Doug Noland – The Terminal Phase Of The Greatest Credit Bubble In History.
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Hey everybody, Jonathan Doyle with you. Once again, welcome back to the supply side podcast. Great. As always to have the pleasure of your company. Really excited to be bringing you this wonderful interview today. Doug Noland was gracious. He made time to to be with us and I really appreciated it because we were able to record it.
None of the usual 3:00 AM or 4:00 AM Australian time, but a little bit later in my day, which was great. Doug joins us all the way over from Eugene, Oregon. And I just really enjoyed this conversation. He’s an absolute gentleman. He’s a true lover of macroeconomics and he’s someone that I think cares deeply.
About people and about how political economy and macro economics can affect so many people around the world. As you’re going to hear in a, in this discussion, his level of analysis and understanding is truly extraordinary. So before we jump in, let me give you a little bit of background here on Doug Nolan. So out of college,
You went straight to price Waterhouse as a CPA. He graduated Summa cum laude from the university of Oregon. And then went on to get his MBA at Indiana university. So Doug’s career began as a treasury analyst at Toyota’s U S headquarters, which he shares was crucial for him because it gave him a really up close look at the Japanese bubble period.
And of course the 87 stock market crash kind of front row seat, if you will. Late 1989, he becomes a trader for a short based hedge fund in San Francisco. Later in the nineties, Doug works at flicking Stein, capital and East shore partners. And then in 1999 began a 16 year association with prudent bear.
Working as a strategist and portfolio manager, until those bear funds were sold. In December Oh eight. And what else can we tell you? He’s currently with Mechelle veiny wealth management. We’re gonna give you some links to that at the end of the show. But many of you would know him of course, from his important work at credit bubble bulletin, he’s been writing that credit bubble bull is in since 1999.
You’ll also of course have come across him on other websites, like dollar collapse. But it’s an extraordinary CV. It’s an extraordinary background. And in prepare preparation for our discussion. I was going back through some of his archive and the level of analysis and insight. That Doug brings us in the things like the 📍 monthly report, the monthly summary and credit bubble bulletin is really something that if you’re not across it, you need to go and check it out at credit bubble bulletin, because it’s a great source of information. All right.
Last couple of things. We’ve got some housekeeping for you. We had some internet glitches. We’ve normally a pretty good. We had some, a couple of issues here and there. If at any point you notice a little a glitch or you notice a tiny break in the flow of the communication. We had a couple little internet bits here and there, but we’ve patched it back together really well.
And and as we begin this interview, I Doug and I were actually discussing his profound. Love for the Oregon ducks. So as this interview begins, you’ll hear us having a laugh about It got cut off at the very start, but you’ll hear us having a laugh about Doug’s love for the Oregon ducks. All right. That’s it from me. That’s a long intro.
But we’re going to talk about a lot of important stuff. So sit back, relax and enjoy this really wonderful discussion. With Doug Nolan.
fascinating to see how they use that canned audience noise. If you noticed that
It’s funny what we do as humans, we just have to convince ourselves that things are normal, but the great to have you with us.
And I wanted to, you wrote something magnificent back on March the 12th in your weekly commentary, but related to that, I also want to give you another quote from two of the greatest social and political commentators of recent time, Willie Nelson and mill Haggard, who in my favorite song of theirs, which my wife says I’m not allowed to sing around the children.
They have these lines. And I think these might relate to global markets. They say it’s all going to pot. Whether we like it or not the best I can tell the world’s gone to hell and was Shogun to miss it a lot. Now, I don’t know whether they’re real political economists, but you give us the top level view.
I’m going to go through a few of your quotes in a minute, but your thesis is that we’re basically looking at the terminal phase of the greatest credit bubble in history. Give us the top level view.
This goes back a ways. I actually started my blog and that’s before they’re even called blogs back in 1999, I was convinced that we had fundamentally changed finance. We had fundamentally changed policymaking. We had created this unstable market-based finance, and we had enormous credit growth and that we were in a huge a bubble.
When I started my blog in 1999, I titled it the credit bubble bulletin, just to have something, a little kind of different. I didn’t expect the bubble to be in the title for long. I thought it would be the bubble. Or the credit bulletin. But here we are over 20 years later. And unfortunately from my point of view, this has followed the absolute worst case scenario.
I thought the bubble burst in 2000, and then in April of 2002, I started warning about the unfolding mortgage finance bubble, because we were having double digit mortgage credit growth. The fed specifically was targeting mortgage credit to use to reflate a system credit to reflate the economy.
I followed that Chronicle, the mortgage finance bubble for, five, seven, eight years. And then when the mortgage finance bubble blew up in 2008, again, I thought the bubble had finally collapsed. And I believe it was March of 2009. I began warning about the potential for an unfolding global government finance bubble.
And that’s a bubble. Financed as a title by government finance, that’s government debt, that’s central bank credit. And now we’re 11 years into that 12 years into that, I can’t believe the excesses and I call it a terminal phase because at the end of a bubble things go a little nuts. You have the monetary disorder, you have their speculation the misallocation of resources, et cetera.
And the system can really self-destruct. And I often use the example of Japan after world war two D did phenomenal things for a few decades and then blew up their credit system in three and a half years of a bubble. The problem with the global government finance bubble is there are really no constraints on it.
As we’ve seen. There’s no constraints on central bank balance sheets, no constraints on the amount of government debt. And from my perspective, it’s just running completely out of control at this point.
I’ve got so many questions and that my brain just exploded listening to you. I’m going to try and ask you two quick questions on that. The first is yesterday. I was reading Thomas souls, basic economics. As I’ve said in previous episodes, I had the worst economics teacher in history in high school.
So I keep saying to my wife, I’m starting this 30 years behind the curve. And so I’m reading Thomas Saul’s basic economics, and he makes the point early on that he doesn’t see maliciousness or bad actors necessarily in some of these decisions. He says, when government gets involved they trying to fix things.
They don’t act maliciously. So my first question is when you look at what’s unfolding, is it simply a case of just an initial desire to backstop markets and keep things ticking along that has just gone crazy? Do you think there’s some kind of deliberate transfer of wealth happening? And the second question, if you can hold them both in your mind is.
Is this credit bubble simply different by degree? Is it simply that the numbers involved are so big or is it that it’s a global contagion that there’s this such an interconnectedness that hasn’t been there before. So is this an accident? Is it deliberate and talk to us about the scale involved?
Okay. Excellent questions. And do I get any easy questions along the way here, Jonathan?
Hopefully. We talked about the Oregon ducks at the start
Oh, there we go. Thank you. Okay, so let me see if I can get through this. For me, it goes back to Alan Greenspan. And he, a free market guy, going back to round. And he saw this evolution to market-based finance, right? We went from having the old system of bank loans to now all of a sudden we had, asset backed securities, mortgage backed securities, junk bonds, the agencies we had securitizations, in 1990, we went into a major crisis. An economic downturn here. The banking system was in trouble. There were even concerns that CD group was going to fail. I think Alan Greenspan saw the opportunity to help this market based finance along to help the economy get through this difficult period where the banking system was severely impaired.
So I think it started innocent early enough. And I think it got away from them. You will recall. There was a major bond market bubble, 1992, 1993, that blew up in 1994. And then you had Mexico blow up in the end of 94 and the 1995. Then you had Southeast Asia. Their bubbles blow up 96 seven. Then you get into 1998 and you have a long-term capital management.
You have LTCM. So they’re fighting fires like crazy. On the one hand, this unstable market based finance, the hedge fund, leverage all the speculation. These bubbles are blowing up all over the world. So there’s plenty of evidence that this new finance is unstable, but I think Greenspan felt authorities felt they had no choice at that time, but to press this to, to press loose financial conditions, low rates.
To use this finance to, to get through the problems. And then when 1999 came along with the mania and technology and then that bubble burst. And then I think at that point they were very concerned. I think they thought the big bubble had burst too. So then I think the mortgage finance just got completely away from them.
I think it just got completely away. I think they thought in their mind, okay, we can stimulate a little mortgage finance and, it’ll help the system. And once it got going, they could not control it. And then it was just a panic and Oh eight. So I don’t see maliciousness, but I do see ineptness recklessness of not being able to get a hold of this.
Yeah. So 2011 comes along and they announced their exit strategy. Where they’re going to pull back some of their stimulus, they had a trillion dollars with a stimulus. They doubled the Fed’s balance sheet in the response to the Oh eight crisis. And I wrote at the time in my bulletin that there’ll be no exit.
I titled it, no exit but I had no idea instead of, there, there was no exit, but they doubled their balance sheet again. Over the next few years. And I think that was the, that was a big problem. They, that was a non-crisis environment. They doubled their balance sheet and they’ve been having to face bubbles ever since.
And then, there’s a lot of talk about the crisis response to COVID, but keep in mind that the fed started QE again in September of 2019 with the unemployment rate it, 50 year lows and then stocks at all time highs. I think that was a huge mistake. And I think that was one of the reasons why the markets buckled so much in March when the COVID stress unfolded is because it, they had already, grossly inflated the bubble and because of COVID now they’re just trapped and, they’ve increased a balance sheet by over almost $3.3 trillion over the past year.
I like you might comment where did I read this? This was on a dollar collapse an article you wrote recently, which I’ll link to, but you were talking about comments from Jerome Powell and you said, I quite hope is not a strategy. I like that.
Jonathan, you’re humble about your economic knowledge. Economic history and the problem with inflation ism. And that’s what I call this. This is inflation, the fed for 30 years now. They just want to continue to inflate credit and continue to inflate money. And the problem is once you go down that path, it is extremely difficult to get off.
And that’s where we are. They, how do they get off that now? How do they go back to a traditional monetary policy? How do they reign in QE? And I don’t think they can. And Jonathan, to follow up on one of the questions you ask is this different in degree, this bubble, and I’ve been warning the global government finance bubble is much different.
And let’s think in terms if you have a bubble, because bubbles are always inflated by some underlying credit, underlying monetary growth that feeds us, self-reinforcing inflation. Let’s say you have a bubble in junk bonds. Okay. That, that can cause a little bit of havoc and some excess, but it’s not going to become deeply systemic because you’ll get to a point in the bubble where people will say, wait a minute, I’ve got all the junk bonds I want here.
I’m not taking anymore. So that’ll keep it from going on for too long. And if it doesn’t go on for, year after year, it doesn’t become as deeply systemic. It doesn’t affect economic financial structure money, or that’s different. That’s different in degree because people have insatiable demand for money.
You give them money. They’ll take as much as you give them, throw it out in the marketplace. They’ll be a home for it. It’s a very dangerous type of credit. We saw that during the mortgage finance bubble period, where there’s talking about subprime and these other things, but the root of the problem was transforming risky loans into AAA safe money like instruments with insatiable demand.
Those are your dangerous bubbles. We’re to the heart of finance global finance right now, word of a heart of money and credit central bank credit. Government debt, right? That’s where we are insatiable demand for both. So this is by far the most dangerous bubble. Not only is it dangerous because it can go on and on as we’re watching, but it also is very dangerous because at the end of the day, if you have a crisis of confidence and junk bonds, you’re going to get through it.
If you have a crisis of confidence in central bank credit and government dead, you got one heck of a problem. And that’s clearly the direction we’re going right now. And that’s one of the reasons I’m just extremely concerned. And I just can’t believe how this has unfolded. It’s you know, I, as an analyst of bubbles I’m just in awe of what of what we’ve watched, especially over the past year.
I keep my wife keeps kicking me under the table at dinner parties. Cause I’ve become that guy. That’s like trying to tell people, and I’ve got that sort of one conversation. She’s like enough. All right. But I was
so you get, you still get invited. I don’t know why, but I don’t get invited out anymore.
Gosh, I do a lot of bike riding and I was riding with a guy who’s a private wealth manager and I was trying to talk to him about gold because I’m a big gold guy and he’s he’s just talking about equity markets and way they hit it.
And it was just, it wasn’t much of a conversation. It was just, he was there for the bull ride and on current numbers, he’s doing okay. A couple of things listening to you, we talked about whether the strategy was malicious. I always like to quote the stats that the federal reserve system across the, I think it’s the 12 federal reserves in the U S has just over 1500 PhDs on staff.
So across that entire network, They have this vast plethora of, classical, economics, PhDs, but obviously behavioral economics. And it’s always interesting that we have that nexus of academic brain power, but we still seem to be going further and further down this path. So what I want to understand, where does MMT end?
I haven’t got an answer for that recently. Like how does an EMT person push back on your thesis? They can just say we’ll do UBI. We’ll just pay people to stay home. We’ll just keep printing. Where does that break down? When does the merry-go-round actually stop? What causes that collapse?
okay. I believe there’s a lot of focus today, of course, on MMT and in the fed and government debt and how. There’s no end to this, right? This is like a new era of finance. What I would say is the key right now is it’s still market-based finance. That is inflating bubbles. It’s still all the securitizations and the equity issuance and all the corporate debt and the agency debt.
I think it ends, we’re where there’s a serious crisis of confidence in this debt. You can’t just double the amount of debt and increase its price and believe that’s going to last forever, right? At some point, if you continue to increase the quantity of this debt, so much of this is non-productive debt.
There’s not real economic wealth producing capacity behind it. You’re just setting the stage for a crisis of confidence. So I think how does it end? All of the sudden markets say, Wait a minute. We don’t want another $3 trillion deficit or $3 trillion deficit, another $4 trillion deficit.
And at some point, and we’re seeing hints of it in the bond market. We’re seeing some nervousness, but all of a sudden, I think things change dramatically and this could happen in a week. It could happen in months, but all of a sudden the bond market starts to go up chairman Powell and the fed continue, their dovish talk.
They even talked, twists, even talk, okay, we can increase more purchases. And the bond market continues to sell off. And all of a sudden, it’ll be the 1994 scenario where the fed, all of a sudden is on their heels. And Oh, what do we say? Does a bond market, one Estee here want to hear Luce dovish talk, or do they want to hear, we’re going to start tightening up and focus on inflation.
And I think that difference in the market changes everything. I think it changes everything.
And on that, this was something it’s a, this is a quote from you that I want you to speak to for me, if you could, this was on dollar collapse. It’s a slightly longer quote on the video. I’ll put this up for people, but. I think you’ve said something really important to you. I’ll get you to speak to this.
You said markets have just begun the process of coming to terms with a harsh reality. There are myriad, historic, speculative, bubbles, and credit bubbles. And central bankers are definitely not in control of the process. They have attained a semblance of control are only through monstrous monetary inflation, and yet this week demonstrated it is no longer, so easy to manipulate market behavior with the usual pedestrian dovish comments markets.
Now scoff at the notion of the fed anchoring inflation expectations at a particular level. And finally you say moreover, after trillions of liquidity injections, central bankers are clearly not in command of marketplace. Liquidity, is this, can you help us understand that in terms of what you’ve already mentioned about bond markets?
Sure. And I’ll back up a little bit again, start from way back. I didn’t emphasize enough when we changed from the old bank loan system where you had these boring bank loans on the banking system that was driving credit growth, driving the economy. When we changed to a market-based system, we basically encouraged, leveraged speculative leverage that’s, that’s when the hate the hedge funds came into their heyday because all of a sudden, why not borrow with Greenspan, you could borrow at 3%.
Lend at 6% to the government and cure, make a huge spread on that. And with leverage, you could make a phenomenal amount of money and it worked fine. The fed was happy with it until they had a problem in 1994. But the problem is if you encourage speculative leverage, you’re selling your soul to the devil as a central banker, right?
You’re selling your soul because you’re in a situation where, and we saw it again in March with COVID where all of a sudden you’re in a big speculative de-leveraging they have no choice. They feel they have no choice, but to go out and aggressively expand their balance sheet, they expanded it.
They announced they were going to expand it by a trillion. And the market said that ain’t going to be enough. And the market kept selling off. A year ago, March on those initial emergency measured by the fed. So the fed just kept increasing and increasing the size of these emergency facilities and their QE.
Not only did they stop the de-risking leveraging the implosion, it started, then they basically incited more speculative leverage. And here’s where we’ve been over the past year. We’ve I think we’ve had enormous amounts of speculative leverage is turned into a mania and equities and the SPACs and I would argue the cryptocurrencies and collectible, we’ve seen these and he is everywhere because of this, Matt unprecedented, monetary inflation.
So there’s money out there for everything. And the problem is today. They can’t get out of this because this works, it appears to work miraculously, as long as the hedge funds are putting on leverage, because that creates new, additional liquidity in the marketplace, which leads to higher securities prices, which leads to more speculation, more speculative leverage.
And it’s a self-reinforcing bubble. But I’ve argued. It does not. It does not work in reverse. If you get into a speculative, de-leveraging all of a sudden markets are a liquid and this thing turned sour quickly. We saw it again in March and I would argue the amount of speculation leveraged the manias have grown significantly over the past year.
So during the next de-risking de-leveraging how big does the Fed’s balance sheet have to get? And while I’m rambling a bit here, Jonathan, see, I was arguing. And this is way pre COVID. Over the last few years, I was already getting the next crisis. The Fed’s balance sheet would have to get to 10 trillion because I saw if you get into a major speculative de-risking de-leveraging meaning the hedge funds are liquidating, leverage positions.
There’s no other buyer, the central banks, the fed they’re the buyer first and last resort. So they have to expand their balance sheet to accommodate de-risking de-leveraging if they don’t the system implodes. Okay. How big is a balance sheet going to get the next de-risking delivering it because it’s going to be at 8 trillion before long, but I always thought that they would get to 10 trillion in accommodating a major de-risking de-leveraging well, no, we haven’t had that yet.
So they’re at 8 trillion. And is it going to grow in the 5,000,000,000,006, 7 trillion during the next serious de-risking de-leveraging? So all of a sudden you can build a scenario where the Fed’s balance sheet is completely out of control here completely out of control. And again, it works miraculously, as long as asset prices are going up, but the more speculative it gets, the more leverage you have in the system, you inevitably had these de-risking de-leveraging periods.
You you can’t have a speculative mania forever. And the next downturn, you’ve got a very serious problem. And I think that is when the markets may question, how sound is this central bank credit? How sound is government debt in this scenario where policymakers have no alternative, but to keep inflating, keep this monitoring inflation going.
It’s only 10 29 here in the morning, but the desire to go and open a bottle of Lagavulin single malt whiskey is getting stronger by the second. So I want to ask you like there was some just on the scale of that speculative mania, there was something I really liked in your March 12 weekly commentary on, I said I’ll link to that.
Somebody really jumped out at me was increased asset based lending, but less genuine productive business lending. That really struck me that it is. Does that mean that basically huge numbers of people are increasing margins. They’re trying to get into, hard assets, real estate as well, but the productive kind of lending that used to be an historical norm for business is decreasing.
Is that the essential point?
know, I’ve gone through, the fed has a wonderful. Wonderful data, quarterly, the Z one flow of funds data. I’ve been doing my quarterly analysis for geez, 20 years in this. And I love it. I get excited, when it comes out though, it’s a lot of data to get through, but, it’s neat. And I was making the point going through the, and this was the Q4 fourth quarter data, and you had this incredible credit growth.
And I think the whole system, total system it’s called non-financial debt. It grew it, I think it was $6.7 trillion, more than double we’ve ever had in a year. And I made the point that you can see the rapid, the unbelievable growth four and a half trillion dollars with a treasury grow, treasury debt growth for the year.
And you can see the growth and agency debt, Fannie and Freddie, the GSEs and you can see securitizations all of this, but then if you look at bank loans, they hardly even grow. The w the loans that did grow, it was interesting. The loans on the balance sheets of the security broker dealers.
Those grew dramatically, it was huge growth, but they’re lending, it’s margin debt, they’re lending for people to buy securities. And that’s, that’s part of the scenario. And I see a lot of parallels to, the late twenties the roaring twenties period, and especially in 1929, where you had that huge divergence between what was going on in real economies and what was going on in financial speculation.
And you had this situation where all at that point, all the credits, gravity you’re gravitating towards inflating asset prices, right? Why does liquidity want to go into corporations when they’re, fighting deteriorating, profit margins and things, they, let’s play the, the asset And inflation game, and that’s where we are.
Now you have this enormous amount of credit it’s non-financial or it’s nonproductive and way too much of it is just going directed right into the stock market mania and corporate debt. And in these other markets, very dysfunctional bubble type of environment.
can you help me understand something? In terms of currency creation, the scale of currency creation, often people just say it’s inflation rates, inflationary, something. Jim Rickards said recently really stuck with me. And I don’t, I’d love to hear your thoughts on it. His thesis is that currency creation isn’t by nature inflationary.
His definition of inflation has to do with the velocity of money. So his thesis is that we don’t face in hyperinflation, just because huge amounts of currency be imprinted being printed. It’s whether that money makes it into the real economy and whether it’s chasing less productive resources. Do you have any thoughts on that?
Is it, if that money is simply printed, but just sits on financial balance sheets, but doesn’t make it to the real economy. you, Can you talk to us about that? About the inflationary outlook on that sort of side?
sure. And that, this is one of these peel off a layer and you find more and more complexity currency. And just for the terminology, a lot of times currency, we’re talking about currency that’s, the fed creates, bank notes, 50, $20 bills, et cetera. Let’s ignore that because that number is not big enough to have a big impact.
What matters is credit. And this goes, this is, the old Austrian school thinking here that I definitely subscribe to the old Austrians credit. If you create credit that these are new instruments, new IOUs, you create them out of thin air. That’s the old Murray Rothbart you can, and w what’s important about it.
The new credit creates purchasing power. Okay. So if you create new credit, you’re going to have increases in prices somewhere because you’re creating new purchasing power. This whole 30 or 30 years of changing finance to male market based finance, so much of the credit now is directed right into asset prices.
And that’s why we have this, huge inflation in asset prices. So we have a huge inflation here. Do we have a huge consumer price inflation? No, not yet. Why not? Maybe there’s something to do with the fact we fundamentally changed output over the past 23 years, right? We used to not have digital downloads the digitalization of everything, right now I argue there’s unlimited supply of things. People can buy at the consumer level, give people money. They can download, they can, they buy more movies online, there’s whatever they want to do. They, they can spend that money. So fundamental fundamentally we’ve changed inflationary dynamics for one, we’re getting more asset price inflation because the nature of finances, we’re driving that into asset prices.
We’re having so much more speculation and bubbles there and in the real economy where we have infinite supply of things. And also we have the issue where this bubble is benefiting the wealthy. So much more than the average person and the unfortunate. So many people haven’t gained purchasing power, so they’re not going to spend money and lead to higher consumer price inflation.
So I don’t, my framework is a lot different than that, that that the ma or the currency and the velocity to me, that’s the old model where you had so much currency in the banking system and velocity would lead to credit growth. You’d use your money over and lead to credit growth.
We, now we just focus on the credit, ignore the currency, but I want to add money again is critical, not in the way it used to be for traditional inflation, but it is critical in perpetuating prolonging this bubble. As I mentioned before, because money has insatiable demand. So right now we have enormous inflation of money.
To me, money is something that people perceive as a safe liquid store value. Okay. So it’s not currency. It can be treasury bills. It can be an ETF. A lot of people believe they can send money to a, to an ETF and it’s money so we have enormous increases of money today, but it’s fueling this asset bubble, not leading to con you know, consumer price inflation.
Although I think things are shifting now, we’re starting to see, I think a key inflection point in inflation dynamics for one. The whole world right now is expanding credit rapidly. You’re starting to see, shortages of it could be some food items, semiconductors container ships.
You’re seeing bottlenecks. We’re now doing wealth readers distribution in the U S there’s going to funnel more purchasing power for consumer purchases. So I think the things are really changing not to mention the fact that, the fiscal deficits in monetary deficits or monetary QE the monetary inflation is completely out of control.
So I think the bond markets looking at this and saying, okay, how does this play out over the coming years? And I think the bond market’s getting nervous about inflation, but I also think the bond market, especially with the treasury market, they look at the Fed’s balance sheet. They look at some of these things and they get nervous about inflation, but then they look at the stock market and they say, This is not a control bowl, and this is going to burst and we’re not going to have to worry about inflation after the stock market bubble burst, which is the way the bond market looked at things back in Oh seven.
When you know, oil prices went to $145 a barrel, and the bond market said, ah, we don’t care about that. Look at the stock market. We had a huge crisis in QE come. And so that’s what we’re getting prepared for. So there’s some interesting dynamics right now in the bond market, but it’s definitely I think an inflect and inflection point in the nature of inflation dynamics.
I, Peter shift makes a good point about universal, basic income at the basic level. He’s like you pay people to stay at home. So less is obviously being produced, but most of the, many of them are being paid more to stay home than they were to work. So you’ve got less being produced, but more money chasing whatever is still being produced.
So that, that has to be inflationary. So is the bond market where you look, is it, what was it? The Canary in the coal mine, as we say is the bond market. Where do you look to really try and pick when this gets truly terminal? Where do you look?
Yes, I look at the treasury market. I certainly follow the dollar. The dollar is an accident in the making here with this type of fiscal monetary policy, this kind of economic structure, this type of asset bubble environment. The dollar has some huge advantages or things that, that. That help it.
And that is the Euro. It has deep structural problems. And you can go to the room B and the Japanese yen and the emerging market currencies. And th the dollars, a little bit of a more challenging analysis, because all of a sudden, as we’ve seen, even recently, if you have issues in the emerging markets, all of a sudden there’s that safe Haven bid to the dollar, but Jonathan for me and again, this is a global bubble. These markets are highly synchronized. The policy making approach is highly synchronized and that’s government deficits and central bank policy. So I follow China very carefully. I follow the emerging markets very carefully because these bubbles, there, there are a lot of bubbles out there and you just don’t know the sequencing.
I think once one goes the, it’ll start at the periphery and then you’ll have issues at the periphery. And then you have, de-risking deleveraging, you’ll have a tightening of liquidity, risk aversion, and then that starts to move towards the core. And I think we’ve started to see that in the emerging markets, but then I follow China closely because that’s one, a histories, just incredible bubbles over there.
And that’s a huge accident and to making also, so there’s plenty of things to follow as an analyst of a financial conditions and bubble dynamics these days.
yeah. I listened to a recent interview that you gave with Michael veiny. And you talking about, the ostensibly command and control system of China, they basically told the banks to go out and lend, domestically right. Significantly. So there was a huge amount of easy credit available in China.
Oh China, I talked about the U S non-financial debt growth, right? Last year credit in the U S grew double what it’s ever more than double what it’s ever grown previously in a year, China, same thing. I think their number and they call it aggregate financing. There was five and a half trillion.
The credit numbers are staggering and a lot of people will say, okay they need to do this temporarily to get through the difficult period. But again, this is back to this theme that once you start inflation ism, it’s very difficult to get off of that. And that China right now, they go out and you create all this credit.
You inflate, not only your asset prices and in China, there are home prices or apartment prices are going up. That apartment bubble is even larger. The misallocation of resources, the distortions and pricing structure throughout the economy. It’s just not like they could say, okay, we’re going to go back to.
$2 trillion with a credit growth instead of five, and then everything will start to normalize. No. And right now in China, Beijing is set as much. They want to try to normalize, but they’ll try to do it gradually, but that is not going to go smoothly. It’s not going to go well. And they recognizing the set as much.
They know there’s bubbles globally. I think they look at the us and they know they’re, I was a bubble here and they’ve got plan around that also. But I , these policy makers have a huge challenge now to try to keep this, on the one hand they don’t, obviously they don’t want to employ the bubbles, but they can’t just feed these manias either.
So they got to, try to find a balance, but I don’t really think that balance
Yeah. And I wanted to ask you back at the macro level of political economy. Again, I did my second master’s in philosophical anthropology, and I did a lot of work around some of the impact of Freud in Western culture. And. I disagree with a lot, but one of the things that was interesting was this idea that the central motivations of human behavior are the pursuit of pleasure and the avoidance of pain.
So at the top level, are we dealing simply with this, going back to Greenspan that nobody wants it to happen on their watch, that it’s the, it’s not so much even the pursuit of pleasure. It’s the avoidance of pine at the top level of policy-making that you don’t want to be the one telling the president, you gotta do a state of the union telling everybody that things telling people the truth about how we’re going to have to change things.
Is it, is that the ultimate dynamic that nobody wants at the top level wants to face the end of the music and take that hot medicine?
clearly. That’s the, the politicians, right? They’re going to kick that can, every time we expect more from our central bankers. And I think Jerome Powell, when he came in, I think his goal, his objective was to start letting markets stand on their own. He knew that the fed had distorted the markets too much had intervened too often.
And he wanted to start backing away from that. And the markets kicked his butt. The market said, no, you’re not going to do that. Now as a fourth quarter of 2018 and he did his pivot so quickly. And at that point it was over, he, it wasn’t going to work. He, I think at that point he recognized I can’t, it’s not going to be possible to try to extricate the fed from being the guardian of the markets, to backstop the markets and all of that.
I remember back to 2013 when Ben Bernanki came out and he made this comment where he said we’re prepared at the fed to push back against any tightening of financial conditions. And I was shocked by this. No one else could, no one could care less. I tried to tell people, Hey, this is what he said, who cares?
What would he was saying? Was this new system of finance? We don’t worry about the banking system. We’re just worried about the markets, because the market’s determined a financial conditions are loose or not. And he’s basically saying if there’s a, even a hint of a bear market, we’re coming in. Bear markets.
Nope. We’re not doing bear markets anymore because bear markets and that implies a tightening of financial conditions. And we’re just not, we’re not doing that anymore. So at that point, and then pal of wanted to back away from that couldn’t and now all the fed can do, I think is just try to keep the system from imploding.
And that sounds, it sounds over the top, but I really believe that. And to me, that’s the only explanation for right now. The pal is so ultra dovish and they’re continuing with their 120 billion a month of QE in the face of a mania in the face of massive fiscal stimulus coming, the economy is recovering rapidly.
Goldman. Now what they’re almost up at 8% GDP growth forecast for 2021. You have to fetch this in. Nope. We’re not doing a thing. We’re not doing a thing. We’re not even thinking of tapering. And the only explanation is to me is he’s they don’t want to face the, the music in the markets.
And I hope that’s not the case, but that’s just the way I look at it.
It’s like a, it’s like a, not Russian roulette, but what’s that game where you’re we call it chicken over here where the last person to flinch, it’s just cause it doesn’t look like the markets are gonna flinch in a hurry. So let me ask you a couple of other big things I wanted to ask you.
I want to talk a little bit about wealth transfer and morality in the sense of a lot of the social turmoil that we’re seeing may have its roots in some of what we’re seeing here. So this goes back to sort of Nathan Lewis, who was one of our first guests on talking about gold standards. How, when you have a high taxes and unstable money and all sorts of disruption and political economy, you get social upheaval.
Can you help us understand? The wealth transfer aspect of what’s happening, what I often call the evisceration of the middle-class. So you get plenty of poor, but you can keep the poor on UBI. So they’ll keep voting and not burning the place down. And then you’ve got a sub section making enormous amounts of money.
So my understanding is that the wealthy gets super wealthy here for a bunch of reasons, but one of them is that if you have the existing capital in surging markets, you leverage up and you make more so help us understand the wealth transfer aspects of what’s happening and help us understand the implications for political economy and social cohesion.
Let’s get back to bubbles. Little bubble theory. Bubbles are basically about the redistribution and the destruction of wealth. When you’re in the middle of a bubble, you feel like, Oh, you’re creating all this wealth, and everybody feels better. During the bubble it’s an in everybody’s best interest to cooperate because the pie’s getting better or bigger, so we can all benefit by working together.
So it’s a period where it seemed like wealth is growing. It seems like everybody’s cooperating. Everybody’s doing well. But at the end of the day what is, not only the speculative bubble aspect, but you see that just resource misallocation, structural impairment, wealth lost in the real economy.
When the bubble burst, then all of a sudden you realize you lost all those wealth and you have a lot of innocent people. They end up losing a lot in that environment. So you have the people that lose their, you get the people that didn’t benefit from the bubble, because so much during the bubble threshold, this is it’s directed towards inflated asset prices.
So the big part of the population that doesn’t participate in that at all, they don’t have the resources to invest in stocks, corporate credit or whatever else. They’re just trying to get by. So they don’t benefit. They get hit by some higher prices. They don’t see their income grow here in the U S their income’s not growing because a lot of the jobs went overseas.
So you’re really damaging your economic structure. And you’re setting the stage for a lot of social instability. And we’re seeing that today. So as an analyst of bubbles, what I’m seeing as far as the instability in the U S on it’s breaks my heart, but it was inevitable. It was inevitable. And now you get the situation where.
Powell and the fed, they talk about, they the black, the Hispanic unemployment rate, they’re very, they’re conscious of the inequality that’s been created here, but their policies do only make the wealth wealthy, wealthier. So the issue only gets worse. The more they stimulate.
And the problem with bubbles too, at the end of the day, it’s your middle class that really gets hurt because the lower class, they don’t have the resources to participate in the bubble. So when the bubble burst, they don’t lose a lot of assets. They didn’t make any during the bubble period, but they didn’t lose a lot.
The wealthy, they find a way to protect themselves. They’re more sufficient. They find a way, right? They’re gonna find a way they’re going to lose some money, but they’re going to protect themselves. It’s the middle class. That’s so exposed to these bubble dynamics. And you see it now where, the middle class is just throwing money at the markets there, their pensions and everything else.
When the bubble burst, they’re the ones that are really going to get hurt. And it’s your middle class, that’s your stability, right? Your stability and interest in your society. And we’re already seeing, the whole the Trump phenomena the divisiveness we’re seeing all the telltale signs of of a really unhealthy social fabric here.
And to me, it all goes back to on sound money and these bubbles, to me it’s clear. It’s, but others don’t see it as clearly. And that’s the problem. And to me, it’s immoral for the fed to inflate bubbles. It’s immoral. And, the fed can talk about all the, they can talk about state, stable prices and their 2% inflation mandate.
Give me a break. Monetary disorders, what I call it, all the price instability in the markets and all the speculation, the bubbles, this is terrible price, stability, monetary instability. It will have a devastating impact on society. It already has had a major impact when this bubble burst.
So I, I really fear for how this will unfold.
Yeah. Gosh, I listened to you and I, yeah I would always say that growing up, I grew up in in a relatively conservative political household and. This learning journey of the last year or two, and, meeting people like yourself and reading your work. I just had this idea that the adults were in control and markets were operating as they should.
And this it’s been confronting to, to actually find myself becoming genuinely concerned with the justice and the injustice of a lot of what’s happening. Let me ask you do you, when this unravels, do you see hyperinflation? Do you see deflation? Do you see some deflation then hyperinflation? How do you think it plays out?
I like to answer that by saying I have to wait. I have to wait and see how things start to unfold. I think a lot depends on the dollar. If the dollar, if we get into a dollar collapsed, then that, that will lead to a significant. Boost of inflation increased the chances of a hyperinflationary scenario.
But in the bursting bubble environment, you can have a lot of deflationary pressures also coming out of the asset markets. The big unknown is the Fed’s balance sheet. Is it going to 20 trillion? And that’s a reasonable question today. It’s that’s not a crazy question. Is the Fed’s balance sheet going to 22 trillion could federal debt be at 50 trillion by the end of the decade?
I think they’re trapped right now and, I fear that scenario where, you know the electronic printing presses, they’re not going to be able to turn them down. So I think there’s a, a significant risk of an inflationary surprise. I don’t necessarily see the hyperinflation scenario because.
So much of this credit is market-based and there’s going to be major disruptions in that structure and that mechanism of credit growth, this market-based finance. But could we get up to double-digit inflation? I don’t know why not. I don’t know why not.
I’ve got two major things I want to do before we wrap up. One is I want to ask you in a couple of moments about your thoughts on, possible reestablishment of gold standard sound money. I also want to ask you what people can do, practically, what your thoughts are on that. But first I was enjoying this question.
I haven’t done it for a while. I want you to imagine that your phone rings later this evening and it’s the white house and I’m president. Biden’s watched our interview today and he’s been very impressed with your answers. And he says to you, you got to, you got a blank check, ironically to fix this problem, to fix this system.
What do you think you would do if you had Supreme executive authority to try and turn this Titanic around? What would you do?
I think that starts it at the federal reserve. I think it starts with central banking and keep in mind on this, Jonathan, this is a huge experiment. Market-based finance, this monetary policy structure. This is all an experiment. We’ve never had this in history, right? So to me, central bankers, they need to get back to traditional central banking.
They need to be much more conservative, no experimenting here. They need to reign in that balance sheet. They need to quit monkeying with the markets. They need to get interest rates off of zero. And none of that goes smoothly, but I’m sorry. It’s, is it the law of holes, right? The law of holes, if you’re in a hole, the first thing you’ve got to do, you’ve got to stop digging.
I am not counting on politicians to help us on this. I they’re going to do what we expect them to do, unfortunately. And right now, because of central banks, because of the fed Washington has a blank checkbook. You never ever want to give Washington a blank checkbook because they’re going to use it.
And good luck trying to take it back from them. They gave them a blank checkbook. So they’ve got to somehow, let the bond market start to normalized, let the bond market start to discipline Washington again. And that’s the only way we can start that to heal the system. Because right now the path we’re on is going to lead to a crisis of confidence in finance generally.
And again, the heart of finance, central banks and government debt. And that’s a very bad place to be. Get monetary policy towards, at least meaningful meaningfully moving towards normalization. Palau has already said that. Ain’t what they’re thinking. They’re not going there.
So I’m stuck when I get that phone call. I’m I’m I’m going to talk to deaf ears. I think
Again, coming back to what I’m trying to understand is that, is this why the bond bucket is so important because it’s the one place that basically says this government debt is increasingly worthless and that signal is some kind of tipping point. Is that what’s happened? Is that how it operates?
Yeah, that’s. Yeah. There’s a lot of leverage, right? Speculative leverage, enormous amounts of leverage globally here in the U S corporate credit treasuries derivatives. Somehow we’ve got to get out of this system where we have all of this leverage. So we’ve got to let prices, securities prices get back to, reflecting supply and demand, the supply of new debt, the demand for that new debt, part of this new financial structure that we’ve created, we used to have kind of a.
Limited supply of money. So it, Henry Kaufman used to do his interest rate predict predictions every year. And basically he would figure out what the demand for debt was going to be the demand for borrowing. He knew basically what the supply finance was. And then he could, do a supply and demand in say our interest rates going up or going down.
Years ago we threw it out the window. We have unlimited finance, leverage all this others. So there’s no pricing mechanism in the bond market. It is completely broken down, no amount of borrowing. We saw this in mortgage finance, no amount of demand for mortgage credit led to higher mortgage rates.
They went down. My internet said, Doug, that you’re talking too much. You rambling too much. I got to cut you off here.
Probably the NSA it’s probably the NSA or the FBI chopping you off, but you assigning if we can’t get the bond market right here.
Yeah. If we can’t get the bond markets, what’s going to, it’s going to regulate speculation. It’s going to regulate credit creation. It’s going to be a major determinant of the resource allocation. So if we can’t get the bond market we’ve the system. There’s no chance for stabilization right now. All we continue to do is feed the bubble.
So that’s, the bond, market’s got to get back to some semblance of a rural market. And I’m hopeful, but these kinds of adjustments don’t come easy. And right now nobody wants to take any pain. Nobody wants nobody’s willing to take pain.
Yeah. That’s it. And all right, so let’s begin to wrap up. So I’ve come into this very late in my life. And, the basis of supply side just appealed to me because it was like the more people that are basically producing worthwhile and valuable goods and services, the better the society flourishes.
And Nathan Lewis really drilled me on this idea of his magic formula, right? So Nathan’s magic formula is low taxes, stable money, low taxes, stable money. Can you talk to me about what you think will replace this? So the global monetary system tends to reset roughly every 75 years. We’re past that window now, post Bretton woods and the gold standard window, close to the gold window closing.
Do you see the reestablishment of a gold standard in the future? Can you see it?
For years now I’ve argued that talk about a gold standard was basically a waste of time. I’m a huge fan of gold. I’m a huge fan of their traditional gold standard, a gold monetary regime. I just don’t see it because we have so much debt and so much money.
I don’t, I can’t see how that ha how that can unfold. Could Russia, or could individual economies decide to back their currency, their credit system with gold, they could try, but as far as globally, I, unfortunately, I can’t see it as much as I wish I could, but again, the goal, I’ll say quickly the gold standard worked because people believed in States and sound money.
They didn’t want to do anything to impair sound money because they believed in this, in, in sound money and in gold standard, it wasn’t because gold, the gold standard made everybody behave themselves. It is because they believed in, in, th that lending had to be sound and you can’t do the crazy things.
You just can’t print money. You can’t have massive deficits and all these things today that we believe we can get away with. So there has to be a major change in thinking before we, have the the psychological framework to be able to take the pain and to, to Institute something like that.
Yeah. Yeah. Okay.
And quickly for me, the markets have broken down because right now, no matter what market we’re in treasuries corporate debt, equities, globally, they believe policymakers are backstopping the markets. So nobody has to think about risk. You don’t have to think about deficits. You don’t have to think about speculation.
You don’t have to think about misallocation allocation resources. You don’t have to think about anything. You don’t have to worry about risk because it’s central bankers are there. Capitalism is not going to work in that type of a system. That’s a breakdown in the market system right there. So I argue, I’m going to have to spend the rest of my life, trying to explain why the issue wasn’t capitalism.
The issue was unsound finance, and policy-making because this structure is flawed.
so true. It’s sobering. I mentioned last week, there’s that great video on YouTube where Peter Schiff goes down on wall street during the occupy wall street movement. And he’s having these very rational lucid conversations with some pretty animated people. And they’re all utterly convinced that this had been, a crisis of capitalism and this was capitalism doing all this to people.
And he kept trying to explain to people that this wasn’t capitalism, like this was something else. This was the collusion between, between politics and wealth. And it was extraordinary. Really fascinating to watch I say that because listening to you, I’m like, yeah, there’s this saying capitalism, like when the downside risks backstopped then.
It must encourage the kind of bubbles that you’ve dedicated your life to studying. So let me ask is I want to send as many people as possible over to to you guys that Mulvaney wealth management. I think the work you’re doing with that tactical short stuff is really important. But talk to us about what you think people should be doing.
I’ll preface it by saying I, I sold a lot of positions and sat a lot of cash on the sidelines in terms of equity markets. I stayed in gold ETFs and I stayed in physical gold and silver and I sold crypto early, too early tragically early. What do you think people can be doing to insulate themselves or protect themselves from what’s coming?
What top level suggestions would you make for people to be thinking about who are listening to us today?
sure. A seemingly easy question and it’s not an easy environment because this is a mania. And everybody is compelled to participate in the stock market, in the securities markets. You’re almost crazy if you don’t, if we think in a mania everybody’s going to crazy participating.
No, it seems completely rational today to put your retirement, to put your savings into the stock market, because it always goes up any temporary pullback central bankers will take care of it and they’ll go up so you don’t have to worry. Okay. I think there’s a lot to worry about. So to me, I would reduce my exposure to the risk markets and that’s, equities that’s corporate credit.
I don’t like long-term bonds, treasuries, corporate credit at all. I don’t like getting zero return on my cash, but I think in this environment I’ll take that as part, as a part of my barbell approach for me, I’m a big fan of the precious metals, big fan and for my inflation hedge I’m comfortable in real estate as an inflation hedge also.
But for most of us, I think we just want to get our financial house in order and get psychologically ready to deal with the adversity we’re warmed up now after the past year in COVID. So I think COVID kinda gave us a test run for how we need to be prepared for all types of situations. So I say, pay down debt, save as much as you can limit your exposure to the markets.
And I think. Yeah, and this sounds a little strange, spend more time with nature, more time outside and gaining a better appreciation for the simple things in life music, good books. And, and just being, we don’t want to be surprised when this blows up and maybe it’s this year, maybe it’s, a few years, but we don’t want to be surprised by it.
So there’s a lot of things we can do to be prepared.
yeah. It’s interesting. You mentioned about. The emotional, psychological wellbeing. I talk about the blessings of COVID and when the lockdown, but I locked down here was a bit different. You could have small numbers of people in your house and stuff. And I had a bunch of guys, like two or three friends that we just became so much closer.
Just the time of actually you couldn’t be racing around doing everything and you just start to say it’s great to reconnect and deepen relationships and friendships. And, in terms of anthropology that’s what we are as a species. We’re an extremely social species. And maybe some of this resetting and change that’s coming will help us to value that a little bit more.
All right. So last thing is just a bit of a summary here. I just want to read this quote and I’ll put this up in the notes as well. I guess it’s a great way for you to give us a summary of things. You wrote on dollar collapse, you said markets. I know that we’ve done that one. So it’s this quote. I love this.
This was from March 12. Again, your weekly commentary and everybody’s listening. You want to go get that whiskey do it now. He says, it’s my opinion that the world is in the terminal phase of history’s greatest credit bubble. It’s my opinion that us and global equities markets are historic speculative.
Bubbles fueled by runaway, monetary inflation, and acute monetary disorder. It’s my opinion that markets in us, stocks, cryptocurrencies, corporate credit and derivatives have evolved into full fledged manias. It’s certainly my opinion that this all ends very badly. Any final comments for stock?
Anything else we should be thinking about?
My thoughts go back to Von the Austrian school and Macy’s, he talked about these credit booms, they would end, with the, just the melt up the crack-up boom,
the crack-up boom. And unfortunately, when I look at the data and the Fed’s balance sheet, the there, the system credit data, Chinese data, I just have that feeling that’s the crack-up boom scenario that No, that’s a terrible place to be.
But also say I hope that I’m too dire. I hope people think back to this interview and laugh at me for being silly and stupid and wrong. I, nothing would make me happier than to be wrong. I’ve got a 12 year old son I’m happy to wear the dunks cabin and be the butt of jokes. I’d be pleased with that.
that is so good. I have said that so many times, like I said to my wife, maybe a thousand times in the last 18 months, I want to be wrong. I want to be wrong. I want to be wrong. And one of my friends and I like my, my, my attitude to precious metals, I say, Hey, look, worst case, I just pass on some intergenerational wealth, best case gold goes to the moon.
And so yeah, I, we call it the dismal science for a reason, right? Like this. Have you heard of PERMA bears? Have you heard that term?
Oh, I hate that term.
I know. I only heard it the first time, the other day. And I I was on a training ride and I thought. Am I a PERMA bear. Am I a PERMA bear? It’s just, but I think I often Jake Mike Kendall, who’s a great friend writes man on the margin blog.
He’s an airline pilot as well, flies for American airlines. And I joked with him the other day. I said, we’re conditioned to believe that optimism is the ideal state. And I said, but you don’t actually want an optimistic airline pilot. You don’t, you want a pet, you want a pessimist. You want a, there was definitely times in life where we we want to be more focused on what could potentially go wrong.
In all seriousness, I want to thank you for your work. I’ve come across, and 📍 started to read your stuff and the level of analysis that you do. I think you’re doing something really important for people. And so for listeners, we want to get you across to to the credit bubble bulletin.
If you just look for credit bubble bulletin, you’re going to just find Doug’s amazing work there. And we’re putting some links of course, over to management as well. Doug, I don’t know if anybody tells you this, but thanks for what you’re doing. It’s really important work. And let’s pray that we’re all wrong.
Hey everybody, Jonathan, back with you again. How good was that? Huh? It’s one of those things that I hope you will listen to a couple of times, because there was just so much in that. We also got cut off there at the very end. Doug was gracious enough to just share a little bit more of this, but I think in the time that we had, you really got the essence of the thesis that he sharing with us. So make sure, as I said, at the start in the intro, you go and check out credit bubble bulletin, just type in credit bubble bullets, and you’ll find.
Doug’s work there. Joined that newsletter. It is just rock solid. And you can also, if you want to find out more about Doug’s current work with the stuff that he’s doing at McElvane wealth management, go and find those guys maca veiny. McElhaney wealth management. I’ll put some links in the show notes here, so you can click across there.
But go and check that out too. I really hope you enjoyed it. Huh? It’s just such a privilege to listen to somebody who’s really been at the forefront of studying. Credit bubble issues for decades and the wisdom and insight that he’s bringing us. I hope. Is a real reminder that things are really in an unusual state and we all need to be as prepared as we possibly can. I’d be like that point in the interview where I said,
The basis of supply side, is that when men and women produce. Useful viable needed goods and services. Then economy’s flourished. And I really liked the part about the middle-class. I think, I really believe in my DNA that without a strong middle-class. Cultures. Really polarized quickly. And we ended up in all sorts of trouble. And I think you’ll agree. We’re seeing some of that now. So let’s get this message out there. If you would be so good as to subscribe to this podcast, if you want to get the regular updates, come across to supply side partners.com.
And make sure you’ve there’s plenty of places to sign up. Then we can get these to you each time they come out. Otherwise. You’ll of course find us. On every podcast player. Just do a search for the supply side podcast, but I’d love you to subscribe and share this other people. If you’re a social media user, please grab these links and post them on your feeds. That would be a huge blessing. 📍 All right, friends, that’s it from me.
Big. Thanks once again to Doug Nolan for just such a great. Discussion. I really appreciated his time. And we’re going to have more wonderful guests in the weeks ahead. So make sure you stay tuned. All right, friends. God bless my name’s Jonathan Doyle. This has been the supply side podcast. And i’ll have another message for you very soon
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