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Speaker 1: This is Masters in Business with Barry Ridholts on Bloomberg Radio. Hi,

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Speaker 1: I'm Barry ridh Holts. Welcome to the podcast. This week

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Speaker 1: I had an absolutely fascinating conversation with Dan Albert. He

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Speaker 1: is the founder of Westwood Capital and author of the

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Speaker 1: book The Age of Oversupply. Dan is really a fascinating guy.

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Speaker 1: He's done a lot of really interesting things in his career,

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Speaker 1: including putting together one of the very first structured financial

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Speaker 1: commercial products. Most of the structured commercial back mortgage guaranteed papers,

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Speaker 1: the cmos that you've seen were residential mortgages. Dan worked

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Speaker 1: with first a group of distressed assets and then a

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Speaker 1: group of commercial assets, and that was fairly early in

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Speaker 1: the world of structured products. He also put out one

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Speaker 1: of the very first reads that ever existed. He's an

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Speaker 1: expert on everything from UH structuring credit and debt to

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Speaker 1: putting out um new products getting them through the process.

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Speaker 1: Really a fascinating conversation about what's happened over the past

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Speaker 1: couple of years and why this is not a temporary phenomena,

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Speaker 1: why it's structural and nature. We talked about central banks

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Speaker 1: around the world and what they should and shouldn't have done,

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Speaker 1: as well as discuss the lack of fiscal response, which

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Speaker 1: is part of the ongoing um fairly mediocre recovery that

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Speaker 1: we've seen since the financial crisis ended in O nine.

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Speaker 1: I find Dan would be just a very informative and

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Speaker 1: intelligent guy who can talk about a number of subjects

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Speaker 1: quite articulately. And it was really a fascinating conversation. If

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Speaker 1: you're listening to this part of the conversation, you're probably

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Speaker 1: listening to the full podcast. And we went for a

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Speaker 1: little over an hour, and before I forget, I have

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Speaker 1: to start thanking some of the people who helped put

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Speaker 1: this together. Dan was very generous with his time. My

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Speaker 1: engineer is Charlie Vollmer, and the head of research who

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Speaker 1: really did a deep dive on this is Michael bat Nick.

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Speaker 1: And without any further ado, here's my conversation with Dan Albert.

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Speaker 1: This is Masters in Business with Barry Ridholts on Bloomberg Radio.

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Speaker 1: My guest this week is Dan Albert. He is the

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Speaker 1: founder of Westwood Capital. He is also an expert on

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Speaker 1: structured finance and distressed companies, and he is the author

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Speaker 1: of the book The Age of Oversupply. Dan, Welcome to

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Speaker 1: the show. Good, Thanks so much for coming in. So

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Speaker 1: you we're gonna get a little wonky today. We're gonna

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Speaker 1: go in the weeds at a certain point. But let's

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Speaker 1: just start with your background. Tell us a little bit

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Speaker 1: about how you found your way into distressed companies and

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Speaker 1: structured finance. Well, I think investment aching as a whole.

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Speaker 1: I had a fairly unusual beginning. Um during the early

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Speaker 1: nineteen eighties. I was in the real estate syndication business,

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Speaker 1: which was very much tax driven at the time. It

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Speaker 1: was sort of taking candy from babies, really couldn't help

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Speaker 1: but make money. All that change very very suddenly in

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Speaker 1: n six were the U. S. Government tried to pull

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Speaker 1: off the old trick of pulling the tablecloth out without

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Speaker 1: disturbing the dishes, and of course the whole renovation to

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Speaker 1: a lot of parts of the tax code and a

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Speaker 1: lot of formerly um let's call it tax focused investment

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Speaker 1: themes suddenly went on right and uh. And that of

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Speaker 1: course precipitated the S and L crisis because of the

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Speaker 1: loans that those banks had made, and then ultimately created

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Speaker 1: the real estate recession, which spread like wildfire around the country,

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Speaker 1: starting in Texas and moving from the east coast to

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Speaker 1: the West coast. Ultimately by prices felt pretty substantially, I

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Speaker 1: mean it was. It was a great training ground for

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Speaker 1: the period of time that came the last ten years.

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Speaker 1: So even though they had told us that real estate

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Speaker 1: had never fallen in price previously, well, well, of course

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Speaker 1: that was residential real estate this time around the first

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Speaker 1: commercials commercial. But what what happened after that is I

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Speaker 1: was very lucky enough to be able to take over

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Speaker 1: the real estate investment banking franchise at Oppenheimer and Company UH,

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Speaker 1: and in that capacity was able to create some new

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Speaker 1: products in in the middle of what was really a

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Speaker 1: total real estate depression, not even a recession. So let's

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Speaker 1: talk about some of those products. One of the innovations

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Speaker 1: that you created, and I don't want to misstate or

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Speaker 1: overstate this, but essentially you took a pool of distressed

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Speaker 1: assets and was that the first securitized pool we did

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Speaker 1: distress commercial, We did the first rated UH commercial mortgage

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Speaker 1: backed securities. Before that, the only mortgage backed securities out

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Speaker 1: there were pools of residential mortgages. Nobody could quite get

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Speaker 1: their head wrapped around the concept of of their being

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Speaker 1: commercial mortgages that could actually be diversified enough to take

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Speaker 1: a rating. UH. And what we were able to do

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Speaker 1: is convince at that time my recollections, correct Standard and

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Speaker 1: Poors and Fitch UH to develop a methodology for rating

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Speaker 1: pools of commercial mortgages. It was a little easy because

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Speaker 1: in that very first trade we were buying a large

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Speaker 1: pool of mortgages a significant discount from Xerox Credit. I remember,

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Speaker 1: and at that time Zero's Credit had been told by

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Speaker 1: the rating agencies they had to divest of all of

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Speaker 1: their non copy or related businesses because they were investing

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Speaker 1: in UH. They had loans in aviation and real estate

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Speaker 1: and everything that you can imagine, and that led to UH,

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Speaker 1: They're they're being forced effectively to fire sales massets which

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Speaker 1: we bought, which were actually performing assets at the time UM.

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Speaker 1: And we were able to securitize those in the first pool.

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Speaker 1: And then that was different UH and and and very

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Speaker 1: good because we were able to deal with a pool

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Speaker 1: where we had multiple borrowers, which is not terribly characteristic

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Speaker 1: of commercial real estate London. So so essentially the first

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Speaker 1: commercial securitized mortgage back paper. In other words, hundreds thousands

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Speaker 1: of different loans in one problem. No, no, no, I mean,

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Speaker 1: you don't get the advantage of having hundreds and thousands

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Speaker 1: in commercial real estate, do you. I mean, obviously during

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Speaker 1: the bubble we had large, large pools, but you know,

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Speaker 1: typically in this particular case, I think they were like

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Speaker 1: sixty somewhat loans, but it's still a big distribution as much,

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Speaker 1: there was a decent distribution to it. Uh. Subsequently, we

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Speaker 1: did UH a year later, actually this was a year later,

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Speaker 1: we did the first a single borrower pool where basically

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Speaker 1: all of the assets where assets of a single company. Uh.

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Speaker 1: They were obviously put into bankruptcy remode structures, but at

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Speaker 1: the end of the day, we were able to overcome

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Speaker 1: this issue of well, if you have a single company

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Speaker 1: controlling all the assets, they can just throw the keys back.

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Speaker 1: And again these were done at fairly low loan to

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Speaker 1: value ratios. When you look at what happened in the

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Speaker 1: CMBs business during the two thousands, it is almost night

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Speaker 1: and day compared to what we were doing in the

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Speaker 1: early days. So collateralized mortgage backed securities then, and then

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Speaker 1: of course you you saw this demand for yield developed

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Speaker 1: as rates continued to fall from the nineteen eighties. Obviously

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Speaker 1: we had a spike in the beginning of my career

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Speaker 1: in nineteen eighty two or we had double digit treasury

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Speaker 1: rights and certainly double digit inflation, and then we saw

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Speaker 1: rates gradually decline, and so by the time you got

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Speaker 1: into the early nineties and ninety three you saw an

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Speaker 1: enormous clamoring for yield. People still had an inflation mentality.

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Speaker 1: They still thought that inflation was coined. Oh god, it

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Speaker 1: spiked interestingly and if now this, I'm really flying by

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Speaker 1: the seat of my pants, because but it was at

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Speaker 1: one no no, no, no, no, no, no, no, there

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Speaker 1: it was. It was in the high single digits, low

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Speaker 1: double digits. But I do remember ninety three, I think

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Speaker 1: it was we had a spike UH and that cost

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Speaker 1: a little bit of a bobble um. But anyway, we

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Speaker 1: did we did a portfolio in connection with the next

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Speaker 1: iteration of this business. We did the second UH read

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Speaker 1: that came out. The first rate was a company called

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Speaker 1: Kimko was done by Meryl, and we did one called

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Speaker 1: Kransco about a few months later, and used structured debt

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Speaker 1: as the leverage because again the debt market was very

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Speaker 1: much bolloxed up still UH, and we were able to

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Speaker 1: do that through the capital markets, which was very which

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Speaker 1: was very creative at the time, pulling off a simultaneous

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Speaker 1: issue of a CMBs offering an anequity offering. No one

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Speaker 1: has done that before, so that's really fascinating. And since

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Speaker 1: that time there's been a tremendous growth of both collateralized

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Speaker 1: mortgages and reads. So you were there at at very

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Speaker 1: early in the process. So in the last thirty seconds

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Speaker 1: we have in this segment, um what's more complex dealing

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Speaker 1: with reats or dealing with far more complex to do

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Speaker 1: what I did next, which is started an investment bank

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Speaker 1: of your own and run it for the last twenty years.

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Speaker 1: I'm barry. It helps. You're listening to Masters in Business

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Speaker 1: on Bloomberg Radio. My guest today is Dan Albert, founding

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Speaker 1: partner of Westwood Capital. Building your own investment bank, which

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Speaker 1: is something that we don't see happen all that much

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Speaker 1: these days. Back in the eighties or so, was it

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Speaker 1: late eighties, mid nineties, you built grown bank left Oppenheimer

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Speaker 1: and I will say that that the only way we

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Speaker 1: could have possibly done what we did. And this is

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Speaker 1: where you come face to face with technology. I mean,

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Speaker 1: when I started working in we had typist pools right.

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Speaker 1: Uh So, so as a pre girl, that literally what

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Speaker 1: I was thinking. But the the you know, by the

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Speaker 1: time year old around, we we actually had the beginnings

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Speaker 1: of email. Not quite I think I was still using

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Speaker 1: an A O L dial up account, but certainly we

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Speaker 1: we had a computing environment in which we did not

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Speaker 1: need the kind of back office that you would have

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Speaker 1: needed ten years before. And so we were able to

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Speaker 1: to start a company with relatively small amount of capital.

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Speaker 1: Uh and and as a true old style investment bank,

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Speaker 1: taking our roller dex and matching it against people who

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Speaker 1: need money. Uh and and that that has been our

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Speaker 1: business for twenty years now. Of course, we've expanded considerably

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Speaker 1: since uh In we we began to branch out into Asia.

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Speaker 1: We opened an office in Tokyo and in two thousand

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Speaker 1: we've now we're now covering all of Pacific Asia. And

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Speaker 1: thanks to my good friends at City Bank for destroying

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Speaker 1: their business, we were able to um we were able

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Speaker 1: to bring on board the entire Latin American structured finance

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Speaker 1: team from from City Bank, and uh they've been a

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Speaker 1: great addition to our firm and and have have been

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Speaker 1: there ever since. So how do you go for from

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Speaker 1: a guy who's structuring products for either come austual real

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Speaker 1: estate or or reads to building a bank, who who

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Speaker 1: is the there's always a mentor behind that sort of thing,

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Speaker 1: who helped guide you through that process. I guess it's

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Speaker 1: funny because it had nothing to do with what happened

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Speaker 1: in ninety five. But back in nineties and eighties seven,

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Speaker 1: I was working for a guy in the in the

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Speaker 1: real estate syndication industry before I left for Oppenheimer, and

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Speaker 1: he took me aside one day and he said, Dan,

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Speaker 1: you're never going to be happy until you have your

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Speaker 1: own shop. Turns around, it turns out he was right,

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Speaker 1: and uh, and yes, I had a great time. I

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Speaker 1: had learned a ton in at Oppenheimer during the some

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Speaker 1: really great years. We had terrific bankers, we had terrific people.

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Speaker 1: But by nine five I was done and had the opportunity,

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Speaker 1: had a little capital, and had a couple of partners. Uh,

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Speaker 1: and we're able to strike out. And quite frankly, it

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Speaker 1: all comes from realizing from whence you get your business right.

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Speaker 1: If you are very capital dependent, if you're a trader,

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Speaker 1: you don't have a choice. You need a large platform

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Speaker 1: with capital but if you're using your creative powers in

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Speaker 1: terms of being able to design solutions for people that

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Speaker 1: haven't been used before, which quite frankly was what we

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Speaker 1: did for the first ten years of our business, uh,

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Speaker 1: and have a decent roll at X in decent context UM,

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Speaker 1: then eventually you realize that you don't need the the

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Speaker 1: overlay of the larger institution, so you could be a

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Speaker 1: little more nimble. And it's really just a matter of

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Speaker 1: putting the right peg in the right hole. Plus, I

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Speaker 1: don't know who ever taught me this, uh, this phrase,

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Speaker 1: but sometime way back when somebody told me keep it small,

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Speaker 1: keep it all and uh, and that became that became

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Speaker 1: my guideline for guide words. But you guys aren't really

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Speaker 1: all that small. Well, you know, we've we've grown, but

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Speaker 1: but still we we managed to do this on a

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Speaker 1: platform that is reasonably sized. We don't keep a ton

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Speaker 1: of capital in the business because we don't need it. Uh,

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Speaker 1: and we we operate um as a practical matter and

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Speaker 1: you know about say the world. So now let's talk

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Speaker 1: a little bit about your expertise in in complex um,

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Speaker 1: real estate structures and and other things. We just came

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Speaker 1: out of a crisis where residential mortgages were the underlying

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Speaker 1: problem and structured residential mortgages was really the bull's eye.

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Speaker 1: How did that happen? And how do we avoid having

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Speaker 1: that happening? Yeah, it's interesting. So again by way of background,

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Speaker 1: I'll go back into what happened recently. So suddenly I

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Speaker 1: find myself an author and economist. Where I had taken

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Speaker 1: my my degree and in those subjects and and stuck

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Speaker 1: them in a drawer for most of my where you

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Speaker 1: going to the University of Pennsylvania, and I graduated with

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Speaker 1: a degree in public policy which incorporated economics and business

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Speaker 1: and a whole bunch of other stuff. Um, But when

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Speaker 1: I when I saw in March of what was going

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Speaker 1: on to volts in the mortgage industry that was already

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Speaker 1: past the peak in both volume and price. We've already

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Speaker 1: but you know, and you were, You were there at

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Speaker 1: the time for sure. But there were a few of us,

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Speaker 1: if you recall, who were actually writing and speaking and

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Speaker 1: and formulating. Literally we all knew each other. Right, you

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Speaker 1: could count it on practically one hand. I can't. Every

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Speaker 1: now and then I'll pull up one of the old criticisms,

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Speaker 1: how many subprime mortgages. Do you think this there are

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Speaker 1: that it's going to actually impact Well, how big is

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Speaker 1: a you know, I'm alignant to him or relative to

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Speaker 1: a man's body weight? Size isn't what does it. It's

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Speaker 1: that leverage point of affecting everything. It turned out it

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Speaker 1: was pretty sizable. Top. Well, we were talking during the break,

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Speaker 1: we were talking about structured finance. And if you put,

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Speaker 1: you know, bad meat into a sausage maker, what you

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Speaker 1: get out the other side is bad sausage. How much

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Speaker 1: bad debt was there, how much bad paper was there

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Speaker 1: that substantly got structured and structured in structure. Well, you know,

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Speaker 1: so you you you saw an industry that from the

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Speaker 1: beginning of the decade two thousand until its peak, had

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Speaker 1: grown from about five point some odd trillion dollars and

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Speaker 1: outstanding mortgages to almost eleven in seven short years. So

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Speaker 1: it was it was an outstanding balloon of of credit. Uh.

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Speaker 1: And then you also saw five trillion to eleven trillion

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Speaker 1: eleven and change. And if you look at total debt

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Speaker 1: in the United States, it actually grew from about twenty

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Speaker 1: six trillion to fifty two doubled there as well. So

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Speaker 1: you know it wasn't just housing, it was it was

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Speaker 1: across the board. We were in this massive debt bubble um.

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Speaker 1: But what what happened is you you you had to

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Speaker 1: ask yourself the question. And in fact you were at

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Speaker 1: a luncheon that I was at at the Harvard Club

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Speaker 1: with with Neurie L. Rabini. I believe you were there.

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Speaker 1: My recollection is that you were. Um where I first

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Speaker 1: articulated this, which is, you know, at some point you

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Speaker 1: have to follow the money and uh. And I had

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Speaker 1: always believed obviously for the first six months, I was

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Speaker 1: just stunned with what was going on, uh in the

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Speaker 1: markets and what was going on. Obviously could see the

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Speaker 1: impendent collapse. Made a few bucks, making a couple of

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Speaker 1: good trades, but but nothing on this on the on

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Speaker 1: the score of a port Paulson or somebody like that,

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Speaker 1: not not Michael Barry money, yeah exactly. But but started

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Speaker 1: to write and that was really the changes that I

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Speaker 1: I felt that I had something I wanted to say. Uh.

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Speaker 1: This was an industry that I had been involved in

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Speaker 1: creating at least one st class if not more of

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Speaker 1: and uh. And I felt that the rating agencies in

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Speaker 1: particular had dropped the ball that the people on the

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Speaker 1: bike side didn't know what they were buying. Uh. And

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Speaker 1: the people who were putting these these packages together, we're

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Speaker 1: we're committing how I fraught, So they didn't care what

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Speaker 1: it was. Right. My guest today is Dan Alpert of

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Speaker 1: Westwood Capital. He's the author of the Age of Oversupply.

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Speaker 1: And let me pull out a quote from the book

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Speaker 1: that I really liked. You said, the greatest challenge facing

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Speaker 1: the global economy is the oversupply of labor, productive capacity,

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Speaker 1: and capital relative to the demand for all three. Explain that, well,

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Speaker 1: this all goes back really to something that we all

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Speaker 1: lived through, or most of us who aren't children, and

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Speaker 1: that is that we saw the collapse of the socialist world,

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Speaker 1: the emergence of these very very large countries with tons

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Speaker 1: of people into bed Idea, all of Eastern Europe and

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Speaker 1: even you can count Vietnam. So so you're talking about

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Speaker 1: three and a half billion people. If you put this

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Speaker 1: in perspective, Uh, the developed world, the so called developed world, Japan, US, Canada,

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Speaker 1: Western Europe is eight million people. So you have three

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Speaker 1: and a half billion people who show up and they

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Speaker 1: decide one day they want to eat our lunch and

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Speaker 1: play by our rules. Uh. And of course part of

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Speaker 1: that is that there will link to work very cheaply.

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Speaker 1: Obviously they have far lower standards of living and far

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Speaker 1: little costs of living. So that digitaliant global labor arbitrage.

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Speaker 1: It's it's a giant global labor glut. And the glut

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Speaker 1: is one of these ones in a history of mankind

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Speaker 1: kind of things. I mean, whoever thought you would shut

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Speaker 1: down the development of the world for some of the

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Speaker 1: world's people behind the iron curtain and the bamboo curtain

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Speaker 1: and say, and then one day something with those curtains

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Speaker 1: and they all show back up. We're we're going to

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Speaker 1: come back out into the So that so that that

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Speaker 1: creates this massive instability. It created, in my argument, the

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Speaker 1: bubble itself because we saw something we've never seen in

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Speaker 1: the history of mankind, which is something economists call reverse

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Speaker 1: capital flows, where we see money coming from poor countries

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Speaker 1: to rich countries, when the Chinese buy our bonds, when

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Speaker 1: other countries buy our bonds, um and and we've never

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Speaker 1: seen that in the history of the world before either

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Speaker 1: um And. So what that creates is as an environment

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Speaker 1: where you have enormous amount of capital trying to find

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Speaker 1: their way into into sovereign debt of developed countries. Interest

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Speaker 1: rates of course then decline because you have an overabundance

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Speaker 1: of demand for for bonds. UM, you have an excess

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Speaker 1: supply of labor relative to total demand because as you know,

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Speaker 1: the Chinese and the Indians, while they're producing, they're not

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Speaker 1: consuming what they should be at least what they should

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Speaker 1: be in order to create equilibrium UM and UH. And

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Speaker 1: then you have the the issue of of uh, way

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Speaker 1: too much stuff being made. And we can see that

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Speaker 1: now as we saw infrastructure and other investment being made

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Speaker 1: in China and other countries has now outstripped rational demand

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Speaker 1: for the product that they make. I mean, look at

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Speaker 1: the steel industry for example. Are you talking like those cities, well,

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Speaker 1: domestically yes, But I think what's even more important is

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Speaker 1: looking at at at the production of manufactured products. And

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Speaker 1: steel is probably the best example. You saw an environment

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Speaker 1: in which people were building steel panets willy nilly and

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Speaker 1: anticipation of not only the a structure demand in China,

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Speaker 1: but also large demand growth globally. And of course that

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Speaker 1: demand growth was haha, driven by a massive amount of

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Speaker 1: debt that was being creative when you created, when you

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Speaker 1: took when you took away the debt, you took away

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Speaker 1: all that demand. Let's talk about over supply in the

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Speaker 1: United States. One of my favorite examples is the total

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Speaker 1: square footage of shopping malls, which is massive. And you

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Speaker 1: go into just about any reasonable sized town in or

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Speaker 1: city in America and there are two malls. There's the

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Speaker 1: new good mall, and then there's the old dilapidated mall,

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Speaker 1: which is half empty, self correcting by the fact that

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Speaker 1: those old malls are now shutting down and becoming ghost properties.

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Speaker 1: UM that that that type of of of over abundance.

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Speaker 1: You have to again go back to the beginning of

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Speaker 1: which is how was it fueled? Right? How did you

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Speaker 1: get those extra malls? And the answer is there was

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Speaker 1: a There was a huge amount of capital that was

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Speaker 1: chasing yield, and as yield drops, real estate becomes, at

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Speaker 1: least on surface, an attractive investment because you can leverage

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Speaker 1: it with cheaper and cheaper money. UH. And of course

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Speaker 1: that's an entire fallacy and and one of the problems

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Speaker 1: with the period through which we're living right now, not

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Speaker 1: just in UH the US, but globally is the zero

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Speaker 1: interest rate environment that all large central banks are pursuing

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Speaker 1: uh in in the developed countries, is creating a price dislocation.

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Speaker 1: We really don't know what the value of anything is

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Speaker 1: on a on a going forward basis. I can't tell

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Speaker 1: you that the house that you bought last week for

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Speaker 1: half a million dollars is really worth half a million

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Speaker 1: because you bought it with money that was so cheap

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Speaker 1: relative to what normal would be. And of course we

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Speaker 1: really don't know what normal is going to be a guest,

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Speaker 1: So shouldn't the market eventually correct that? Because I've been

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Speaker 1: hearing similar arguments from a lot of people for a while.

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Speaker 1: We have market prices, except the market prices are distorted

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Speaker 1: by the Fed. Now we have the Fed end in queue,

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Speaker 1: or at least in theory, ending que They ended quee,

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Speaker 1: whether or not they can reverse zero interest rate policy. Right,

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Speaker 1: so we're twenty five basis points. There are some people

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Speaker 1: who think that by the time the year is over

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Speaker 1: will be closer to one percent FED funds rate, which

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Speaker 1: is still historically extraordinarily low. Is that theoretically possible? Can

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Speaker 1: the Fed? A lot of people claim the Feds boxed

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Speaker 1: in what's your perspective on the Fed? The Fed is

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Speaker 1: boxing itself, and I don't believe they'll be able to

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Speaker 1: raise rates other than a token basis point rise just

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Speaker 1: to say, look, we've got control over the tiller. But

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Speaker 1: as a practical matter, the wave of price softness that's

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Speaker 1: not just here in the United States but elsewhere h

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Speaker 1: is really telling the story for them. Well, my guest

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Speaker 1: today is Dan Albert. He is the founder and managing

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Speaker 1: partner of Westwood Capital. He is also the author of

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Speaker 1: the Age of Oversupply. And we've been talking about UH

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Speaker 1: three and a half billion new on on entrance into

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Speaker 1: the labor pool, which is part of the reason why

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Speaker 1: we haven't seen any increase in wages. So let's talk

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Speaker 1: a little bit about what's going on around the world.

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Speaker 1: We have three central banks, the US Federal Reserve, the

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Speaker 1: European Central Bank, and the Bank of Japan, and they

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Speaker 1: all seem to be So don't leave the Bank of

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Speaker 1: England at it. This will be insulted, is the Bank

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Speaker 1: of How big a player these days is the Bank

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Speaker 1: of England relative to the Trilateral But what's fascinating to

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Speaker 1: me about those three banks is they all seem to

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Speaker 1: be in a different phase. The US done with QUI

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Speaker 1: and talking about raising rates. The Bank of Japan in

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Speaker 1: the middle of their qui and relative to the size

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Speaker 1: of their economy actually bigger than the U s que

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Speaker 1: And now the European actually announcing I think we're gonna

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Speaker 1: have to do something because this austerity thing has been working.

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Speaker 1: So how do we find ourselves in this situation with

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Speaker 1: bankers all lot of phase with each other? Well, I

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Speaker 1: don't see it really is being out of days. Uh,

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Speaker 1: They're they're all basically pursuing the same policy, whether you

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Speaker 1: go from zero interest rate policy to actual quantitative easing.

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Speaker 1: It's it's just two versions of the same same soup.

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Speaker 1: The the the upshot though, is that what's been going

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Speaker 1: on since the Great Recession is we have been literally

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Speaker 1: seeing the hot potato of inadequate demand being passed back

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Speaker 1: and forth among regions. And it's very interesting how that happens.

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Speaker 1: It happens due to uh, policy, it happens due to

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Speaker 1: labor markets. Uh, it happens due to fiscal issues and

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Speaker 1: government fiscal issues. Um. But nevertheless, you know, we were

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Speaker 1: looking at a period only a few years ago where

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Speaker 1: Europe was, you know, before the European crisis. They were

432
00:24:44,680 --> 00:24:48,439
Speaker 1: sitting there saying Oh, we're fine, We're great, right uh.

433
00:24:48,480 --> 00:24:52,520
Speaker 1: And it was the US that was that was in trouble. Uh.

434
00:24:52,600 --> 00:24:55,240
Speaker 1: And suddenly we find ourselves with the correcting of the

435
00:24:55,280 --> 00:24:57,680
Speaker 1: realities or reaching of the realities of what was really

436
00:24:57,720 --> 00:25:00,240
Speaker 1: going on with Europe, which was this mass of or

437
00:25:00,280 --> 00:25:04,439
Speaker 1: cancelous policy out of Germany. Um and and and we

438
00:25:04,480 --> 00:25:08,000
Speaker 1: saw the problem are up there that was very similar

439
00:25:08,080 --> 00:25:12,080
Speaker 1: in nature, just fractioned into eighteen different countries, with all

440
00:25:12,160 --> 00:25:14,159
Speaker 1: each with their own little story, but still pretty much

441
00:25:14,240 --> 00:25:19,320
Speaker 1: the same overall one monetary policy. Yeah crazy, yeah, but

442
00:25:19,320 --> 00:25:23,160
Speaker 1: but the uh so we saw them uh suffer and

443
00:25:23,160 --> 00:25:26,160
Speaker 1: and then of course as they began to suffer, Japanese

444
00:25:26,160 --> 00:25:29,440
Speaker 1: tried Albonomics and albynamics gave them a little booze for

445
00:25:29,480 --> 00:25:32,800
Speaker 1: a period of time, ultimately failed. Um and so failed

446
00:25:32,960 --> 00:25:36,480
Speaker 1: did they introduced that big sales tax. Sales tax was stupid,

447
00:25:36,560 --> 00:25:40,520
Speaker 1: but arrescued whatever growth they had going. But but but

448
00:25:40,600 --> 00:25:44,080
Speaker 1: as a practical matter, uh, you know, the effectiveness of

449
00:25:44,560 --> 00:25:49,440
Speaker 1: Albanomics was basically tanking the currency, right, and they did

450
00:25:49,480 --> 00:25:52,960
Speaker 1: that more or less by jaw boning it's expectations based

451
00:25:52,960 --> 00:25:56,560
Speaker 1: tanking of the currency. Yes, they did quei and they

452
00:25:56,560 --> 00:25:58,879
Speaker 1: did all the things that would engender that. But as

453
00:25:58,960 --> 00:26:02,040
Speaker 1: practical matter, well, their their interest rates were low already

454
00:26:02,320 --> 00:26:06,640
Speaker 1: right up until yesterday. We're recording this on a Wednesday,

455
00:26:06,800 --> 00:26:10,560
Speaker 1: up until yesterday, lowest rates in the world until Germany

456
00:26:10,600 --> 00:26:14,119
Speaker 1: managed to bypass them. Right. So so you you you know,

457
00:26:14,160 --> 00:26:18,000
Speaker 1: you had Japan sitting there with for the most part,

458
00:26:18,080 --> 00:26:20,200
Speaker 1: a surplus for most of the period of time, current

459
00:26:20,200 --> 00:26:26,080
Speaker 1: account and trade surplus. Uh, simply because they were in

460
00:26:26,119 --> 00:26:31,200
Speaker 1: a period of almost continuous deflation, right, mild deflation, not

461
00:26:31,200 --> 00:26:34,840
Speaker 1: not not severe deflation. Um. And you know what they

462
00:26:34,880 --> 00:26:37,280
Speaker 1: experienced and what was what was really putting them on

463
00:26:37,320 --> 00:26:40,160
Speaker 1: the ropes is they saw their currency appreciate through the roof.

464
00:26:40,920 --> 00:26:43,399
Speaker 1: You had the end go you know, below eighty and

465
00:26:43,400 --> 00:26:45,520
Speaker 1: and that was which is this is a couple of

466
00:26:45,640 --> 00:26:47,320
Speaker 1: years ago, a couple of years ago, and that was

467
00:26:47,359 --> 00:26:51,360
Speaker 1: stiming their their exports, and uh, suddenly their trade deficit

468
00:26:51,560 --> 00:26:56,280
Speaker 1: was was vanished, a trade surplus was vanishing. Uh. And

469
00:26:56,400 --> 00:26:58,920
Speaker 1: uh it really has nothing due to anything more than

470
00:26:58,960 --> 00:27:01,399
Speaker 1: the fact that, Uh, what you have to ask yourself,

471
00:27:01,480 --> 00:27:05,080
Speaker 1: why did the currency of a country that was the

472
00:27:05,119 --> 00:27:09,159
Speaker 1: most heavily indebted country in the world and had it

473
00:27:09,200 --> 00:27:14,160
Speaker 1: was experiencing deflation, no nominal growth, right, why was its

474
00:27:14,160 --> 00:27:18,560
Speaker 1: currency appreciating? And quite frankly, the only answer is, and

475
00:27:18,680 --> 00:27:20,399
Speaker 1: you know, I put it in simplistic terms, that a

476
00:27:20,440 --> 00:27:23,359
Speaker 1: grain of rice just costs less en in in in

477
00:27:23,560 --> 00:27:26,360
Speaker 1: end terms, right if the if the end, If you're

478
00:27:26,400 --> 00:27:29,720
Speaker 1: if you're having consistent year over year deflation and the

479
00:27:29,760 --> 00:27:33,080
Speaker 1: price of the goods that are manufactured or produced in

480
00:27:34,080 --> 00:27:37,640
Speaker 1: Japan drop in end terms, well then they're worth more

481
00:27:37,840 --> 00:27:42,399
Speaker 1: by definition in dollar terms, all currencies are relative, right,

482
00:27:42,440 --> 00:27:45,399
Speaker 1: All currencies a relative, so so they so so the

483
00:27:45,440 --> 00:27:48,840
Speaker 1: currency appreciated, which you wouldn't sort of put in the

484
00:27:48,920 --> 00:27:52,040
Speaker 1: same but when you look at it from the perspective

485
00:27:52,080 --> 00:27:55,800
Speaker 1: of the grain of rice, but the energy expanded to

486
00:27:55,840 --> 00:27:57,840
Speaker 1: produce this grain of rice is more or less the

487
00:27:57,880 --> 00:28:00,880
Speaker 1: same or from year to year, so it's closting less.

488
00:28:00,920 --> 00:28:02,960
Speaker 1: It means the measuring stick actually has to be getting

489
00:28:02,960 --> 00:28:06,200
Speaker 1: a little bit exactly. So, so we saw this happen,

490
00:28:06,240 --> 00:28:09,200
Speaker 1: which is also something that economists would not have expected.

491
00:28:10,080 --> 00:28:13,880
Speaker 1: Um and uh, and that created a huge amount of

492
00:28:14,080 --> 00:28:19,720
Speaker 1: pain because you saw the trade surplus evaporate and then um,

493
00:28:19,760 --> 00:28:22,640
Speaker 1: you already had no upward pressure on wages. In fact,

494
00:28:22,680 --> 00:28:26,600
Speaker 1: wages had deflated along with with goods and services. The

495
00:28:26,600 --> 00:28:30,320
Speaker 1: the way they tried to reverse that was to try

496
00:28:30,359 --> 00:28:33,560
Speaker 1: to talk down the end and they did successfully. You

497
00:28:33,840 --> 00:28:36,920
Speaker 1: talk it down quite a bit. Uh. And so what

498
00:28:36,920 --> 00:28:40,360
Speaker 1: what you then had is an environment in which you

499
00:28:40,400 --> 00:28:44,040
Speaker 1: would think that you could create inflation, right because they

500
00:28:44,040 --> 00:28:46,320
Speaker 1: still have to import oil, it would cost more, blah

501
00:28:46,360 --> 00:28:48,840
Speaker 1: blah blah. But here's the magic to all of this.

502
00:28:49,000 --> 00:28:51,640
Speaker 1: And this applies in the United States, it applies in Europe,

503
00:28:51,680 --> 00:28:56,320
Speaker 1: applies throughout the world. In the age of oversupply. Unless

504
00:28:56,400 --> 00:29:01,720
Speaker 1: you can move wages, you cannot create inflation. We're experiencing

505
00:29:01,760 --> 00:29:04,600
Speaker 1: this right now in the United States. Europe has been

506
00:29:04,640 --> 00:29:08,800
Speaker 1: experiencing it for years, Japan has been experiencing it for decades,

507
00:29:09,280 --> 00:29:11,880
Speaker 1: and we're now seeing if you start looking at what's

508
00:29:11,920 --> 00:29:15,520
Speaker 1: going on in China, some very worrisome signs. I mean,

509
00:29:15,560 --> 00:29:18,960
Speaker 1: their last inflation print. This is a country that's growing,

510
00:29:19,320 --> 00:29:22,040
Speaker 1: depending on who you believe, five to seven percent a year.

511
00:29:24,560 --> 00:29:26,800
Speaker 1: And we saw we saw an inflation print there of

512
00:29:26,920 --> 00:29:29,600
Speaker 1: one point four percent year over year last month or

513
00:29:29,600 --> 00:29:32,280
Speaker 1: maybe one point five of my memories. So essentially their

514
00:29:32,280 --> 00:29:36,000
Speaker 1: wages aren't growing. The well prices certainly aren't growing. Wages

515
00:29:36,000 --> 00:29:37,840
Speaker 1: have continued to grow, but at some point people are

516
00:29:37,880 --> 00:29:39,400
Speaker 1: going to shrug their shoulders and say, why do I

517
00:29:39,480 --> 00:29:42,640
Speaker 1: need to pay anymore for labor? Because their costs are

518
00:29:42,640 --> 00:29:45,640
Speaker 1: not the costs being incurred by the families are not rising.

519
00:29:45,720 --> 00:29:47,640
Speaker 1: So you said something before. I want to come back

520
00:29:47,680 --> 00:29:51,240
Speaker 1: around too, because I find it really fascinating you had

521
00:29:51,280 --> 00:29:56,440
Speaker 1: said they're the natural demand just didn't exist. And we've

522
00:29:56,440 --> 00:30:02,480
Speaker 1: been talking about monetary policy, which is playing interest rates

523
00:30:02,480 --> 00:30:06,560
Speaker 1: and it's a supply side concept. Monetary policy. What you're doing. Uh,

524
00:30:06,600 --> 00:30:09,400
Speaker 1: you know, montery policy has in this in this context,

525
00:30:09,880 --> 00:30:14,200
Speaker 1: has several stages, right. Uh. One is you try to

526
00:30:14,240 --> 00:30:16,640
Speaker 1: make sure that you create solvency and liquidity in the

527
00:30:16,640 --> 00:30:18,840
Speaker 1: banking systems so their banks don't shut down. So they

528
00:30:18,840 --> 00:30:22,400
Speaker 1: did that right by lowering rates and by by pursuing QUWI.

529
00:30:22,960 --> 00:30:26,360
Speaker 1: Then you try to make it very, very attractive to borrow.

530
00:30:26,400 --> 00:30:28,360
Speaker 1: But in order to want to borrow, you need a

531
00:30:28,440 --> 00:30:31,880
Speaker 1: need for new capacity and need for new production and

532
00:30:31,920 --> 00:30:34,560
Speaker 1: equipment what have you. If that doesn't work, you go

533
00:30:34,600 --> 00:30:37,280
Speaker 1: to your third step, which is you make risk free assets,

534
00:30:37,320 --> 00:30:41,160
Speaker 1: bonds and what have you so ridiculously unattractive to people

535
00:30:41,240 --> 00:30:44,000
Speaker 1: because the interest rates are so low that you force

536
00:30:44,080 --> 00:30:47,840
Speaker 1: people into risk assets. That's the monetary side, that's supply

537
00:30:47,880 --> 00:30:51,640
Speaker 1: side monitorism. And then if that doesn't work, you count

538
00:30:51,640 --> 00:30:55,920
Speaker 1: on the wealth effect, which which to create increased asset

539
00:30:56,000 --> 00:30:58,800
Speaker 1: prices and and make a few people with money actually

540
00:30:58,920 --> 00:31:02,320
Speaker 1: able to There's there's a lot of math behind the

541
00:31:02,360 --> 00:31:08,320
Speaker 1: wealth effect that basically suggests that it's more correlation than causation.

542
00:31:08,720 --> 00:31:11,200
Speaker 1: When when you look at when you look at all

543
00:31:11,240 --> 00:31:15,120
Speaker 1: these things going up, people weren't spending because they felt

544
00:31:15,120 --> 00:31:18,360
Speaker 1: wealthier people were earning more money and therefore spending more.

545
00:31:18,760 --> 00:31:21,280
Speaker 1: And therefore, I think a lot of of the FED

546
00:31:21,320 --> 00:31:24,360
Speaker 1: research on this gets it exact back exactly backwards. But

547
00:31:24,440 --> 00:31:27,960
Speaker 1: let's go back to the demand side of the equation.

548
00:31:28,480 --> 00:31:33,640
Speaker 1: So we have a huge amount of FED driven monetary

549
00:31:33,680 --> 00:31:38,040
Speaker 1: policy during the central banks, not right, all central banks

550
00:31:38,400 --> 00:31:41,600
Speaker 1: during the crisis, after the crisis, but in the United

551
00:31:41,640 --> 00:31:45,680
Speaker 1: States and to some degree Europe, actually a greater degree Europe,

552
00:31:46,200 --> 00:31:50,959
Speaker 1: the fiscal response is non existent. Oh it's not just

553
00:31:51,080 --> 00:31:53,720
Speaker 1: Europe in the United States, it's Europe, the UK, United States,

554
00:31:53,800 --> 00:31:56,960
Speaker 1: Japan's across the board. But China seems to be spending money,

555
00:31:58,160 --> 00:32:00,960
Speaker 1: you know, left and right, speed els and cities, and

556
00:32:00,960 --> 00:32:03,320
Speaker 1: they're sitting on a three point seven trillion dollar foreign

557
00:32:03,320 --> 00:32:07,240
Speaker 1: currency reserve. Why not know they're They're bigger problem is

558
00:32:07,280 --> 00:32:10,400
Speaker 1: they they've now exceeded the demand for the facilities that

559
00:32:10,400 --> 00:32:13,920
Speaker 1: they're building. Um, so you're you're now building for the future,

560
00:32:13,920 --> 00:32:15,600
Speaker 1: so to speak, and there's a limit to how much

561
00:32:15,640 --> 00:32:18,560
Speaker 1: you can do with that. So you're old enough, you're

562
00:32:18,600 --> 00:32:21,480
Speaker 1: more or less my age that you could recall in

563
00:32:21,600 --> 00:32:25,280
Speaker 1: Soviet Russia, they would have a factory where they get

564
00:32:25,360 --> 00:32:27,920
Speaker 1: raw materials come in one end and what would roll

565
00:32:27,960 --> 00:32:30,440
Speaker 1: out the other end, or jeeps and tanks, and then

566
00:32:30,480 --> 00:32:32,560
Speaker 1: they would take those to another factory where they would

567
00:32:32,600 --> 00:32:35,080
Speaker 1: take it apart and send the components back to the

568
00:32:35,080 --> 00:32:38,760
Speaker 1: first factory. Is China at a point where they're not

569
00:32:38,760 --> 00:32:41,479
Speaker 1: not quite because they're they're consumer economy. While it's not

570
00:32:41,680 --> 00:32:46,120
Speaker 1: adequately consuming relative to production, their consumer economy is growing. Uh.

571
00:32:46,160 --> 00:32:48,080
Speaker 1: And I don't see that as being a problem because

572
00:32:48,080 --> 00:32:51,360
Speaker 1: obviously China is dumping off it's very high quality products,

573
00:32:51,400 --> 00:32:53,800
Speaker 1: and the quality of their products in terms of where

574
00:32:53,840 --> 00:32:56,080
Speaker 1: they are and the value added chain is going up

575
00:32:56,120 --> 00:32:59,000
Speaker 1: every year, so they're dumping those products abroad. Uh. And

576
00:32:59,040 --> 00:33:01,560
Speaker 1: that's what's causing the problem. Right, So that's part of

577
00:33:01,560 --> 00:33:05,040
Speaker 1: the oversupplies, part of the chief Chinese labor making high quality.

578
00:33:05,080 --> 00:33:07,520
Speaker 1: But getting back to the fiscal issue, right, you have

579
00:33:07,960 --> 00:33:13,440
Speaker 1: you have uh, these the countries all pursuing monetary policy

580
00:33:13,480 --> 00:33:16,040
Speaker 1: was there, as I say, is a supply side remedy,

581
00:33:16,120 --> 00:33:19,160
Speaker 1: and not pursuing demand side remedies, which would be fiscal spending.

582
00:33:19,160 --> 00:33:22,480
Speaker 1: In fact, they've cut if you're in Europe, cut dramatically back,

583
00:33:22,600 --> 00:33:25,600
Speaker 1: and in the US with our sequester, cut dramatically back.

584
00:33:26,080 --> 00:33:29,960
Speaker 1: During the period immediately prior to ABBE in Japan, the

585
00:33:30,080 --> 00:33:33,520
Speaker 1: Japanese abandoned heavy fiscal spending because they started to worry

586
00:33:33,560 --> 00:33:36,080
Speaker 1: about the same thing, they're debt to GDP ratio, so

587
00:33:36,120 --> 00:33:39,800
Speaker 1: they stopped spending right And in the UK you saw

588
00:33:39,960 --> 00:33:44,840
Speaker 1: a conservative fiscal policy as well. This policy of austerity,

589
00:33:44,880 --> 00:33:48,160
Speaker 1: whether it's within a region or globally, is a huge

590
00:33:48,200 --> 00:33:51,320
Speaker 1: problem in the age of oversupply. What you're effectively doing

591
00:33:51,840 --> 00:33:55,640
Speaker 1: is you're trying to solve a demand side problem with

592
00:33:55,760 --> 00:34:01,080
Speaker 1: supply side remedies. And it's like throwing fire on throwing

593
00:34:01,200 --> 00:34:04,200
Speaker 1: gas on a fire. It's it's ridiculous. So are you

594
00:34:04,280 --> 00:34:08,000
Speaker 1: saying that after all this time, John Mayner and Keynes

595
00:34:08,080 --> 00:34:10,719
Speaker 1: turned out to be right, and we're ignoring lessons that

596
00:34:11,200 --> 00:34:15,040
Speaker 1: we're learned almost a century ago. I don't know how

597
00:34:15,080 --> 00:34:18,880
Speaker 1: anyone could conclude otherwise. Thank you Dan for spending so

598
00:34:18,960 --> 00:34:21,520
Speaker 1: much time with us. Today, I've been speaking with Dan

599
00:34:21,719 --> 00:34:26,040
Speaker 1: Albert of Westward Capital UH. Dan is the author of

600
00:34:26,120 --> 00:34:29,480
Speaker 1: the Age of Oversupply. What's your Twitter handle? Dan at

601
00:34:29,600 --> 00:34:34,680
Speaker 1: Daniel Albert at Daniel Albert. If you enjoy these conversations,

602
00:34:34,800 --> 00:34:37,920
Speaker 1: you can listen to Dan and I continue chatting about

603
00:34:37,960 --> 00:34:42,719
Speaker 1: everything from the Fed, two Keynes to austerity. UH. That's

604
00:34:42,760 --> 00:34:47,200
Speaker 1: available on Bloomberg dot com as well as on iTunes,

605
00:34:47,440 --> 00:34:51,640
Speaker 1: where all of our prior conversations have been archived. You

606
00:34:51,680 --> 00:34:55,800
Speaker 1: can follow my daily column on Bloomberg View dot com

607
00:34:55,960 --> 00:34:58,720
Speaker 1: and at Ridults dot com, which is the Big Picture,

608
00:34:59,239 --> 00:35:03,040
Speaker 1: or follow me on Twitter at Ridhults. I'm Barry Rihults.

609
00:35:03,040 --> 00:35:07,920
Speaker 1: You're listening to Masters in Business on Bloomberg Radio. Welcome

610
00:35:07,920 --> 00:35:11,880
Speaker 1: back to the show. This is the podcast portion of

611
00:35:11,920 --> 00:35:14,640
Speaker 1: the show, which is a little more loose and freewheeling

612
00:35:14,719 --> 00:35:18,200
Speaker 1: and m Dan and I have taken our ties off

613
00:35:18,280 --> 00:35:23,440
Speaker 1: and basically loosened it loosened it up. Um let's continue

614
00:35:23,440 --> 00:35:26,200
Speaker 1: where we left off. We stopped on the broadcast portion

615
00:35:26,600 --> 00:35:30,160
Speaker 1: about something that I think is really fascinating and it

616
00:35:30,280 --> 00:35:34,560
Speaker 1: never ceases to amaze me that people argue about this.

617
00:35:35,239 --> 00:35:38,640
Speaker 1: But the problem that we've been suffering for for all

618
00:35:38,680 --> 00:35:42,120
Speaker 1: this time is a lack of organic demand. We had

619
00:35:42,120 --> 00:35:44,440
Speaker 1: a huge credit bubble. You know, when you have a

620
00:35:44,480 --> 00:35:48,800
Speaker 1: regular bubble, what you're left with afterwards is cheap infrastructure.

621
00:35:49,200 --> 00:35:51,640
Speaker 1: So think back to the nineties old the dark fiber

622
00:35:51,680 --> 00:35:54,239
Speaker 1: that was laid at Media Fiber and global crossing it

623
00:35:54,719 --> 00:35:57,200
Speaker 1: so they all go belly up, and because you can

624
00:35:57,239 --> 00:35:59,920
Speaker 1: buy that stuff for pennies on the dollar, you end

625
00:36:00,080 --> 00:36:03,000
Speaker 1: up with YouTube and Facebook and Google Maps and Uber

626
00:36:03,080 --> 00:36:06,960
Speaker 1: and all these bandwidth intensive applications that you couldn't have

627
00:36:06,960 --> 00:36:08,960
Speaker 1: done in the nineties because they just weren't the pipes

628
00:36:09,000 --> 00:36:11,000
Speaker 1: for it. And if even if you had the pipes,

629
00:36:11,040 --> 00:36:14,920
Speaker 1: that were really expensive, following the end of a credit bubble,

630
00:36:15,480 --> 00:36:19,760
Speaker 1: you're left with nothing but debt that crimps demand. People

631
00:36:19,760 --> 00:36:22,359
Speaker 1: are de leveraging even if they want to spend, they

632
00:36:22,400 --> 00:36:25,920
Speaker 1: can't get credit. Isn't it obvious that we need some

633
00:36:26,000 --> 00:36:30,080
Speaker 1: sort of temporary boost to demands and we're just not

634
00:36:30,120 --> 00:36:33,120
Speaker 1: seeing it from the congressional side, from the fiscal side. Yeah,

635
00:36:33,360 --> 00:36:36,040
Speaker 1: I think your your point is well taken. We have

636
00:36:36,080 --> 00:36:39,359
Speaker 1: a classic Irving Fisher style debt deflation, right and where

637
00:36:39,320 --> 00:36:42,400
Speaker 1: everybody's trying to pay down debt. People have seen their

638
00:36:42,440 --> 00:36:44,799
Speaker 1: assets fall below the value of the debt that they've

639
00:36:44,840 --> 00:36:47,719
Speaker 1: taken on. You have to remember that even today, with

640
00:36:47,800 --> 00:36:50,160
Speaker 1: the price recovery that we've seen in the US housing market,

641
00:36:50,200 --> 00:36:53,960
Speaker 1: we still have ten million homes that are not you

642
00:36:54,000 --> 00:36:58,280
Speaker 1: know that are they're either underwater or just slightly above water. Uh,

643
00:36:58,280 --> 00:37:00,319
Speaker 1: and those people are still stuck in those homes. Those

644
00:37:00,360 --> 00:37:03,120
Speaker 1: homes can't trade. It's part of the reason, by the way,

645
00:37:03,160 --> 00:37:05,960
Speaker 1: that home prices actually accelerated as fast as they did

646
00:37:06,000 --> 00:37:09,600
Speaker 1: simply because a lot of homes can't trade. Jonathan Miller

647
00:37:09,680 --> 00:37:14,520
Speaker 1: talks about the perversion of all these homes with either

648
00:37:14,719 --> 00:37:18,839
Speaker 1: no equity or low equity or negative equity, and that

649
00:37:19,000 --> 00:37:22,560
Speaker 1: perversely causes home prizes to rise. Very strange because you've

650
00:37:22,640 --> 00:37:26,719
Speaker 1: artificially prempt the supply potential sellable homes. Um But but

651
00:37:26,840 --> 00:37:29,360
Speaker 1: that's a you know, that's a unique function of the

652
00:37:29,440 --> 00:37:32,680
Speaker 1: US residential real estate markets. Something you don't see elsewhere

653
00:37:32,680 --> 00:37:35,920
Speaker 1: because the structure isn't the same. But um, when you

654
00:37:36,000 --> 00:37:40,320
Speaker 1: look at what's going on in on the demand side,

655
00:37:40,360 --> 00:37:42,880
Speaker 1: you have to conclude that we've done pretty much everything

656
00:37:43,840 --> 00:37:48,399
Speaker 1: possible to avoid addressing that problem. Because if you think

657
00:37:48,440 --> 00:37:51,239
Speaker 1: it's just a debt deflation and what we've been through

658
00:37:51,400 --> 00:37:55,279
Speaker 1: is a severe downturn on a cyclical basis, and I

659
00:37:55,320 --> 00:38:00,480
Speaker 1: think a large portion of both pundits and UH Chicago

660
00:38:00,520 --> 00:38:04,680
Speaker 1: style economists believe this. They really believe that what we've

661
00:38:04,719 --> 00:38:08,560
Speaker 1: incurred is a is a severe downtick in the business cycle.

662
00:38:09,840 --> 00:38:11,200
Speaker 1: Of course, in order to believe that, you have to

663
00:38:11,200 --> 00:38:13,279
Speaker 1: believe there is such a thing this is a cycle.

664
00:38:13,520 --> 00:38:16,640
Speaker 1: I'm not so sure of that. Um. But but regardless,

665
00:38:17,400 --> 00:38:20,279
Speaker 1: what we have other folks out there who start to

666
00:38:20,360 --> 00:38:24,359
Speaker 1: understand that this is actually a much broader secular problem.

667
00:38:24,400 --> 00:38:26,920
Speaker 1: It's not just a secular problem within the borders of

668
00:38:26,960 --> 00:38:29,680
Speaker 1: the United States or any other global It's a global

669
00:38:29,719 --> 00:38:33,840
Speaker 1: secular problem, in my opinion, caused by the oversupply of labor,

670
00:38:33,880 --> 00:38:36,200
Speaker 1: productive capacity, and capital. Right, So, how much of this

671
00:38:36,280 --> 00:38:38,799
Speaker 1: is a function of demographics? You have you have an

672
00:38:38,840 --> 00:38:43,800
Speaker 1: aging population in Japan with with no immigration or practically

673
00:38:43,800 --> 00:38:47,080
Speaker 1: no immigration and a very low birth rate. You look

674
00:38:47,120 --> 00:38:51,440
Speaker 1: throughout most of Europe, really low birth rates. United States

675
00:38:51,480 --> 00:38:54,759
Speaker 1: is one of the best developed country birth rates and

676
00:38:54,800 --> 00:38:59,040
Speaker 1: even birth rate we're not we're now falling the you

677
00:38:59,040 --> 00:39:01,520
Speaker 1: know where we actually fell below replacement, which is a

678
00:39:01,520 --> 00:39:04,960
Speaker 1: little bit disconcerting when you look at where that replacement

679
00:39:05,000 --> 00:39:07,359
Speaker 1: was coming from. Was coming from a very small group

680
00:39:07,360 --> 00:39:10,960
Speaker 1: of recent immigrants, mostly mostly Hispanic uh and they have

681
00:39:11,320 --> 00:39:14,400
Speaker 1: now sort of become higher income and more developed than

682
00:39:14,480 --> 00:39:17,319
Speaker 1: hence they're having for your children. But the that's the

683
00:39:17,400 --> 00:39:19,839
Speaker 1: nature of the demographic trends is right, and you don't

684
00:39:19,880 --> 00:39:21,680
Speaker 1: get a lot. You don't get a lot of immigration

685
00:39:21,920 --> 00:39:25,080
Speaker 1: when you have no job. So it creates another problem.

686
00:39:25,120 --> 00:39:27,000
Speaker 1: There was a brief period and I want to say,

687
00:39:27,040 --> 00:39:30,879
Speaker 1: oh eight oh nine where the border problem disappeared because

688
00:39:31,000 --> 00:39:33,080
Speaker 1: nobody was coming to right. We had we actually had

689
00:39:33,120 --> 00:39:37,400
Speaker 1: reverse for for I think fifteen months, we had reverse

690
00:39:37,480 --> 00:39:40,120
Speaker 1: migration to Mexico, which is our biggest source of immigration.

691
00:39:40,840 --> 00:39:44,960
Speaker 1: So you have a big problem in that in that context,

692
00:39:45,000 --> 00:39:49,719
Speaker 1: but when you point at the demographic argument, excuse me,

693
00:39:51,520 --> 00:39:55,719
Speaker 1: it's very tempting because you have this incredible obvious correlation, right,

694
00:39:55,760 --> 00:39:59,560
Speaker 1: You see that the developed world, that even China is

695
00:39:59,600 --> 00:40:02,919
Speaker 1: getting a older and it's very tempting to say that

696
00:40:02,920 --> 00:40:05,839
Speaker 1: that's the cause of all the problems. You go one

697
00:40:06,320 --> 00:40:10,360
Speaker 1: iteration away, you go one iteration away, and what you

698
00:40:10,520 --> 00:40:15,399
Speaker 1: what you find is that look at, for example, US

699
00:40:15,480 --> 00:40:20,080
Speaker 1: labor force participation, there has been some obvious demographic decline

700
00:40:20,120 --> 00:40:25,439
Speaker 1: that's been going on since well before the Great Recession. Yeah, well,

701
00:40:25,600 --> 00:40:27,759
Speaker 1: I mean it really was the early two thousands when

702
00:40:27,760 --> 00:40:29,880
Speaker 1: you look at the stats. But but yeah, it was that.

703
00:40:29,920 --> 00:40:31,360
Speaker 1: It was that period of time and you saw the

704
00:40:31,440 --> 00:40:35,920
Speaker 1: labor force participation rates start to decline slightly, but it

705
00:40:36,160 --> 00:40:40,319
Speaker 1: fell off a cliff after the Great Recession. This is

706
00:40:40,360 --> 00:40:43,800
Speaker 1: not the same factor. The This slope and that slope

707
00:40:43,840 --> 00:40:46,920
Speaker 1: I'm using my hands are not the same slope. There's

708
00:40:46,960 --> 00:40:50,200
Speaker 1: been something else going of a far broader secular phenomenon.

709
00:40:51,120 --> 00:40:53,840
Speaker 1: Add to that the fact that when you talk about

710
00:40:53,880 --> 00:40:57,880
Speaker 1: aging populations and don't talk in the same sentence or

711
00:40:57,880 --> 00:41:02,319
Speaker 1: at least the following sentence about technology. Technology, of course,

712
00:41:02,360 --> 00:41:05,720
Speaker 1: has always been regarded as a sort of enemy of labor,

713
00:41:05,760 --> 00:41:08,920
Speaker 1: at least in terms of its initial introduction, right, and

714
00:41:08,960 --> 00:41:12,560
Speaker 1: then eventually we have people freed to do other things.

715
00:41:12,600 --> 00:41:16,280
Speaker 1: Sometimes more creative things in our society has become better, etcetera, etcetera.

716
00:41:16,800 --> 00:41:19,120
Speaker 1: But I don't know anyone that can look at the

717
00:41:19,160 --> 00:41:23,920
Speaker 1: demographic phenomenon that are going on in developed countries and

718
00:41:24,000 --> 00:41:26,560
Speaker 1: ignore the fact that we just don't need as many

719
00:41:26,640 --> 00:41:29,480
Speaker 1: people to do the same jobs that we did before.

720
00:41:30,000 --> 00:41:34,120
Speaker 1: We have a technology issue we and and believe me,

721
00:41:34,160 --> 00:41:37,680
Speaker 1: that's not being that is more than that's more than

722
00:41:37,719 --> 00:41:42,040
Speaker 1: offsetting the decline in working population, right, and so that

723
00:41:42,080 --> 00:41:45,200
Speaker 1: creates oversupply of labor in and of itself. We have

724
00:41:45,280 --> 00:41:47,319
Speaker 1: a global phenomena that has always been the case. I mean,

725
00:41:47,320 --> 00:41:51,000
Speaker 1: there's nothing new about technology. We have a debt deflation

726
00:41:51,320 --> 00:41:53,520
Speaker 1: right where you have an inadequacy of demand because people

727
00:41:53,520 --> 00:41:55,640
Speaker 1: are paying off that, and then you have this global

728
00:41:55,760 --> 00:41:59,680
Speaker 1: oversupply of labor that has basically made it very un

729
00:41:59,719 --> 00:42:05,080
Speaker 1: a track active for people to employ individuals in developed countries.

730
00:42:05,320 --> 00:42:09,120
Speaker 1: Let me, I mentioned this, It comes up every few weeks.

731
00:42:09,600 --> 00:42:13,360
Speaker 1: So we were running a small office that we launched

732
00:42:13,400 --> 00:42:16,839
Speaker 1: a less than eighteen months ago, and everything we do

733
00:42:17,000 --> 00:42:21,000
Speaker 1: has a very heavy software technology component, whether it's the

734
00:42:21,000 --> 00:42:25,799
Speaker 1: financial planning side, whether it's the software to rebalance you

735
00:42:25,800 --> 00:42:28,440
Speaker 1: know years ago, if you want to rebalance a multi

736
00:42:28,480 --> 00:42:32,920
Speaker 1: factor portfolio. You had five guys and and Green Eye

737
00:42:32,920 --> 00:42:36,560
Speaker 1: Eye advisors working a week to figure out, right, here's

738
00:42:36,560 --> 00:42:38,520
Speaker 1: what we need to do in order to capture some

739
00:42:38,600 --> 00:42:42,160
Speaker 1: tax losses. And you know we'll harvest. Now you push

740
00:42:42,160 --> 00:42:44,880
Speaker 1: a button, it's done. And so what we end up

741
00:42:44,920 --> 00:42:49,080
Speaker 1: doing with seven people, whether it's producing content or managing

742
00:42:49,120 --> 00:42:52,680
Speaker 1: portfolios or just communicating with clients and staying on top

743
00:42:52,719 --> 00:42:57,560
Speaker 1: of stuff ten years ago would have taken fifteen people

744
00:42:57,600 --> 00:43:00,320
Speaker 1: to do, and twenty five years ago would have taken

745
00:43:00,480 --> 00:43:03,640
Speaker 1: forty people to do. And it's amazing that. You know,

746
00:43:03,680 --> 00:43:06,560
Speaker 1: every time we think about adding a body, the first

747
00:43:06,640 --> 00:43:09,759
Speaker 1: question is, well, isn't there a software I can get

748
00:43:09,760 --> 00:43:12,440
Speaker 1: from grand to do this instead of paying someone eight

749
00:43:13,000 --> 00:43:15,800
Speaker 1: dollars a year. It's astonished. Just look at the clerical

750
00:43:15,880 --> 00:43:19,279
Speaker 1: head count. You're talking about the stando pool that the

751
00:43:19,320 --> 00:43:24,480
Speaker 1: girls in type everybody does their own typing today, and

752
00:43:24,480 --> 00:43:28,120
Speaker 1: and and telecommunications is not something you need staff for.

753
00:43:28,239 --> 00:43:31,600
Speaker 1: I mean, you look at the decline in support staff

754
00:43:31,960 --> 00:43:34,879
Speaker 1: necessary to run even a large institution, and it's it's

755
00:43:35,040 --> 00:43:39,200
Speaker 1: it's astronomical. It's it's there's no doubt about it. And

756
00:43:39,239 --> 00:43:42,759
Speaker 1: then on top of everything else. There are all these

757
00:43:42,800 --> 00:43:48,360
Speaker 1: companies that have become niche specialists where they use their software.

758
00:43:48,440 --> 00:43:52,040
Speaker 1: So you used to have a bookkeeper, on accountant, on staff.

759
00:43:52,120 --> 00:43:55,640
Speaker 1: We use a company to handle an outside company. They

760
00:43:55,719 --> 00:43:58,040
Speaker 1: charge us like a hundred dollars a person a month

761
00:43:58,800 --> 00:44:04,279
Speaker 1: to basically you all of the payroll, the tax, the

762
00:44:04,360 --> 00:44:08,600
Speaker 1: state compliance, the UH disability. There's a whole run of

763
00:44:08,640 --> 00:44:10,440
Speaker 1: things that you run a business that you used to

764
00:44:10,440 --> 00:44:13,680
Speaker 1: have a staff to do that's gone. Bringing this all

765
00:44:13,719 --> 00:44:16,080
Speaker 1: back into the macro context, right, So now you have

766
00:44:16,160 --> 00:44:20,920
Speaker 1: these three phenomenon. You have the continued UH development of technology.

767
00:44:21,000 --> 00:44:23,880
Speaker 1: You have UH the the debt deflation, and then you

768
00:44:23,920 --> 00:44:27,520
Speaker 1: have this oversupply of labor globally. And these things are secular.

769
00:44:28,160 --> 00:44:30,640
Speaker 1: The the not going away anytime. There's no there's no

770
00:44:30,760 --> 00:44:33,680
Speaker 1: there's no business cycle for technology. As you have plateaus,

771
00:44:33,719 --> 00:44:37,040
Speaker 1: but technology continues to progress, right, That's been going on

772
00:44:37,120 --> 00:44:40,560
Speaker 1: for thousands of years and it's only accelerated, right, um

773
00:44:40,960 --> 00:44:44,640
Speaker 1: with with the the debt deflation is classically secular. Right,

774
00:44:44,680 --> 00:44:47,440
Speaker 1: It's not a you can say it's cyclical because we

775
00:44:47,480 --> 00:44:50,760
Speaker 1: had a bubble, right, But until we're able to remove

776
00:44:50,840 --> 00:44:54,320
Speaker 1: that impediment, it's a secular impediment, and it's a decade

777
00:44:54,520 --> 00:44:56,960
Speaker 1: or longer. It's not we have to actually get to that.

778
00:44:57,040 --> 00:44:59,759
Speaker 1: I mean, where you realize that while people point to

779
00:44:59,800 --> 00:45:02,600
Speaker 1: debt to GDP figures or debt to all sorts of

780
00:45:03,120 --> 00:45:07,800
Speaker 1: even debt to income UM because and certainly debt service

781
00:45:08,080 --> 00:45:12,920
Speaker 1: UH costs have have decreased enormously but nominally from the

782
00:45:12,960 --> 00:45:17,600
Speaker 1: point of the bubble to today, total debt outstanding UH

783
00:45:17,719 --> 00:45:20,640
Speaker 1: in households in the United States has fallen by four percent,

784
00:45:21,200 --> 00:45:24,479
Speaker 1: not a whole lot. Yeah, and and so so you're

785
00:45:24,520 --> 00:45:27,600
Speaker 1: you're you're not talking about this enormous retrenchment where suddenly

786
00:45:27,640 --> 00:45:30,160
Speaker 1: you've written off half the debt or something like that.

787
00:45:30,480 --> 00:45:32,840
Speaker 1: And of course you see the same problem in Europe.

788
00:45:32,880 --> 00:45:35,760
Speaker 1: The problem in Europe is different from country to country.

789
00:45:35,760 --> 00:45:40,279
Speaker 1: Spain has massive household debt, Greece has massive government. That

790
00:45:40,440 --> 00:45:43,279
Speaker 1: doesn't really matter how they took the money. Ultimately, they

791
00:45:43,280 --> 00:45:45,880
Speaker 1: took the money, generally to pay to their own people,

792
00:45:45,920 --> 00:45:48,000
Speaker 1: whether it was lending it to them or paying them

793
00:45:48,040 --> 00:45:50,520
Speaker 1: wages for jobs that they shouldn't have paid for. But

794
00:45:51,200 --> 00:45:52,880
Speaker 1: it doesn't really matter how they took the money. They

795
00:45:52,960 --> 00:45:56,799
Speaker 1: ultimately took the money from mostly other European lenders who

796
00:45:56,840 --> 00:46:01,560
Speaker 1: received that money received that money by through the enormous

797
00:46:01,560 --> 00:46:04,360
Speaker 1: influx of demand for their government bonds. So let me

798
00:46:04,400 --> 00:46:07,200
Speaker 1: bring this back to an earlier conversation we had about

799
00:46:07,920 --> 00:46:10,880
Speaker 1: some criticism, and you've been a pretty vocal critic about

800
00:46:11,000 --> 00:46:13,520
Speaker 1: the Federal Reserve and all the central I'm not a

801
00:46:13,600 --> 00:46:15,440
Speaker 1: critic of the Federal Reserve. In fact, thank God for

802
00:46:15,480 --> 00:46:20,520
Speaker 1: the Federal Depression. So what did the so I was

803
00:46:20,560 --> 00:46:24,480
Speaker 1: gonna turn this on you? What did the Fed do? Right? Well,

804
00:46:24,520 --> 00:46:27,799
Speaker 1: they stepped in early and hard. And what Bernanke did

805
00:46:27,800 --> 00:46:29,960
Speaker 1: obviously as a student of the depression, as he came

806
00:46:29,960 --> 00:46:33,759
Speaker 1: in and he he realized the emergent nature of the situation,

807
00:46:33,800 --> 00:46:37,840
Speaker 1: and he he did what was prescribed by the years

808
00:46:37,840 --> 00:46:40,360
Speaker 1: of study and research that he's done, which is to

809
00:46:40,880 --> 00:46:44,760
Speaker 1: flood the markets with enormous amounts of liquidity uh and

810
00:46:44,760 --> 00:46:48,040
Speaker 1: and bail out institutions. But of course, when you really

811
00:46:48,040 --> 00:46:50,359
Speaker 1: go back and understand the role of a central bank,

812
00:46:50,400 --> 00:46:52,759
Speaker 1: you have to reflect back onto its lender of last

813
00:46:52,800 --> 00:46:56,760
Speaker 1: resort function, which is really why central banks were created

814
00:46:56,800 --> 00:47:00,000
Speaker 1: to begin with, the whole notion of stopping bank runs.

815
00:47:00,040 --> 00:47:02,759
Speaker 1: So banks have a bank to borrow from Uh. And

816
00:47:02,960 --> 00:47:07,000
Speaker 1: it wasn't that supposed to be at um punitive rates

817
00:47:07,120 --> 00:47:11,600
Speaker 1: to institutions of of good credit market actually market rates

818
00:47:11,840 --> 00:47:18,480
Speaker 1: markets of good right, badge, My is a going to

819
00:47:18,560 --> 00:47:21,799
Speaker 1: be terrible, But that's not really what we did. We

820
00:47:21,880 --> 00:47:25,440
Speaker 1: lent money at very low rates to companies that were

821
00:47:25,520 --> 00:47:30,799
Speaker 1: essentially bankrupt and against assets that were questionable value. So uh,

822
00:47:30,840 --> 00:47:35,480
Speaker 1: if anything, it did not follow Badget's prescription. Uh. And

823
00:47:35,560 --> 00:47:38,440
Speaker 1: we ended up with with the situation with with the

824
00:47:38,480 --> 00:47:42,240
Speaker 1: situation in which we created enormous you talk about moral

825
00:47:42,320 --> 00:47:45,080
Speaker 1: hazard for the shop owners or whatever I mean, moral

826
00:47:45,120 --> 00:47:47,840
Speaker 1: hazard that we created for banking institutions will be with

827
00:47:47,920 --> 00:47:51,239
Speaker 1: us now for for decades generations. Uh and and and

828
00:47:51,280 --> 00:47:53,000
Speaker 1: we may, in order to reverse that, have to let

829
00:47:53,000 --> 00:47:55,560
Speaker 1: a huge bank fail at some point. And letting Lehman

830
00:47:55,640 --> 00:47:59,200
Speaker 1: go down, by that wasn't sufficient. Well, that wasn't the

831
00:47:59,239 --> 00:48:05,400
Speaker 1: warning Colude, or should have been. It was ironically counterproductive.

832
00:48:05,480 --> 00:48:08,480
Speaker 1: So by letting Lehman go down, which of course they

833
00:48:08,560 --> 00:48:11,840
Speaker 1: felt they had to do, that created such an enormous

834
00:48:12,000 --> 00:48:14,880
Speaker 1: financial crisis that their conclusion was, what, we can't lose

835
00:48:14,920 --> 00:48:22,759
Speaker 1: anyone else. What they did instead of uh, nationalizing, which

836
00:48:22,800 --> 00:48:24,800
Speaker 1: is what you know when I was I was actually

837
00:48:24,800 --> 00:48:27,560
Speaker 1: sitting a few feet from this very room in which

838
00:48:27,560 --> 00:48:31,160
Speaker 1: we're talking on Charlie Rose back in twenty nine and

839
00:48:31,360 --> 00:48:35,000
Speaker 1: uh and you know, those were the days in which everybody,

840
00:48:35,080 --> 00:48:37,920
Speaker 1: half the people out there were talking about nationalizing them.

841
00:48:38,040 --> 00:48:40,680
Speaker 1: I thought that's the way to go, and and and

842
00:48:40,800 --> 00:48:44,520
Speaker 1: one of the benefits of nationalization. There are many many detriments,

843
00:48:44,520 --> 00:48:46,239
Speaker 1: and I'm glad to a certain extent we didn't do

844
00:48:46,280 --> 00:48:49,160
Speaker 1: some of that. But the notion of allowing managements to

845
00:48:49,200 --> 00:48:53,520
Speaker 1: continue on in management after they've blown it so badly

846
00:48:53,680 --> 00:48:56,399
Speaker 1: is really the worst of moral hazards that can create.

847
00:48:56,480 --> 00:48:59,719
Speaker 1: So the benefit of nationalization, I can't believe it's and

848
00:48:59,840 --> 00:49:04,319
Speaker 1: was talking about it in abstract theoretical terms, is that

849
00:49:04,520 --> 00:49:08,600
Speaker 1: you wipe out the shareholders who had made ill advised

850
00:49:08,960 --> 00:49:13,120
Speaker 1: investments and deserved to be wiped out. The government provides

851
00:49:13,200 --> 00:49:16,080
Speaker 1: dead or in possession financing the them in Warren Buffett

852
00:49:16,080 --> 00:49:18,399
Speaker 1: are the only people who could afford to an even

853
00:49:18,440 --> 00:49:21,680
Speaker 1: who was questionable if Warren could have bailed out everybody

854
00:49:21,800 --> 00:49:25,439
Speaker 1: or provided piece once called Warren Buffett walks into a bar,

855
00:49:26,320 --> 00:49:29,359
Speaker 1: and it was about Warren Buffett not having any money

856
00:49:29,360 --> 00:49:31,680
Speaker 1: in his wallet. So he decided he'd write an IOU

857
00:49:31,800 --> 00:49:34,400
Speaker 1: on a napkin, right, And I was trying to explain

858
00:49:34,440 --> 00:49:38,399
Speaker 1: the notion of of of currency and who wouldn't take

859
00:49:38,400 --> 00:49:41,560
Speaker 1: that currency? Anybody would take Warren Buffett's napkin. And first

860
00:49:41,600 --> 00:49:44,160
Speaker 1: of all, you would never even cash in. You want

861
00:49:44,160 --> 00:49:47,000
Speaker 1: that napkin, you put that outside, assuming it's not for

862
00:49:47,160 --> 00:49:50,920
Speaker 1: seven figures, right, that's exactly right. So so you you

863
00:49:51,120 --> 00:49:53,960
Speaker 1: wipe about the shareholders. You give the bond holders, who

864
00:49:54,080 --> 00:49:57,280
Speaker 1: then become the main creditors of the institution a haircut,

865
00:49:57,880 --> 00:50:00,600
Speaker 1: but you really hit the nail on the head. You

866
00:50:00,760 --> 00:50:04,320
Speaker 1: also clear out that top level of management. They're all fired,

867
00:50:04,680 --> 00:50:07,600
Speaker 1: and then the next level of people below them hopefully

868
00:50:07,920 --> 00:50:10,279
Speaker 1: learn Oh, by the way, if you drive the bank

869
00:50:10,320 --> 00:50:13,160
Speaker 1: into insolvency, you're gonna get fired. You don't get your bonus,

870
00:50:13,160 --> 00:50:15,680
Speaker 1: your stock is worthless. But you also don't retain the

871
00:50:15,719 --> 00:50:20,000
Speaker 1: bondholders as bondholders. You make them owners. They become equity owners.

872
00:50:20,200 --> 00:50:22,279
Speaker 1: There's a classic and in fact, what's going on right

873
00:50:22,280 --> 00:50:26,040
Speaker 1: now in Europe. You can look at what vera Focus

874
00:50:26,120 --> 00:50:28,400
Speaker 1: is doing in Greece. He's trying to pull off a

875
00:50:28,440 --> 00:50:30,879
Speaker 1: classic dead equity swap, right, he's got all this dead

876
00:50:30,880 --> 00:50:34,000
Speaker 1: outstanding that he can't pay, and he's basically running around

877
00:50:34,000 --> 00:50:37,680
Speaker 1: Europe right now telling the finance ministers of Europe, look,

878
00:50:37,680 --> 00:50:40,360
Speaker 1: here's what we'll do if we come out of this

879
00:50:40,680 --> 00:50:42,920
Speaker 1: and our GDP rises will give you a piece of it,

880
00:50:43,480 --> 00:50:45,279
Speaker 1: but we're not gonna owe you this money anymore. Well,

881
00:50:45,560 --> 00:50:49,000
Speaker 1: why doesn't he even take us a further step and say,

882
00:50:49,080 --> 00:50:53,120
Speaker 1: you know what, we're out, We're done, we're defaulting, We're

883
00:50:53,120 --> 00:50:55,680
Speaker 1: out of the euro, We're on the Drachma. And if

884
00:50:55,719 --> 00:50:58,400
Speaker 1: the drachma plummet's great, we'll sell a lot of yogurt

885
00:50:58,440 --> 00:51:01,480
Speaker 1: and have a lot of touris force only that they can.

886
00:51:01,520 --> 00:51:05,000
Speaker 1: They have yogurt and olive oil, but they don't have

887
00:51:05,040 --> 00:51:07,280
Speaker 1: a lot of hard exports. And one of the problems

888
00:51:07,280 --> 00:51:10,319
Speaker 1: with exiting for them, I mean, if if it were

889
00:51:10,480 --> 00:51:14,560
Speaker 1: Spain or Italy, you're talking about easy Italy, it'll be easy,

890
00:51:15,040 --> 00:51:17,880
Speaker 1: but Greeten be easy, but it be easier easier for

891
00:51:17,920 --> 00:51:21,640
Speaker 1: the for the exiting country. The problem in h in Greece,

892
00:51:21,640 --> 00:51:25,160
Speaker 1: as you have a country that doesn't make matter very much. Now,

893
00:51:25,280 --> 00:51:29,160
Speaker 1: in theory, if they exited and they had a redenominated

894
00:51:29,200 --> 00:51:33,080
Speaker 1: currency and paid their taxes. Yeah, they would, They would

895
00:51:33,120 --> 00:51:36,560
Speaker 1: attract investment because people would want to use their labor pool,

896
00:51:36,840 --> 00:51:40,560
Speaker 1: which would be very cheap to use um and and

897
00:51:40,600 --> 00:51:42,719
Speaker 1: hopefully that would work itself out, but it's still be

898
00:51:42,800 --> 00:51:46,719
Speaker 1: massively painful and within Greece itself, public opinion is not

899
00:51:46,800 --> 00:51:50,440
Speaker 1: supportive of that. So it's very hard to get a

900
00:51:50,600 --> 00:51:53,760
Speaker 1: consensus for for gregsit as they call it, the gregs.

901
00:51:54,040 --> 00:51:59,120
Speaker 1: So so back to the earlier conversation, Lord Keynes wrote

902
00:51:59,120 --> 00:52:03,000
Speaker 1: about this and it was pretty forceful and pretty persuasive

903
00:52:03,520 --> 00:52:07,239
Speaker 1: and pretty clear um. But there is a subset of

904
00:52:07,440 --> 00:52:14,360
Speaker 1: people who are just knee jerk opponents of any philosophical

905
00:52:14,480 --> 00:52:17,799
Speaker 1: spending by the government. Their philosophical opponents of hey, there's

906
00:52:17,840 --> 00:52:22,600
Speaker 1: a massive decrease in demand on a temporary basis, let's

907
00:52:22,600 --> 00:52:26,280
Speaker 1: have the government step in and we'll refurbish the roads,

908
00:52:26,320 --> 00:52:30,040
Speaker 1: and we'll shore up our defenses in our electrical grid

909
00:52:30,120 --> 00:52:33,400
Speaker 1: and our ports in and our chemical plants is planting.

910
00:52:33,560 --> 00:52:38,280
Speaker 1: There's not of almost free money right now. If based

911
00:52:38,280 --> 00:52:40,440
Speaker 1: on what's going on in the Bloomberg terminal right now,

912
00:52:40,480 --> 00:52:42,120
Speaker 1: and since I don't have it up in front of me,

913
00:52:43,040 --> 00:52:46,320
Speaker 1: my guess is that the ten year Treasury bill, probably

914
00:52:46,680 --> 00:52:54,120
Speaker 1: treasury bond probably cost closed it around. And uh, the

915
00:52:55,160 --> 00:52:58,239
Speaker 1: that those rates, you can pretty much go out and

916
00:52:58,280 --> 00:53:01,280
Speaker 1: build whatever you want and actually be in the money

917
00:53:01,280 --> 00:53:03,920
Speaker 1: on the trade. And here's why. If I have a bridge,

918
00:53:03,920 --> 00:53:06,040
Speaker 1: I know I'm going to have to rebuild twenty years

919
00:53:06,040 --> 00:53:10,120
Speaker 1: from now. I know that either by obsolescence or by

920
00:53:10,560 --> 00:53:13,160
Speaker 1: increased volume that it needs to carry, or for whatever reason,

921
00:53:13,200 --> 00:53:15,319
Speaker 1: I know I wouldn't need to rebuild it or expand it.

922
00:53:15,760 --> 00:53:18,000
Speaker 1: And I take that work and I present value it

923
00:53:18,040 --> 00:53:20,760
Speaker 1: to today. And I do that work today, creating massive

924
00:53:20,760 --> 00:53:25,000
Speaker 1: amounts of economic stimulus. And it costs me one to

925
00:53:25,080 --> 00:53:27,960
Speaker 1: borrow one five As of the time we're recording, the

926
00:53:28,080 --> 00:53:30,319
Speaker 1: market rallied at the end even cheaper it was. It's

927
00:53:30,360 --> 00:53:33,319
Speaker 1: even cheaper. So it cost me, you know that that

928
00:53:33,400 --> 00:53:35,040
Speaker 1: kind of an interest rate. It's a little higher for

929
00:53:35,080 --> 00:53:38,880
Speaker 1: twenty years, but still very very low. Uh and uh

930
00:53:38,960 --> 00:53:42,560
Speaker 1: and you have, uh that kind of borrowing costs in

931
00:53:42,640 --> 00:53:44,319
Speaker 1: order to present value the work, you know you're gonna

932
00:53:44,360 --> 00:53:47,000
Speaker 1: have to spend the money anyway. So you do it today,

933
00:53:47,040 --> 00:53:50,279
Speaker 1: you create massive influx of both primary benefits in terms

934
00:53:50,360 --> 00:53:54,440
Speaker 1: of paying workers wages, secondary benefits in terms of paying

935
00:53:54,480 --> 00:53:57,640
Speaker 1: to procure uh, steal and what have you that you need,

936
00:53:58,000 --> 00:54:00,560
Speaker 1: creates other jobs and then of course terch arey benefits

937
00:54:00,560 --> 00:54:02,480
Speaker 1: because all those people spend all that money or a

938
00:54:02,560 --> 00:54:04,879
Speaker 1: lot of it, and you create a platform for goods

939
00:54:04,920 --> 00:54:09,000
Speaker 1: and services to move some upward pressure on wages, and

940
00:54:09,040 --> 00:54:11,880
Speaker 1: you cure the problem. Now this is really a critical

941
00:54:11,920 --> 00:54:15,759
Speaker 1: issue here. We have an addition to all of the

942
00:54:15,800 --> 00:54:18,120
Speaker 1: other problems that we have. We have an enormous amount

943
00:54:18,680 --> 00:54:22,440
Speaker 1: of polarization of wealth and income. So we have people

944
00:54:22,480 --> 00:54:25,040
Speaker 1: who are sitting on enormous amounts of money, who are

945
00:54:25,080 --> 00:54:29,479
Speaker 1: putting that money in treasuries I mean anywhere that they're

946
00:54:29,480 --> 00:54:32,680
Speaker 1: not going to lose it, and sometimes in cash uh.

947
00:54:32,719 --> 00:54:35,560
Speaker 1: And those people have no desire to reinvest because there's

948
00:54:35,600 --> 00:54:40,120
Speaker 1: no demand for private sector goods that's not being satisfied

949
00:54:40,120 --> 00:54:43,319
Speaker 1: by a cheaper source outside the country. UH. And so

950
00:54:43,440 --> 00:54:45,960
Speaker 1: you ask yourself, well, here we have the ability to

951
00:54:46,040 --> 00:54:48,520
Speaker 1: round trip some of this money. After all, they're buying bonds.

952
00:54:48,520 --> 00:54:50,520
Speaker 1: The Chinese are buying our bonds. Everybody else is buying

953
00:54:50,520 --> 00:54:52,960
Speaker 1: our bonds, which is why interest rates are at the

954
00:54:53,040 --> 00:54:56,319
Speaker 1: level that they're at. And all we're missing is the

955
00:54:56,360 --> 00:55:00,640
Speaker 1: connecting piece which is what's known by which was economists

956
00:55:00,640 --> 00:55:04,080
Speaker 1: called the collective agent. Right, if I'm depending on Barry

957
00:55:04,160 --> 00:55:06,520
Speaker 1: Ridholts to make an investment decision, I pretty much know

958
00:55:06,560 --> 00:55:09,279
Speaker 1: what Barry Ridholts is going to invest in right now,

959
00:55:09,360 --> 00:55:12,560
Speaker 1: and I certainly know your point of view. Uh, And

960
00:55:12,640 --> 00:55:14,640
Speaker 1: I know that you're not going to step in and

961
00:55:14,680 --> 00:55:17,400
Speaker 1: build a giant plant that doesn't need to be built

962
00:55:17,800 --> 00:55:20,840
Speaker 1: because you have cheaper sources of labor elsewhere. You're not stupid,

963
00:55:21,560 --> 00:55:24,600
Speaker 1: and and so you're going to sit on your money. Uh.

964
00:55:24,640 --> 00:55:27,280
Speaker 1: It is only US as a country, as a nation

965
00:55:27,560 --> 00:55:31,160
Speaker 1: collectively that can decide to do otherwise, not by taking

966
00:55:31,239 --> 00:55:34,399
Speaker 1: your money. You can keep your money, but we're very

967
00:55:34,440 --> 00:55:38,200
Speaker 1: happy to take your not taking your use your money

968
00:55:38,680 --> 00:55:41,839
Speaker 1: where it's being parked in those treasury bills and put

969
00:55:41,840 --> 00:55:43,680
Speaker 1: it to productive use. And by the way, all of

970
00:55:43,719 --> 00:55:46,720
Speaker 1: the people that buy our bonds outside of the United

971
00:55:46,760 --> 00:55:50,080
Speaker 1: States who depend on us demand to sell their goods

972
00:55:50,080 --> 00:55:53,160
Speaker 1: and some of their services. Those people would kiss us

973
00:55:53,760 --> 00:55:56,560
Speaker 1: on the you know what in Macy's window. If we

974
00:55:56,640 --> 00:56:01,600
Speaker 1: actually use that kind of money for for for infrastructure building,

975
00:56:01,920 --> 00:56:05,200
Speaker 1: created additional jobs in the United States, which would ultimately

976
00:56:05,320 --> 00:56:09,359
Speaker 1: create additional demand for for their building for their goods

977
00:56:09,360 --> 00:56:12,480
Speaker 1: and services. So in other words, it becomes a giant

978
00:56:12,560 --> 00:56:18,000
Speaker 1: economic stimulus that a cruise to the benefit of everybody,

979
00:56:18,160 --> 00:56:21,600
Speaker 1: and I get to ride on roads that don't destroy

980
00:56:21,680 --> 00:56:24,440
Speaker 1: the suspension system of my car. Well that that is

981
00:56:24,440 --> 00:56:29,240
Speaker 1: actually very interesting, uh thing you mentioned because the the

982
00:56:29,280 --> 00:56:33,240
Speaker 1: that's the fourth benefit of infrastructure constructing actually create greater

983
00:56:33,280 --> 00:56:37,120
Speaker 1: efficiency in the economy. Not only greater efficiency, but at

984
00:56:37,160 --> 00:56:40,160
Speaker 1: one point in time, now I'm gonna wax a little philosophical,

985
00:56:40,640 --> 00:56:43,920
Speaker 1: at one point in time we actually had an infrastructure

986
00:56:44,480 --> 00:56:48,440
Speaker 1: that wasn't embarrassing when when you have clients or or

987
00:56:48,560 --> 00:56:53,239
Speaker 1: colleagues flying from London and passed through JFK and say

988
00:56:53,320 --> 00:56:55,560
Speaker 1: I got off the jet and I was a little confused.

989
00:56:55,760 --> 00:56:59,319
Speaker 1: I thought I was in Zimbabwe. And the answer is no, no,

990
00:56:59,480 --> 00:57:01,880
Speaker 1: you are con fuse. Zimbabwe has a nice new airport.

991
00:57:02,520 --> 00:57:05,759
Speaker 1: So that sort of stuff is is to me is

992
00:57:05,840 --> 00:57:09,759
Speaker 1: just where is the I understand the philosophical debate. I

993
00:57:09,840 --> 00:57:12,600
Speaker 1: understand the drowned the beast drowned, the baby in the

994
00:57:13,239 --> 00:57:15,360
Speaker 1: in the bathtub argument. Even though I don't agree with

995
00:57:15,680 --> 00:57:18,600
Speaker 1: government the baby being government. I don't agree with that argument,

996
00:57:18,600 --> 00:57:21,000
Speaker 1: but I understand it But what I don't understand is

997
00:57:21,560 --> 00:57:24,840
Speaker 1: where is your pride of ownership? This is your country.

998
00:57:24,920 --> 00:57:27,680
Speaker 1: You drive around you look, you and I both criss

999
00:57:27,680 --> 00:57:30,080
Speaker 1: crossed the country. I was just in Seattle. I got

1000
00:57:30,080 --> 00:57:32,160
Speaker 1: a trip coming up to San Francisco. I'm gonna be

1001
00:57:32,160 --> 00:57:34,840
Speaker 1: in Miami. I'm gonna be in you probably. But here's

1002
00:57:34,880 --> 00:57:38,640
Speaker 1: here's it's astonishing if you, if you really think it through.

1003
00:57:38,840 --> 00:57:42,160
Speaker 1: What is driving that argument. Let's driving that argument in

1004
00:57:42,440 --> 00:57:46,120
Speaker 1: the simplistic sense is that those people who are making

1005
00:57:46,120 --> 00:57:49,000
Speaker 1: it believe that they will one day have to pay

1006
00:57:49,040 --> 00:57:52,400
Speaker 1: that money back. And what I'm saying is that they're

1007
00:57:52,440 --> 00:57:54,400
Speaker 1: never going to be in a situation where they're gonna

1008
00:57:54,480 --> 00:57:56,680
Speaker 1: let the bridge fall into the river. How do we

1009
00:57:56,760 --> 00:57:59,480
Speaker 1: know that's the case. How long did it? Literally the

1010
00:57:59,520 --> 00:58:05,120
Speaker 1: Capital Dome was collapsing, and the Congress for five years

1011
00:58:05,200 --> 00:58:08,000
Speaker 1: refused to authorize One thing I know about it. One

1012
00:58:08,000 --> 00:58:10,640
Speaker 1: thing I know about infrastructure is that if it starts

1013
00:58:10,760 --> 00:58:14,840
Speaker 1: costing businesses too much money to ship their goods and

1014
00:58:15,200 --> 00:58:17,960
Speaker 1: don't get workers because the bridges are out the answers,

1015
00:58:18,520 --> 00:58:21,320
Speaker 1: bloody hell, they're going to get the consensus. So we're

1016
00:58:21,320 --> 00:58:24,360
Speaker 1: gonna do it late and expensive instead of early and cheap. Yeah,

1017
00:58:24,480 --> 00:58:27,200
Speaker 1: I mean, and and in an environment in which the

1018
00:58:27,280 --> 00:58:29,920
Speaker 1: cost of of of recycling money. And I think that's

1019
00:58:29,920 --> 00:58:32,160
Speaker 1: the way you have to look at it. This the

1020
00:58:32,200 --> 00:58:34,880
Speaker 1: sovereign debt rate is at the level it is because

1021
00:58:35,200 --> 00:58:38,760
Speaker 1: we are not recycling money. We've actually created a blockage

1022
00:58:39,040 --> 00:58:41,920
Speaker 1: in where money is supposed to flow. We've created this,

1023
00:58:41,920 --> 00:58:45,919
Speaker 1: this this black hole of of sovereign debt where people

1024
00:58:45,920 --> 00:58:49,760
Speaker 1: are parking their money. That is not too different than

1025
00:58:49,840 --> 00:58:52,080
Speaker 1: holding bundles of cash. If you look at the cash

1026
00:58:52,080 --> 00:58:55,280
Speaker 1: in your wallet, you'll see it says federal reserve note.

1027
00:58:55,680 --> 00:58:58,600
Speaker 1: But it's a special magical kind of federal reserve note.

1028
00:58:58,880 --> 00:59:03,560
Speaker 1: It doesn't pay intest zero interest, so it's a zero

1029
00:59:03,600 --> 00:59:07,400
Speaker 1: interest pot. Well, if you're issuing a short term debt

1030
00:59:07,520 --> 00:59:11,520
Speaker 1: at twenty two basis points, it's not much different than cash.

1031
00:59:11,600 --> 00:59:15,080
Speaker 1: And you mentioned the longer twenty year thirty year we're at,

1032
00:59:15,280 --> 00:59:19,600
Speaker 1: So if the ten year was that, so the thirty year,

1033
00:59:20,520 --> 00:59:24,680
Speaker 1: according to my Bloomberg app is a two spot three four.

1034
00:59:25,240 --> 00:59:29,160
Speaker 1: That's insane. That's that's about as close to free money

1035
00:59:29,200 --> 00:59:31,400
Speaker 1: over long periods of time you're gonna get. And again,

1036
00:59:31,640 --> 00:59:34,640
Speaker 1: you pay you you you look at it as a

1037
00:59:34,640 --> 00:59:36,960
Speaker 1: at some point, as a cash substitute, you might as

1038
00:59:37,000 --> 00:59:39,760
Speaker 1: well take the interest. It ain't much, but you might

1039
00:59:39,800 --> 00:59:42,240
Speaker 1: as well take it knowing that the guy on the

1040
00:59:42,240 --> 00:59:44,520
Speaker 1: other end of that bond owns a printing press and

1041
00:59:44,640 --> 00:59:47,200
Speaker 1: is always going to be able to repay you. The

1042
00:59:47,240 --> 00:59:50,120
Speaker 1: idea of the inflationistas out there saying, but you're gonna

1043
00:59:50,200 --> 00:59:55,800
Speaker 1: lose purchasing power. Era of we have the most incredible

1044
00:59:55,880 --> 00:59:58,320
Speaker 1: environment in the world where we have all these people

1045
00:59:58,400 --> 01:00:01,040
Speaker 1: running around shouting about the potent ential for inflation because

1046
01:00:01,080 --> 01:00:03,960
Speaker 1: we flooded the world with cash, and and in fact

1047
01:00:04,000 --> 01:00:08,400
Speaker 1: inflation is dropping like a stone and the dollar is appreciating.

1048
01:00:08,480 --> 01:00:12,280
Speaker 1: So it's very, very hard for me to understand where

1049
01:00:12,320 --> 01:00:14,720
Speaker 1: the big disconnect is. And quite frankly, I do think

1050
01:00:14,720 --> 01:00:19,600
Speaker 1: it does rest in one place. It does it. It

1051
01:00:19,800 --> 01:00:22,760
Speaker 1: is a It is a thirty year argument that we've

1052
01:00:22,760 --> 01:00:26,800
Speaker 1: been having, actually more like going close to forty between

1053
01:00:26,880 --> 01:00:31,040
Speaker 1: people who really don't like government and people who really

1054
01:00:31,080 --> 01:00:36,440
Speaker 1: believe in something called the efficient market hypothesis. And these people,

1055
01:00:37,160 --> 01:00:41,200
Speaker 1: during the nineteen eighties, the Reagan years, took control of

1056
01:00:41,600 --> 01:00:44,919
Speaker 1: government and changed people actually did things that I would

1057
01:00:44,960 --> 01:00:47,760
Speaker 1: argue in the least uh and certainly. I have friends

1058
01:00:48,160 --> 01:00:50,840
Speaker 1: who believe this as well, who were in the Reaguan administration,

1059
01:00:50,880 --> 01:00:54,240
Speaker 1: and the first Reagulan administration, cutting the tax on income

1060
01:00:54,600 --> 01:00:58,080
Speaker 1: above a thousand dollars a year from seventy to fifty

1061
01:00:58,840 --> 01:01:02,840
Speaker 1: was probably the right. That's a huge behavioral change in

1062
01:01:02,920 --> 01:01:06,760
Speaker 1: response to that giant tax. Right, so so so and that,

1063
01:01:06,960 --> 01:01:11,240
Speaker 1: but from right, they didn't cut it down to where

1064
01:01:11,240 --> 01:01:13,840
Speaker 1: we are today, and and and the second thing they

1065
01:01:13,840 --> 01:01:16,320
Speaker 1: did is that they did deregulate some of the guild

1066
01:01:16,360 --> 01:01:20,600
Speaker 1: industries like financial services. What they did in the first

1067
01:01:20,760 --> 01:01:23,840
Speaker 1: term Reagan was was was reasonable. What came after was

1068
01:01:24,000 --> 01:01:27,000
Speaker 1: was was absurd. One of the things, you know, Bruce

1069
01:01:27,040 --> 01:01:29,800
Speaker 1: Bartlett is a great guy to listen to. Love his stuff.

1070
01:01:29,840 --> 01:01:32,600
Speaker 1: He's got a new book coming out. His new book,

1071
01:01:32,640 --> 01:01:35,240
Speaker 1: by the way, he has the working title this is

1072
01:01:35,360 --> 01:01:38,919
Speaker 1: right up your enemy. It's called what the Right Gets Wrong. Yeah. Well,

1073
01:01:39,000 --> 01:01:41,360
Speaker 1: and again it's very with the reason. And this is

1074
01:01:41,360 --> 01:01:43,360
Speaker 1: what I'm coming back to. The reason the right gets

1075
01:01:43,360 --> 01:01:47,040
Speaker 1: it wrong is because of the underlying product that they

1076
01:01:47,040 --> 01:01:49,960
Speaker 1: were able to sell to the electorate. And it has

1077
01:01:50,040 --> 01:01:53,160
Speaker 1: nothing to do really with economic growth other than the

1078
01:01:53,200 --> 01:01:56,840
Speaker 1: fact that they have this theory, right this this curve

1079
01:01:57,360 --> 01:02:00,200
Speaker 1: right that they say is going to produce greater growth

1080
01:02:00,360 --> 01:02:03,640
Speaker 1: at at at lower tax rates. But it's lower tax

1081
01:02:03,720 --> 01:02:06,800
Speaker 1: rates themselves that they're able to sell. And they became

1082
01:02:07,000 --> 01:02:09,280
Speaker 1: very good at selling this product. And in fact, I

1083
01:02:09,400 --> 01:02:12,920
Speaker 1: didn't need to understand anything about economics in order to

1084
01:02:13,000 --> 01:02:16,560
Speaker 1: stand in front of the American people, or in the UK,

1085
01:02:17,000 --> 01:02:21,360
Speaker 1: or in Canada or anywhere and tell people we're going

1086
01:02:21,400 --> 01:02:25,840
Speaker 1: to cut your taxes, which is popular. Who votes against

1087
01:02:25,880 --> 01:02:27,480
Speaker 1: we're going to cut your tap? No, No, I'd rather

1088
01:02:27,640 --> 01:02:30,720
Speaker 1: have you increased my taxes. At least a smart person

1089
01:02:30,760 --> 01:02:34,600
Speaker 1: will remain neutral. But everybody likes that message, and it's

1090
01:02:34,640 --> 01:02:36,400
Speaker 1: an easy way to get elected. And so you have

1091
01:02:36,520 --> 01:02:41,040
Speaker 1: this red state blue state division really fundamentally over that issue.

1092
01:02:41,200 --> 01:02:46,440
Speaker 1: It is the actual way in which small government theory

1093
01:02:46,560 --> 01:02:53,360
Speaker 1: or Jeffersonian jackson Ian theory metastasizes into this complete shutdown

1094
01:02:53,400 --> 01:02:56,760
Speaker 1: of the political system in the United The immediate question,

1095
01:02:56,840 --> 01:03:02,400
Speaker 1: the immediate response to anybody who says we're gonna cut

1096
01:03:02,440 --> 01:03:05,840
Speaker 1: your taxes, the answer has to be okay, So now

1097
01:03:05,880 --> 01:03:11,320
Speaker 1: I appreciate your offering up an unfunded tax cut, because

1098
01:03:11,360 --> 01:03:14,120
Speaker 1: taxes pay for spending. How are you going to pay

1099
01:03:14,160 --> 01:03:18,680
Speaker 1: for that. What spending are you gonna cut to offset that?

1100
01:03:18,760 --> 01:03:20,720
Speaker 1: And by the way, this isn't a left right argument.

1101
01:03:21,040 --> 01:03:23,280
Speaker 1: You could say the same argument to people who want

1102
01:03:23,280 --> 01:03:26,280
Speaker 1: to increase spending, which is, if you're gonna increase spending,

1103
01:03:26,480 --> 01:03:29,800
Speaker 1: what taxes are you gonna raise to pay for it?

1104
01:03:30,120 --> 01:03:34,520
Speaker 1: And so anytime someone says in Kansas and Governor Brownbeck

1105
01:03:34,640 --> 01:03:37,160
Speaker 1: is now the have become the poster child for this.

1106
01:03:37,600 --> 01:03:42,240
Speaker 1: All right, you slashed business taxes and you cut personal taxes,

1107
01:03:42,280 --> 01:03:45,520
Speaker 1: and now the theory says they're supposed to be an

1108
01:03:45,600 --> 01:03:50,360
Speaker 1: uptick in revenue. But it's years of this and by

1109
01:03:50,360 --> 01:03:52,520
Speaker 1: the way, he got reelected book called What's the Matter

1110
01:03:52,560 --> 01:03:55,320
Speaker 1: with Kansas? Right? Well that was long before he got

1111
01:03:55,360 --> 01:03:59,120
Speaker 1: into office. But here we are. And so the question is,

1112
01:03:59,160 --> 01:04:02,000
Speaker 1: if you're slash taxes, Hey, listen, I'm in a top

1113
01:04:02,040 --> 01:04:05,000
Speaker 1: tax bracket. I'm very happy to pay less taxes. But

1114
01:04:05,160 --> 01:04:07,920
Speaker 1: I want to know what I'm giving up if I'm

1115
01:04:07,920 --> 01:04:10,720
Speaker 1: paying less taxes. I could tell you right now. I

1116
01:04:10,840 --> 01:04:14,960
Speaker 1: know I've given up infrastructure. I know that the gas.

1117
01:04:15,080 --> 01:04:18,120
Speaker 1: This is my pet peeve is the guess tax is

1118
01:04:18,200 --> 01:04:21,800
Speaker 1: locked at levels it's been since we've had big inflation

1119
01:04:21,840 --> 01:04:25,720
Speaker 1: over the ensuing fifteen twenty years before the deflationary period,

1120
01:04:26,040 --> 01:04:28,600
Speaker 1: and all these things built in the fifties and sixties

1121
01:04:28,600 --> 01:04:32,920
Speaker 1: and seventies are crumbling. I was just in in Belgium.

1122
01:04:33,160 --> 01:04:38,800
Speaker 1: They're apologizing about all the roadwork, their roads before their repair,

1123
01:04:39,680 --> 01:04:42,680
Speaker 1: our head and shoulders above hours, and everybody forgets. In

1124
01:04:42,720 --> 01:04:46,480
Speaker 1: the fifties and sixties, after the Eisenhower administration, the United

1125
01:04:46,520 --> 01:04:49,880
Speaker 1: States infrastructure was the envy of the world. And now

1126
01:04:49,920 --> 01:04:53,520
Speaker 1: we've fallen to the bottom of the developed world. And

1127
01:04:53,560 --> 01:04:57,520
Speaker 1: I don't it's astonishing to me that this is even

1128
01:04:57,560 --> 01:05:00,240
Speaker 1: a debate. You want to drive on a highway, you

1129
01:05:00,320 --> 01:05:03,760
Speaker 1: gotta pay for it. And if that means adjusting the

1130
01:05:03,800 --> 01:05:07,560
Speaker 1: gas tax from I think it's nineteen cents now to

1131
01:05:07,640 --> 01:05:10,800
Speaker 1: the cost of living to inflation. Even though there's low inflation,

1132
01:05:10,880 --> 01:05:13,840
Speaker 1: you still have to have some increase in spending to

1133
01:05:14,080 --> 01:05:17,120
Speaker 1: maintain these roads. I mean. The the the irony, of course,

1134
01:05:17,200 --> 01:05:21,160
Speaker 1: is that you again talking about the blockage aspect that

1135
01:05:21,200 --> 01:05:25,280
Speaker 1: I was saying before. Uh you you have this huge

1136
01:05:25,280 --> 01:05:28,720
Speaker 1: amount of what i'll call stranded capital that is sitting

1137
01:05:28,720 --> 01:05:32,520
Speaker 1: there not being employed for productive use. Uh So, not

1138
01:05:32,640 --> 01:05:36,080
Speaker 1: only is this not just a question of of tax

1139
01:05:36,240 --> 01:05:39,840
Speaker 1: versus spend. It's also a question of why shouldn't we

1140
01:05:39,880 --> 01:05:43,400
Speaker 1: be in a situation where we are deficit spending, borrowing

1141
01:05:43,440 --> 01:05:46,920
Speaker 1: money that costs almost nothing to do things we know

1142
01:05:47,040 --> 01:05:50,080
Speaker 1: we need to do. Eventually, you're gonna have to do it, yeah,

1143
01:05:50,240 --> 01:05:52,240
Speaker 1: buying ourselves. You build a bridge, you get a hundred

1144
01:05:52,320 --> 01:05:55,920
Speaker 1: years out of it, right, we have bridged fifty years anyway,

1145
01:05:56,120 --> 01:05:58,960
Speaker 1: a long time. Uh So. So we have bridges all

1146
01:05:59,000 --> 01:06:01,320
Speaker 1: over this country that are so old they're falling apart,

1147
01:06:02,120 --> 01:06:05,160
Speaker 1: require enormous amount of maintenance each year, which is an

1148
01:06:05,440 --> 01:06:09,840
Speaker 1: which is also cost borne by government. Um. And by

1149
01:06:09,880 --> 01:06:12,960
Speaker 1: replacing them, we can get all of these great benefits

1150
01:06:13,040 --> 01:06:16,920
Speaker 1: and unblocked this capital that's being stranded uh in in

1151
01:06:17,080 --> 01:06:22,280
Speaker 1: sovereign obligations. It's it's it's actually kind of collective lunacy.

1152
01:06:22,480 --> 01:06:25,320
Speaker 1: It is, so I would love to keep you here

1153
01:06:25,320 --> 01:06:27,720
Speaker 1: for hours. Let me hit you on one last subject

1154
01:06:28,240 --> 01:06:32,400
Speaker 1: related to the blockage, which is velocity of money. It's

1155
01:06:32,440 --> 01:06:35,200
Speaker 1: something that we don't hear about that often. But if

1156
01:06:35,200 --> 01:06:36,840
Speaker 1: we want to get a little wonky and get into

1157
01:06:36,880 --> 01:06:41,960
Speaker 1: the weeds, why have we seen money just not circulating well?

1158
01:06:42,040 --> 01:06:45,080
Speaker 1: And I don't mean cash, I mean actual what we

1159
01:06:45,200 --> 01:06:48,040
Speaker 1: used to call M two and M three. Why is

1160
01:06:48,080 --> 01:06:51,240
Speaker 1: the money supply just kind of sitting on the Fed's

1161
01:06:51,280 --> 01:06:55,680
Speaker 1: balance sheet and not coursing through um our our economy. Well,

1162
01:06:55,680 --> 01:06:58,520
Speaker 1: the simple answer is there's no demand for money. There's

1163
01:06:58,520 --> 01:07:01,880
Speaker 1: no demand for money because there's no demand for new infrastructure.

1164
01:07:02,360 --> 01:07:04,720
Speaker 1: There's no demand for new infrastructure's no no way of

1165
01:07:04,760 --> 01:07:06,760
Speaker 1: creating it. There's no demand for new plants, there's no

1166
01:07:06,840 --> 01:07:09,720
Speaker 1: demand for new equipment. If they're going to be built,

1167
01:07:09,760 --> 01:07:13,040
Speaker 1: they're likely to be built outside the United States where

1168
01:07:13,120 --> 01:07:16,760
Speaker 1: labor is cheaper. Um. So the demand for capital side

1169
01:07:16,840 --> 01:07:19,800
Speaker 1: is really the sort of bigger answer. But then you

1170
01:07:19,840 --> 01:07:22,240
Speaker 1: look at what's gone on in the field of economics.

1171
01:07:22,720 --> 01:07:25,560
Speaker 1: You know, when Milton Friedman blessed his heart was creating

1172
01:07:25,600 --> 01:07:29,520
Speaker 1: monetary theory, or at least expounding upon monetary theory. In

1173
01:07:29,560 --> 01:07:33,040
Speaker 1: his heyday, all of his equations held the velocity of

1174
01:07:33,040 --> 01:07:37,160
Speaker 1: money constant, and uh and and and what we've proven

1175
01:07:37,400 --> 01:07:40,920
Speaker 1: in this great recession and thereafter is that the velocity

1176
01:07:40,920 --> 01:07:44,800
Speaker 1: of money is anything but constant. Again, it's the view

1177
01:07:45,000 --> 01:07:49,240
Speaker 1: of an economics of shortage versus in economics of oversupply.

1178
01:07:49,840 --> 01:07:52,960
Speaker 1: You have a condition going back as long as we

1179
01:07:53,000 --> 01:07:55,920
Speaker 1: can remember in modern economic thought, that's probably about a

1180
01:07:56,000 --> 01:07:59,240
Speaker 1: hundred years even before getting back to the people who

1181
01:07:59,320 --> 01:08:04,880
Speaker 1: are sitting there with with agricultural economies. Um, but you

1182
01:08:04,880 --> 01:08:08,520
Speaker 1: you look at sort of the post industrial revolution of

1183
01:08:08,640 --> 01:08:12,000
Speaker 1: view of econ of economics, it was always governed by

1184
01:08:12,040 --> 01:08:14,960
Speaker 1: something that quite frankly was inherited from the agricultural view,

1185
01:08:15,280 --> 01:08:19,719
Speaker 1: which is that most of economics is about shortage. There's

1186
01:08:19,720 --> 01:08:22,880
Speaker 1: always a shortage of supply relative to demand. That's a

1187
01:08:22,880 --> 01:08:25,439
Speaker 1: grarian in its nature. And it's a grarian its nature, right,

1188
01:08:25,760 --> 01:08:29,599
Speaker 1: So you you you then then sort of ramp forward

1189
01:08:29,640 --> 01:08:33,040
Speaker 1: into this completely different environment, which, by the way, I

1190
01:08:33,040 --> 01:08:36,439
Speaker 1: would argue, probably would not have have happened. And he

1191
01:08:36,600 --> 01:08:40,240
Speaker 1: is in fact, in the broad scheme of things temporary. Um,

1192
01:08:40,280 --> 01:08:44,439
Speaker 1: if you didn't have this massive uh situational change in

1193
01:08:45,240 --> 01:08:48,879
Speaker 1: by by having all of these post socialist economies suddenly emerged,

1194
01:08:48,880 --> 01:08:51,040
Speaker 1: I mean you, I like to that's what really opened

1195
01:08:51,040 --> 01:08:54,519
Speaker 1: the floodgates. Suddenly you had the Berlin Wall and the

1196
01:08:54,600 --> 01:08:58,519
Speaker 1: Chinaman incident. You had massive industrial policy in China, you

1197
01:08:58,600 --> 01:09:03,160
Speaker 1: had UH democracy flowing in and and markets flowing into

1198
01:09:03,160 --> 01:09:07,080
Speaker 1: Eastern Europe, and and this was this was a situation

1199
01:09:07,120 --> 01:09:11,040
Speaker 1: that we really cannot repair other than by looking to

1200
01:09:11,240 --> 01:09:17,000
Speaker 1: mechanisms that are not oriented towards this underlying premise of

1201
01:09:17,000 --> 01:09:20,280
Speaker 1: their always being shortage. We live in the age of oversupply.

1202
01:09:20,720 --> 01:09:23,120
Speaker 1: So I'm gonna leave it at that note. For for

1203
01:09:23,240 --> 01:09:26,760
Speaker 1: the anti Keys and Keynsians and the tax coders, if

1204
01:09:26,760 --> 01:09:28,519
Speaker 1: they want to send you hate mail, what's the best

1205
01:09:28,560 --> 01:09:30,880
Speaker 1: way to get ahold of you? Either on Twitter or

1206
01:09:30,960 --> 01:09:35,280
Speaker 1: eldert at Daniel Albert And of course you can always

1207
01:09:35,280 --> 01:09:39,960
Speaker 1: go to my blog on econom Monitor. Uh and uh,

1208
01:09:40,240 --> 01:09:44,160
Speaker 1: please pulled two cents Dan Albert's two cents at econom

1209
01:09:44,200 --> 01:09:48,599
Speaker 1: monitor dot com. Uh and uh, you know the the

1210
01:09:49,600 --> 01:09:52,240
Speaker 1: I'm a fellow with the Century Foundation, so I could

1211
01:09:52,240 --> 01:09:53,960
Speaker 1: be found there as well. So you're you're easy to

1212
01:09:54,000 --> 01:09:57,360
Speaker 1: track down to to send angry letters to. So I've

1213
01:09:57,360 --> 01:10:01,360
Speaker 1: been speaking to Dan Albert of Westward Capital, author of

1214
01:10:01,439 --> 01:10:04,479
Speaker 1: the Age of Oversupply. Thanks so much for joining us.

1215
01:10:04,520 --> 01:10:08,000
Speaker 1: I'm Barry Riholts. You've been listening to Masters in Business

1216
01:10:08,160 --> 01:10:15,840
Speaker 1: on Bloomberg Radio. H