Ep 79 – How the Fed’s Intervention Will Impact the Housing Market, Inflation, and Our Economy with Richard Duncan
Inflation is seen everywhere right now, and the Fed is doing anything they can to try and tamp it down. Whether or not they will be successful remains to be seen, and what the other ramifications that will come with these actions will be.
Richard Duncan joins Adam Schroeder and Zach Lemaster to discuss not only what’s happening with inflation, but what sectors will also be impacted, and how you can protect yourself in the coming investing landscape.
Hey, rent to retirement, it’s Adam Schrader here with Zach Lawmaster. For another episode, and we are joined by a very special guests, we’re going to take a little bit different route today. And we have an economist with us. And that is Richard Duncan. He is the publisher of the macro watch newsletter. And he also is author of the recent book, the money revolution, how to finance the next American century, as well as several other books that you might want to go check out if you have any interest at all in economics. Richard, thanks for joining us today.
Hey, thank you for inviting me. It’s nice to meet you guys.
Absolutely. So let’s start off just a little bit about kind of how you what interests you in economics. And in general, just a real quick rundown of kind of what what you think is currently going on in terms of inflation, one of the big questions everybody’s talking about is inflation. So why don’t we start there, kind of what are you? What got you into economics? And what do you see moving forward with inflation? I saw it dropped off a little bit month month, but obviously, it’s still over 8%, which isn’t exactly the target.
Okay, well, my views on inflation and the outlook for inflation. And what’s happened to inflation for the last several decades is, has been shaped by my career, which I’ve spent, largely in Asia. After, after I graduated from from college, I was lucky enough to get to backpack around the world for a year. And I saw Asia in early 1984. And it was booming. So I realized that it would probably be a great place to have a career. So I went to business school for a couple more years in the US. And then in 86, I moved to Hong Kong and found a job as a securities analyst. And it didn’t take long to realize by traveling across the border into China. There were factories as far as the eye could see full of young women earning $3 a day. And it was like a lightning bolt struck me. This was going to be extremely deflationary disinflationary, it was going to drive down wages in the US, it was going to cause deindustrialization in the US. And we put downward pressure on wages and product prices, and therefore, inflation, and therefore interest rates. So that has been, I would say, globalization, if you want to call it that has been the main theme running through my career. And what globalization has meant, is very low rates of inflation, even when the Fed was creating trillions of dollars, and the budget deficit was trillions of dollars. Before COVID, there was very low inflation. And that was because of globalization is so disinflationary. And where we are now is we’re experiencing a partial reversal of this paradigm shift. Globalization was a paradigm shift that transformed the nature of our economy, and opened up new possibilities that didn’t exist before in terms of the policies the government could get away with, such as quantitative easing on a very large scale. But now we are experiencing a partial reversal of globalization. First, because of COVID COVID calls supply chain bottlenecks. And and it turned out not just to be one round of COVID, but delta came next. The first round didn’t affect Asia very much. But Delta did started shutting down factories in Thailand and Malaysia. And now Omicron is here. And Shanghai has been shut down for the last two months. So that was the first blow. And then when there seemed to be some light at the end of the tunnel, as to that going away, Russia invades Ukraine. And we have a second major blow to globalization, drive, driving up oil prices and wheat prices and food prices and metal prices. So what we’re experiencing now is a very serious blow to the, to the economic
environment that we’ve enjoyed going on for almost 30 years. One have very low rates of inflation and very low interest rates. As the interest rates move lower, the asset prices moved higher. In fact, they moved so high that they are really at the end of last year, they were in unchartered territory. One measure that I look at in terms of asset prices is something I call the wealth to income ratio. Now, what this is, it’s the total net worth of all the Americans, you could say the wealth of America, all the assets, minus all the liabilities of the household sector, divided by personal disposable income, so as wealth to income. Now, this is something the Fed publishes every three months. And it goes back to 1950. And the average since 1950, it was 550%. But at the peak of the NASDAQ bubble, it went up to 620%. And then that bubble popped, and a lot of people lost a lot of wealth. So it came back down to the average, then during the property bubble in 2000 678, it went up to 660%. And then that bubble popped, and people lost a lot of wealth. So it came back down to the average of 550. Again, well, at the end of the last year, it was 825%, which was 23% above the previous peak is at the peak of the property bubble. So this was, you know, asset prices were extremely inflated, suddenly, we’ve been hit with very high rates of inflation, forcing the Fed to not only begin hiking interest rates, but now they’re also about to start reversing quantitative easing, instead of creating dollars and pumping dollars into the financial markets. For instance, by buying mortgage backed
securities, and government bonds, which pushed up those prices and drove down the yields. Now they’re going to do the reverse. They’re going to start quantitative tightening, instead of creating dollars, they’re going to start destroying dollars. And so all of this talk about aggressive tightening, has, as you know, pushed mortgage rates up very sharply. And also the interest rates on the 10 year government bond yield, and has created an absolutely brutal sell off, and most asset classes, stocks and Kryptos, for instance. Well, Richard,
thank you for that. That was pretty deep. And so I appreciate that. And I think a lot of people are, maybe would would listen to that and go, that was a lot of concrete information. But like, holy cow, what is what does that mean? You know, so if we can kind of tie that back around to simplify it? I mean, there’s a few key things that you you talked about economically of like, I think really what what most people want to know is like, Okay, where are we at right now, and what is likely going to be the next five or one to five to 10 years, specifically around real estate since we’re real estate centric, but it also just economically as a whole, you talked about a few metrics, your wealth to income ratio, it almost sounded like, you know, this is an unprecedented time for that where you were suggesting a possible, you know, correction or recession because of that, just looking at historically, what’s happened. We talked a lot about what’s going on. I mean, this is just I think you would probably agree just a very unique time with all the stuff going on globally. And kind of where we’re at. I mean, this is specifically with real estate, we’ve also seen we’ve never before seen such discrepancies in supply and demand for housing. And such a such a demand for housing, a lot of people want to immediately look back at 2008 and say, that’s, you know, because that’s what’s so solidified in everyone’s mind for anyone that, you know, especially people that were affected financially through that. But we’re in a completely different environment right now. I mean, I guess what I’m trying to ask you is what what do you think the future looks like for us in the real estate sector over the next five to 10 years in the you know, economic sector, we have crypto and stocks kind of volatile right now moving more towards a bear market. You know, real estate is actually thriving extremely even though we have inflation, high inflation and interest rates rising. I mean, we still are seeing increasing appreciation on assets, even though we’ve seen unprecedented appreciation over the past couple of years. I mean, what what’s your thoughts? Just, I mean, if we can keep it just kind of high level simple as possible, what what do you project the next five years to look like in the US?
Okay, well, what makes this time so frightening to so many investors, especially in the stock market, as we’ve seen, is that it’s very unclear which way things are going to go in terms of inflation and interest rates. On the one hand, in the best case scenario COVID ends now and they’re no no more variants, and it just goes away and the Supply Chain bottlenecks get worked out over the next year and a half or so. And in this best case scenario, the war in Ukraine and tomorrow, and sanctions are lifted. And in that scenario, a couple of years from now, we’ll be back where we were pre COVID, they’ll be very low inflation rates again, and asset prices will be rising again, because by that point, the third can start cutting interest rates again. So that’s, that’s one possible possibility. Now, the problem is, is no one is certain, that’s what’s going to happen. We’ve had three big rounds of COVID. So far, we may have three more, you know, omicron, hasn’t been as deadly as some of the others, but the next one may be
more deadly. And that’s the possibility that, you know, no one can forecast with any degree of certainty. And also looking on the gloomy side, this war and Ukraine may not end. In fact, it could spread into Poland, and Czechoslovakia, and Germany, and beyond, in which case, globalization would break down completely, and inflation would go sky high. So that’s the problem. We don’t know how long these setbacks to globalization are going to last. If they go away, everything will be fine. If they stay like they are now, it’s going to be rough for a while. And if it gets worse, we could be in very, very serious trouble. Now, what is the most probable outcome? Alright, so let’s assume, sort of middle case here? Well, yes, inflation went up to eight and a half percent, a couple of months ago, the CPI came down just a little bit last month, but not very much, it was pretty disappointing. Now, looking ahead, most economists think it is going to move down toward four and a half 5% By the end of this year, and probably keep moving down further next year, which would be great. But four and a half percent is still twice the Feds inflation target. So the Fed is going to have to keep their next meeting is in June 15, they’re going to increase the the federal funds rate by another 50 basis points, they’re going to increase again, six weeks later by 50 basis points. And then after that, in September, we’ll see what they do. Meanwhile, they’re going to start destroying a lot of dollars, and sucking it out of the financial markets through quantitative easing. Now, when I say I am a macro economist, and I think that most important thing from the macro level, is to understand that liquidity, in other words how much money the Fed creates, that’s the most important factor determining whether asset prices, like stocks and property are going to go up, or whether they go down. When the Feds creating a lot of money and pumping it into the economy. It’s like the the tide goes up, and lifts all the boats, all the asset prices in flight. And over the last couple of years, they’ve created so much money, we got a major boom and property and stocks and everything else. Well, now that’s about to reverse, and is starting at the Feds going to start destroying 47 and a half billion dollars this month, and next month, and the month after that, and then they’re gonna destroy $95 billion a month, every month. And that means over the next year, they’re going to destroy a trillion dollars. And over the next two years, if they continue at that pace, they’ll destroy $2 trillion. That’s 30% Of all the dollars. So that’s going to suck an enormous amount of liquidity out of the out of the financial markets. And it’s going to put downward pressure on all the asset classes including property. So it’s quite likely the property boom is over. We’re already seeing much lower new home sales, right? The number of new homes being sold is I think, 40% below the peak a few months ago. So things are beginning to change with the 30 year mortgage rate above 5%. Suddenly, it’s become quite a different. Yeah, we
did see that mortgage mortgages were down 40% I don’t know if that factors in you know, actual cash investor. It doesn’t factor in at all investor sales. I think that’s just just new homeowners. But so, so I think we understand kind of where you’re at. And a lot people, I think, don’t understand that. The government can put money, inject money into the economy, you know, with quantitative easing, but then also take a bit, take it back out. Take it out of circulation. And so that’s something that I guess is is always an option to affect kind of, you know, the valuation of the doll. Arthur, obviously over over the long term inflation will continue to devalue the dollar. So, I mean, all this being said, All this doom and gloom of like property values not not continuing to increase stock market crashing. I mean, so what are people supposed to do with their money? I mean, this is, of course, a huge million dollar question here, Richard. But, I mean, what would you recommend to a smart investor to do if, if the scenario that you just outlined is, is on the horizon over the next few years, I mean, some people would say, Oh, no prices are coming down. And in real estate, I should just wait it out and not buy.
And of course, we’ve never, we’ve never met a successful investor that said, I just decided to wait and time the market perfectly. That’s unrealistic. But you need to obviously be doing something with your money to keep pace with inflation, to use leverage to be a successful investor, and still be making action steps, even when there is, you know, this uncertain economic time, but I mean, what would your your advice to someone that’s listening to this saying, you know, they’re looking at where to invest in and what to do with their money in times like these?
Well, so the, because of all the the liquidity that the Fed has injected in to the economy over the last couple of years, roughly, almost $5 trillion of new liquidity, they doubled the amount of dollars in the economy in the last couple of years. That has, and that started back at the end of 2000, with a crisis of 2008, the first three rounds of quantitative easing. But since 2009, because of the extremely low interest rates, and all the money that the Fed has injected into the economy, the wealth, the net worth of the American public, has increased from $60 trillion dollars, to $150 trillion. Since 2009, that’s a 150% increase in wealth, almost everything has gone up. Now, in the environment, we’re heading into a significant amount of that wealth is going to be destroyed. So people just need to get used to it. There, there are no, there are very few places to hide. If you’re super sophisticated, and know how to short, and you’re really brave, and you know, willing to take big risk, you know, you may be able to make money on the downside. But that’s very risky. And that’s probably not what most of your real estate investor audiences is interested in doing, and probably shouldn’t do. So. Now, what do you do with your money? Well, you probably have made money over the last couple of years. And of course, I am reluctant to give specific investment advice, because every individual out there has a different set of financial conditions that they they’re living with. So what’s appropriate for someone with a great deal of money is not appropriate for someone with a limited amount of money, of course. Yep. So you know, what can you do? Well, I don’t think you should expect property prices to keep going up. I think you should expect property prices to go down later, later on in the second half of this year. How much probably not like the stock market NASDAQ’s down, down practically 30%. Property is not going to fall 30% I don’t think but much less than that. So but when you are deciding what to do, no factor in the probability that this surge in property prices that we’ve been seeing over the last couple of years is about to end?
Well, we don’t we don’t expect investors, our investors are not speculative. They’re not gamblers. They’re not shorting stocks. So you are correct. They’re they’re looking to, you know, outpace inflation and make a stable investment long term. And they’re investing for not on speculation for appreciation, but they’re investing for cash flow. But I guess the kind of the the main question without giving us specific investment advice, stick your money in the mattress and hold it or put it in the bank losing 8% per month or still still find a place to invest it even though potential downturn with asset prices may affect the short term valuation of those assets. What do you think hold the money are still invested in specific asset classes.
So the inflation was 8% a year last month and it’s likely to be lower. So you’re probably not
So the inflation was 8% a year last month and it’s likely to be lower. So you’re probably not
based on based on CPI, right, which doesn’t include I believe energy and and food. Is that
That was that was the yes that’s right, but To the CPI it that was the CPI headline number, right? But the know that that’s that does include food and energy, the core CPI is lower than that. Got it? And so yes, so the inflation is probably going to come down. Now, if you know, I am a believer in most normal Americans buying rental property, particularly houses on a piece of land, if you listen to any of my many of the podcast I’ve done over the last five to 10 years, I always say, I think that’s a great investment for average Americans. Because the land is as good as gold, they’re not making any more land. So if gold goes up, the land would go up for the same reasons. And factors occur that cause gold prices to go down, land prices will probably also go down. But you’ll still have the rental income from your from your home. So I’m a big advocate, and people investing in rental properties on a piece of land, not so much condos, there’s no limit as to how many condos can be built. But there is a limit as to how much land can be. There is no more land coming. So I do think that’s a good long term investment for for most average Americans to make. And if they can build up a portfolio of rental properties like that, that’s a very wise approach, particularly for young young, younger people who could build up a very comfortable portfolio of rental properties over a few decades. But as to what you do right now, you know, I think I would wait before I bought a house and see how much the price comes down.
Now, one of the things that people talk about whenever there is a downturn in the stock market, and you know, higher inflation is the importance of hard assets, which you were just talking about, but you had a recent posts on your so you had a recent posts on your website, where you were discussing how gold hasn’t had the run up that you know, everything else has, and kind of saying, Maybe we should be concerned about the future of it if it’s not running up right now. So I’m not a huge fan of gold in and of itself. And especially I’m definitely not a gold bug. So what are the gold bugs currently saying about the prices of gold? And kind of do you think it’s an asset class that is kind of separated from what it used to be or kind of what’s going on with that?
Yeah, so just today, I posted a new video called Gold, if not, now, when. And the first paragraph begins something like we have inflation is gone above 8%, there’s a major war in Europe, the Feds been creating money hand over fist, and gold hasn’t gone anywhere for the goal should
going to be losing 8% a year on your money
be like 50,000, or something according to the gold bugs,
precisely. And now looking forward, it is very likely that the inflation rate will start moving down, you know, just because, for instance, gasoline or oil has moved up so much over the last 12 months. Now, if it flattens out where it is, it’s still going to be very expensive. But if it stays at this level for the next year, then a year from now there’ll be 0% inflation on oil. So just because of this base effect, it’s very likely that the inflation rate will start moving down and the economists are probably right, it’s probably going to be below 5% At the end of this year. And we could you know, as the Fed slows down the economy, now that the Fed can’t do anything about the supply side, it can only it can’t plant any more wheat, it can’t drill any more oil, all it can do is affect the demand side. So in order to get the demand to come down so that inflation will come down, they have to throw people out of work, and quite a lot of people If so, the economy is likely to slow reducing demand, putting downward pressure on inflation, just hopefully at the time that a lot of these supply chain bottlenecks will be worked out and the supply will increase. Supply is increasing and demand is falling that should put downward pressure on inflation. And if inflation moves down, then gold could be in for a very bad next 12 months. If it hasn’t gone higher with the inflation rate this high. What’s it going to do and the inflation rate comes down by half or if the war in Europe ends. So, of course, gold has had many very amazing runs up. But it’s also experienced long periods where it has had very big corrections, most recently after its peak in 2011, between 2011 and 2016, so I’m worried about gold, you know, I think everybody should own some gold. But for me, it doesn’t make sense to have a large amount of money invested in gold, it would be much more sensible to put that money in a portfolio of rental properties. As I was saying earlier, land with houses on top to rent out,
I like the fact that real estate produces income, as well as being a hard asset, I can’t get to my goal isn’t going to pay me cash flow in the meantime. So I don’t own any gold, nor do I own any stocks or anything else. But that’s me. What my concern with inflation, Richard is sometimes when we see these type hyperinflationary environments, it’s and I think this goes to your base point is like, we don’t really ever even though inflation may come down, interest rates may come down, prices never come down. So I mean, we have the supply chain issues. Now. I mean, oil, you know, that that could fluctuate, obviously, we see that fluctuate, but a lot of times just with consumer pricing. You don’t, you don’t see cost of goods, and maybe you can agree or disagree, but at least in my perspective, we don’t see when when prices go up just for services and goods. In these type of environments. Very seldom do they ever come down unless there’s a change in a marketplace, you know, and like an oversupply of some type of assets of a product or service. And so it’s like, we have these hyper, hyper inflationary situations where all sudden cost of living goes way up in a short period of time. And then all of a sudden, that’s that’s the new base. And it’s, it’s a challenge. And we’ve seen this sometimes with rents to very seldom do. And that’s why we love rental real estate, by the way, in inflationary environments, because often you can increase rents to outpace the inflation rate. But I mean, we see that with rents, too, very seldom do rents ever come down. I mean, is that, would you agree with that? Or do you have any other additional perspective of like, okay, let’s
say we get a opening in the supply chain issues, because that’s a big thing, like ordering materials, and costs of all sorts of products for, you know, H HVAC equipment, lumber building houses. I mean, that’s it’s a challenge right now. But is would you agree with that statement, or you have any other perspectives on, you know, we’re pricing is going to be on stuff in a year.
Broadly, broadly, I do agree, you know, if prices go up, as we’ve just been talking about 8% inflation over the last year. But and it will slow down, it won’t be 8%, next year, and 8%. The year after that, it’s going to come back to you know, we have these wild swings and commodity prices, especially oil, go, you know, a couple of years ago, oil was minus $40 a barrel. Remember that? You got to pay people to buy oil. And now it’s 120. US car prices have gone up 40% year on year, because there’s a semiconductor shortage, they’re probably going to come back down 40% Once the semiconductors become available. So what we’re experiencing now is a very unique shock, supply shock from COVID and Russia. And at the same time, they probably overdid it on. On the stimulus side. We’re giving people too many stimulus checks, giving them savings and giving them spending power. And that’s that combination has led to this high rates of inflation. But, you know, I feel that the Fed is often too criticized and the government policies to criticize, they didn’t know for sure what was going to happen. And had they not given out these stimulus checks, none at all. For instance, starting back in 2020, we would have had a Great Depression. People were locked home locked at home, they didn’t have jobs and didn’t unemployment rate was 14%. If they and if without the stimulus checks, those people would have defaulted on their mortgages and on their car payments and on their credit cards, and all the banks would have gone bankrupt. So the policy response was very effective. It brought the unemployment rate down very quickly from 14.8%. I think. Now it’s 3.6%. And the economy grew very rapidly last year. It’s true inflation was at a 40 year high Recently, but economic growth last year was nearly at a 40 year high also. So it hasn’t been all bad. And given you know what they knew at the time, they didn’t know there was going to be a war in Russia, they didn’t know that Omicron was going to shut down China. So they do the best they can. And the inflation will move back down, it’s not going to remain at these very high levels forever, unless they’re, you know, there’s a really bad case scenario, it’s very likely that the inflation rate is going to move back down to the Feds 2% inflation target. In fact, between the year 2000, and right up until 2019, the inflation rate was something like it averaged 1.7% a year. So it was below the Feds 2% inflation target for almost the first 20 years of this century. So they were having a hard time making the inflation go up to 2%. They didn’t want it to go, they were afraid it was going to go too low. And not only here, but in Europe. And Japan, of course has been suffering from deflation for a long time. And this is because of globalization is so disinflationary. So if we move back to a normal kind of world, where COVID is gone, and the war is over, and nothing else horrible happens, then we’re going to be back in a global world where there are 2 billion people in the world who live on less than $3 a day, these people are going to keep taking jobs that would otherwise have gone to Americans. And they’re going to be paid very low wages, and it’s going to put downward pressure on wages. So I believe that in the future, you said, what’s the world going to look like five years from now, we’re probably going to be back to a world similar to what we had pre COVID, with a lot of downward pressure on inflation, because of globalization. And this will give the flat low inflation will mean high asset prices, and it will give the government a lot of flexibility in terms of how much stimulus it can provide without causing inflation.
So when you when you talk about the supply chain and globalization, we obviously saw, you know, a horrible result of, you know, having all of the manufacturing overseas, and the just in time shipping that is, you know, decimated a lot of the supply that we could have, do you see any changes coming? You know, longer term around manufacturing in the United States, or, you know, more warehouse storage or something like that? Or is this just going to be in one to two years, they’re gonna say, Oh, that’ll never happen again. And keep on with business as usual.
I think there will be some significant changes. For instance, the Congress, both the Senate and the House, over the last year have passed, acts that will have the US government fund $52 billion dollars of semiconductor manufacturing capacity in the United States. So that will increase the manufacturing capacity in the US for semiconductor production. And those that was just part of what these acts do. The Senate passed a bill called the US innovation and competition Act, which allocates $250 billion for new industries and new technologies, not only semiconductors, but artificial intelligence and quantum computing, robotics, renewable energy, that sort of thing. And the House version passed, very similar bill, but it was $350 billion. So that’s going to be more government funding for basic research and these new industries and technologies, which is a great thing. That’s what America needs to do. Because we’re about to be overtaken by China, technologically, economically and militarily, in very short order, if the US doesn’t once again, begin investing more aggressively in basic research and development. So
a lot of that is politically driven as we just went through. I mean, also, same thing with oil to you know, how much access can we actually allow to produce oil in our own country, but without going too deep into that political side? Richard, I feel like you have a soft, soft spot in your heart for the feds. We’re not a lot of us do. But that’s, you know, this has been a good perspective. Before we wrap up too much.
Let me tell you, let me let me just jump in there and give you a chance. Yeah. I’ve just written this book called The Money revolution. And the first there are three parts. The first part is a history of the Federal Reserve from All the time it was created in 1913, up until now, and it goes through 10 consecutive periods, showing exactly how the Fed created money, and exactly how it used the money it created, in response, normally to crises like World War One, and World War Two, when it helped finance the war and allowed us to win the war. And like 2008, when the bubble blew up, they reflected the bubble and prevented a Great Depression. And in 2020, when COVID Shut down the country, they paid for the stimulus checks that prevented households from losing their homes and the banking sector from collapsing. And they prevented another Great Depression. So I think, you know, these people are trying to do the best they can with the situation they inherit, and the horrible events that come their way. And you know, now 2008, it’s 14 years ago, right? We have all enjoyed a pretty good 14 years in
terms of the alternative might have been the 1930s and the 1940s. Had they not acted as they did. So I think people need to keep, you know, a much more open mind about the Fed. People think they’re a lot of people have the view that they’re villains and trying to steal their money and ruin their lives. It’s just the opposite.
Well, thank you for that perspective. And you’re absolutely right. We just all want to we us all on Sunday to complain about Richard, so we got to have that. Okay. But you mentioned 2008. What, that’s the last kind of thing I want to really run through is what in your perspective, what happened economically to lead to this specifically housing? What led to that housing bubble and cause it to collapse? And then how are we different economically today than we were in in that period of time?
Okay, so now this, I know you want to short answer. But what happened is, the reason we got that bubble is credit exploded, exploded for a number of reasons in the years leading up to 2007 and 2008. But for example, leaving out a lot of the history, in the about the five years before 2008, household sector debt expanded by $1 trillion a year, which was much, much greater than it ever occurred before. So this explosion of credit is very rapid credit growth blew the property bubble, the property property market into a giant bubble. And eventually, we got to the point where the households couldn’t afford to. There was too much deregulation and too little regulation of things like the adjustable rate mortgages and anybody who could walk in and sign his name to get a mortgage, whether they had a job or not, so it was poorly regulated too much credit. A lot of the credit came from abroad, if you really want to know a little bit deeper, the central banks outside the United States, were creating a lot of their own money and buying the dollars that were entering their country to prevent their currency from appreciating. And then once they had accumulated the dollars, they had to invest them in US dollar denominated assets like treasury bonds, or mortgage backed securities, or Treasury or bonds sold by Fannie Mae and Freddie Mac. So foreign central banks pumped trillions of dollars into the economy during the first part of that decade. And that played a big role in blowing the property market into a bubble. And so asset prices can only go so high relative to income, before the income is insufficient for the people to have enough money to pay interest on the debt that they borrowed. And we got to that tipping point in 2008. And the banking sector was so poorly regulated, that the whole Ponzi scheme imploded on itself. And it had the government not jumped in. We had the budget deficit was more than a trillion dollars for the next four years. And, and the fed through three rounds of quantitative easing, created three and a half trillion dollars and pumped it into the economy, buying mortgages and buying Treasury bonds that pushed up their price and pushed down the interest rates. And that reflected the bubble, instead of allowing the bubble to implode as it did in 1930. The Fed and the government reflected at this time through massive government deficit spending and financed by the Fed and all that huge budget deficits and huge money creation by the Fed.
Everyone thought that was going to lead to very high rates of inflation, like all the textbooks teach that it would, I thought it was going to lead to very high rates of inflation. But the highest
teach that it would, I thought it was going to lead to very high rates of inflation. But the highest
rate the inflation rate got then it peaked at 3.8% in 2011. And by early 2015, there were two or three months when there was deflation, prices were actually falling by 2015 for a few months. So now the idea that inflation is, Milton Friedman famously said inflation is always in everywhere a monetary phenomenon. Well, that what we saw after 2008 shows that’s not true. In 2009, the money supply grew by 110%, which was just completely off the charts compared to anything that didn’t have ever occurred before. PEAK money supply growth in World War Two was just about 25%. But despite this massive expansion of the money supply in 2000, following 2008, we didn’t have any inflation. Now, what’s different this time is the percentage increase in the money supply peaked at about 60%. So roughly half of what it was in 2009. But this time, we have eight and a half percent inflation. Why because globalization has has gone into reverse global supply chain bottlenecks. And, and also, to be fair, while the government did spend trillions and trillions of dollars to follow in 2008, they didn’t do it all in one year, they did it over four or five years. Whereas this time, it happened very quickly. The fit the government, for instance, in one month, in April 2020, the US government borrowed $1.4 trillion in just that one month, that was as large as the largest budget deficit, annual budget deficit had ever been before then. And in the in the second quarter of 2020, as a whole, the government borrowed $2.8 trillion. So they did do a lot, very fast this time, and that no doubt has played a role in pushing up the inflation.
And what we’re seeing Yeah, and this, this hyperinflation, you know, right, today, and so I appreciate that. Richard, I think the only other thing I want to add to is just also on the supply and demand side, we had an overproduction in 2008, obviously, we talked about the regulation of lending, today’s lending world is nothing like it was back at that point in time, you don’t have these stated income loans with these crazy variable rates you can walk into. And people are banking on appreciation. You know, obviously, we coach the fundamentals of investing for cash flow and using financing responsibly, which you’re pretty much required to, based on today’s underwriting guidelines, and then also just supply and demand from a housing perspective. We’ve never been foreseen this scenario, right? Like we have right now, with how much demand and lack of supply there is where there was an oversupply in that period of time due to the overproduction building, you know, the supply chain issues right now actually assists will with from an investment perspective, you know, assist with keeping the supply low. That’s not an ideal situation. That’s not what we want. But we do have a large discrepancy in supply and demand between now and 2008. So, Adam, if you can wrap us up here, I know Richard has some books he wants, I mean, he’s got so much good information out there. And he’s doing so much. I mean, obviously, wealth of knowledge. He’s, he’s gonna give out a special on, you know, one of his books, so maybe let’s close it up and hear kind of where people can learn more about Richard.
Yeah. So Richard, I just have one more quick question before we wrap it up. And that is, you talk about the Fed raising by 50 basis points over the next few few months and their next few meetings. You know, one of the big things that people are always asking us about his interest rates, obviously, do you foresee them having to continue raising their rates for the next like,
two years? Or do you think it’ll slow down or they’re eventually cut it in? Maybe a year or two, whenever everything is fully opened up? Or how high do you think they need to go, and for how long to fix things.
So the interest rates have already moved up, really, very sharply this year. Even though the Fed hasn’t done much tightening yet. The Fed increased once by 25 basis points, and then once by set by 50 basis points. And so now the interest rates are between 75 basis points and 1%. And they only stopped quantitative easing in March. So they haven’t done much of tightening, but they said they’re going to and just by saying they’re going to that already made the
interest rates go up a lot. Yes, what we’ve seen over the last few weeks, just the last couple of weeks, as interest rates have started to come back down a little bit. Now, the 10 year government bond yield peaked at around 3.2% and mallets 2.9%, it was a little lower. But so a lot of the movement and interest rates has already occurred, just like a lot of the collapse in the stock prices has already occurred in anticipation of tighter interest rates. So I do think they’re going to have to keep hiking 50 this time 50 Next time, and they’re just hoping and praying that the inflation does start to come down, as it looks like it will just because of the base effect. And then we get to September is it 25 or 50, maybe it can be 25. And then if things really starts moving, inflation does move down, hopefully faster than people anticipate, then they might skip a meeting before they hike again. No, that’s, that’s the optimistic scenario. So within, now, they’re going to have to keep hiking rates for the next six months. And, and they can’t do a u turn on the quantitative tightening, either they’re going to have to destroy this money, they say they’re going to destroy, but there’s so much liquidity out there already, there’s a lot of excess liquidity that they can destroy before causing too much pain. So hopefully, if inflation comes down, then they can begin to start being much less aggressive and less hawkish in their statements. And as the economy slows down, and as unemployment starts to go up, then you know, it’s really quite possible there will be a recession later this year. And as those things occur, then at some point, they’re going to start giving out hints that they’re not going to be as aggressive as they had indicated. And when that happens, all the stocks will move up very sharply immediately. And all of the most speculative assets will move up. But it does, it does seem now interest rates are ridiculously low. The federal funds rate below at least the federal funds rate is ridiculously low, at less than 1%. It’s going to have to go significantly higher.
Lots of unforeseen things in the future, obviously still, you know, it’s important to look at what you’re doing with your capital now and how you can still be an aggressive investor to combat what is happening currently with high inflation and how you can prepare for the future. Richard, final question. What’s your favorite Thai dish?
I like something called yum Nula, which is spicy beef salad. My wife is a very good cook. I love them. Thank
you so much. And well. Fantastic. Richard, thank you so much for joining us. As we mentioned before, Richard is the publisher of the macro watch newsletter. You can find him at Richard Duncan economics.com. That’s Richard Duncan economics.com. Richard, you had a little something special for our listeners, would you mind running through that a little bit.
So my business is macro watch is a video newsletter. Every couple of weeks, I publish a new video talking about something important happening in the global economy, and how that’s likely to impact all the asset prices and currencies and interest rates. So if your listeners would like to check that out, they can find that at my website, Richard Duncan economics.com. And if they’d like to subscribe to macro watch, I’d like to offer them a 50% subscription discount. If they hit the Subscribe NOW button and use the they’ll be prompted to put in a coupon code. They put in the coupon code retire, they can subscribe at a 50% discount. And at the very least while they’re on my website, they could sign up for my free blog, or follow me on Twitter. My Twitter handle is at paper money econ.
All right. Well, thank you so much for joining us, as he mentioned, go to Richard Duncan economics.com enter the keyword and enter the code word retire and get that discount. You can check us out at rent to retirement.com. That’s rent to retirement.com. You can see the properties you can schedule a call with us to talk about these sorts of topics, but mostly about your real estate portfolio that both we and Richard suggest you start looking into. So Richard, thank you again for joining us today. Everybody. Don’t forget to head over to your podcast platform and leave us a review. We greatly appreciate it. And we’ll see you on the next episode.