The Breakdown - The Devastation of Main Street Business, feat. Daniel Lacalle

Episode Date: December 30, 2020

Daniel Lacalle is the chief economist for Tressis SV and a well-known economics personality. In this conversation with NLW he discusses the devastation of small businesses in America and around the world and why the recovery could be less even than people think in the year ahead. Find our guest online: @dlacalle_IA The Breakdown is produced and distributed by CoinDesk.com

My prediction is that next year is not going to be a good one for the global economy. And I think that that is certainly not consensus. I think that consensus is extremely optimistic about the global economy and is putting all of the problems of the global economy under the COVID-19 umbrella, thinking that once the pandemic is over, everything is going to be sort of boom time. And I'm afraid it's not going to be like that. Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world.

The breakdown is sponsored by crypto.com and nexo.io and produced and distributed by CoinDesk. What's going on, guys? It is Tuesday, December 29th, and today I am joined by Daniel LaCal. Daniel is an extremely well-known voice on macro and a huge array of economic issues. as well as the chief economist at Tresses SV. He has written extensively about central banks, current economic policy, and has been a guest on this show before. I'm extremely excited to welcome Daniel back, so let's quit yapping and get into this conversation.

All right, Daniel, welcome back to the breakdown. It's great to have you here again. Thank you very much for having me again. It's always a pleasure. So this should be a really fun episode. We get to look back across what was a crazy year. And so I guess just to get us started, what was the most important economic story of 2020? Of course, one would be tempted to say COVID-19.

Now, I think that the biggest economic story of 2020 was not COVID-19, but the decision of governments to shut down an entire economy by a governmental decree. I think that that was the biggest economic decision. Pandemics have existed in previous. occasions, numerous times. What we had never seen was governments deciding to shut down an entire economy because of it. And I think that that has proven to be food for many studies in the future about the long-term implications of such a measure. Yeah, that was my kind of next question following up from where you started, which is, what is your sense of where the conventional wisdom is now, around the right or wrongheadedness of those types of policies, or is it still just too early

to tell? Because I mean, even right now, we're living through it again. Well, I think that conventional wisdom is probably now closer to an idea or at least an understanding that the false dilemma of health or the economy should not be considered. It's not health or the economy. It is health and the economy. I think that by now it is pretty evident from all parts of consensus that the countries that have preserved the business fabric and maintained economic activity the most that they could at the same time as providing safe and simple protocols for the pandemic to be contained have been the most successful in 2020, both in managing the healthcare crisis and the economic. crisis. So I think that right now, at least where we are, is 99% of economists would agree with me that severe lockdowns have been extremely damaging for the economy and relatively ineffective in terms of the healthcare crisis, whilst we have seen economies that have managed the healthcare

crisis with simple procedures and with strict protocols and maintained the business fabric. can the economy open as much as possible have actually succeeded. Do you think that there are any real clear winners or losers coming out of this in terms of jurisdictions and their policies? No, I don't think. I think that, again, the rhetoric that China wins the rest of the world loses is very simplistic and wrong, no? I think that everybody has suffered immensely from the crisis, even Asian countries that are

going to see a small fall into. GDP will see very, very significant impact on their exports, on the job situation, on wages and on savings of citizens as well. So I think that, no, I don't think that there are clear winners and losers. I think that there are clear losers. I think that there are some that have some economies that have clearly performed much, much, much worse. And if there's any lesson out of this crisis is that if we look at, for example, the governments and the countries that have more interventionist policies, those have actually performed much worse, both in terms of the pandemic and in terms of the economy. Interesting stuff. Okay, so let's flip this question a little bit and

ask, what is the most important economic story that people didn't pay enough attention to? So maybe went under the radar a little bit more than it should have. That's a great question. I think that in 2020, I have seen a surprising lack of interest about the huge acceleration in the technology displacement of fossil fuels in the economy. I think that one of the big stories of 2020 is how what was initially perceived to be as a year in which the trends of technology and the trends of the big social and macroeconomic trends that had been started in the early 2010 technology, the change in the technological

landscape for energy, many perceived that that would sort of grind to a halt and it actually accelerated. And 2020 was a year in which, unlike all the other. previous crisis, we saw a very, very aggressive acceleration in the diversification and technology innovation in energy. So I think that that is going to be a big story. How much do you think that that has to do with shifts in demand? And I guess there's kind of a larger context for that question as well, which is, I think one of the big questions that everyone has moving into next year, moving into kind of a vaccine era is what part of these shifts that we've experienced this year are permanent demand destruction versus something that's more temporary?

Oh, I think that there is a factor of permanent demand destruction, certainly. The consumption patterns and also trade patterns have changed probably for the long term in many cases. And so I would say it's a combination of both. On one side, there is an important element of obviously the lockdowns and the impact on the economy of the government decisions to try to combat the COVID-19 crisis. Certainly that generated some demand destruction. But I think that there is also a significant part that comes from a change in the behavior of consumers. I think that a lot of us have realized that many of the habits that we had about traveling, about the way in which trade was being implemented, were based on, you know, on things that we were accustomed to,

but that we probably have changed for good. And I think that that is likely to be one of the big drivers. But in terms of energy coming back to that, it's not just. about demand and supply. It's about capital expenditure. I think that what we have seen in 2020 is that the acceleration in technology investments in energy has been something that many expected to be actually the opposite. Many expected 2020 to be a year in which the energy landscape would go back to traditional energy sources

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easy steps with their high-yield savings account for digital assets. Step one, create an account at nexo.i. Step two, transfer assets to your secure nexo wallet with no minimum or maximum limits on funds deposited. Step three, sit back, relax, and earn up to 12% compounding interest paid out daily on your crypto and fiat. Your passive income made simple. Get started at nexo.io. This is kind of the inverse of that last question, I guess. But what is an economic story from the last year that people paid more attention to than they should have? Or another way to look at this might be, what's a conventional wisdom that seems overstated now at this point in the discourse? Oh, in my opinion, the U.S. elections, clearly.

Interesting. Yeah, I think that the U.S. elections and the economic impact of whatever may happen in terms of the U.S. elections has been one of the biggest and most polarized debates in economics. In reality, is not so significant. If we think about it, we will see some changes, obviously, in economic policy from Joe Biden being president-elect to the Trump administration. but there will not be significant changes in trade. There will not be significant changes in fiscal policy and certainly not on monetary policy. Do you think that's just because sort of the die is cast in terms of structurally what the U.S. has to do to continue? Or is it more about a long-term shift in the political cycle that has to do with the U.S. withdrawing from the world? I think that the two things.

isolation of the United States relative to the rest of the world is not something that started with presidency of Donald Trump. It's been ongoing. You could actually say that before 9-11. And just

not because it was a catalyst, but because it was already ongoing that the United States was becoming a more inward-looking economy. But it absolutely accelerated during the Obama administration when the U.S. started to be energy independent or close to energy independent.

I think that the U.S. going from the biggest importer in the world to being almost self-sufficient or at least self-sufficient in a North American perspective certainly made a big change. So I think that both things are true is that on one side, if you look at Joe Biden's economic program, You have a massive bi-American program there, pretty much not too dissimilar to the messages that the Trump administration or even the Obama administration had. In terms of trade, you see that the first thing that Biden has said is that he's not going to withdraw the tariffs on China. The World Trade Organization conflicts with the European Union and with China are ongoing. I think that all of those things are part of the different dynamic. which is that the United States has stopped being sort of like the leading economy in terms of

what the rest of the world has to do, is that it's focused on its own big market. And not because it's a bad thing. It's simply that we're seeing how economic trends are becoming more regional. It's not just in the United States. It's also in Latin America. It's also in Russia, which has been very much. forgotten in the debate, the European Union works on its own. So we see regional, sort of big economic areas that are becoming on one side more open. Yes, obviously, bilateral

agreements and multilateral agreements, but at the same time, more insulated. It's almost a return of regionalism to some extent. Certainly. Certainly. I completely agree with that. I think the answer to this question is probably pretty obvious for anyone who's been listening to you for the last few minutes, but do you think that this year, the changes that we've seen represent a fundamental or paradigm shift or more of an acceleration of what was already happening? I think it's an acceleration of what was already happening. The big trends, technology, the technology revolution, the demographic, big demographic changes that are happening in the large economic agents, the European Union becoming an aging society and

which almost 20% of the European Union citizens are going to be over 60 years old pretty soon. The rise of the middle class and the rise in the demographic importance for consumption and for economic growth of Asia and the emerging economies. So technology, demographics and socially responsible, climate change driven, everything that has to do with sustainability in the capital expenditure. and the business fabric and the planning of companies, all those three trends have been accelerated in this pandemic. What do you think about that? I mean, the other one that people often reference with this year is the role of central banks and monetary policy

and new types of fiscal policy, you know, with governments having a stronger hand in economies. Is that something that you see as one of those accelerating trends? And do you anticipate more of that in the year to come? Yeah, unfortunately, it is, yeah. I was talking about the others as sort of good trends. This is a batch. Technology, longevity, the growth of the middle class and emerging markets and sustainability are good trend.

Country policy and sanity is not a good trend. And it's unfortunately accelerating and it's accelerating without control. You already have messages coming from central banks saying that they will maintain extremely accommodative policies. even if inflation rises. You see central banks hostage to governments that are completely unwilling to make structural reforms and reduce the debt burden in growth periods. Governments spend more and increase deficit spending or maintain deficit spending in growth periods. And in crisis, they present themselves as a solution and obviously demand even more spending.

So it's very complicated. I don't envy the position of central bank officials that defend the independence of central banks because the independence of the entities is not just being questioned. It is that unfortunately right now monetary policy is only focused on maintaining the sovereign debt bubble at any cost, which is extremely dangerous because it creates a provision. incentive for governance to deny all the structural risks that they are undertaking and and continue with the insanity of big fiscal deficits no matter what what happens. It's not just a policy that is used in crisis periods in order to help navigate a difficult environment. It is a policy that has

become the norm and it's completely insane. Yeah. So it's hard to shift off that, but I have a couple more questions that I want to ask you in our last few minutes. What assets surprised you most over the past year? I think that, if anything, I was surprised at the big rise in cryptocurrencies. Not because I don't think that cryptocurrencies are responding to the to the insanity of monetary policy, which they are,

and that they would likely go up alongside risky assets. But I think that how quickly they, cryptocurrencies like Bitcoin have reached all-time highs has actually surprised me. I expected them to do well, but more probably in line with the, with the increase in money supply growth rather than the massive increase in price that we have seen. Yeah, I mean, it's been fascinating to see just how quickly a new narrative took hold.

I mean, I guess it's, you know, part and parcel of the fact that the narrative has been there for years, but it seemed to be coming to fruition. And you had all these different models and catalysts, but it's definitely been, I think, even folks in the space have been surprised to see just how quickly, especially the institutional interest has increased in it. I agree with that. I think I was reading from a blogger that writes quite a bit on cryptocurrencies from quite a bullish standpoint, how surprised he was at the rapid rise in value of so many of these cryptocurrencies.

Again, it comes back to what so many, I think that it comes back to the reality that so many emerging economies have seen is that in a year in which the dollar has been relatively weak irrespective to the euro or the Japanese yen, what we have seen is that numerous fiat currencies have completely collapsed or suffered immensely. We've seen the Real, the Argentine peso, the Turkish lira, the rubble. So I can understand what is happening. But I mean, it's interesting to see how, for example, gold has underperformed what would have been our logical, very bullish trends, particularly in the last couple of months and how cryptocurrencies have sojourned on.

I think that it's showing that the world is changing more rapidly than we even expected. Yeah, that is a good summary of this year, I think. Here's a fun one, I guess, as we round out. What's one prediction that only you have? something that you tend to think of is likely to happen that maybe some of your peers and colleagues don't quite see? I wouldn't see only I, but I would say that my prediction is that next year is not going to be a good one for the global economy.

And I think that that is certainly not consensus. I think that consensus is extremely optimistic about the global economy and is putting all of the problems of the global economy under. of the COVID-19 umbrella, thinking that once the pandemic is over, everything is going to be sort of boom time, and I'm afraid it's not going to be like that. Obviously, there are a few other economists out there talking about this, but I think that it's certainly consensus that there's going to be a relief balance that may, in my opinion, be more than overestimated.

Well, Daniel, it is always awesome hearing your insights and ideas. I really appreciate you hanging out. I know all the listeners do as well. So thanks again for spending some time with us and look forward to talking to you in the new year. Absolutely. Always a pleasure. Have a fantastic Christmas and happy holidays, everyone. And a great 2021 because the good thing about 2021 will be that 2020 is over, certainly.

Absolutely. All right. Thanks, Daniel. How good day. Thank you.