jump in 90 days. And the Federal Reserve created a similar amount of money at that time, $2.9 trillion, and essentially bought up the government bonds and financed it all. So what I’m proposing is, you know, not a multi-trillion dollar investment over 90 days, but over a decade, and that could easily be absorbed and investments on a trillion dollar scale over a decade. It would turbocharge US economic growth. It would induce a new technological revolution.
It truly has the potential to result in extraordinary medical breakthroughs. Mm-Hmm. We could probably cure all the diseases and extend life expectancy by yeah. Potentially decades. And on top of all that shore up US national security, because right now our national security is in danger because we’re being overtaken by China. China’s government is investing very aggressively in all the technologies of the future, and that’s why they got 5G years before we did. That’s why they have hypersonic missiles. And we don’t, that’s why they’re dominating the electric car industry and the electric battery industry. They are overtaking us. And this is a real threat to the United States future. And there’s no reason we have to allow China to surpass us. The United States does not have to be a declining superpower. If we invest on an aggressive enough scale, the first American century doesn’t have to be the last, these sorts of investments will ensure, will finance the next American century as the subtitle of my book suggest. Right. So funding is available. All that is lacking is the imagination and the willpower to drive these investments forward. And if we do, the economy is gonna grow very much more rapidly. Everyone’s going to become wealthier and healthier, and we’ll have US national security guaranteed for generations to come. So this is an extraordinarily good idea whose time has come and it now has bipartisan support and the American public should get behind it because they’re going to be the major, major beneficiaries of this.
Yeah. So bottom line is the wealth fund is not for issuing grants to companies. It’s really an investment fund where it’s taking equity ownership in these developing new and developing businesses in the us Right. It’s essentially a, an equity fund.
That’s right. Rather than making grants and seeing the government money just fly out the door, it would be like the government’s acting like a venture capital company where it backs the startups. Yeah.
Seed capital.
And with lavish funding on a scale that’s so large that it just simply can’t fail. You know, for instance, right now the funding for the National Cancer Institute is only about $6 billion a year. 600,000 Americans die of cancer every year. Yeah. $6 billion is not curing cancer. Back a couple of years ago when the Fed was doing quantitative easing on a very large scale, the Fed was creating $120 billion every month. So $6 billion is just 5% of one month of quantitative easing. Yeah. You know, how about take half a month of QE and increase National Cancer Institute’s budget by 10 times to $60 billion a year, then we have a real shot at curing cancer. Yeah. Or funding startups in the biotech industry with billions of dollars of funding these companies that the government would be taking stakes in, they wouldn’t be managed by government bureaucrats, they would be managed by America’s best entrepreneurs and scientists. And so this is just a win-win situation that we need to take advantage of as quickly as possible. And if we do, our future is going to be very bright. But if we continue to lag behind China in making investments in new industries, then very quickly the, the United States is going to become a, has been second rate vulnerable power effectively at China’s mercy. And we don’t want that. Of course.
Yeah. Sounds like politicians are clueing into that, you know, and, and they, they see that there’s wealth benefits, health benefits, national security benefits, it feeds, it trickles down into the economy and adds to the prosperity of the current generation and obviously future generations. So it sounds like there’s a tremendous number of benefits. I don’t know what the downside or, or or cons are, if you will, other than maybe the potential cost of initially seeding or funding this thing because where’s the money gonna come from It, you know, it’s, it’s, let’s call it taxpayer dollars, but it has to come from somewhere. So I mean, is that the downside of it is that, you know, we’re gonna pay for it upfront in the hopes of seeing returns down the road.
I think it could be funded easily two different ways, or in some combination of these two ways. It could be funded directly by US government borrowing more government debt. Right now, US government debt is about 120% of US GDP, even after all the debt the government incurred during covid and after the crisis of 2008, government debt to GDP is about 120%. Japan’s government debt to GDP is 260% of GDP. Wow. Their government debt to GDP ratio blew past 120% about 30 years ago. So this suggests that it would be very easy for the US just to take on more debt and make these initial investments. And of course it would take five to 10 years for these things to begin paying off massively. But then they would, and they would pay for themselves many times over. So that’s one way just through debt. But as I was alluding to earlier, the Fed could finance it through money creation.
Not so long ago. The Fed was creating $120 billion a month, and after the crisis of 2008, the Fed increased its balance sheet by five times. In other words, the size of its total assets reflects how much money the Fed is creating. And they created three and a half trillion dollars between the end of 2008 and 2014. I think at that time it was, I think it was 95 billion later after, during covid, it was up to 120 billion a month following the crisis of 2008. Even though the Fed created so much money that didn’t lead to high rates of inflation, the highest rate of inflation we had at that time was in 2011. The CPI moved up to just 3.8%. That was the highest level of inflation we had, despite all of this money creation by the Fed following the crisis of 2008. And also despite the huge surge in government debt during that period.
So at that time, they got away with having a lot of money creation without causing high rates of inflation. So I think this could also be funded through fed financing, money creation. You know, right now the inflation rate has come back down to 2.5%. It peaked at 9.1% in the middle of 2022. And now it’s essentially back quite close to the fed’s. 2% inflation target. Close enough that the Fed has now begun cutting interest rates. And if we have a recession, which generally is we always do sooner or later, then the inflation rate will move lower and lower and potentially go negative again. And in that, and interest rates will come down very sharply. And in that sort of environment, it would be very easy for the government to borrow cheaply. Mm-Hmm. <Affirmative>. And also it would be very easy for the Fed to create money and buy these government bonds to finance these investments on a very large scale without the risk of creating high rates of inflation. ’cause We’d be back in a recessionary deflationary environment. And we’re essentially now back to where we were before covid, before covid globalization had been driving down inflation and interest rates in the United States starting in the early 1980s
Because the cost of goods was becoming cheaper and cheaper because they were being manufactured all around the world, not just locally. Correct.
That’s right. Starting in the 1980s, the US started running very large trade deficits for the first time. By up until then, US trade had been in balance. And so that meant that if the government spent too much money or that the Fed created too much money, it would overstimulate the US domestic economy. It would lead to hot full employment among the Americans, and it would lead to full industrial capacity utilization. The US only has so many car factories and so many cement factories and, and steel factories, and only so many workers. But once globalization really got underway in the early 1980s, suddenly we no longer had this closed domestic economy. We could buy goods from the entire world. And the population of the entire world is about 23, 24 times larger than the US and industrial capacity around the world is very much larger than US industrial capacity.
So suddenly the size of our economy, rather than just having a closed domestic US economy, we had a global economy and most of the workers in the global economy earn very much less than American workers do. So this was extremely disinflationary. Now, workers in China, Vietnam, Bangladesh, India, they earn 80%, 90% less than the Americans do. So this drove down prices and this drove down US wages. And this was extremely disinflationary. And this allowed the US government then to have larger budget deficits. And it allowed the, to stimulate the economy, right. And it allowed the Fed to create a lot of money and to get away with this without creating high rates of inflation. But covid dealt a severe glow to globalization because suddenly all the Americans were locked in at home. They couldn’t go out and spend money on services. So they started ordering a lot of things through Amazon, like iPads and iPhones and jogging machines and other goods, most of which were made in China.
But China was locked down. And so the supply chain was extremely disrupted. The Americans got stimulus checks from the government, so they had a lot of demand to buy things, but the supply dropped, demand increased supply dropped because of the supply chain disruptions. And so we got high rates of inflation. Right. And then just when that started to abate in February, 2022, Russia invaded Ukraine and we got another big wave of inflation and oil. When we spoke last time, oil prices were $120, 110 to $120 a barrel. Right now they’re at 70. And food prices spiked wheat, corn and metal prices, mineral prices spiked because of the war. So we got another round of inflation. But now these shocks to globalization have been worked out. You know, the, the idea of the Fed increasing the federal funds rate so much and so sharply, let’s say five and a half percent was to cool down the US economy.
The idea was let’s, the Fed wanted to essentially throw American workers out of their jobs so that they wouldn’t have enough demand to buy things anymore. They wanted to slow the economy down so that inflation would come down. But that didn’t happen. The, the economy didn’t slow down. The economy’s been very strong. Right. And what changed? The demand didn’t slow. What changed is the supply improved drastically as the supply chain bottlenecks got worked out and with supply up and demand’s still good, the inflation rate came down. Right. We’re now back to roughly an inflation rate that we’ve had on average for most of this century. And it looks like it’s heading lower. Yeah. So this once again makes it possible for the government to fund the sort of investments Yeah. Through a sovereign wealth fund that our country so badly needs without causing high rates of inflation.
In the last few minutes, you’ve probably touched on four, maybe five of, you know, these six factors that you talked about that have an impact on our economy and the markets, the financial markets. And you know, it’d be interesting to just touch on these different factors real quick as we kind of get through the midpoint of this interview, because these are the things I definitely wanted to touch on in addition to the us you know, sovereign wealth fund. But you, you know, one of the things you just mentioned is the stimulus from 2020. Clearly there’s some lingering effects or impact from the massive, massive, massive injections of capital or liquidity into the markets. And you know, there’s been, I mean that fiscal and monetary stimulus has a huge impact and it lingers for a while because you know, that money sloshing around in the system, whatever you want to call it, what is going on with the stimulus that we saw, that massive injection in 2020, I think into 2021. What’s going on with that today and where are we headed with that?
Yeah, so this is really interesting and really important. Last year, for instance, everyone, all the economists including me, thought that the US was going to go into recession, but it didn’t, even though the Fed was hiking interest rates aggressively and carrying out quantitative tightening, the economy remained strong. It, it was growing above trend growth rates and it still is. And why is that? Well, the reason must be that all the stimulus that the government sent out during covid is still driving the economy forward since the end of 2019. Just before covid started, government debt has doubled from roughly $18 trillion to roughly $35 trillion now. And during the first, which is an extraordinary surge in government debt, government stimulus that was pumped into the economy. And during the first 24 months of covid, let’s say from March, 2022, sorry, from March, 2020 to March, 2024, during that 24 months period, the Fed created $5 trillion and bought government bonds making it possible for the government to borrow so much money without driving up interest rates.
Mm-Hmm. And this stimulus on that scale is something that we’ve almost never seen before. Mm-Hmm. This is kind of economic stimulus, fiscal and monetary stimulus on a war-like scale. Now, maybe not like World War ii, but a medium sized war. And when the government is in war, of course they have big budget deficits and a lot of paper money creating and that that stimulates the economy. Even Russia’s economy right now is booming because they’re spending a lot of money fighting the war. So when you have a lot of government stimulus on a war-like scale, it drives the economy for it. We had the Great Depression for 10 years during the 1930s. It didn’t end until World War II started. And when World War II started, the government of course spent enormous amounts of money and borrowed enormous amounts of money. And the Fed created a lot of money in order to buy weapons and fight the war. And that stimulus was so large that when the war ended, it continued to drive the US economy forward all through the fifties and into the 1960s. And resulted in a lot of new technological advances and things like jet engines were created during that period, for instance, on the back of government investment in jet engines. So what we’re seeing now, I think is the lingering impact of this massive stimulus that we got during covid is still driving the economy forward. Yeah,
Speaker 2:
It’s fascinating. Let me transition to something a little more local. One of the things I was reading from your recent slide deck and in your video you were talking about how high the wealth to income ratio is in the United States, which is quite fascinating to me because it, you know, on the surface it sounds like it’s a good thing, right? It’s a great thing. We’ve got, you know, wealthy Americans, you know, they’re asset rich, maybe not income rich, but asset rich. But it sounds like a good thing on the surface. But I think the reason you pointed out and maybe what you’re implying is that’s not a good thing because there’s the possibility that if asset prices deflate our net worth is gonna go down, we won’t be as wealthy. However you wanna measure that and that it could be, you know, a psychological impact to that. There could be a borrowing and spending impact to that. But the net worth as a percentage of disposable income is at it almost like near a, a historic higher, an all time high. What happens if that changes? Like what happens if asset prices come down for whatever reason? I mean with mortgage or with interest rates going down, you’d think that there’d be more liquidity and it’ll push asset prices back up again and we’ll have like new highs. But what happens if that flips around and we start to lose that wealth?
Right. Well, linking this into what we were just discussing about this impact of the stimulus, one of the impacts of the stimulus was that it created an extraordinary boom in wealth in the United States. And wealth is called household sector net worth, which is calculated. You take all of the assets of the Americans and subtract their liabilities. Yeah. That’s the net worth that is wealth of the American public. And this increased, I was just looking at this num, these numbers a few minutes ago. It increased from the end of 2019 just before covid started up until this, the middle of this year, household wealth increased by $47 trillion, which is about 40% increase in wealth in four and a half years or five years. That’s a lot. $47 trillion, I mean to put $47 trillion increase in wealth into perspective, the entire US government debt is O is only $35 trillion <laugh>.
So this is enough money to pay off all the government debt with $12 trillion left over. So this stimulus has created this extraordinary boom in wealth. And the wealth, of course is one of the things that’s helping to stimulate the economy because it allows people to consume more. Yeah. And the consumption makes up nearly 70% of the economy and stock prices are high, property prices are high. That’s why the wealth went up. And now this has resulted in an unusual surge in the ratio that I call the wealth to income ratio. So this wealth to income ratio is something that I’ve looked at for a long time. It’s actually published by the Fed. And what it is is this household sector net worth that I just described, wealth, which is now $164 trillion of wealth, 164 trillion relative to disposable personal income, wealth to income. So this wealth to income ratio, going back to 1950, the average has been 550%.
The ratio 550% wealth to income during the property during the NASDAQ bubble is shot up to a new high of 620%. Mm-Hmm <affirmative>. And then the NASDAQ bubble popped and it went back to its long-term average of five 50. A few years later the property bubble, it went up to 680% and then the property bubble blew up and the US went into recession and it went back to its long-term average of 550%. But now this wealth income ratio is completely off the charts. It’s, it’s up to the previous high was 680, now it’s 750. And that suggests that asset prices are very inflated relative to income. And this suggests that asset prices are very vulnerable to any sort of shock, whatever that might be. If history is any guide, there’s a real risk that this is going to plunge back to its long-term average of 550%.
And if it does, of course that would be destroyed, you know, 30, $40 trillion of wealth and clearly throw the US into a severe recession. So that’s something I worry about is this inflated wealth income ratio. It’s been elevated for a number of years. Initially people used to say, okay, well interest rates were so low before the Fed started hiking a couple of years ago, interest rates were so low that justified high asset prices. But even after the Fed increased the federal funds rate to nearly five and a half percent, the asset prices remained high. And so that they didn’t Correct. And now the fed’s beginning to cut interest rates, which if anything should help asset prices go higher in and of itself. All of the things remaining unchanged. Right. Which of course they never do. But so, but yeah, this is something that I watch and worry about. So one of the things I worry about is that asset prices aren’t clearly inflated historic norms relative to income and suggesting they’re vulnerable to any sort of shop.
So, what makes up the majority of that wealth? Is it a principle residence? Is it real estate in general? Is it equities like the stock market? I mean, what’s in that basket of wealth?
So the main items are real estate and directly owned equity individuals owning stocks, but also pension money, pension entitlements make up a large part of that. And then also bank accounts savings. Those are the main things. Properties, stocks, pension entitlements and deposits in the bank. Those are the main items. And of course the stock market has soared and property prices have gone up sharply as well. And therefore the pension entitlements have also, pension funds now have much more wealth than them, than they did before.
Interesting. Okay. And so your greatest concern about that is a shift in interest rates changing that or income’s not going up fast enough?
Well, it’s vulnerable from many different angles. If inflation were to start picking up again and the feds started hiking interest rates again, that would really probably pop this bubble in asset prices. And that’s why I’m concerned about the risk of protectionism in my work. I really try to stay out of politics. I want to be friends with, you know, both sides. I’d like both sides to listen to my economic recommendations. Right. I don’t want to alienate either side. I don’t want to alienate half the country, so I try to stay out of politics. Right. But if we did have very high trade tariffs imposed next year, say 100% trade tariffs on China or 200% trade tariffs on the things that deer manufacturers in Mexico and brings back into the United States or 10 to 20% trade tariffs imposed on all of our trading partners around the world, that would clearly be extremely inflationary because that would sort of take us back to where we were before globalization drove down.
We would once again have a closed domestic economy with a limited number of people in the workforce and a LI limited number of factories. And suddenly everyone would be fully employed and wages would go up and we’d get in this wage push inflation spiral as we were in in the early 1970s. And the Fed would have to increase, you know, pretty soon would have double digit inflation and would have double digit federal funds rates and double digit mortgage rates that would be certain to crash the economy and crush asset prices. So that’s something that is very concerning. You know, many things can happen, A lot of things happen that you don’t see coming, but it is very certain, in my mind at least, that if we did have protectionism on that scale, very high levels of trade tariffs, then it would be a disaster for the economy and for wealth property owners, stock owners, and essentially all Americans.
Right. Yeah.
So, so hopefully that doesn’t happen.
Yeah. You’ve mentioned interest rates many, many times. What does your crystal ball say about the Fed funds rate? And if you want to touch upon it, mortgage rates, where do you see interest rates going over the next, let’s say border year few years?
So I’ve just produced a new macro watch video yesterday or uploaded it yesterday, discussing how the Fed controls interest rates. Now people know the Fed cut interest rates last week by 50 basis points. Most people don’t understand how the Fed controls interest rates. What did the Fed do to make interest rates go down by 50 base? Right. It’s very interesting in that after all of the paper money that the Fed created or the, the money the Fed created during covid that created a lot of excess liquidity throughout the economy. The Fed creates money and pumps it into the banking system and suddenly the banking system is flooded with money and roughly $4 trillion of excess liquidity in the banking system. Now bank reserves now, when the Fed wanted to increase interest rates this time, they actually had to pay the banks interest on those bank reserves to make interest rates go up.
That’s not the way they controlled it in the past. I won’t go into the way they controlled interest rates in the past. It’s a bit detailed, but what people need to understand now is the reason the federal funds rate went up to 5.5% is because the Fed paid interest on bank reserves of just almost 5.5%. It was roughly 5.3%. So the Fed pays interest on bank reserves and that ensures that the banks will not lend to anyone at less than 5.3% interest. Why would they lend anyone at less than 5.3% interest if the Fed is going to pay them 5.3% interest? Right. Right. So the Fed controls interest rates by paying interest on all of this excess liquidity that it created during all these rounds of quantitative easing. What changed last week, instead of paying 5.3% interest on bank reserves, now the fed’s paying 50 basis points less is paying 4.8% on interest on bank reserves.
And if the Fed were not paying interest on bank reserves, interest rates would collapse because there’s no place else. This $4 trillion of excess liquidity that’s squashing around in the banking system, that $4 trillion can’t earn 4.8% interest anywhere else. No one else is going to pay them 4.8% interest. So if the feds suddenly stopped paying interest on bank reserves, interest rates would plunge back to 2% or 1% as it was earlier because there’s just so much excess liquidity. Right. There are no viable investment opportunities that will pay the banks so much. The main point here for people to understand is interest rates are at the current level because the Fed paying interest a very high rate of interest to hold them up and the Fed, when it reduces rates as it did last week, it does it by reducing the amount of interest it pays on the excess liquidity.
So the Fed can control these interest rates by paying less interest on bank reserves. And right now, even after this rate cut last week, the federal funds rate is let’s call it 4.8%. It’s a range between 4.75 and 5%. That’s twice as high as the inflation rate. So that’s very tight monetary policy. Yeah. Inflation rate’s 2.5%, feds paying 4.8% to keep the federal funds rate high. It looks like the inflation rate’s going to keep moving lower. We already have goods are actually deflating. You can break the inflation numbers up into three big components, core goods, inflation, core services and housing services. Well the goods inflation, things like automobiles and washing machines, those are actually deflating again. Mm-Hmm <affirmative>, those prices are negative. They’re falling year on year and have been for more than a year already. And the other two components are also coming down, although they’re still a bit higher than the Fed would like.
So the inflation looks like it’s going to keep dropping and there’s a real concern that it’s going to soon fall below the fed’s 2% in inflation target. Wow. The Fed wants to have 2% inflation during most of this century. Fed had to struggle to make inflation be high, be up to 2%. It couldn’t get the inflation rate up to its 2% target. It doesn’t want to have deflation. Right. So if they’re not careful with the rates so restrictive and at the same time that the Fed is destroying money through quantitative tightening as it’s also doing now destroying money roughly $60 billion a month, that’s very restrictive monetary policy. So they are very likely to keep cutting the federal funds rate. In fact, the members of the FOMC people who work at the Fed and make decisions on interest rates, they publish their projections about what they expect interest rates to be over the next couple of years.
And they have told us that they expect the federal funds rate will drop from where it is now around 4.8% to 4.4% by the end of this year, 3.4% by the end of next year and 2.9% by the end of 2026. Wow. So it looks very likely that interest rates are gonna keep moving lower. Mm-Hmm. <affirmative>, of course this is based on the current information that they have now and the current data that they have now. Things could change next year. As I was just saying earlier, if the new administration imposes very high trade tariffs, then we’re going to get a new spike in inflation and all this would change. But as things not stand now, it looks like the inflation rate is going to keep coming down and it looks like interest rates are gonna come down quite sharply and that should be good for property prices.
Right. And for equity prices. But there is one thing I wonder, Marco, and you probably have a better feel for this than I do, I’ve always read so frequently that one reason that property prices in the US have have moved up over the last few years is because there are so few sellers because people are locked into very low rate mortgages, right? Yeah. They have mortgages from three or four years ago, 2% mortgage rates or, or extremely low mortgage rates. If they sell their house now they’ll have to refinance at six or 7% interest on a new mortgage. Yeah. So there’s no supply of homes because of this mortgage situation. If interest rates do move down and mortgage rates do move much lower, which seems quite possible, do you think that suddenly there’ll be a wave of sellers of homes around the country who have been reluctant to sell up until, until now because their mortgage rates were so low before and they wanted to lock them in? Yeah. What if there’s a new wave of selling for this reason with new supply of homes, perhaps that would put some downward pressure on home prices rather than what you would intuitively expect that lower interest rates would lead to higher home prices. What do you think about that?
I don’t think it’s gonna push prices down, but it’ll slow or curb the appreciation rate of appreciation in many, many markets. There’s an undersupply of housing, we have a 1.2 million housing unit shortage right now in the country in terms of the, the supply versus demand. If mortgage rates go down, like you’re talking about, it will bring some people out of the woodwork to move, whether move up, move laterally, but let their home go and get that low rate mortgage off their books. They’ll get a new mortgage at a comparable mortgage rate, but at least they’ll take up one more housing unit free up one more housing unit in the resale market. I don’t know if it’s gonna make a big impact, but it certainly will free up housing in the resale market. But builders are building like crazy right now to put out inventory to keep up with the natural demand, the organic demand that we have for housing.
We have almost a historic number of shortfall housing units out there, 1.2 million. And that’s not gonna correct itself anytime soon. It it, you know, it’s already predicted that it’s gonna be at least 20, 30 or beyond before we reach a level of equilibrium. So could it help potentially, but it can also fuel the fire because if mortgage rates go down, affordability goes up, more people can get into the housing market, they could buy their first or their next home and that increases demand which will push prices back up, which you know, adds to inflation because housing is a cost of living. So <laugh>, it’s an interesting dynamic, you know, between all that part of it is driven heavily by interest rates because that affects affordability but also supply and demand plays heavily into housing.
Right. Let’s, it is, it will be interesting to see how that plays out. I mean, like you said, intuitively you would expect lower mortgage rates to make property prices go higher. I’m just wondering about this other possible wild car that may make things turn out otherwise. Now everyone thought that the higher interest rates would push property prices down right as the Fed with hiking. There was a real fear that property prices would fall, but instead of falling they went up.
I think it’ll just make the problem worse. And the reason for that is, is there are a lot of households that have multiple people living in there only because they can’t afford to live on their own. So if mortgage rates go down, affordability goes up, those people who are would effectively take up two housing units or potentially three that are living in under one roof now all of a sudden doubles the number of housing units needed from that one household. And so now you’ve rapidly increased the amount of demand for housing and that’s gonna create a massive problem. Problem. I mean if you’re a property owner, it’s a great thing, you know, your equity just doubled.
<Laugh>. Right, right.
So, but yeah, there’s a lot of people even in their twenties and thirties that are still living at home or bunking up with other people because you know they can’t afford a house on their own.
Good news then, because according to the Fed officials themselves, they’re expecting to cut interest rates by another 200 basis points over the next couple of years.
Wow. Well you know, the mortgage rates are affected by the bond market more so than you know, the fed funds rate. But I don’t know if those work one-to-one linearly, but if they do, then yeah, we’re gonna see mortgage rates drop and that’ll be another housing boom. I
I think we will keep seeing mortgage rates drop in that scenario because you know, as I was just saying before, right now the fed’s paying 4.8% interest on about to the banks on bank reserves on about $4 trillion of bank reserves. If they pay 200 basis points less, then there’s gonna be $4 trillion looking around for new investment opportunities at a much lower level of interest. So all of the market determined interest rates should also move lower as well, including mortgage rates. ’cause The mortgage rates are really still quite elevated currently. They’re much higher now than they have been most of the time since 2010.
Well the long-term mortgage rate, if you go back about 30, 35 years is 7%. You know, if you just wanna look at it historically. So we’re right around there right now. But yeah, I mean if we drop below seven it’ll spur activity. If we drop below six, you definitely see more activity. And if we get below five again I think watch out, we’re gonna see another housing boom.
Well as long as globalization persists and we continue to have downward pressure on imported good prices and disinflation, then there’s every reason to expect, I believe that inflation will be very low as it has been during most of this century. And in that case, interest rates should also be much lower than they are now.
I’ve heard it said that we live in interesting times and <laugh> I can’t help but think we live in interesting times.
We definitely do.
Yeah, we’ll see how it goes. Well Richard, I’ve taken up a lot of your time. I appreciate you staying on. This has been great. I love the content, I love your newsletter. Macro Watch is fantastic. So tell our listeners how they can follow you, find you subscribe to Macro watch your books, anything else you wanna share?
Thanks Marco. Yeah, so my business is Macro Watch. Macro Watch is a video newsletter every couple of weeks I come out with a new video. It is typically about 20 minutes long and it has 30 or 40 charts that you can download just discussing something happening in the global economy and how that’s likely to impact asset prices. Things that we’ve been discussing toward the latter end of our conversation today. And it’s been going on now for 11 years. I launched Macro Watch 11 years ago. So if your viewers, listeners are interested in, in learning more about Macro Watch and following my work, I would encourage them to visit my website, which is richardduncaneconomics.com. That’s richardduncaneconomics.com. And if they’d like to subscribe to Macro Watch, hit the subscribe button, I’d like to offer them a 50% subscription discount. If they hit the subscribe button, they’ll be prompted to put in a discount coupon code if they put in the Coupon Code – PASSIVE and they can subscribe at a 50% discount to Macro Watch and they will find that it is very affordable, it’s not expensive at all. And they will get new video from me every couple of weeks for the next year. And they will also have access to all of the videos and the archives now more than 100 hours of videos and the Macro Watch archives. So I hope your listeners and viewers will check that out at richardduncaneconomics.com.
Yeah, and I speak highly about it. I mean, I’ve been a subscriber for years. It’s worth every penny. It’s inexpensive, affordable, it is chockfull of information. You’ve got a great slide deck with every video. You explain things very well. I can’t speak highly enough about it. I think it’s great. Anybody who wants kind of like a big picture what’s going on on the world stage, information and trends, it’s all there. So I mean, you don’t really need to go anywhere else. <Laugh>.
Well, thanks Marco. The big theme of it is that the economy just doesn’t work the way it used to when money was backed by gold. Right? Now it works very differently. And so I I explain how the economy really works in the 20th century because it doesn’t work the way that it did when money was backed by gold. There were a lot of constraints then that no longer exists now. And if you don’t understand how the economy works now, then you’re going to be not at all well positioned to make wise investment decisions. Right?
Yeah. So if you care about your economic and financial future, this is a great source of education for you. So, I think it’s well worth it a hundred percent.
Thank you for the good recommendation. Yeah,
Definitely. Well, Richard, thanks for coming back on. Maybe we’ll have you back on in not two years from now, but <laugh> <laugh> probably into the new year. How about we do that?
Let’s do that. I, I would like that. Perfect.
Okay. Well again, thanks for coming on. Thanks for your time and we will see you again soon, Richard. So thank you. Great.
Thanks for having me on.
Thank you.
Well, that is our episode for today. I appreciate you hanging around and listening. I hope you found it interesting. We could have gone down so many rabbit holes and gotten into so much depth, but we are going to leave it the way it is as it is for today. Download your free report of The Ultimate Guide to Passive Real Estate Investing available on our website at noradarealestate.com, N-O-R-A-D-A. That’ll be in the show notes as well as Richard’s contact information and whatnot. Don’t forget, you can have a free strategy session with our investment counselors to talk about investing in real estate, where to invest, what to invest in a game plan going forward, how you can make that become your retirement plan or part of it, generate cashflow, generate wealth. If you have questions about real estate investing, don’t forget, you can email me directly at Ask Marco at noradarealestate.com. I believe that’s it, or it’s Ask Marco at passiverealestateinvesting.com. It’s probably both. Or just simply go to the website passiverealestateinvesting.com and click on the Ask Marco button, and guess what? It’ll send me an email. Remember to subscribe, share the show with your friends and family. And that is it for today. Thank you for listening and being here, and we’ll see you on the next episode.
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