Hello, my friends. And welcome to another episode of Passive Real Estate Investing. I’m your host Marco Santarelli. So this is part two of my interview with Richard Duncan titled The Money Revolution, the name of his new book that just came out not too long ago. Great book ,500 pages, 250 charts. Very interesting. Read the subtitle, How to Finance the Next American Century. It was actually an eyeopener of a book and an eye opener of an interview because it kind of changes the way I thought about how money printing and how the economy works in the us and the impact and effect of the federal reserve and the amount of currency that’s being put into the system and what that looks like on the global stage. So today is part two of my interview with Richard Duncan. Very interesting person, great books. He’s got four books out, really, really good books about the global economic crisis and the global economy.
Just really good stuff. I really highly recommend you read his stuff or at least go to his website and check out what he has to offer. We went long during the interview. And so this is part two. I had to chop it up into two and we were talking before and after I was recording as well. So we were probably talking for a total of two hours and I could have gone for another four. So I hope you enjoy it with that. Let’s go right into part two and we’ll wrap it up here in about 30 minutes.
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There’s a lot to unpack there. And you know, in the back of my mind, I’m thinking, you know, how is this going to impact me and other investors and real estate investors down the road as inflation changes, interest rates, change debt, burdens, income tax changes, our tax benefits and tax incentives gonna be changed or taken off the table in order to pay for all this extra spending.
I’m just thinking of all these different things. My first quick question here is what you just described as not as, as increased spending. Is it sustainable? Because when you go from the numbers you were talking about, you know, 10, 15 years ago, as far as you know, what our, our national debt was to the explosive growth that we have today, that’s not just explosive, it’s, it’s exponential. And we all know that you can’t keep following that same trajectory on a chart in, in terms of debt. I mean, even federal debt, when, you know, you have the printing press of the federal reserve, and you can just print to infinity at some point that system, I would think, I don’t know if I believe this, but I would think will break down, especially in an environment where you have rising rates, because the government doesn’t want interest rates to rise. If they’re having to pay on that debt, the interest on the debt that they’re borrowing. I mean, correct me if I’m wrong here, but overall, this doesn’t sound like it’s sustainable over the long term.
Well, let’s for the moment. Assume we go back to where we were in 2019 with low inflation, low interest rates and globalization keeping a lid on both inflation and interest rates. If we return to that environment, then it would be possible for the Fed to finance this borrowing over. And again, this is over a 10 year period and keep interest rates down by buying the, the debt that the government sells just as it kept interest rates down after 2008. And again, in 2020 and 2021. Now, in terms of the, the size of the debt, I actually think this sort of investment would bring down government debt rather than causing it to increase, because what we are talking about is government investment or government funded investment in basic research and development corporations tend to invest in applied research and development. In other words, they take existing research and development.
The basic research that’s generally funded by the government, and then they put it into their products and make profits from it. They don’t have the patients to, to do the actual fundamental research that ultimately leads to new industries and technologies. So for instance, back in the late 1950s, when the Soviet union launched Sputnik, this sparked panic across the United States and throughout Congress. And they responded by radically expanding the amount of government money. The government was investing in basic research and development in things like NASA and that spending on basic research and development was more than twice as high then as it is now as a percentage of GDP. And that produced extraordinary technological breakthroughs. I mean, for instance, everything in your smartphone practically that makes it smart, came from government funded, basic research and development, things like semiconductors GPS, touchscreen GPS, and touchscreen technology.
And of course the internet itself, but after, after the, after the Sputnik threat died down and we got sent man to the moon first and ultimately President Reagan had the government invest so much in the us military that it bankrupted the Soviet union. And afterwards, during the subsequent decades, the amount that the government has been investing in basic research and, and, and development that has has plummeted. And as it has plummeted US productivity growth has slowed down and US economic growth has slowed down. So if we ramp this back up, then that’s going to create more US productivity in more us economic growth. In fact, the sort of investment that I’m talking about on a multi-trillion dollar scale would induce a technological revolution that would turbocharge us economic growth. And it would really not only boost economic growth, but it has the potential to radically improving human wellbeing with the sort of investment I’m describing.
We really have a shot at curing all the diseases. So people today are worried about social security and Medicare going bankrupt 30 years from now. Well, the proposal I’m making is let’s not wait around for 30 years and see what happens. Let’s cure the diseases in the, in the near term. We could cure probably cancer and, and just look at how rapidly these COVID vaccines were developed. Thanks to government backing. The same thing needs to be applied to curing cancer. I mean, cancer kills 600 million, 600,000 Americans a year. That’s on par with COVID. We need a cancer moonshot to cure cancer and heart disease and kidney disease and Alzheimer’s disease. So with the sort of a multi-trillion dollar investment program over a decade would give us the potential to do that. Now, what we’ve seen take the, the response to COVID in one month in April, 2020 government borrowing increased by 1.4 trillion.
That was as much as the largest government annual budget deficit up until then 1.4 trillion. And in the, that quarter, the second quarter of 2020, the government borrowing increased by 2.8 trillion in three months. And the Fed created enough money during that period to finance about 70% of that. So 2.8 trillion in three months, that’s a multi-trillion dollar government reaction. In one quarter, I’m not advocating a one quarter multi-trillion dollar investment program. I’m invest advocating this occur over a 10 year period over a decade. So just the fact that the government was able to borrow 2.8 trillion in three months, and the fed was able to finance 70% of that just demonstrates how easy it would be for the us to carry out an investment program like this over 10 years. And there are three big reasons why we need to do this. The first of all, our economic system creditism requires credit growth to survive.
We have a big credit bubble. If credit contracts, our economy collapses into depression, the private sector is quite heavily indebted. They can’t keep their credit, their debt growing enough to drive the economy anymore. So this means government debt, the expansion of government debt would keep the economy growing. It would keep creditism it would allow creditism not to collapse. The second reason is because we’re about to be overtaken by China. China invests as a percentage GDP, China invests twice as much as the United States does, they invest 42% of GDP. The us invest 21% of GDP in terms of investment in research and development in the year 2000 China, the United States invested eight times more in research and development in China did, but by 2019, China was investing more than the US. And if current trends continue by the, by 2030, in that one year alone, China will invest 40% more than the US does.
And if, if we allow that to happen, then China is going to surpass us very quickly. Not only economically and technologically, but militarily. If China develops artificial intelligence before the United States does the, and gets to the point, artificial general intelligence, where their <affirmative>, their computers are as intelligent as humans afterwards, they become exponentially smarter. And whoever reaches that stage of artificial intelligence first, they will have the rest of the world at its mercy. And at this rate is going to be China. They are going to win. They will have the 21st century equivalent to a nuclear weapons monopoly. If they get there first, there’ll be no catching up with them. Then the, the fate of the United States will no longer be within its own hands. We will. And along with the rest of the world will essentially be at China’s mercy. That’s the second reason for national security reasons.
We need to aggressively invest in new industries and technologies, but the final reason, and I think this is the most compelling reason I call it a moral imperative. It would be so easy for us to finance this kind of investment that I’m describing that because we can do it. We must do it because it would, it would be certain to produce medical miracles and technological breakthroughs that would radically enhance human wellbeing, not only in the US, but all around the world. So those are the reasons that we need to find a way to finance the next American century right now. So this so COVID and the war and the Ukraine have dealt a very big blow to my book and the thesis of the book and this argument that we can invest because I was arguing, we could do all of this without having high rates of inflation.
And now we have high rates of inflation, but in, we did something very similar in after 2008, in 2009, the money supply grew by 110% because of the fed creating a lot of money. But the, as I said earlier, the inflation rate peaked at 3.8%. The difference between this time and 2009 is this time we have global supply chain bottlenecks, and we have a war in Europe. Now, if these things go away, then we should return to a point where we have globalization. Again, it’s deflationary low interest rates, low inflation. And then what I’m proposing in this book becomes possible.
So I buy into your argument. It’s compelling. And I, it’s hard not to agree with you. The biggest question going through my mind is you’re describing this. We’re not talking about what was once like an unimaginable amount of money, like the 800 billion bailout in, in 2008, but we’re talking trillions of dollars here. And so that, you know, that has to come from somewhere, but it’s essentially a debt it’s it’s on somebody’s books, call it the government’s books or the federal reserves, you know, balance sheet, but someone has to pay for that, right? I mean, it’s gonna accrue interest and that interest needs to be paid. And ideally at some point in time, that debt needs to be repaid. Unless, you know, it’s a forgivable loan, how is that loan or that debt gonna be serviced?
It would be a forgivable loan. It would be the Fed, the government issues debt, and the Fed creates money and buys that debt. So the Fed owns the government debt and it earns interest on that debt. But at the end of every year, the fed has to give all of its profits back to the government. So all of the interests that the Fed would earn from financing this, by buying all of these government bonds, it would all be returned to the government at the end of every year. So it would effectively be cost free debt and cost free debt is debt in name only.
That sounds like the ultimate system. I wish I could create that in my <laugh> in my hometown where I could just create my own, my own currency and issue it from the left hand to the right hand and have the right hand or an interest, pay it off to the left hand. I mean, essentially that’s well, so.
That’s, that’s what the fed has been doing. The, the over the, since during the Fed’s existence, it’s has handed over more than 1.3 trillion of profits to the treasury. Otherwise the US government debt would be more than $1.3 trillion higher than it is now. The Fed last year made more profit than apple. If the fed had been a corporation, it would’ve been the most profitable corporation in the world last year. And it gave all of those profits back to the government because the profits came from owning government bonds and mortgage backed securities, earning interest on those. But when the fed bought them, it didn’t cost the fed anything to buy those bonds because it created money and creating money doesn’t cost anything. If you’re the central bank cost of funds with zero and the interest income was the yield on government bonds and mortgage backed securities. So that’s how it would be financed.
So based on what you’re saying, it implies that the taxpayer is not going to be on the hook for this. In other words, the taxpayer’s not the one who’s gonna be repaying servicing the interest, servicing the loan, repaying, the loan. And now if that’s true, then, I mean, first of all, is that true?
That is true. That’s right. It would not talk cost a taxpayer or anything.
All right. Well, assuming that’s true. Maybe I’m distrustful of many politicians, but I would think that the pitch to the people in raising tax rates would be that, Hey, we need, we just spent all this money and we need to get the money from somewhere to pay for it. And that’s gonna be their argument to raise taxes, whether federal or otherwise, do you not see that happening?
No, I wouldn’t see any reason for the under those circumstances for the politician to press for tax increases, because there wouldn’t be any pressure to raise funds because the fed would be providing the funds. Well, now it’s interesting. Sorry, go ahead.
No, I was gonna say if, if they’re, if they’re open, honest and transparent about it and telling the American people that that’s actually how it works, then, then great. Everybody is going to be happy about it because their taxes aren’t gonna go up and we’re basically paying for all this innovation and technology, which is gonna help society and help the American people, which is great, but at someone else’s expense and the, the someone else is really the, the partnership between the federal or government, the treasury and the federal reserve. But that’s assuming that politicians are gonna be transparent and honest about it.
I don’t see why they would have any reason not to be okay. In fact, there’s so many reasons for them to support what I am advocating for. For instance, I’ve been talking about this idea for a number of years in, in terms of a very large scale government funded investment program. And most of the, the years people have said, well, that’s a very interesting idea that you can’t really believe that us government is ever going to do anything like that. They’re not going to be smart enough to do anything like that, or there there’s not enough political to do anything like that. Right. But in fact, there’s been a very positive development. You know, my book has encountered some significant setbacks because of the high rates of inflation over the last couple of years, but one very positive development that supports the book is this in last year, the Senate passed a bill to invest 250 billion in new industries and new technologies, all of the ones that I’m discussing, artificial intelligence, et cetera, et cetera.
250 billion with 52 billion of that specifically allocated for building semiconductor factories in the United States, that bill was called the US Innovation and Competition Act. Then a few months ago, the house passed a similar bill called the America competes act, allocating 350 billion for investment in, in research and development in all of these industries that I’ve discussed. And also with 52 billion specifically allocating, allocated to building semiconductor factories in the us. So these two bills now are going through the reconciliation process. Hopefully they’re going to come outta that process soon and be signed into law by the president. So 200 somewhere between 250 and 350 billion for investment government funded investment in new industries and new technologies, that’s precisely what I’m calling for. And now this is not multi-trillion, but it’s a good first step in the right direction. And it shows that this can be done. The government can do this. It’s starting to do this. And it’s interesting. The reason that they pass these bills is very clear. They have finally woken up to the realization that the United States is about to be overtaken by China. And this is a severe national security threat, and we need to respond to it while we still have time. They make it very clear in the wording of these bills that this is the reason they’re doing it.
This is just fascinating stuff. And, and I think as we start to wind this up right now, your book is very interesting and makes a very compelling case for spending more, not less for not being physically conservative or physically tight, but to basically open up the pocketbook or the purse and spend more, but spend more in the right places, which is technology innovation and you know, industry that can help further humanity expand the US economy, improve our lives and our livelihoods and create medical innovations and breakthroughs and all kinds, good stuff, which is very, very difficult for anybody to argue against. You know, that because these are all good things. I think, where I struggled with your argument, and it’s not that I, I disagree. It’s just a paradigm shift. It’s a different way of thinking about it because most people will say, Hey, the government spends too much, we’re printing more and more money.
And you know, a lot of people out there believe this, you know, even certain schools of thought like the Austrian school of economics and whatnot will always say, look, the more you print, the more currency you’re putting into the economy and the system. And as that flows through and trickles down, you create more inflation. Although I used to believe that I don’t believe that as much now as I used to, because I just don’t think that there’s a direct one-to-one relationship or a direct relationship between money printing and inflation. I think the main drivers now are supplying demand more so than currency creation.
Right? And so what those people have missed is that the economy they’re not look, we don’t have the same economy we had when Austria right. Economic theory was built. Now we have economy with a population that’s 23 times larger than the us population. We have a global economy. So the size of the economy has expanded 23 times in terms of the labor pool. And 2 billion people live on less than $3 a day. So it’s extremely deflationary. So this is completely, yeah. If we had the same economy that we did in the 1960s, then yes, that would all be true. But suddenly our economy is, is infinitely larger. And with infinitely more resources, particularly labor resources, but also industrial capacity, which is why we’ve been able after the crisis of 2008, to have government spending on a multi-trillion dollar scale and money printing on a multi trillion dollar scale with low inflation. So you’re right. It is supply and demand. And the supply is expanded. Just infinitely.
Everything you’re saying, though is on a global stage, you’re talking about a global economy and I agree with you. But if we were to narrow down the context to the US economy, and I don’t know if that’s a fair thing to do anymore, because we do live in an environment where it is a global economy. It, it’s not just what happens within the us, but if the federal reserve, which is, you know, part of our us economic system, if we’re creating more and more currency, do you not think that we are creating problems? I mean, your argument is pretty strong that yes, we should continue to expand the Fed’s balance sheet, create more currency and take that money. That currency, if you will put it towards all these good things. I don’t know. I, I, I don’t know where if there’s a breaking point at some point there.
Well, so you can think of our economy. We’re like the US economy is like a fishbowl and the, the economy is like a fish floating around in a fish bowl. That’s the US economy. This fish bowl has now been dropped into an ocean. And all the fish has to do is swim out the top in being this ocean. That’s 23 times larger than the economy used to be. We’re in a different economic environment. That is the result of the money revolution that occurred when money stopped being backed by gold. It opened up the possibility for the us to have trade with low wage countries this year, for instance, the US current account, deficit’s going to be $1 trillion, meaning we’re going to buy 1 trillion worth of goods from other countries. Most of those countries are countries with low wages, and this has created a new economic environment and has created completely new opportunities that didn’t exist before.
That’s the money revolution. And we need to take advantage of it. Now, the problem is, is that this globalization has suffered these two big blows. And it’s not certain whether we’re going to return to this period where of globalization. Our economy may shrink in terms of it may shrink back to a closed domestic economy in a worse case scenario in which everything I’m advocating would no longer be possible. But so we have, if, if inflation, if globalization returns and recovers and we once again have very low rates of inflation, then it’s a no brainer. What I’m advocating is very, is very clear, open and shut case. This is what we need to do. We can do it. We must do it. Yeah. If it doesn’t and inflation remains high, then we’re going to have to make a tough decision. We’re going to have to decide how much inflation we’re willing to tolerate so that we won’t be conquered by China. Or put differently how much inflation would you tolerate for the next 10 years, if we could cure all the diseases and you could live for an extra 40 years and extremely good health as a young man.
Yeah. And that’s definitely a great question and a good debate that, you know, people can certainly discuss and argue and kick around. It’s a good question. And who knows what the right answer is to that, but you know, the title’s brilliant, the money revolution because it, it really does change the way you think about what you often hear. And that is, we are printing too much money. We are heavily in debt as a country, and that’s just growing exponentially. We’re beyond the point of no return. And the bottom line is, or the reality is, is that we don’t really have a true capitalist system. We live in an economic system that is based on credit and credit expansion. And, and if you stop that credit expansion, you contract the economy, you go into recession or even worse, maybe depression. And so the fed definitely doesn’t wanna see that they don’t like a deflationary environment and that would be bad for the US and the economy and everybody else. So I guess maybe this is the new normal, this is the, the right path forward.
Well, so us government debt, as a percentage of GDP is 125% of GDP. Japan got there 20 something years ago, Japan’s government debt to GDP is now 260% of GDP. Wow. And in terms of the size of the Fed’s balance sheet, the size of the Fed’s balance sheet, in other words, how much money it has created is about 35% of GDP. The size of the bank of Japan’s balance sheet is four times that large and the size of the European central bank’s balance sheet relative to the size of the Euro area. GDP is twice that large. So where the laggards here that shows you how much more the US government debt could increase by and how much more the Fed’s balance sheet could expand by Japan is twice ahead, ahead of us in terms of government debt to GDP. So the US economy is 24 trillion in size that suggests that the government could borrow and invest another $24 trillion before we got to 260% of GDP where Japan is now, and that assumes that the GDP doesn’t grow at all. Whereas of course, if we spent that kind of money, the GDP would grow by 10% every year. And we would never get to 260% of government debt to GDP.
These, these are all things that are laid out in the 500 pages and the 250 charts in the money revolution. Yep. And E even if you hate the idea about government investment in RND you should read the two you’d love the, I think most people need to understand the first two parts of the book, the history of the fed in particular part one, because the fed is the world’s most powerful economic institution. It is the government’s most effective policy tool. And as I said, if it were a corporation, it would’ve been the most profitable corporation in the world. Yeah. So if you want to understand the forces driving the economy and the financial markets and interest rates, you must understand the fit, or you have no hope of understanding what’s going on in our economy and in financial markets. So if you read this book, you will.
Yep. I agree. It’s a great book. The money revolution, how to finance the next American century, I’m gonna suggest people pick it up. It’s, it’s just fascinating. Every, every part of it is just fascinating. So Richard, let’s wrap it up here. We’ve been going long, and I appreciate your time. Thank you for, you know, spending the hour and 10 minutes with me here, tell our listeners how they can find you follow you, get more information, find the book and where they can find Macro Watch.
Right? So the, they can find the book and find bookstores everywhere. And of course, on Amazon. But my, my business, let me mention my business is, is called Macro Watch. Macro watch is a video newsletter. And every couple of weeks I upload a new video, which is essentially a PowerPoint presentation that I describe in audio, 15 to 20 minutes long with 30 or 40 charts describing something important happening in the global economy. For instance, the, the most recent one we’ll discuss the Fed’s 75 basis point hike and how much higher interest rates, federal funds rate, and 10 year bond yield and mortgage rates are likely to go over the next year and how that’s likely to damage and cause asset prices default. So there’s a new video every couple of weeks, if you’re explaining developments in the global economy and how they’re likely to impact asset prices.
So if your listeners would like to check that out, and I hope they will, they can visit my website, which is richardduncaneconomics.com that is richardduncaneconomics.com. And if they would like to subscribe to Macro Watch, I’d like to offer them a 50% subscription discount visit the website, hit the subscribe now button. And when prompted use the discount coupon code passive for a 50% discount, that’s, that’s passive. So I hope your listeners will check that out at richardduncaneconomics.com. And at the very least, while they’re there sign up for my free blog so they can follow my work. They can also follow me on Twitter. My handle is @PaperMoneyEcon.
That’s great. Richard, I really appreciate the discount code passive for our listeners. I’ve been a subscriber for a number of years. It is a great video newsletter and it’s just good to know what is going on in the world on the world stage and in, you know, the economic scenario. I don’t know how else to describe it, but what’s going on that will have an impact on you directly or indirectly. So I highly recommend it. It’s very, very well done, and it’s, it’s easy to, to absorb and digest in your slides and your presentation is very, very good. So I think it’s a great subscription for anybody you’d have, and it’s extremely affordable. So there’s no reason not to have it, but I do appreciate you taking the time to come on. We’ll put all that in the show notes, and we will have you back on maybe in six months or so just to see how things have unfolded on the world stage, and hopefully COVID will be gone. And the whole upset in the Ukraine will be resolved.
Marco, thank you for giving me this opportunity to talk about the, the money revolution, because I think, you know, it’s, it’s really important what, what our society does over the next few years is going to determine how prosperous and how secure the United States is for decades to come.
Yeah. I, I completely agree with you, Richard. Thank you so much. I appreciate you coming on and we’ll have you back on again soon.
Thank you.
Well, that wraps it up. This is part two of my interview with Richard Duncan and the money revolution. I hope you enjoyed it. There was a lot there, and there’s just a lot more to unpack, but again, you don’t need to get deep into the weeds, just understand what’s going on at a high level. And that should give you a little bit of insight to where we’re headed and what to expect going forward. Again, a quick reminder, I mentioned this on the last episode on part one, just again, an open invitation for our power room mastermind. The next event is in lake Tahoe, September 13th to 15. And then our last event of the year is in Las Vegas, Nevada, December 5th through seventh, you can find all the information on power room.com and when you’re there, be sure to watch the video. I think there’s a two or three minute video that gives you a good overview and introduction as to what power room is all about.
It’s a lot of great content and a lot of community. We have amazing members. We have a hundred and some members, I don’t remember the account, but we are growing to about 300 members. So there’s gonna be a lot of talent and success and resources and community within our mastermind. In addition to all the content and the events that we put on, not just the four events during the year, but member events too, that are optional, that you can network with other like-minded individuals and have some fun and build some new friendships, bonds, and relationships. And who knows. There are deals that come out of it. I’ve had a number of deals come out of the masterminds that I belong to. So again, power room.com, just check it out. I am founding member there. And so I am just talking to you about it because I was there from the very beginning, and I know what it is and what it’s like, and the benefit that it could provide you. That is it for today. Remember to subscribe if you haven’t done so already, thank you for listening and we will see you all on our next episode.
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