Andrew Brill welcomes renowned economist Daniel Lacalle, PhD, to discuss the unsustainable trajectory of the U.S. and major global economies, which are already experiencing a private-sector “hidden recession.” Lacalle, Chief Economist at Tressis, unpacks how massive government spending and loose central bank policies are inflating short-term GDP growth while creating long-term risks, including persistent inflation, unmanageable public debt, and debasement and potential loss of confidence in the U.S. dollar, as reflected in the S&P 500 and the price of gold. He highlights the growing disparity between strong headline figures and the struggles faced by everyday citizens, as inflation disproportionately affects the lower and middle class and small businesses. Lacalle advocates for pro-growth private sector policies and warns that only by curbing debt and inflation can a sustainable economic future be secured.
#Economy #Inflation #DebtCrisis #Recession #Finance #GlobalMarkets #EconomicPolicy #Investing #FinancialNews #StockMarket #EconomicPolicy #Wealthion #Wealth #Markets #DanielLacalle #Fed #CentralBanks #SP500 #Gold
Investment Concerns? Get a free portfolio review with Wealthion’s endorsed financial advisors at https://www.wealthion.com/free
This interview is sponsored by BetterHelp. Give online therapy a try at https://www.betterhelp.com/Wealthion and get on your way to being your best self.
Daniel Lacalle 0:00
The state of the economy is a, is a, is a private sector recession disguised in a no recession period? Governments think, well, the deficit doesn’t matter because we can always finance it with higher debt. Inflation is so sticky because, because the government continues to print way too much money. If you look at Gold and the S, p5 100 they they perform almost in the long term, almost in the same trend. No, what are both discounting?
Andrew Brill 0:35
The stock market continues to touch new highs. By some metrics, the economy is doing just fine. Is the Fed about to screw it all up? Welcome to wealthion. I’m your host, Andrew brill, and we’ll answer that question and a bunch more coming up right now. I’d like to welcome Daniel lakaye to wealthion. Daniel has a PhD in economics. He’s a fund manager, a best selling author, Daniel, welcome to wealthion. I hope I did okay with your name.
Daniel Lacalle 1:05
I think you did fantastically. So congratulations and thank you very much for inviting me absolutely.
Andrew Brill 1:11
Now I want to ask you, Daniel, what is your take on the current economy?
Daniel Lacalle 1:18
Well, we’re living the the big disparity between the headline economy and what people live on a day to day basis. And this is very typical now, inflationary periods, the headline GDP looks certainly robust. Employment Outlook relatively stable, pretty good. All of those headline figures, aggregated figures look decent, however, because GDP is relatively easy to bloat with debt and public spending and employment as well with public work and immigration, what happens is that the the more disaggregated figures show a completely different picture. What is the picture that we see? Consumer confidence is extremely low. The businesses that are focused on activity in the in the country are actually struggling. Small and Medium Enterprises, families are suffering the pinch of inflation and higher taxes. So what I would say is that we live in a, in a, I always say a private sector recession that disguises a real recession with very elevated levels of government spending and a type of government spending that does not generate any kind of GDP growth, we have seen how the level of public debt goes through the roof, the level of deficit spending continues to be very elevated, and that the difficulties of families and small businesses to make ends meet and get to the end of the month are quite significant. So I would say the state of the economy is a, is a, is a private sector recession disguised in a no recession period? How can
Andrew Brill 3:12
we, you know, we talk about GDP and all these things, why don’t we separate out those numbers? Daniel, it seems silly not to, because the put the government spending aside. It’s the it’s the citizens of the country that drive the GDP. Now, if we’re we can’t spend money, because obviously our wages are up, but so are prices, so our money’s not going as far. Let’s just measure that. Take the government out, because they can just print as much money as they want you, and I can’t do that
Daniel Lacalle 3:43
absolutely. I think it’s very relevant. And if you see the disparity between GDP, gross domestic product and GDI grows domestic income, which also includes government spending. But as a more let’s say, refined analysis of how the domestic economy is doing, you can see these, these sort of strange but but clearly reasonable and obviously logical reasons why things are not going as well as people believe. We should definitely stop adding government to macroeconomic figures, and I’ll explain to you why GDP can be bloated with government spending and debt. However, debt, government debt, is calculated as debt divided by GDP, and it’s nominal GDP. So if the government prints a lot of money and creates inflation, the denominator rises and it also rises in the GDP, because it spends more and it gets into more debt. Therefore it’s basically reducing the ratio by increasing its own debt. So it’s it’s not that it’s flawed, it’s that it requires. Requires more granular analysis, and that’s why it’s so frustrating when I read from politicians, etc. Well, from politicians, it’s logical, but when I read from economists, that there is that the reason why citizens perceive that the economy is not doing well when figures are so positive is because of disinformation? No, it’s not because it’s disinformation. It’s because they feel it, they see it, they they are actually suffering on a day to day basis. And let’s remember inflation is something that benefits governments, debt is something that benefits governments, and obviously, government spending is sold as something that is the government injecting in the economy, but it’s also bloating non productive administrative burdens, and that means higher taxes, lower real wages and lower growth in the future. In
Andrew Brill 5:58
your recent article that I read on your website, you talk about the 50 basis point cut, but you also mentioned that we’re living in a loose economy. Can you explain what you mean by that?
Daniel Lacalle 6:08
Well, everybody says that central banks are very hawkish and that the and policy is restrictive. Policy is too restrictive. I read everywhere, how is it too restrictive? No, the central banks increased the balance sheet of by about 20 trillion, and they have barely touched those balance sheets. Very small reduction in the balance sheet. If we look at the Fed, it already panicked in June. In June, it already started to announce that it would reduce the pace of reduction in the balance sheet. That means basically losing policy, obviously. Now the second thing that we have to understand is that in the period that it was called restrictive. The Federal Reserve injected trillions to save the regional banks injected trillions to reduce the pressure on government bonds. In reality, central banks remain hugely accommodative. It’s not just the Fed, it’s the ECB, which is even looser than the Federal Reserve. It’s the Bank of Japan that has gone crazy for many, many years now. So we’re leaving, we’re living in a permanent, permanent loosening cycle in which there are sort of hints, or, I would say, disguised normalization periods that basically don’t even get close to normalizing to the levels that were created in 2008 let alone in 2020 so central banks are not focused on maintaining price stability, or the way the price stability is measured, which is 2% per annum loss of price stability, that is not stability, but central banks are hugely, hugely accommodative, and they prioritize liquidity, which means printing money over inflation combating
Andrew Brill 8:22
so they’re still going to have to print money, because they lower the rate by a half a percent, but we have a lot of debt to service, yeah, so they’re going to still be printing money, and maybe the rate will be lower, but now they got to print more money to get more bonds on the market to service a trillion dollars a year. Yeah,
Daniel Lacalle 8:44
and this is the and what you just mentioned, that figure that you just mentioned, the the interest expense of the United States economy, is particularly staggering, because you have to remember that the United States is the world reserve currency, the US dollar, and that the US Treasury is supposed to be the lowest risk asset in the in the global economy. So the fact that the government is already spending in the budget more than a trillion dollars more than it’s going to surpass the expense and defense, which is already phenomenal. No that is already showing you that the fallacy repeated over and over by King James that say that debt doesn’t matter as long as interest expenses are low. Well, you have low interest rates in Japan, and the government has to spend almost 25% of the budget on interest expenses. So that is a that is one of the warning signs now, when people say that governments have unlimited ability to issue more debt and to print money, there are a number of warning signs that are telling you that all of that is false. Number one, the interest. Expense figure that you just mentioned. Number two is inflation, obviously, and that is a big, a big problem for everybody. And number three is the loss of confidence in the US dollar and as the world reserve currency. So those three elements, those three things, should be something to pay attention to. No So
Andrew Brill 10:20
you mentioned the loss of confidence in the dollar. Lowering interest rates is going to continue to make that happen. Now, absolutely, you mentioned that, you know, we could be in danger of the dollar not being the dominant currency, which would be a huge blow for the United States, wouldn’t
Daniel Lacalle 10:38
it? It would be devastating, devastating. Governments think, well, the deficit doesn’t matter because we can always finance it with higher debt, and higher debt is always financed because there is a global demand for US dollars, and that has never gone to end. No and saying that it’s never going to end is a very, very dangerous way of thinking, because it’s basically just like saying, you know, I’m driving 200 miles an hour down the road. I have not killed myself. Let’s accelerate. No, the loss of the confidence in a currency happens very fast. The United Kingdom probably did not imagine that it would lose its world reserve status. The British Pound, so many global currencies have lost world reserve status. No those things happen, and there are warning signs that indicate that governments and central banks should not be as complacent as to say there is no risk and it’s never going to happen. As I said, the first one is inflation. No, you think that you can print all the money that you want and it’s never going to generate inflation? Well, you’ve had 20% accumulated inflation in the United States in the last four years in the in a period of growth, and in a period in which the United States became the largest oil producer in the world over Saudi Arabia and Russia, no so that should be disinflationary. And the technology giants are North American, which is also disinflationary. Technology is disinflationary. So to think that the United States has had a 20% accumulated inflation in these four years, which means that the essential goods and services have risen by 30% that shelter has risen by 40 that insurance has risen also by 35% all these figures are phenomenal in terms of the indication of what type of destruction of the purchasing power of the currency we have lived. And that is the beginning of loss of purchasing power, the beginning of loss of confidence. And it’s a loss of confidence when you see that the national debt has risen to 35 trillion and the holding of central banks and foreign investors of treasuries as reserves has actually virtually unchanged from where it was five years ago. So people are not buying people abroad or outside of the United States are not buying more treasuries. You know, a lot of people, a lot of these Neo kings, say that deficit spending and public debt are reserves for the private sector. That is completely untrue, as this actually shows no is that it stops being a reserve when you see that both the purchasing power of the currency and the and the level of debt of the of the of the government simply become unsustainable. So
Andrew Brill 13:56
do you think that this 50 point drop was excessive and or was it even necessary at all?
Daniel Lacalle 14:04
Well, I don’t think it was necessary at all, unless what you wanted to do was what you rightly said before, which is to try to disguise the unsustainable levels of public deficit and debt. No but bringing down interest rates incentivizes the government to take on more debt. I read the other day in analysis from somebody close to government saying, oh, with 50 basis points rate cut, if that feeds through the cost of debt, we will have more ability to spend with the same level of deficit. IE, they’re not looking to reduce the deficit. They’re basically thinking, Okay, we have more room to spend even more. No, and it’s logical the idea that cutting interest rates and printing money are tools to help governments deleverage. Makes no sense. It’s like saying that if I had in front of me a display of burgers and sweets, that is an incentive for me to lose weight? No, it’s not. No, it’s not
Andrew Brill 15:12
so. Daniel, what are the tools if we don’t use interest rates, what are the tools to get out of the situation we’re in and get rid of some of this debt, of course, but
Daniel Lacalle 15:25
you need to use the tools appropriately. You have too much debt. Deficit spending is too high. You have to have higher interest rates and lower purchases of government bonds in order to give the signal to the government that it needs to curb on spending and on debt. Now, central banks are supposed to be independent. No, so the central bank hikes rates and decides to reduce the balance sheet. Phenomenal. The government doesn’t care. Continues to spend, continues to deficit spend, and increases the debt even faster in a growth economy with record tax receipts, this is critical to understand, so the central bank maintains stubbornly its position. We’re going to continue to have rates higher for longer and to reduce the balance sheet. And the government doesn’t care. It continues to overspend, continues to increase the deficit and the debt, despite yet another year of record receipts and yet another year of growth phenomenal. So what basically happens is that the government leads the central bank to a corner at which, once the government bond yield reaches a very high level, it may create a financial crisis or a market slump, and therefore the Federal Reserve The central bank has to have a knee jerk reaction and basically abandon its normalization and go back to printing. So the only way in which you can actually curb government from taking more debt and increasing the deficit is precisely by having a really independent central bank that doesn’t just increase rates, because you also have to pay attention to the private sector, no but it, but more importantly is that it stops purchasing government bonds, And ultimately, when the government finds itself in a debt crisis, then it will have to react.
Andrew Brill 17:47
So we’re in a debt crisis, aren’t we?
Daniel Lacalle 17:49
We are in a debt crisis. It’s just disguised by making people poorer. A debt crisis, a public debt crisis, can be manifested the way that we saw in the euro area in 2012 2011 No, oh, my god, the Greeks are not going to pay their debt, and there is a huge market turmoil, etc. The other way to manifest it is via the slow impoverishment of people. You can be if you think about it, think about this, for Americans watching us right now, Americans in the last four years have been impoverished, have been have reduced their wealth. The ones that are dependent on a salary and the ones that are dependent on deposit savings have been impoverished as much as the Greeks in the Greek crisis, only, instead of in one year or in one month in four years, that is always the way in Which that crisis sort of manifest and play out no the idea that you’re going to have a government that can increase dramatically its imbalances without passing the implications to not just the rest of to the citizens of The country, but to the poorest citizens of the country, because you and I can protect ourselves against inflation, Prices, prices rise. The loss of purchasing power happens. We invest. We have savings to invest. We have assets. We’re able to protect ourselves against inflation. We also suffer it, but we don’t suffer it as much. The ones that that suffer the most unjust tax, which is inflation, is the middle class and the the poorest that have only their wages and their small deposit savings to live day by day. Let’s. Show
Andrew Brill 20:00
is sponsored by BetterHelp. It’s finally happened, and was only four years in the making, the Fed has cut rates by 50 basis points. Yes, it was a little surprising, but maybe they see bumps in the economic road going forward, and maybe there are bumps in your personal economic road that are weighing on you, or maybe there are other things that are on your mind, keeping you from thinking about all the good things in your life. It happens to all of us. We walk around with the weight of the world on our shoulders. Look at others thinking their lives are perfect with no worries or cares in the world. Everyone has worries and things they think about all the time. You can’t let those things get in the way of the fun things you want to do and explore, or the things you’re curious about and want to tackle. It’s why I speak to someone. It helps to ease some of the negative thoughts and gain a new perspective on some of the things that are floating around in my head. And believe me, there’s plenty if you need to talk to a professional or thinking about giving therapy a try, give better help a try. It’s easy, online, convenient and flexible. To fit your schedule, just fill out the questionnaire, get matched to a licensed therapist anytime. Rediscover your curiosity with better help. Visit betterhelp.com/wealthion to get 10% off your first month. That’s better help, H, E, l, p.com/wealthion. You Why do you think inflation’s been so sticky? Obviously, the Fed, for a long time said, Oh, we want to get we want to get inflation down to 2% that’s our magic number. We can’t move until it gets close to that. It’s probably hovering around three right now. But all of a sudden that adjusted employment figure came out, and they’re like, oh, we have to do something. So why do you think inflation is so sticky? Well, inflation
Daniel Lacalle 21:47
is so sticky because, because the government continues to print way too much money. It’s as simple as saying a 2 trillion deficit in a growth economy. It’s insane. It is completely insane to have a government that, with record receipts, is increasing its annual debt pile up by $2 trillion and expects in its own estimates, own estimates of the Treasury, not mine, since which are actually worse that between 2024 and 2034 the Treasury expecting no recession, record tax receipts and a robust labor market expects debt in the United States to increase by 16 trillion That is insane. That is completely, completely unsustainable. So why is inflation sticky? Well, think about it, who consumes the largest number of newly created units of currency the government? So basically, the government is overheating the economy artificially, and therefore creating an the equivalent of a false demand that is generating higher prices. Actually, it’s not higher prices is the loss of the purchasing power of the currency. Now it’s simply that the that the the government is issuing way too much money, hm, way too much currency that is diluting its purchasing power. And obviously you mentioned, yeah, but, but the Federal Reserve has been normalizing, well, not that much. Hm, remember that the Fed first increased money supply five times faster than in 2008 then when the regional bank crisis started. Injected trillions of liquidity in the regional banks via the liquidity window. Then when the government the two year government bond yield rose to 5% decided to reduce the normalization process. So ultimately, it’s basically the the lag effect of all of that newly created money that was that was injected in a in a an economy that had shut down in 2020, added to a government that should have done the following, 2021 the economy is recovering fast, obviously, because of the of the reopening, the government should have stepped back instead of adding fuel to the fire. No and what it did in 2021 was actually to increase government spending from where it was and increase deficit spending. So basically, it’s literally the government is literally adding gasoline to the fire. But
Andrew Brill 24:54
wasn’t a lot of that spending handouts to people that. Were hurting because of the pandemic, so they gave a lot of money away, and maybe some of those people didn’t need the money, and they were giving it away anyway. And they pumped trillions of dollars into an economy that probably could have been okay anyway, right? It would have been okay
Daniel Lacalle 25:16
anyway. A lot of the so called stimulus packages implemented all over the the developed economies in 2020 2022, have done nothing in terms of anything else than an economy that recovered back to where it was in 2019 once you let it reopen. But I think it’s very important to to to explain that the government didn’t give away money. The government created money. There wasn’t they, it wasn’t reserves that already existed that were given to people. The government printed money, huh? And you may have thought, and we may have thought, and rightly so, as you say, that many that received those checks did not meet them. Okay, fair enough. The problem did not happen in 2020 hm, that was insane. But if the government in 2021 had put the brakes, reduce government spending, washed that money out of the system. In one year, we would have reduced inflation. The problem is that in 2021 after that, the government decided to double down. The government decided to increase further the build back better, build back better, more printing the all of the entitlement programs that were added, etc. So, so basically, imagine the following. You actually 2020 you start handing out a newly created money in checks to people. Some of them invest it, others save it. Others spend it. Okay. That would not have created the level of persistent inflation and accumulated inflation that I mentioned 20% since 2021 if in 2021 when the economy was already recovering very, very fast, particularly the services sector. With the reopening, the government did not add 2 trillion, 3 trillion, 4 trillion of more spending in the economy so but that was basically, basically it. If the amount of money printed in 2022 handout checks had been offset by reduction in government spending in 2021 in 2022 inflation would have already been 2%
Andrew Brill 28:04
so the 50% rate cut that, I’m sorry, the 50 basis point rate, rate cut that the Fed just implemented, isn’t that inflationary to a degree?
Daniel Lacalle 28:17
Oh, that’s a great question. It depends on how it how it manifests within the economy. Two things can happen with a 50 basis point rate cut, and we’ve all immediately you have already read the the experience of the past. No, the last time that the Federal Reserve cut rates by 50 basis points, 2001 2007 it was, it was the beginning of a recession and large increases in unemployment. Why? Because the rate cut is basically the admission by the Fed that the economy is actually not doing well, hm, not because the red the rate cuts created the recession, or or inflation, or sorry, or or unemployment. But the risk right now is that, because there is small risk of recession, but government spending remains very elevated, is that it actually sort of adds to inflation that is a risk right now, because if you if you don’t have a demand reaction, then what this basically does is to incentivize more spending and more debt. So
Andrew Brill 29:38
it seems that the 50 basis point cut will devalue the dollar slightly, obviously, bond prices will go down. That seems inflationary.
Daniel Lacalle 29:51
Well, it can be inflationary, yes, it can be inflationary, but it also can be recessionary, and if and if you get a recession. And then, even with those factors, the demand, demand destruction may create a reduction in the velocity of money. Ultimately, inflation is inflation, CPI prices, or however you want to call it, times velocity of money equals the the level of activity in the economy and the quantity times the So, sorry, quantity of money times velocity of money equals the level of inflation times the growth in the economy, no. So ultimately, what happens is that if velocity of money dramatically declines, then you may get some deflation. But the problem is not right now is not deflation. The problem right now is persistent inflation. That’s why the impact can be the one that I mentioned before, adding fuel to the fire. Is it going to generate a burst of inflation that leads us to 567, percent annualized inflation? No, but you’ve just mentioned it if annualized inflation is now 3% that means 20% accumulated inflation in four years, we could go to 23% accumulator inflation next year. That’s that’s the risk that you can get.
Andrew Brill 31:32
So are there we keep hearing about soft landing, soft landing, in your opinion, are we headed towards a recession, or is there a possibility of a soft landing.
Daniel Lacalle 31:42
There is a possibility of a soft landing. The problem is that, what is the problem is to understand what a soft landing means. In the eyes of the of the of the Federal Reserve, a recession is not bad in itself. No recession can happen. The United States had a recession, no very, relatively recently, and nobody seemed to pay attention. It’s two quarters of GDP decline that may come from reducing government spending, but it may not reduce employment and not reduce activity. That is not necessarily bad. The problem of what the Fed considers a soft landing is that it’s hurting the average consumer faster than what they imagine. What is a soft landing? Soft Landing means that gradually inflation will get to 2% great inflation is accumulative. So how many years you want to get it to 2% Oh, three years. Okay, that means 9% you know that could mean no 9% added reduction in the purchasing power of the currency to the 20 odd percent that we got in four years. The problem of the soft landing is that it’s basically a sort of diplomatic way of telling you slow roast. If I tell you we’re going to slow roast the economy, you don’t like it. No. Furthermore, imagine that I’m going to say we’re going to soft boil the economy that doesn’t look very good. Well, that is basically what soft landing means. So
Andrew Brill 33:25
how do we get out of this cycle? Obviously, the one way to come up with a, I want to say, a more true GDP, is for the government to stop spending so much money. Someone told me that the tax dollar that the country brings in is already spoken for because of mandatory spending. So anything that government spends after this is debt spending. So how do we get out of this vicious cycle? It’s either collect more taxes and we’re already collecting record taxes, or just spend
Daniel Lacalle 33:59
less money, you have to spend less money, and you have to have more growth driven policies. The problem is when you when the government spends more and at the same time, puts brakes on the private sector and puts and increases taxes, puts more burdens on businesses, puts more burdens on Business, Growth, on investment you need to have there. You’re absolutely right. Mandatory spending is the problem in the United States, and you cannot tax it to bring down the deficit, let alone to to completely reduce the deficit to zero and start bringing down debt. So you need pro growth policies. You need You need both things. On one hand, you need a you need, clearly, to conduct a very thorough analysis of government spending and start cutting because the problem is that the number. Are so huge that people say, Oh, and what are you going to cut? Well, there’s, there’s a tremendous 1000s, hundreds of 1000s of items in which you could cut $10,000 here, $20,000 there, $100,000 here. You know, little by little, the trick of very elevated government spending is to say, ah, we cannot cut in Medicare, we cannot cut in defense. We cannot cut in pensions. Therefore, you cannot cut in anything. Hold on a second. Let’s look at the numbers. And let’s look at them the way that you look at them in your business, the way that I look at them in my business, little by little, and see what are the small items that we can cut. And that’s part of the of the solution. But it’s not the only solution. The other solution is to have pro growth policies that drive the United States to grow, not the GDP bloated by government spending and debt, but the private sector GDP that we were mentioning, mentioning before, drive it to 345, percent growth, which it can. I mean, it’s got the most phenomenal companies, the most innovative companies in the world, the the most creative entrepreneurs. It’s got the small businesses that are doing everything that they can just let the private economy breathe. It’s not worth to even discuss that the economy is doing badly when you increase GDP by 1.5 trillion and you increase debt by two and a half trillion. It’s ridiculous. No. So it’s it’s basically pro growth policies that are focused 100% on making it easier for small family, small businesses and families to thrive, and for large companies to invest more in the United States, for foreigners to invest more in the United States, and so that that and that will come if they put the main objective on the private sector, instead of thinking that they can solve it through entitlement spending, via higher debt. So
Andrew Brill 37:19
Is that what’s driving the market? You had said earlier, you and me and people with with means are able to protect themselves by investing. Is that why the market continues to go up? Because people are like, look, you know what? I’m not going to spend this money. I’m just going to invest this money and try and protect myself.
Daniel Lacalle 37:39
Absolutely. What? What market participants, what investors know is that the level of fiscal insanity is so huge that central banks will be almost uh, inevitably accommodative in the next years. So what the so it’s no wonder that you have a slump in August, and everybody invests knowing that what the market is actually discounting almost to a T. If you look at Gold and the S, p5, 100, they they perform almost in the long term, almost in the same trend. No, what are both discounting? What both are discounting is the destruction of the purchasing power of the dollar, not just the value of of the profits of the companies that are there are investing, there are, there are members of the S p5 100. No, it’s no wonder that the NASDAQ does better than the S p5 100, that the S p5 100 does better than the European stock market, and that all of them do better than the Chinese market. It’s basically literally discounting the destruction of purchasing power of the currency. So that’s why markets are likely to continue to be strong with volatility. Obviously, that’s never going to be disappearing if the insanity that is happening at the fiscal side is is continuing and printing money with it. And a lot of people in the academia say, Well, that is good because, you know, people’s homes are more expensive, therefore people are richer. People’s 401, case are making, are getting, you know, better, are rising. Therefore that is good for people. Well, it’s good for those that already have assets. It’s really bad for those that only have a wage and their small deposit savings. That
Andrew Brill 39:50
was, that was gonna be my next point is that, you know, the people who are able to invest, they’re protected. Is there a way for the. Person who only has a wage in very little savings to protect themselves, or are they, in essence, just screwed? It’s, it’s, it’s a sad scenario. The
Daniel Lacalle 40:09
person that only has a wage and that cannot invest because they need whatever they have been able to have in the bank for a rainy day, that person is destroyed by the same policies that are selling them that they will protect them. So when those people hear that, what the government is going to do is protect them by giving them hands out in a in a currency that is constantly depreciated. They’re actually paying the highest tax of them all. It’s no wonder, it’s not even a coincidence. It’s no wonder that the concept, the concept of inequality, has become so relevant in the last decade, because it’s also a real consequence of trying to disguise the fiscal imbalances of governments with monetary policy. And it’s very easy for governments to create the problem and present themselves as the solution. Think about what we’re hearing these days in the election process. We hear, oh, people are really suffering, and the cost of living is really high. So this is what we’re going to do. We’re going to give you a subsidy. Oh, how are you going to give me a subsidy in newly created money? Ah, phenomenal. So going to become even poorer. You see the if people don’t understand that, the reason why my government in my country, the government in other country, etc, is telling you that you are going to get more things from the government is because it makes you more dependent. Then it’s there is no solution for those people. I’m really, really sorry for them, but it is. It is becoming really, really but, and allow me to digress here, I think that those people are getting it. I see it a lot in many elections in Europe and in many other is that they they hear the government telling them, oh, we understand your problems. We understand that inflation is way too high. Don’t worry, we will give you more entitlement spending. And people say, because I know what’s where, where that money is coming from, I’m already paying for it in lower wages, in lower real wages, in lower in lower savings and in lower capacity to make ends meet. So
Andrew Brill 42:43
before I leave you, I want to ask you about commodities. They’ve been kind of suppressed for so long, and I know copper is starting to come back. Where are commodities at this point?
Daniel Lacalle 42:59
Commodities have been weak because in a so called growth economy, the manufacturing sector is truly depressed, truly depressed in strong contraction, also because rate hikes are not good for commodities. It’s more expensive to law, to buy commodities, it’s more expensive to store them. It’s more expensive to finance margin calls. It’s more expensive to finance long positions. Therefore, commodities may bounce with a 50 basis point rate cut if you get more money going to relatively scarce assets. The problem then is that we may get a reversal, which is what you said before. Remember, what we’re mentioning is you may get a reversal of the disinflation process. What the Fed does not because the Fed and European Central Bank or the Bank of Japan or the Bank of England, they don’t pay attention to monetary aggregates. Do you think that inflation is declining because of some magic thing, supply chain disruptions and the Ukraine war, etc? Instead of thinking, you know, money supply up, and money velocity up is inflation up, and money supply down. Money velocity down is inflation down. So if the rate cut starts to feed through two more government spending and more money going to commodities to protect the money from the purchasing power loss, then you may get a reversal in the disinflation process. I think that it’s probable that we can see some sort of sorrent. Of recovery in commodities from three factors, no number one, China was in a money velocity down, money supply down period, and is now mentioning a very large stimulus package, which means money velocity up, money supply up. Okay, and the and this is the largest importer of commodities in the world. Number two is the rate cuts, no that it’s cheaper to finance margin calls and long positions. And number three is the fact that throughout this period, a lot of the investments in in the commodity spectrum have been cut to the bone, the level of disinvestment and the level of under investment, sorry, in the commodity spectrum is staggering. No. So those things tend to sometimes create a bounce, and that could lead to an impact on the on on a headline inflation that is very dependent, obviously, on energy prices. Do
Andrew Brill 46:08
you see? It seems that China didn’t learn from our stimulus packages, but they’re now trying to stimulate their their economy by a stimulus package. It do you envision a problem in China at some point because of the money they’re going to now start pumping into their economy, I think that China
Daniel Lacalle 46:24
was reasonably logical in understanding that their challenges in the real estate sector, overcapacity, all these things came from very aggressive stimuli. Stimulus programs, no, and therefore was trying to sort of manage or navigate a 5% growth with with prudent monetary policy and fiscal policy. It seems that that ship has sailed and that they may go down the Japan route. And China needs to pay attention to the mistake of going aggressively to another stimulus package, because not just the overcapacity that they suffer from today is a consequence of previous stimulus packages, but because the demographic factor in China is not working anymore. Demographics were a strong driver of growth in China, but the demographic trend is actually reversing and fast. No, so we need to be aware of that. It’s it’s sad. That’s why I don’t envision a burst in inflation back to the the previous levels, but I come back to the point inflation is accumulative. If we have yet another year of over 2.5 2.7 inflation, that adds on top of the already 20%
Andrew Brill 48:00
Daniel, thanks so much for joining me. I really appreciate it. Where can we I went to your website so I’m able to read everything that you write. Where else can we find you? Are you on Twitter or anything like that?
Daniel Lacalle 48:12
I’m on all social media. I always say that it’s easier to find me than to avoid me. So what I suggest to everyone is that they go to Twitter. My Twitter account is in English at dilakaye, underscore IA, IA, for international account. So dilakai, underscore IA. My website, dilakaya.com/en, in English. So everything is in Spanish and in English you can find me, but mostly Go Daniel la calle, you will find me. Don’t worry, I did
Andrew Brill 48:47
listen to an interview in Spanish, and I will tell you I didn’t understand one word, but I did listen to interviews in English, so I appreciate you doing the ones in English, but we’ll put up all the links to your stuff, and we appreciate your time. Thank you so much.
Daniel Lacalle 49:01
Thank you very much. Thank you. It’s been a pleasure. Have a great day. You too.
Andrew Brill 49:05
Thanks so much for watching our discussion here on wealthion with Daniel lakaya, maybe the picture, at least, according to Daniel, isn’t so rosy. So if you need a clearer picture on being financial resilient, please head over to wealthion.com/free for a free, no obligation, financial review. And of course, if you could like and subscribe to the channel, we’d greatly appreciate it. Don’t forget to turn on notifications. So you know when we post new videos to the channel, and please do the social media thing with us. The links are below in the description. And if you like this content and they’re looking for more ways to achieve long term wealth. Watch this video next. Thanks for watching until next time. Stay informed. Be empowered and may your investments flourish. You.
