CW 229: Understanding the Global Economic Crisis with Richard Duncan Author of ‘The Corruption of Capitalism’

Welcome to Creating wealth with Jason Hartman. During this program, Jason is going to tell you some really exciting things that you probably haven't thought of before. And a new slant on investing fresh, new approaches to America's best investment that will enable you to create more wealth and happiness than you ever thought possible. Jason is a genuine, self made multimillionaire who not only talks the talk, but walks the walk. He's been a successful investor for 20 years and currently owns properties in 11 states and 17 cities. This program will help you follow in Jason's footsteps on the road to financial freedom. You really can do it. And now here's your host, Jason Hartman with the complete solution for real estate investors.

Welcome to the Creating wealth show. This is episode number 229 and this is your host, Jason Hartman. Well, I have missed you. Have you missed me? I hope you have a little bit. Sorry, we've been out for a little while here on a mini sabbatical from the show and I hope whenever we don't publish as often, you use that as an opportunity to go and listen to the old episodes. Many of them are up on the website@jasonhartman.com and on iTunes and they are accessible for free. And some of the selected episodes are of course in the members only section@jasonhartman.com and we would love to have you, Jo, as a formal member and be part of our members family for lots of extra benefits there. But always whenever we're not publishing as often or you just have extra time to listen, you know, with the holidays upon us now, you may have extra time and maybe not, maybe it'll be the opposite for you, but it's a great opportunity to listen to the old episodes. And the great thing about this is that if we were investors in stocks, bonds, mutual funds and all those things that generally don't work very well, if we were investors in those, and I was to say go listen to the old episodes of Jim Cramer or CNBC in general or anything like that, a lot of it wouldn't apply, but with income, property, with real estate, of course things change, but the underlying principles really change very, very slowly, if ever. So you can listen to a show that was recorded a year ago and it is still very, very informative based on today's situation. You can listen to a show that was recorded for four years ago and it's just interesting to get that perspective of what we predicted and what has come true and the few things that haven't. Not everything we've predicted has been on top of it but pretty much we've been very good at our record. So, you know, our old shows are up there. You can listen to them at any time and hold us accountable, take us to task, see how our predictions have borne out in the marketplace. So a lot has been going on and that's why I haven't been with you in a couple of weeks. And I guess first of all, it's a good time to talk about my recent whirlwind tour of several of our markets in the Midwest. Just had a great time out there. I flew in and this is about, I guess a week and a half, two weeks ago, flew into Kansas City and looked at properties there. Of course we're not super keen on what we're finding there right at the moment. That may change at any time in the near future. But did a little bit of a Kansas City tour and stayed with our local market specialist from St Robert, who happens to live in Kansas City and stayed with him and his wife and just had a great time, learned a lot. And gosh, I got to tell you, you know, he's been on the and you've heard from him, but this guy is very, very knowledgeable and I can't believe it. I almost hate to admit it, but looking at some people that are younger than me now and thinking of them as kids or young people. But you know, a lot of these kids are young people. They really know what they're talking about. And I don't want to be thought of as very old. So I was just impressed with really my visit with Zach and his wife and really just so knowledgeable. I wish I knew all of that stuff when I was 26 years. And I tell you, if you are whatever age you are listening today, if you are aware of the things we're talking about on this show, you're going to be so far ahead of the game, so far ahead of most of your peers, if you're aware of what's going on with monetary policy, with Wall street, with the banksters, etc. Etc. You are just so far ahead of the game. So I want you to raise your right hand and reach over and pat yourself on the back. You'll probably be patting the left side of your back for listening to the Creating wealth show, knowing what's going on, being so well informed. But anyway, back to the tour. So started in Kansas City and then took a very, very early morning about 6am we were on the road to St. Robert, Missouri and took that rather long drive out there. Zach and I did and we met with his whole team in St. Robert for the first time. I saw the 10 unit building that I'm an investor in there and was very impressed with it. I'm really impressed with the occupancy rates, military tenants, lot of big advantages there at Fort Leonard W. And really one of those sort of under the radar marketplaces that I was. We've been having very good fortune in for our clients for a few years now in that market. And my investment there is going well also. So was very pleased with my visit. I interviewed the property managers, went to their office, interviewed the construction people. We did some videotapes. Maybe we'll play the audio track of those or release the videos themselves on our video podcast of the Creating wealth show. And you can see those, but if not, you can at least hear them and it will give you some good ideas and good feedback about that market. Very, very good market. And then in that very same day, we then drove to St. Louis for our St. Louis tour that started that Friday evening. And it was really great to hang out with a couple of our clients. Again, we didn't have a lot of time to market that one, so it was a fairly small size tour compared to our Phoenix event several months ago where we had decent amount of marketing time to promote the event. But the St. Louis tour was good and we've been doing a lot of business in St. Louis. You know, I talked with one of our investment today and I know we've done about, I don't know, in the past two weeks. I think we've done about 10 properties in St. Louis. So that market is going quite well. And again, it's a market that we've never really promoted very much. But we have done some business there over the years just kind of without promotion, just people asking for it. And the tour went well and it was really great to hang out with some of our clients there and get to know them in depth and hear about their experiences and so forth. Just to really, really cannot tell you how much I enjoyed that. So that was great. And the properties in St. Louis, it's kind of interesting because the first day we saw the properties that were, again, these are older, this is a much older city than what we're used to in a lot of our markets. And the first day we saw the properties that were, you know, mostly built around the 60s, give or take, that's pretty old for us. And our local market specialist was in the front of the bus and everybody else was. It was in the bus there. And I'M you know, maybe four or five rows back. And I, I said, I kind of yelled out, I said, hey, when are we going to see the newer suburban properties? And this was on Sunday when we were looking at the really old stuff that was built in like the 20s, 1920s, if you can believe that. And he said, well, we already saw that yesterday, Jason. I thought, oh gosh, it's a different kind of market. But I tell you, the numbers work great. It's a very desirable city, has a lot of amenities and not the least of which was going up in the St. Louis Gateway Arch, which I got to do on Monday morning. And that was really an interesting experience. If you haven't done it yet, put it on your bucket list. Pretty cool. But you know, again, if you didn't get a chance to go on the tour, just remember that we can set up a, essentially a private tour for you anytime. If you want to go to St. Louis, if you want to go to Atlanta, St. Robert, any of our markets, we can connect you with our local market specialists who can meet you there, tour you around and show you the properties. So that's always available for you in a less formal and less organized fashion, but it's definitely available for you. So just let any of our investment counselors know and we'll be happy to help you with that. And then Indianapolis, that was the next stop on my whirlwind tour and I went into Indianapolis. I took a look at the properties that I recently purchased there and just did a deal on one of those. So I'm happy about that. Got that one out of the way and taken care of. And properties are leasing pretty well still in Indianapolis, that's still just been a perennially good market for us. Nothing exciting, but again, fantastic cash flows. And that's the play. Of course nowadays as investors, you're looking at cash on cash returns anywhere between, just off the top of my head, about 11 to 20% annually. And that's before you take any tax benefits. It's before any appreciation or as we say, regression to replacement cost might occur. So you've got some great opportunities there. Compare it to a dividend paying stock or a bond that is just producing income for you. Call it an income property bond. And that is the play nowadays because we don't really think you're going to see any appreciation in real doll, any to speak of, I should say. And with still many areas declining, my prediction stands. I think areas like California and other markets like that still in decline and destined to lose maybe another 10, even 15% depending on the price segment of that market and the area. It was interesting too, because I was talking to the associates of one of my former guests on the show who will remain nameless for this comment, but you might be able to figure out who it is. And this is a person who was on the show and is very good at what he does, but likes California. And I just don't like California that much as a marketplace. Even in places like the Inland Empire, I think it's okay. I think there will always be a certain element that is drawn to California and the cash on cash returns aren't too bad there anymore. But again, I said, hey, you know, you were on my show, I think I should be on your show. And he says, well, you don't like California, so we don't want to have you on the show. So I thought that was kind of funny. But anyway, you know, some of our Midwestern markets. Fantastic. Just had a great, great time there looking at those and would highly encourage you to take a look at them at the property section on jasonartman.com properties. You can see all of them there. And another market that we are having, some doing very well in having great inventory and I know I've mentioned it quite a bit, but that is Atlanta, Georgia. So check out the Atlanta properties on the website as well. One of our vendors there, we have a couple of different local market specialists there. One of our vendors has recently post some new properties and they're looking pretty good. Check those out on the website, ask your investment counselor about those as well and we'll be glad to help you. So I got back from Indianapolis on I believe it was a Tuesday evening about a week ago Tuesday and then the next morning at 8:30am I started moving and I moved into my very swanky new place. I just absolutely love it. And I am a renter. Yes, I've only been a renter a couple times in my whole life. When I moved out of my house instantly was an owner and I'd been an owner for many years and then did a short stint as a renter while one of my houses was being built and I rented in Corona del Mar for a while. Corona del Mar, California, kind of a beach town there if you're not familiar with it. And then for a very short time I rented again when I was building a home in Newport Coast, California. And but I've pretty much always been a homeowner other than that. And I cannot tell you how much I like being a renter and Here is why. And those of you who went to the meet the Masters event, the last one, I told you what my deal was, but it was pretty phenomenal. So my expense, my housing expense for the property I sold in California was about $10,000 a month. And I sold that house, my company, Open Door Auction sold it for me, and the escrow closed on that property, I think on June 10th of this year. And again, I was spending about $10,000 a month. And when you're a high end renter, the world is your oyster. You get incredible deals. When you're a low end renter, you should probably be buying. So it all depends on the price segment, not only the geographic market, but the price segment of that market. So let me tell you about my very swanky new penthouse. I've always wanted to live in a high rise. I now live in the tallest, highest, all residential building in the entire state of Arizona. It's pretty cool. I have forever views on three sides of my building. My penthouse is about 3,000 square feet. I rent it. And if you were to buy this property, and this is of course a guesstimate of what it would sell for, but I would guess this property in today's market would sell for about a million, about $1.8 million. Probably at the peak of the market, this property would have sold for about $3 million somewhere around there. Okay, and maybe I should have a contest on this. How's that sound? A contest? Why don't you guess what I'm paying in rent? It's a pretty darn good deal. And it's brand new, just stunning. It's probably got about, I don't know, you know, I'm just guessing here, maybe 6 or 700 square feet of deck space, views on three sides of the building. I can see forever in every direction practically. And wow, what a great property. I just, I'm absolutely, I love it. It's, it's, it's awesome. And it is so nice to be able to have all these amenities. A huge fitness center, a business center, all of these beautiful common areas, pools, jacuzzis, etc. And not have to worry about any of them. I mean, I just remember being a homeowner, you know, I was always like having to meet with my gardener. The landscaping was never quite right. It was never quite done as well as I wanted it to. The plants weren't growing right. Have the exterminator come over, the gardener. I had a pool in one house, I had a jacuzzi in another, and all the Dealing with all this, all that stuff that just sucks away all of your time. I just kind of love having that handled for me. And of course I love the price because I think my lifestyle has probably doubled or tripled in quality since leaving the Socialist Republic of California. But my expense has actually declined quite a bit. So I'm very happy about that. And I tell you, California, I lived there for virtually all of my life except for a few years when I was very young. And it used to be a great place, but I just think it's. It's highly overrated now. It's overrated, it's over regulated, it's over taxed. And I just cannot tell you how you sometimes just don't realize what a place is lacking until you leave it and you move to a new place with just a fantastic sense of community, with entertainment, restaurants, lifestyle galore. I'd say the only flaw Arizona really has, maybe there's two flaws. One thing I miss about California is I kind of miss the greenery. I really like that greenery. Going down the roads in Newport beach and around the Irvine area, very green and lush. I must be honest, I do miss that. And the other thing, of course, in Arizona you have to figure out a way to escape is the summers. And I moved here in the summer. I put up with it and it wasn't as bad as I thought it would be. And frankly, I don't like heat very much. The weather is gorgeous now and even in the summer it's very nice at nighttime. But those days during the summer are very, very warm. But you know, as they say, it's a dry.

He.

Anyway, enough about that. So I just kind of had to tell you. That's why I've been so busy with that trip and the move. It's been quite busy. So sorry I haven't been with you in a little while, but we are back on track with publishing new shows. Hey, John Burns, who was a guest on a prior show, I think that was back around. Number, I'm going to guess here, maybe 133. He's a real estate consultant and his newsletter today was really interesting because it talks about how homeownership is going to fall by 8%, 8% decline in homeownership. And here he says, we've done a lot of quantitative and qualitative research on the future of homeownership and concluded that homeownership is likely to fall 8 percentage points from 70% in 2005 to 62% in 2015. Fox Business News Did a nice job interrogating us on homeownership rates. And of course they post a video about it and it says from 2015, from 2005 to 2015, homeownership will fall from 70% to 62.1% influenced by the following. And they identify three major factors. Foreclosures that will have an effect on homeownership, causing it to decline by 5.6%. It says foreclosures and short sales will displace an unprecedented number of homeowners. So those people will recycle into the rental market. And that's great news for us as landlords, as great, great news for us. We want to see foreclosures. Why? Well, they offer us great buying opportunities, number one, so we can stock up on below cost, below replacement costs, below construction cost properties, basically be packaged commodities investors. So that's wonderful, first of all. And then we have so many people that are former homeowners that are being recycled into the rental pool and that's just a great thing. Oh, and by the way, I'm sure if I made my point when I was talking about my move, being a high end renter is a great deal. Let me just touch on that for a moment. In Newport Beach, I was considering selling my property, my home that I owned and lived in there a couple of years ago. And yes, I should have done it, but I was just kind of too busy with my business at the time and with my investments. And I looked around at that time and discovered that I could have rented a home in Crystal Cove. Crystal Cove is an area in Newport beach or Newport coast actually. And it's this very, very high end area where the homeowners association fees are over $600 a month just for the HOA multi, multi million dollar homes in that neighborhood. I remember looking at some properties there that would have sold for about four and a half million dollars that you could rent for $10,000 a month. So you see how when it comes to price segmentation, not just market or geographical segmentation, but price segmentation, how incredibly good the deal is if you want to be a high end renter, if you're a low end renter, you should probably be an owner, depending on the marketplace. So you know, if someone is paying 12 to $1700 a month, and of course this depends on geography in rent, they'd probably be better off being a homeowner. But if someone is paying $3,000 a month or up to $10,000 a month rent, they're probably getting a much Better deal being a renter than they are being an owner. Now most of our tenants that we of the properties we invest in, you might ask yourself well, why aren't they owners? They should be owners. Well, the first and most important reason is financial maturity. Financial maturity renters. And I know this because when I first got into the traditional real estate business and I was selling mostly HUD and VA repossessed foreclosure properties, government repos, that's how I started my career. When I was doing that, you know, as I as a part time real estate agent and going to college at the same time, I always noticed that the people that I would try to get to buy properties back then, they would always go through this really, really difficult process of the non financially mature people, they couldn't take a step back in order to take two steps forward because they could always rent something a little bit nicer than what they could afford to buy. And it was always hard for them to plan to sa. I dealt with a lot of first time buyers that were, they just couldn't save money. They had to spend their money on all the things like Robert Kiyosaki talks about. He calls them doodads, all the doodads of life, okay? And listen, I love doodads too, okay? I spend too much money on doodads. A fair criticism of me since especially I moved and I have more stuff than I can possibly use or store or anything. It kind of drives me nuts every time I move and see all the junk I've spent money on, but I can afford it. The other people though, they should not be spending their money on doodads. They should be saving up for a down payment and taking one step back so they can take two steps forward to buy a property. That's the first thing. Now a lot of those people over the past few years got themselves into a lot of trouble, didn't they? Because they were able to buy properties with no money down. They bought all the doodads they wanted and they didn't save money because the lenders just let them in with lots of debt, didn't qualify them properly. So they bought properties and they are now recycling through foreclosure back into the renter pool where they probably should have been in the beginning because they didn't have financial maturity, they didn't have financial self discipline. So that's a 5.6% effect or decline in the homeownership rate right there. Now the other one is cyclical trends. We're back to the John Burns Newsletter now. Okay, cyclical trends again. Here we're subtracting another 3% from the homeownership rate. The propensity of households to own a home will fall from the peak of the housing cycle and will overshoot the historical norm due to a fledgling economy, poor consumer confidence, tightening mortgage credit and other factors. So here you've just got all of those cyclical trends. You could even call that part of the business cycle, although it's not exactly the business cycle, but it's kind of the business cycle in housing and lending and construction, maybe. And then you combine that with consumer confidence. So there we lose another 3% from the homeownership rate. And then positive Demographics are a 0.7% effect on the homeownership rate. Okay? And this is positive, positive demographics of an aging population whose propensity to own increases as they age until they reach age 70 will push a homeownership upward. So that's the last positive trend that counteracts the two major, much larger negative trends. So here We've got an 8% reduction predicted in the homeownership rate up until 2015, just four years from now. Remember, we did a presentation at maybe three Meet the Masters events ago where we talked about six years, six million new renters. And we think that's a conservative number still. We think it could be as many as 25 million new renters. A phenomenal, phenomenal opportunity for investors. So, folks, we are at the time, the inflection point, the golden opportunity to own good property in the right markets. It doesn't apply to every market, obviously. It doesn't apply to every property, obviously. I would not want to buy the place in which I live. I'm much better off renting it. But, boy, I'll buy a lot of little, little properties. Oh, and I should give you a little update on my big deal, my biggest deal ever, that 125 unit apartment building in Scottsdale. We just got the commitment lender from the lender today who is going to while they're proposing a refinance on the property. Now, keep in mind, we've only owned this property for a couple of months. And I will go in depth about this deal on a future show. And, you know, I just kind of want to get it all done and solidified, but, boy, this is looking like a phenomenal deal. I love income property. 125 unit building. We purchased it myself and a client, $3.9 million. We purchased a note. We foreclosed a week later and have been working on turning the property around with our vendor there remodeling and rehabbing a lot of the units. Our vacancies are pretty high right now and if they were lower we could even get a better refinance loan. But this is pretty amazing. It looks like we're probably going to get a 10 year fixed interest rate loan at get this right around 4.6%.

Wow. Is that just a phenomenal opportunity? 4.6% fixed rate rate, 10 years. And I mean the inflation rate right now is easily well over 9% in real numbers if you ask me. And if you ask a lot of other people in the know, they will say the same thing. I love income property. I mean the opportunities right now are nothing short of phenomenal. Stock up on these great little properties if you're starting your career, if you're just progressing in your career as an investor, keep buying the single family homes, the duplexes, the triplexes, the fourplexes. Those are great. We're here to help you along the way with any of these and then work your way up to the larger multifamily properties just as I did. Anybody can do it folks. I started with virtually nothing and just did this myself just over the years just accumulating more and more properties and it is without a doubt the most historically proven wealth creator in America today. So we've got a guest. Yes, after all this, this long intro, we do have a guest today and this is going to be a fairly pessimistic view of the future. But I think it's important that you hear it because in every cloud there is a silver lining. And we all know, all of us regular listeners to the Creating wealth show know what the silver linings are. They are inflation, the demise of the dollar. It looks like the euro is on the verge of collapse if you've been following the European news. And that again will create a lot of despair but a lot of opportunities at the same time. So that's what we're here for today is to look at the real picture, the real world picture of what's going on and figure out how to exploit it. That's what the Creating wealth show is happen about. That's what you can find out more about@jason hartman.com and we will be right back with our guest in just a minute.

What's great about the shows you'll find on jasonhartman.com is that if you want to learn about investing in and managing income properties for college students, there's a show for that. If you want to Learn how to get noticed online and in social media. There's a show that if you want to know how to save on life's largest expense, there's a show for that. And if you'd like to know about America's crime of the century, there's even a show for that. Yep, there's a show for just about anything only from jasonhartman.com or type in Jason Hartman in the iTunes store.

It's my pleasure to welcome Richard Duncan to the show. He is the author, most recently of the Dollar Causes, Consequences and Cures by.

John Wiley and Sons.

And actually, I believe his more recent book, I Apologize is the Corruption of Capitalism. I think you'll learn a lot from this interview. And it's my pleasure to welcome from Bangkok, Thailand, Richard Duncan.

Richard, how are you over there?

Very well, thank you. Thank you for having me on your program.

Well, it's good to have you on. Noting this extreme time difference that we have. There is a lot going on in the financial world. We've got Greece on the verge of catastrophe. The euro's in a mess. We've got talks about another quantitative easing and wow, we are living in interesting times, aren't we?

Unfortunately, very interesting times on the macro scale, anyway.

Well, how did we get to this point, Richard? So many people are quick to blame the subprime crisis, which is certainly part of it, but what is your take on it?

A disaster of this magnitude doesn't just develop overnight. This crisis originated back in the 1960s when US government leaders abandoned the core principles of economic orthodoxy, balanced budgets and sound money backed by gold. And when our leaders abandoned these core principles of economic orthodoxy, this open pent up Pandora's box and all kinds of evils have flown out that we're now having to deal with.

Well, so did it really stem then from Nixon taking us off the gold standard in 71, or what were the origins before that?

Well, it preceded that a little bit, I would say. So this really began under President Johnson. Johnson was spending too much money on the Vietnam War, overseas and domestically on the Great Society welfare programs. And by spending too much, this stimulated the US Economy. When the government spends a lot of money, it stimulates the economy. And when the economy is booming, the country imports more from abroad. And in the 1960s, the US was still under the Bretton woods system. And so as we imported more and shipped dollars overseas to pay for our imports, other countries had the right to convert those dollars into US Gold. And as a result, during the 1960s, the United States lost half of its gold reserves, it lost 250 million ounces of gold. And so by the time, by 1971, when Nixon ended the Bretton woods system by unilaterally declaring that the US would no longer allow its dollars to be converted into gold, well, he really didn't have very much choice because the US just simply didn't have enough gold left to allow the dollars to be converted into gold. And so at that point, after 1971, there was no longer any gold backing for the dollar whatsoever. And then extraordinary things started to happen.

Well, it seems to me that for politicians who love to spend money to buy votes, whether it be with the social programs, great society type programs, or back to fdr, or to support the military industrial complex or whoever them in office, getting off the gold standard is a pretty good deal if you're a politician, isn't it?

Well, it was good in the short run, but unfortunately it's led to really a worldwide credit bubble of enormous proportions. And that credit bubble now is popping, as every credit bubble eventually does, because eventually there's just so much debt outstanding that people don't earn enough money in their real jobs to pay the interest on all the debt. And when that happens, the debt blows up and that destroys the capital in the banking system. The capital really is nothing more than money invested in other kinds of financial assets. And that's how our banking Crisis erupted in 2000 when the subprime mortgages couldn't be repaid, then that destroyed, essentially destroyed all the capital in the financial system, not only in the US but essentially globally. And the government had to respond by jumping in and replacing that lost capital through the Fed's program of quantitative easing round one. And they had to also stimulate the global economy economy through trillion dollar budget deficits to stave off a new great depression.

And so when you look at this picture, I mean, the first part of the financial crisis was really quite deflationary. And now we are seeing signs, at least in terms of what really matters to people, which is largely food and energy, we're seeing real signs of inflation. Are we past the deflationary cycle and the credit bubble bursting and onto the inflationary cycle, where governments, especially the US being the most profligate, think they just print their way out of the disaster with more quantitative easing. Where are we in the cycle of this?

Well, in a sense, we're on the razor's edge. On the one hand, if the government doesn't intervene by printing money and having these massive trillion dollar budget deficits, then the global economy is going to deflate and that would result in deflation and depression. On the other hand, if the they print too much money and have budget deficits that are too large, then we're going to flip over into a situation where we have higher prices and inflation. So what we have seen most recently is as a result of QE2 with the Fed printing 600 billion extra dollars. This has created inflation in certain areas, particularly in food prices around the world. Food prices have spiked globally and this is a very severe problem because 2 billion people on the planet live on less than $2 a day. And these people have started becoming even more hungry. And these people have also begun overthrowing their governments in North Africa, for instance, in the Middle East. And if they don't stop the QE.

In the near term, then it's likely to that food prices are going higher and that there's a real risk that these food riots could spread east across Asia into Pakistan, India, even China, Vietnam, Indonesia. So at the food price level there is really quite a humanitarian disaster going on.

Yeah, there sure is. There sure is. Bill Gross is predicting that there's going to be a QE3, that the Fed is going to unveil a Jackson Hole whole. I mean, do you think there will just be continued easing like you explained, that governments really, especially the US have those two choices. Either print and keep the deflationary depression from happening or just let it happen and eventually we heal from it. It's really a catch 22. There is no good way out of this. And what the company line at the Fed seems to be, well, we're just going to play the razors edge and we're just going to print now. And when we get to the point where inflation is a real fear, we have other tools. As Bernanke famously said in his 60, his first 60 Minutes interview, which he thinks he can just turn off inflation at a whim, which I don't think is possible. It can't be contained. That's the problem. But what do you think is next? I mean, do you think a QE3 is on its way?

Well, I think it's crucial for everyone to understand that the global economy is now on government license support. In other words, it is the deficit spending by the US Government that is preventing us from collapsing into a new Great Depression. Now the Great Depression itself came about for reasons very similar to, in fact identical to the reasons that produced our current crisis. The Great Depression originated in World War I when all the countries in Europe went off the gold standard to fight the war, they didn't have enough gold to fight the war. So they all started printing a lot of paper money and issuing enormous amounts of government debt. Well, all the government debt that they created at that time, that led to a worldwide credit boom that we now think of as the roaring twenties. Well, the roaring twenties were great fun, but in 1930, the credit couldn't be repaid. And at that time the government, governments didn't do very much of anything. They just more or less stepped back and let market forces work. They let market forces re establish a market determined equilibrium in the global economy. And that's what happened. Market forces did work. Unfortunately, the equilibrium that was reestablished was at a level of economic output that was 45% less than it had been in 1920 and at a level of unemployment that exceeded 20% for a decade. And the depression didn't end until the US Government started spending massive amounts of money to fight World War II. And when that occurred, then that was a complete game changer for the global economy. But now here we find ourselves exactly in the same position again when the Bretton woods system broke down in 1970. After that, the US government started issuing enormous amounts of debt to pay for its budget deficits and also its trade deficits abroad. All of the debt that the US created has led to a 30 year worldwide boom that we've really all enjoyed all throughout our lives. Unfortunately in 2008, that credit couldn't be repaid. And that this time the government realized that if they did the same thing they did in 1930, in other words very little, then we would have a depression, a worldwide depression. And of course the outcome of that is so uncertain, the Great Depression itself really led to World War II and enormous suffering around the world. So in order to prevent that sort of scenario from being repeated this time, the governments have jumped in. And instead of allowing market forces to do their thing and to establish a market determined equilibrium, the governments are doing everything in their power to prevent that from happening. And what they're doing in the United States is the government is spending a great deal of money. It has a budget deficit that's roughly $1.4 trillion this year. That's 10% of the. If it were not for that 10% of GDP budget deficit, the economy in the United States would shrink by 10% relative to what it will be this year, and then it would get worse next year. So we are on government life support now. Of course, that's in many senses humiliating for the proud capitalist American economy to be supported by the government. But it beats the alternative, which is collapse into worldwide depression and with unknown geopolitical consequences. So that's where the QE2 comes in. The Fed comes in. This budget deficit is a very large number, $1.4 trillion. How can that be financed? Normally, when the government borrows so much money, it pushes up interest rates, which prevents everyone else from borrowing and spending. So instead of allowing that to occur, the government's budget deficit is being financed by the Fed printing money. So what we've seen now, since QE2 started in November, the Fed has printed $600 billion roughly over seven months. During that seven months, that was enough to finance the entire government budget deficit over that period and keep interest rates at very low levels. The problem now is when QE2 ends at the end of the of this month, there will be no one to finance the government's budget deficit in that way. So it's very likely that that will cause interest rates to go up, and higher interest rates will cause stock prices to go down and commodity prices will go down also. In other words, by printing money and buying government bonds, this has forced the people who would have bought those government bonds to buy other things instead, like stocks. So this, this has produced the enormous stock market rally that we've enjoyed since QE2 was announced. Higher stock prices have created a wealth effect, and that's supported spending and consumption in the United States. But now all these things are likely to be reversed. When the Fed stops printing money, the bond prices will drop, the stock prices will drop, the commodity prices will drop, probably including gold and oil and silver. And then the US Economy will we weaken again? And I suspect that sometime around by the end of the year.

The Fed will be so concerned and other government policymakers that the Fed will once again begin a new round of quantitative easing, QE3, in order to drive stock prices and bond prices back up again and interest rates lower.

So I assume we're going to see an increase in the debt ceiling then?

Yes. If we don't, there will be a depression.

Right.

This is a real mess, you know, it's just a real, real mess. So what would you be recommending to people now? I want to delve more into that, but what are your suggestions in terms of investment? I mean, what should one do with their money and maybe even their business interest? Career path? Any advice you have for listeners at all whatsoever.

Every investor in a different personal and professional position. Some people have billions of dollars to invest and others a few thousand. So of course, it depends. Everyone's financial position differs, but generalizing. I think that everyone should understand that we are on government life support. It is the government, what the government does that will determine the direction of asset prices. So therefore, investors, rather than trying to do microeconomic research and looking at factors affecting the supply and demand of individual corporations and their profitability, forget all that. What matters is macro. What is the government going to do? Government policy is going to drive the asset prices. And there are two, two main drivers there. There's fiscal policy and there is monetary policy. So on the monetary side, listen to the Fed. They make lots of announcements, publish lots of papers, and now even Wernanke is giving a press conference following the FOMC meetings each six weeks or so. So when the Fed tells us that they're going to stop printing money, which they have said in recent, recent announcements, that's likely, that suggests that asset prices are going to drop. And so that's a good idea then for investors to reduce risk, reduce their waiting and risky stocks, and also get out of the commodity markets if they are there. And similarly, the other driver for the economy is the government's budget deficit, the fiscal spending. If the government spends less, the economy is going to grow less. That's just that simple. Let me explain. Every economy is made up of just really four major categories. There's personal spending, business investment, net trade, and government spending. In the US the personal spending makes up about 70% of GDP. The business in investment is about 16%. The net trade is a negative number because the US has such a big trade deficit that actually deducts 4% from GDP and the rest, about 20% is government spending. So now we're in a situation where on the personal spending side, the outlook for that is very weak because the households are so heavily indebted they can't access any more credit. And therefore the outlook for personal consumption inflation is bad. Businesses aren't going to invest more because there's already too much capacity already. Net trade is a negative number to start with. That's not going to help. So the country's economy is being driven by government spending. If the government cuts its budget deficit, then it's just arithmetic. By whatever amount it cuts its budget deficit. That's the amount by which the economy is going to grow less. Now, in the old days, people thought, and rightly so, that when the government borrowed and spent a lot of money through deficit spending, this was bad because it pushed up interest rates by there was only a fixed amount of money under a gold standard. And if the government borrowed it, it pushed up interest rates and other people couldn't borrow and spend and therefore it was always a good thing for the government to spend less because if they borrowed less then interest rates would come down and that would benefit the economy. But that's not the world we live in anymore. We live in the world of paper money. And now if the government spends less, well, interest rates aren't going to go any lower. Interest rates are at rock bottom levels already. So if the government spends less, this is not going to magically boost consumption or magically boost investment. Just the opposite in fact. When the government spends less, fewer people will have jobs so there will be less personal spending and less investment. And interest rates won't fall because they're already at rock bottom levels.

Let me take a brief pause.

We'll be back in just a minute.

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Let me ask a question just before you go on there Richard, about that. I mean, isn't the common thinking, at least on the conservative or libertarian side that the private sector should be making up for the government? I mean, you know, get the government out of the economy as much as possible. Of course you have to have some, but the government has grown to such a bohemian monstro proportion that can't there be private sector, that's not a fixed thing. That if the government just spends less than there are fewer jobs. Maybe there are during a transition period. But ideally if the government spends less, then the government gets smaller and the taxes are potentially lower. I mean, and then more money is available to be in the private sector, right or no. What? Where's the distinction there?

Maybe? Well, a couple of things on the tax side. I mean actually the US the amount of revenue that the United States government is taking in as taxes is less than 15% of GDP. That's the lowest it's been since the 1950s.

Well, and before you go on, I would argue that the reason that is so low is because we're not practicing enough trickle down economics. When you raise taxes and interfere more, you actually reduce tax revenue ultimately. I don't know if you agree with me politically on that, but that's what I think.

Well, I think, you know, if we tried to trickle down economics and we've cut the taxes and the budget deficits just keep getting larger and larger. I don't think if we cut the taxes any further that it's going to improve the budget deficit. If we cut taxes, we'll just have less tax revenue and the budget deficit will get bigger. And in terms of the gdp, in terms of the whole economy, we're not beginning from some sort of laissez faire Garden of Eden. We can't just take one step back and be back in a situation where we're in some sort of starting from day one, stepping out of the Garden of Eden. The government has spent so much money for so long, it's completely transformed the nature of the economy.

That I will agree with.

Absolutely.

And unfortunately.

And so now if the government spends less, then the just going to cut jobs and cut investment and there's no reason that magically somehow new jobs are going to pop up to replace those jobs. Underlying this entire very sad situation is the fact that now the U.S. economy is just simply no longer viable the way it's currently structured. The main reason it's not viable is because as a result, result of globalization, the US economy is de industrializing and all the manufacturing jobs are disappearing because the prevailing wage rate globally in the manufacturing sector is $5 a day. And in the United States, the wage rate in the manufacturing sector, if you include benefits, is probably something closer to $200 a day. So our wage rates in manufacturing are a good 30, if not 40 times higher than the prevailing wage rate.

And so the pressure is to see those equalize. And you know, I would argue that the reason that's true is because of government interference. And especially when you look at like Michigan or the Rust Belt unions and those are largely supported by the leftist government. And that has made the US that has made that disparity so long. And then you put NAFTA and all these different free trade agreements on top of that. It's Ross Perot. You have the giant sucking sound. There it goes, there goes the jobs.

You can't have an open free trade.

Type of world and a bunch of unions and environmentalists and regulations and OSHA and all of that stuff at the same time. They can't coexist, it seems to me.

Well, of course. So if our wage rates drop to $5 a day, then there will be no one left to buy any manufactured goods. Not US manufactured goods or Chinese manufactured goods. I mean really what we have seen is, I mean 70% of the US economy is consumption. And at the end of the day, consumption is based on wages or else credit. And we've hit the point now where the credit that we have already borrowed can't be repayed. So if wages go down, consumption goes down, the economy goes down. I mean, this we're really because of the sudden emergence of globalization. In many ways, it takes us back to where we were at the beginning of the Industrial Revolution when the English and the Scots first invented the factory system. Well, this resulted in huge expansion of the society's ability to produce goods. Factories, you could make a lot more goods than you could in cottages. And so the supply side expanded enormously. Production exploded. The problem was that wage rates, the people in the manufacturing jobs at that time were paid just subsistence wages, just enough to keep them alive, more or less. And so those people couldn't afford to buy the things that they were making.

Right. And that was sort of like Henry. Henry Ford's philosophy is pay the workers more so they can afford to buy my cars. Right?

Well, that's right. When he started paying his workers $5 a day 100 years ago, people thought he was insane. At least the other wealthy people did. But pretty soon, those people did start buying his cars.

That is true. All I'm saying to follow up on my previous statement is that you can't. The wages have got to equalize between the US and all of the other countries like China, or we've got to have protectionism. It just can't be both ways. Right?

Well, that's right. I mean, and wages aren't going to equalize because the reason that wages are still $5 a day globally is because demographic trends are so adverse. There are so many people coming into the workforce in places like China and India that wages just can't go up if left to the law of supply and demand. So I'm not sure how many manufacturing jobs there are in the world. 3, 4, 500 million at the most. Well, I can assure you that there are 500 million Indians who will happily work for $5 a day. And that's not going to change for decades. And so wages aren't going to go up there. And so if we're talking about wage equalization, it means wages in the US are going to go down to $5 a day.

That's what I was suggesting. I think. I think that's what we're seeing. I mean, really, and I almost hate to say this, but why is it fair that some factory worker in Detroit should make $40 an hour while his counterpart in Bangladesh makes five bucks a day or probably less. In Bangladesh that's probably the Chinese worker making the five bucks a day. Frankly, it's in a equitable. Why should it be that way?

Well, when we start talking about what's fair and what's not fair.

That'S a very complicated situation. I mean in terms of fairness, why should investment bankers make $10 million bonuses when factory workers in Bangladesh make $2 a day?

I agree, but that's a much more complicated thing.

Yeah, so yes, so there's a lot of, of fairness issues we could discuss. But in terms of practical policy, the reality is that the United States has a democracy and the Americans are not going to accept their wages falling anywhere near $5 a day. They are going to. There will be another Ross Perot type political leader who comes around and points out to everyone that globalization, the way it's currently structured is really not working out very well for the United States.

And I think people are really realizing that now and they have the past 10 years or so. That seems very top of mind to most people.

And the Americans will vote for protectionism and that will be bad for the us it will be terrible for the world and it will be catastrophic for countries like China that are dependent on export led growth. The geopolitical consequences of that sort of breakdown of globalization.

Could be catastrophic.

So what should be done? What is the right way out of this? The thing I like about your work, Richard, is that you actually propose some solutions whereas most people just talk about the problem. But you have some ideas along those lines.

Right? I think rather than accepting protectionism and the collapse of globalization as inevitable, or instead of blaming government spending for all of our problems, I think we need to understand exactly where we are now and how we got here and understand that it is the government spending that got us into this mess. But right now the government spending is keeping us from collapsing into depression is kind of a sort of stopgap measure that is keeping us from falling into severe economic distress in the United States and around the world. And if that occurs again.

Normally in that sort of situation, war erupts. So what we need to do is develop new policy tools for the new century. The US government now has roughly 100% debt to GDP. That's a very large amount of debt. But Japan on the other hand, has something like 225% debt to GDP. Their bubble popped 20 years ago and.

They'Ve been languishing ever since.

They've been languishing, but they've also managed not to collapse into a Great Depression.

But their story is going to have a very unhappy ending. Sooner or later. Maybe they can take their debt up to 250% of GDP, maybe 300% of GDP, but sooner or later it's just going to end very.

And they have a terrible demographic problem in Japan. They're just not having children, right?

That certainly makes their situation even worse. So the US needs to learn from Japan's experience. We need to learn really three important lessons. First, when the big bubble pops, the government is going to have massive budget deficits for years into the future to prevent the economy from imploding. And that's what we've seen since our bubble population. And that's what's going to continue for years to come. The second point though is that when a bubble pops, it's a lot cheaper to finance all this government debt than people fear. Japan has 225% government debt to GDP, but the yield on their 10 year government bonds is a little more than 1%. And in the US we have trillion dollar budget deficits, but now the 10 year bond yield is less than 3%. So.

That'S good news because when the bubble pops, no one wants to borrow any money. There are no viable places to invest the money anymore, and so interest rates decline. Now, the third and most important lesson we need to learn from Japan, understanding that we are going to spend massive amounts of government money for years to come. The point is, what we need to understand from Japan's experience is not to waste all that money building bridges to nowhere the way they said the Japanese did. If the Japanese had realized 20 years ago that they were going to take their government debt up to such enormous levels, they would have come up with a very clever plan on how to spend that government money. They could have spent that money in a way that could completely restructure their Japanese economy. So that's what the US Needs to do. Like it or hate it, the government is going to spend trillions and trillions of dollars over the next 10 years. The only question is, is that money going to be wasted or is it going to be invested wisely? If we actually invest that money wisely, we could completely restructure the US economy and develop new industries that would allow us to sell new products to other countries that would balance our trade deficit and generate new jobs. For instance, it looks very likely that the US government's going to have $10 trillion, trillion dollars of budget deficits over the next 10 years. Now what I would recommend is instead of having $10 trillion of budget deficits and really accomplishing nothing except getting further down the road to ruin. The US government should spend an extra $3 trillion. The government should spend a trillion dollars on solar or some sort of other renewable energy, fusion perhaps. The government should spend a trillion dollars on genetic and biotech. And the government should spend a trillion dollars on nanotechnology technology. And those investments would give the United States an absolutely unassailable lead in 21st century technologies and industries. By spending a trillion dollars on solar 10 years from now, the United States could have complete energy independence, free eternal energy. That would cut our trade deficit by 40% because we wouldn't have to import any more foreign oil. Moreover, we could cut our military spending by $200 billion a year because we wouldn't have to defend the foreign oil. And on top of that, the government could tax the domestically generated electricity and bring down the budget deficit. If the government spent a trillion dollars on genetic technology in biotech, it's very likely that we could create medical miracles. And as soon as the United States government starts selling a cancer vaccine, not only would we be able to balance that year's budget deficit, it wouldn't take long to pay off the entire national debt. So in other words, instead of just wasting the money, spending it and consuming this money that's going to be spent, we need to invest the money, invest it in a way that will actually generate investment returns and in a way that would restructure the economy so that we can develop new industries, new products that we can sell abroad and develop new jobs and new industries to tax so that we can bring our trade deficit back into balance, bring our budget deficit back into balance and transition back to the point where we can return to economic orthodoxy, where we do have balanced budgets and hopefully one day can re establish sound money as well in order to get credit back under control.

Well, certainly not. No one in their right mind would disagree with you that investment rather than consumption spending is wise. I mean, everyone in their right mind would agree with that. I guess the only question is what strides can be made for that amount of money. Say in your example, a trillion on each. And then when you do that, what structural components sort of start lodging themselves in the economy and never goes way. That seems to be always the problem with government is you spend money and then all you do is sort of create another thing that's just there forever and it becomes hollowed out by special interest and greed and corruption and fraud and it's just so depressing.

Well, yes, but you know, we have a democracy, so it's the people should not. It's wrong to blame the government. We we are the government. If the elected officials are not doing the right thing and not putting in place the right policies, it is our responsibility as citizens to replace them with policies that work. If there is fraud, we as citizens, it is our responsibility to send those fraudulent individuals to prison and put in virtuous politicians. It is our duty. We are the government. If we cannot handle our responsibility, then our democracy will fail and it will be our fault. We the people. So we are capable of having good government and it is our responsibility to make sure that we do.

No question about it. It's just the only problem comes into effect when you have that voter who has that responsibility, as you say, reaping the benefits of the government largesse. And then they always vote for their own pocketbook. But it's not perfect. It's just better than anything else so far. And that is for certain. Tell us about your books if you would, and where people can get them. And you have three so far, is that correct?

Two. And the third one is a work in progress. The first book is called the Dollar Crisis. It was published in 2003 and it explained why this global dog disaster was inevitable given the flaws in the post Bretton woods international monetary system. The second book is called the Corruption of Capitalism and that's now available on Kindle. That came out about a year and a half ago. The Kindle version has a new preface that was just written a month or so ago. The Corruption of capitalism is divided into three parts. The past, the present and the future. Future describing the past, how we got into this disaster, the long series of government policy mistakes that brought us here. And the President describes the government life support now that's keeping us from collapsing into depression. And the future describes what must be done in terms of reform to permanently resolve this disaster before the government does go broke. Resolve resulting in a new and long lasting depression. So the past, the present and the future. I have a website and a blog. My website is richard duncan economics.com and everyone's welcome to go there and sign up for my blog. The blog is free. If you input your email address, it will be sent to you when I write it every week or so.

Fantastic. Well Richard, thank you so much for your insights today. We really appreciate it. And by the way, I never asked you what are you doing in Bangkok? Are you living there permanently?

Yes, I have. I have been living in Asia most of the time since I started my career in Hong Kong in 1986. So I had spent almost all of my adult life living outside the United States, most of that time in Asia, moving around, living Hong Kong, Singapore and Thailand.

Fantastic. Well, thank you for coming to us from such a long distance tonight and we really appreciate having you on the show. And everyone should go out and get those books and check out your blog as well. Appreciate having you on, Richard.

Jason, it's been a pleasure talking with you. Thank you for having me.

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