We Study Billionaires - The Investor’s Podcast Network - TIP207: Tariffs & China with Richard Duncan (Business Podcast)

Starting point is 00:00:00 You're listening to TIP. On today's show, we bring back one of our guests that receives some of the biggest praise from our listeners, and his name is Richard Duncan. And he's the bestselling author of three different books, and we've had them on our show for the fourth time now. Richard has worked abroad in finance for over 30 years, and he's worked for the IMF, the World Bank, and large-cap asset management companies. During today's discussion, we're going to be talking about a really hot topic that I'm

Starting point is 00:00:27 sure is on everybody's mind, and that's the impact. of tariffs and the trade war with China. We'll talk about how this might impact your investments here in the U.S. and what this means for emerging markets and also what's happening with the dollar. So without further delay, get ready to hear from the highly intelligent Richard Duncan. You are listening to The Investors Podcast, where we study the financial markets and read the books that influence self-made billionaires the most. We keep you informed and prepared for the unexpected. All right, welcome to the Investors podcast. Thig and I are so excited to have you guys here with us. And we're really, really excited about our guest today. Richard Duncan, welcome back to the Investors

Starting point is 00:01:20 podcast. It is always such a pleasure to have you here. Preston Stig, thank you very much for having me back. Well, Richard, there is a lot, and I mean a lot to talk about right now with everything that's going on. The one thing that we want the audience to know is because we're talking global macro kind of stuff. We want to be really upfront with folks in knowing that we're not trying to talk one political side or the other. What we're really trying to do is just talk about some of the political dynamics and the policies that are shaking out of these positions and kind of trying to understand how that will affect the financial markets and how we can position ourselves in the most advantageous way. So with that said, let's talk China and let's talk this trade war between the

Starting point is 00:02:05 U.S. and China. So just from a real high-level point of view, Richard, give the audience just kind of your vantage point as you're looking at things from a really high level of this back and forth between the U.S. and China. Okay, well, I think this is certainly the big story of the year and maybe for the next several years and beyond. Up until recently, it wasn't really very clear whether President Trump was going to carry through on what he had pledged to do during his campaign. He had made it very clear during the campaign that China was a threat to the United States in terms of trade as well as geopolitically. And he campaigned on the pledge to put up high trade tariffs on Chinese goods entering the United States. He often said he would put 45% trade

Starting point is 00:02:59 tariffs on Chinese goods and 30% trade tariffs on Mexican goods. And it wasn't certain whether he was really going to carry through with that until the last few months. It seems last year they were focused on tax cuts and that happened. And now that the tax cuts are out of the way, he's really seemed to shift his focus on to trade. And so given the recent developments, I think now we really have to consider very seriously the possibility that there is going to be an all-out, no-holds-barred trade war between the United States and China. Since the last couple of months, this trade war has been heating up, I've gone back and looked at some of the things that President Trump said in the past and also at some of the speeches that his trade advisor, Peter Navarro, have made.

Starting point is 00:03:51 Peter Navarro is now one of Trump's very highest advisors on international trade issues. He wrote a book called Death by China and other books. And one book was called The Coming China Wars, Where They Will Be Fought and How They Will Be Won. That was 2008. Then in 2015, he wrote a book called Crouching Tiger, what China's militarism means for the world. And so if you watch these documentaries or read any of these books, it is very clear that Peter Navarro considers China to be a very grave threat to the United States. And if you listen to what President Trump has been saying,

Starting point is 00:04:30 he also shares that view. He views China as a grave threat to the United States, and it seems increasingly possible and even likely that what he is doing is not so much trying to just bring trade back into balance as possibly reining in China's growth so that China will not become increasingly powerful. relative to the United States and in fact will cease to be a threat to the United States.

Starting point is 00:04:57 So that is possibly what this trade war is really all about. Richard, talk to us about this aspect of currency manipulation. Whenever we talk about this trade war, it seems to always pop up that Chinese are manipulating the currency to take advantage of the U.S. Or are the Chinese manipulating the currency and if they are, how are they doing it? China has been manipulating its currency. since early 1990s. In 1993, it devalued the currency by 50% one month.

Starting point is 00:05:28 And then it pegged the currency then for the next 10 years. And there is no question about this because you can see that the People's Bank of China, the Chinese Central Bank, they accumulated $4 trillion of foreign exchange reserves. What that means is that that central bank created their money, RMB, And they used it to buy dollars so that the RMB would not appreciate relative to the dollar. So in other words, they depressed the value of the RMB through intervention on an extraordinary scale through their currency markets. And that kept Chinese prices very low. And that allowed China export more and more to the United States.

Starting point is 00:06:12 And they were able to do this because there was no peg, correct? Well, so they created the peg. Under the Bretton Wood system, which ended in 1971, all the currencies were paid to one another, and they were all backed by gold. But once the Bretton Wood system broke down, countries no longer had to back their currencies with gold. And so this made it possible for the Central Bank of China to create, well, 28 trillion RMB. That's roughly $4 trillion U.S. dollars. And they used this 28 trillion RMB to buy $4 trillion, or dollars in other currencies as well, in order to push up the value of the dollar and push down the value of the RMB,

Starting point is 00:06:56 so that their currency would remain artificially depressed, and that they could continue to grow their economy through rapid export-led growth. So in 1990, China didn't have a trade surplus with the U.S., and they were a very poor third-world country. China's trade surplus with the U.S. was $1 billion a day, $370 billion last year, the trade surplus. So China exports $500 billion worth of goods to the United States, but the United States only exports $130 billion worth of goods to China. So every $5 that's being spent out of here is going to China and only $1 coming back to us in generalized terms. Would that be a fair way to look at it? Yes, that's right.

Starting point is 00:07:37 But, I mean, to be fair, everyone, I believe, needs to be open-minded about the situation we're facing. It's not really USA versus China. It's not Team USA versus Team China. It's more complicated than that, because there are a very powerful interest in the United States who have benefited enormously from this arrangement and who have encouraged this arrangement and have facilitated this arrangement. For example, the multinational corporations have moved their factors. out of the United States and into China in order to produce things with very low-cost labor there.

Starting point is 00:08:14 And that has resulted in their profits going up very sharply and also the bankers. The banking industry in general has benefited from this paradigm because it's required the Americans going deeper and deeper into debt and they've financed this. So they have also encouraged this arrangement. But on the other hand, the average Americans, the middle class and the working class, their wages have been stagnant now for 30 years. And as long as home prices were going up, up until 2008, they were able to maintain their spending by refinancing their home, even though their wages were stagnant. But when the crisis struck, many of them lost their homes. And this political backlash against free trade, which has really been to their disadvantage, bubbled to the surface.

Starting point is 00:09:01 And they voted for Donald Trump. And he's now the president. And he promised them that he would protect them. In his inaugural address on January 20th, 2017, this is what he said. From this day forward, a new vision will govern our land. From this moment on, it's going to be America first. Every decision on trade, on taxes, on immigration, on foreign affairs will be made to benefit American workers and American families. We must protect our borders from the ravages of other countries making our products, dealing our companies, and destroying our jobs. jobs. Protection will lead to great prosperity and strength. So, Richard, what I think is really interesting for people hearing this. Now, whether you agree with that politically or not, that doesn't matter to us. What matters to us is really kind of understanding how the economics of this kind of shakes out, considering when a president, you know, they have unique policy tools at their disposal. And one of those, the president can play with tariffs quite a bit without the Congress getting involved. And

Starting point is 00:10:06 really having to listen to anybody else. That is a tool that the president has. And you can see him exercising this like we have never seen in the history of the U.S. or at least in the recent known history of the U.S. So talk to us a little bit about how he's sitting at the, if this was a game of poker, he's sitting at the table and playing his cards. And let's talk through how you kind of see this maturing as we move forward. Okay.

Starting point is 00:10:33 Well, just let me add one more thing to this, my comments about this. not being Team China versus Team the USA. On one side, it is everyone in China is on China's side, obviously. In the U.S. is different. You have the middle class and the working class on Team USA, if you will. You know, for lack of a better term, the 1% are on Team China. What is changed recently, and within the last 10 years, I would say, is suddenly you have the Pentagon on Team USA.

Starting point is 00:11:05 that the Pentagon has suddenly become concerned about China's growing military power and China's expansion overseas through initiatives like their one belt, one road project in which they intend to build infrastructure connecting China to Europe and beyond with Chinese made cement and steel and financed with Chinese loans. So the Pentagon has come to view China as a growing threat as well. So it's uncertain which side is going to be more powerful, but we really are at a turning point in history. If this trade war goes ahead, and it seems as though it probably will, this will be a tipping point in history. Now, returning to your question, how is this going to play out, well, again, we have to ask ourselves, really, what is it that President Trump is after?

Starting point is 00:11:58 Does he really just want to help reduce China's trade surplus with the U.S. and to stop China from stealing technology and advanced technology from U.S. corporations? Or does he intend to stop China's economic rise altogether? Well, okay, so really, if he does the former, he will do the latter. One of his demands was that China reduces trade surplus by $200 billion a year. So that would reduce the trade surplus from $370 billion to $170 billion. Well, that would be a death blow to China's economy. China's economy is already the greatest economic bubble in history.

Starting point is 00:12:40 They have enormous excess capacity across every industry imaginable. One statistic that's just too good not to quote again and again is that in three years, 2011, 12, and 13, China produced as much cement as the industry. United States did during the entire 20th century. It gives you some idea how much production capacity they have. And it's not just cement. It's steel and every other industry conceivable. Even without this trade war, China is in grave danger of this economic bubble popping because their problem is they have such incredible excess capacity across all their industries. Within China, the average person only has disposable income of $10 a day.

Starting point is 00:13:29 So the Chinese people simply do not earn enough money to begin absorbing half of what China can produce. So this has made it necessary for China to export the rest of all of its production. But now its production has grown to such an enormous scale that the entire world doesn't have enough purchasing power to continue to absorb more and more Chinese goods year after year after year after year. we've got this growing political backlash and this paradigm is going to end one way or the other

Starting point is 00:14:00 that's why their one belt one road initiative made so much sense if they can pave Mongolia with Chinese cement then at least they have something to do with their cement instead of pouring it into the ocean and they can keep their cement workers employed and they can actually finance they can use some of the credit they're creating in China to lend the money to Mongolia

Starting point is 00:14:22 some Mongolia can afford to buy the Chinese cement. So that's why they have to expand overseas through these sorts of initiatives. But that makes them all that much more of a growing geopolitical threat to the United States. So the underlying assumption is that the past will also hold in the future, meaning that you will continue to see free trade. And that's really what's being challenged now. Is that correctly understood? That's right.

Starting point is 00:14:48 So if suddenly they were forced to reduce their trade surplus with the, U.S. by $200 billion, that would have catastrophic consequences for China's economy. There's no way in the world that they would ever agree to that. They are not going to give in. They are not going to capitulate. They're going to fight back. So it could go something like this. We've already seen it progress just in the month I've been working on this subject.

Starting point is 00:15:16 It started out first President Trump imposed 34 billion tariffs on China. China retaliated with $34 billion of tariffs on U.S. goods. So then President Trump said U.S. would put 10% tariffs on $200 billion of Chinese goods. And China responded by saying they would put high tariffs on another $60 billion of U.S. goods. And then President Trump up the any, he said, we're not going to put 10% tariffs on the Chinese goods, we're going to put 25% tariffs on the Chinese goods. And so it goes back and forth. President Trump said,

Starting point is 00:15:53 we can take this all the way to $500 billion, the entire amount that China exports to the U.S. every year, half a trillion dollars a year. Well, you can read the Chinese newspapers, their English version. You can read the People's Daily on the Internet. And they are beginning to freak out, I guess, is the best way to put it.

Starting point is 00:16:11 So what can China do in response? Okay, well, if U.S. puts tariffs on $500 billion of Chinese goods, Obviously, China is going to put tariffs on everything the United States sells to China and ultimately not allow any American goods be sold in China. They could go beyond that and nationalize all the American companies in China, Walmart, Starbucks, and they could default on the debt that they owe other countries. And North Korea most probably start lobbying missiles across Japan again. over Japan and testing nuclear missiles.

Starting point is 00:16:51 The Chinese military would be put on top alert. And already in an article yesterday in People's Daily, it discussed trade wars, hot wars, and cold wars. So you can see how this conflict could easily turn into the most serious geopolitical conflict the world is seen since the collapse of the Soviet Union. You know, trade wars had the potential to become real wars. For instance, in the summer of 1941, the United States imposed an oil embargo on Japan. And six months later, Japan attacked Pearl Harbor and took over Southeast Asia.

Starting point is 00:17:26 So no one should underestimate how serious an all-out trade war between the United States and China could become. Because China is not going to back down. Let's take a quick break and hear from today's sponsors. All right. I want you guys to imagine spending three days in Oslo at the height of the summer. You've got long days of daylight, incredible food, floating saunas on the Oslo Fjord, and every conversation you have is with people who are actually shaping the future. That's what the Oslo Freedom Forum is. From June 1st through the 3rd, 2026, the Oslo Freedom Forum is entering its 18th year, bringing together activists, technologists, journalists, investors, and builders from all over the world, many of them operating on the front lines of history. This is where you hear firsthand stories from people using.

Starting point is 00:18:14 Bitcoin to survive currency collapse, using AI to expose human rights abuses, and building technology under censorship and authoritarian pressures. These aren't abstract ideas. These are tools real people are using right now. You'll be in the room with about 2,000 extraordinary individuals, dissidents, founders, philanthropists, policymakers, the kind of people you don't just listen to but end up having dinner with. Over three days, you'll experience powerful mainstage talks, hands-on workshops on freedom tech and financial sovereignty, immersive art installations, and conversations that continue long after the sessions end. And it's all happening in Oslo in June. If this sounds like your kind of room, well, you're in luck because you can attend in person.

Starting point is 00:18:59 Standard and patron passes are available at Osloof Freedomforum.com with patron passes offering deep access, private events, and small group time with the speakers. The Oslo Freedom Forum isn't just a conference. It's a place where ideas meet reality and where the future is being built by people living it. If you run a business, you've probably had the same thought lately. How do we make AI useful in the real world? Because the upside is huge, but guessing your way into it is a risky move. With NetSuite by Oracle, you can put AI to work today. NetSuite is the number one AI cloud ERP, trusted by over 43,000 businesses.

Starting point is 00:19:39 It pulls your financials, inventory, commerce, HR, and sales. CRM into one unified system. And that connected data is what makes your AI smarter. It can automate routine work, surface actionable insights, and help you cut costs while making fast AI-powered decisions with confidence. And now with the NetSuite AI connector, you can use the AI of your choice to connect directly to your real business data. This isn't some add-on, it's AI built into the system that runs your business. And whether your company does millions or even hundreds of millions, NetSuite helps you stay ahead. If your revenues are at least in the seven figures, get their free business guide demystifying AI at net suite.com slash study. The guide is free to you at net suite.com slash study.

Starting point is 00:20:26 NetSuite.com slash study. When I started my own side business, it suddenly felt like I had to become 10 different people overnight wearing many different hats. Starting something from scratch can feel exciting, but also incredibly overwhelming and lonely. That's why having the right tools matters. For millions of businesses, that tool is Shopify. Shopify is the commerce platform behind millions of businesses around the world and 10% of all e-commerce in the U.S. from brands just getting started to household names. It gives you everything you need in one place, from inventory to payments to analytics.

Starting point is 00:21:03 So you're not juggling a bunch of different platforms. You can build a beautiful online store with hundreds of ready-to-use templates, and Shopify is packed with helpful AI tools that write product descriptions and even enhance your product photography. Plus, if you ever get stuck, they've got award-winning 24-7 customer support. Start your business today with the industry's best business partner, Shopify, and start hearing sign up for your $1 per month trial today at Shopify.com slash WSB. Go to Shopify.

Starting point is 00:21:37 shopify.com slash WSB. That's Shopify. com slash WSB. All right. Back to the show. I think you got a really strong point there with respect to the fact that you're dealing with a communist country and the fact that they got a safe face with their population and not back down. Now, with that said, when we look at the U.S. and we look at China and we talked about the $5 for

Starting point is 00:22:04 every $1 and the way that it's flowing. The U.S. has a lot of negotiating power here with the fact that they're sending $5 out and only getting $1 back. So how long can President Trump do the stiff arm that he's doing here and the threatening that he's doing? Because a lot of these terrorists haven't even kicked in. And I can only imagine what's going to happen when they do start kicking into the Chinese economy. I think the Chinese stock market's down, what, 20% since the start of the year, something like that. And when you look at the U.S. stock market, it's pretty flat. So in terms of the stock market, U.S. hasn't even been hurt at all where China's in a recession at this point because of this

Starting point is 00:22:47 stuff. And the tariffs haven't even kicked in. So I'm kind of curious how you see the perception in the U.S. You're talking about the Chinese population and how the actions they've got to take. How do you see it playing out in here in the U.S.? Can Trump continue to do this? Like what kind of political and how do you see the U.S. population reacting to this moving forward? Okay, well, as you said, these are very early days still. And China's economy is on the weak side, but they do say that it grew by something like 6.8% in the most recent quarter. So it's still growing. But the U.S. also has some very serious vulnerabilities. For instance, U.S. economy has benefited enormously in some respects from buying inexperienced.

Starting point is 00:23:34 expensive goods from low-wage countries like China. This has been very disinflationary. Back in the early 1980s, we had double-digit inflation. But as we began running trade deficits with countries like initially Japan and Germany, but later China, as we started importing more and more cheap goods, then the inflation rate came down literally to zero a couple of years ago, zero percent. And as the inflation rate came down, then interest rates came.

Starting point is 00:24:04 came down to very low levels as well. And as the interest rates became cheaper and cheaper, this made it more affordable for the Americans to borrow more and spend more. So credit growth accelerated very sharply. In fact, credit as a percentage of GDP in the United States increased from about 150% of GDP in 1980. It increased all the way to 370% a couple of years ago. In other words, credit growth was growing much more rapidly than the economy. the credit growth was driving economic growth.

Starting point is 00:24:36 The reason the credit growth expanded was because interest rates came down so sharply. And at the same time, the very low interest rates pushed up the stock market and pushed up the property market and created an extraordinary amount of wealth in the United States. So household sector net worth

Starting point is 00:24:53 is now more than $100 trillion. This is 70% more than it was in 2009. So this has only a current level, because interest rates have fallen so sharply and also a big dose of quantitative easing help push up asset prices. Well, now, if we put up 25% trade tariffs on all $500 billion of Chinese goods, inflation rates going to move from 2%, 3%, up to 8, 9, 10%, and interest rates will move right up along with it and above it.

Starting point is 00:25:30 Now the 10-year government bond yield, most important number in the world, is less than 3%. But if inflation goes to 8%, the 10-year bond yield is going to be in double digits. If U.S. interest rates go up to 10%, then credit is going to contract, and that's going to throw the U.S. into a severe recession, and on top of that, asset prices are going to crash. The stock market is going to crash, and the property market is going to crash. And the U.S. will be in very severe recession, and unemployment will surge. So that's the U.S. vulnerability. Can it survive, can it withstand higher interest rates that would come with the high tariffs? So literally today, Jamie Diamond came out in the Wall Street Journal and he said that we are still seeing interest levels that are probably artificial.

Starting point is 00:26:17 Right now, we are in August of 2018, around just short of 3%. And he was talking about 5% as perhaps being a more realistic number. How do you see the interest level, say, for the next 12 months? And how do you see this together with the inflation? We hear so many people talking about inflation is going to come, even though there's something that we haven't seen yet. So what is the time horizon for that? Yes, if inflation comes back, then that would certainly push up interest rates. There are other things that can push up interest rates as well, that being the supply

Starting point is 00:26:54 and demand for money. Quantitative tightening is occurring now. The Fed is literally destroying $40 billion a month, and that's going to increase to $50 billion a month in October. So just as quantitative easing, the Fed at that time created money and used that money to buy government bonds. That pushed up the price of the bonds, and therefore that pushed down the yield on those bonds, pushed down interest rates. Well, now they're doing the exact opposite. They're in effect selling bonds and with the money, they're retiring the money, which literally destroys dollars.

Starting point is 00:27:32 It drinks the dollar money supply in the world. So the supply of dollars in the world is contracting. And at the same time, the U.S. budget deficit is becoming very much larger because in December last year, Congress passed very significant tax cuts. The budget deficit this year is going to be probably above $900 billion, moving above a trillion dollars next year. So you have the government borrowing more at a time when the Fed is removing the amount of dollars that exist in the world, reducing the amount. And so the supply and demand alone, with more government demand or dollars, at a time when there are fewer dollars, that means that interest rates should rise. a source of funding for

Starting point is 00:28:16 U.S. government bonds is other countries like China. China takes its trade surplus money, the central bank of China, prints its own money, it buys all the dollars coming into China so that the Chinese currency won't appreciate. And then once

Starting point is 00:28:32 it accumulates these dollars, it doesn't just put all of these dollar bills in some gigantic safe somewhere. It takes these dollars that it has bought and it invests them in the U.S. government bonds. So in other words, the larger the U.S. trade deficit is, the more money comes into the United States to finance the budget deficit. But now we're talking about reducing China's trade surplus with the U.S. by $200 billion a year.

Starting point is 00:28:57 That's the initial demand. Well, that would mean there would be $200 billion less Chinese investment in U.S. government bonds a year. So another reason interest rates should move higher. If we have a major trade war with China, then more things are going to be made in the United States. factories will begin coming back to the United States. We're already starting at a point where there's nearly full employment. And even though wages have been stagnant still, wages are not going. Wage growth is slightly below the rate of inflation.

Starting point is 00:29:28 And inflation adjusted terms, wages still aren't going up. But if we have an all-out trade war with China, then there will be more manufacturing jobs in the United States. And wages will begin to go up. And there will be, once again, will hit domestic capacity constraints in the United States that will be inflationary. For example, let me go back to what happened in the 1960s and 1970s. Back then, we were still on the Bretton Wood system.

Starting point is 00:29:58 And back then, trade between all countries was more or less in balance. Countries couldn't have big trade deficits. Because if they did, they had to pay for their trade deficits with their gold. And there was only a limited amount of gold. If they had a big deficit, they'd quickly run out of gold. So that meant that trade between nations had to balance. And so back in the 1960s, when the Vietnam War heated up, at the same time that President Johnson started spending more money

Starting point is 00:30:25 on the social welfare programs, things like Medicare and Social Security, then that government spending overheated domestic economy. Suddenly, everyone had jobs, and the factories were producing at full capacity. And this led to wage push inflation. Wages went up and that pushed up prices. The steel companies couldn't make steel fast enough. So steel prices went up, et cetera, et cetera, throughout the economy. And that eventually led to the double digit rates of inflation in the early 1970s.

Starting point is 00:31:01 And that lasted throughout most of the 70s. Paul Volcker, the Fed chairman at the time, rushed those higher rates of inflation with extremely high interest rates. It caused a severe recession. It caused unemployment to go up to 10%. And that's how they brought the inflation back down. That was in the early 80s. But then President Reagan came along and he had even larger budget deficits than President Johnson or Nixon had much larger budget deficits. So you would have expected that those very large budget deficits once again would have overstimulated the U.S. economy and led to another round of very high rates of inflation. But that didn't happen in the 80s. Why? Because starting in the 1980s, the United States started running

Starting point is 00:31:44 very large trade deficits with other countries, initially Germany and Japan. And so we didn't hit the domestic bottlenecks. We didn't run out of U.S. capacity because we could use Japanese capacity and German capacity. And as we entered the 90s, then we could use Chinese capacity and Taiwanese and South Korean capacity. So after 1980, once we started running the big trade deficits, We no longer had a closed domestic economy that was subject to overheating if the government spent too much money. We had a global economy with tremendous spare capacity in labor in particular. Even today, they say two billion people live on less than $3 a day. And so we're not going to run out of labor in our global economy.

Starting point is 00:32:31 We're not going to face wage rate inflation due to a labor shortage in the global economy. any time for generations. However, if we put up trade tariffs and go back to a situation where we have a closed domestic economy the way we did when President Johnson was president, then once again, we're not going to have a global economy with an infinite supply of cheap labor

Starting point is 00:32:54 and an infinite supply of industrial capacity in other countries like India, Vietnam, and China and Indonesia. We'll be back to a closed domestic economy and will very quickly be back in this situation where we'll have wage push spiraling inflation heading back into the double digits. But the difference between now and back then is on the fiscal side.

Starting point is 00:33:18 Back then we were fiscally responsible relative to where we're at today, where now on both sides, Democrats or Republicans, you can't find anybody who's saying that they want to try to balance the budget. And it's just like, hey, how much higher can we raise the cap on spending? It's to the point where now people were saying, let's not even have a cap on spending. So how does that play out moving forward? Because we didn't see that in the past whenever we were talking about a U.S. first or basically we didn't have these massive trade deficits that we've got now. And if we continue to go down the path that we're on, how do you see that shaking out, considering the fiscal side is so different?

Starting point is 00:34:00 So on the fiscal side, I'm not so concerned as many people are about the level of U.S. government debt. We have something like $20 trillion of government debt in total, which is roughly 100% of U.S. GDP. But of that debt, something like $6 trillion out of the $20 trillion is owned by the government. For example, Social Security Fund. In other words, it's debt that the government owes to itself, which really can't. It cancels quite a bit of that. Now, if you look at Japan, back when their economic crisis started in 1990, their government's total debt was 60% of GDP. They've now taken that up to 250% of GDP by having very large budget debts year after year.

Starting point is 00:34:48 Even at the total measure of US government debt is only 100% of US GDP. So the US is not going to face any sort of fiscal crisis anytime within the foreseeable future. future. If there were any concerns about government fiscal sustainability, 10-year bond yield wouldn't be below 3%. It would be 13%. So with the U.S. economy, almost $20 trillion in size, that suggests the U.S. government could borrow another $20 trillion before it even hit 200% government debt to GDP. And that's assuming 0% GDP growth, whereas if the government borrowed on that scale, even over a 10-year period, the economy would grow. it practically 10% a year, and we would never reach 200% government debt to GDP.

Starting point is 00:35:34 So I'm not concerned about any sort of immediate fiscal crisis or fiscal problems in the U.S. In fact, I believe the U.S. economy did require some fiscal stimulus, which we have had as a result of the tax cuts. But I would prefer that the budget deficit increased, not through tax cuts on corporations and primarily the wealthy, I would have preferred to see a higher budget deficit resulting from increased government investment in new industries and new technologies. I think that would be a much better approach

Starting point is 00:36:08 to stimulating the economy. If you give tax cuts to the wealthiest people by greatly reducing inheritance taxes, for instance, then okay, yes, those families, they will probably buy another private jet and a bigger yacht, But it will come at the cost of having a higher budget deficit and higher debt, and it won't produce any other benefits.

Starting point is 00:36:30 Whereas to spend a trillion dollars over the next 10 years investing in genetic engineering and biotech industries, you could probably have a cure for cancer and Alzheimer's. And that would produce enormous benefits for society, obviously, but also for the budget. If the average American worker remain in the workplace for just an extra two or three years, that would solve all concerns about our Social Security underfunding and Medicare underfunding for the next 30 years. So rather than wasting the money on tax cuts for the wealthy, blowing out our deficits in debt that way, it would have been far better for the government to borrow more but use the borrowed money to invest in new industries and new technologies on a very aggressive scale so that we could restructure the U.S. economy and continue to have strong U.S. economic growth

Starting point is 00:37:23 and continue to be the world leader in technology and economically and militarily. Let's take a quick break and hear from today's sponsors. No, it's not your imagination. Risk and regulation are ramping up and customers now expect proof of security just to do business. That's why VANTA is a game changer. VANTA automates your compliance process and brings compliance, risk, and customer trust together on one AI-powered platform. So whether you're prepping for a SOC 2 or running an enterprise GRC program, VANTA keeps you secure and keeps your deals moving. Instead of chasing

Starting point is 00:37:59 spreadsheets and screenshots, VANTA gives you continuous automation across more than 35 security and privacy frameworks. Companies like Ramp and Ryder spend 82% less time on audits with VANTA. That's not just faster compliance, it's more time for growth. If I were running a startup or scaling a team today, this is exactly the type of platform I'd won in place. Get started at vanta.com slash billionaires. That's vanta.com slash billionaires. Ever wanted to explore the world of online trading but haven't dared try? The futures market is more active now than ever before, and plus 500 futures is the perfect place to start. Plus 500 gives you access to a wide range of instruments, the S&P 500, NASDAQ, Bitcoin, gas, and much more.

Starting point is 00:38:50 Explore equity indices, energy, metals, 4X, crypto, and beyond. With a simple and intuitive platform, you can trade from anywhere, right from your phone. Deposit with a minimum of $100 and experience the fast, accessible futures trading you've been waiting for. See a trading opportunity. You'll be able to trade it in just two clicks once your account is open. Not sure if you're ready, not a problem. Plus 500 gives you an unlimited risk-free demo account with charts and analytic tools for you to practice on.

Starting point is 00:39:23 With over 20 years of experience, Plus 500 is your gateway to the markets. Visit Plus500.com to learn more. Trading in futures involves risk of loss and is not suitable for everyone. Not all applicants will qualify. Plus 500, it's trading with a plus. Billion dollar investors don't typically park their cash in high-yields. savings accounts. Instead, they often use one of the premier passive income strategies for institutional investors, private credit. Now, the same passive income strategy is available to investors of

Starting point is 00:39:57 all sizes thanks to the Fundrise income fund, which has more than $600 million invested in a 7.97% distribution rate. With traditional savings yields falling, it's no wonder private credit has grown to be a trillion dollar asset class in the last few years. Visit fundrise.com slash WSB to invest in the Fundrise Income Fund in just minutes. The fund's total return in 2025 was 8%, and the average annual total return since inception is 7.8%. Past performance does not guarantee future results, current distribution rate as of 1231, 2025. Carefully consider the investment material before investing, including objectives, risks, charges, and expenses. This and other information can be found in the income fund's

Starting point is 00:40:44 prospectus at fundrise.com slash income. This is a paid advertisement. All right. Back to the show. So Richard, I would like to go back to the China discussion. How do you see the Chinese retaliating, for instance, in terms of the currency? And is there anything that they can do to persuade the U.S. government to stop the trade war? Yes, so already, you can see that the Chinese currency has depreciated by 8% And partially in response to that, President Trump has announced that the tariffs won't be 10% on $200 billion of goods. They will be 25% on $200 billion worth of goods. So the more of the Chinese currency depreciates, the higher the tariffs are likely to become.

Starting point is 00:41:32 As the currency depreciates, this creates problems for China on one level. Of course, the more the currency depreciates, the more competitive Chinese exports become. But on the other hand, anyone in China expects the currency to depreciate by another 10% is going to try to find ways to get his money out of RMB and into dollars. And this would cause capital flight. And we saw this kind of capital flight in 2015 and 2016. And it was on quite an extreme scale. China's foreign exchange reserves fell by $1 trillion, indicating from $4 trillion to $3 trillion, indicating that money

Starting point is 00:42:11 left the country. And when money leaves the country, that tightens up liquidity conditions within the country. So the central bank had to respond to this outflow of money by lending newly created money from the central bank to financial institutions to prevent the money supply from contracting, because a contracting money supply would have caused China's economy to slow down very severely. So they're concerned that if the currency depreciates further, there'll be another massive wave with capital flight. So that is a problem for them. Now, going back to your question constraints facing President Trump, so it's not certain that President Trump's supporters will continue to support him during the months ahead. If the tariffs are put in place on 25% tariffs on $200 billion

Starting point is 00:43:01 worth of Chinese exports to the U.S., prices are going to go up. And as prices go up, then the stock market's inflation will go up, interest rates. will go up, the stock market will come down, property market will come down, unemployment will go up, U.S. economy will start getting visibly weaker, and it wouldn't be inconceivable that there could be a significant sell-off on the stock market. So given that, it's uncertain whether President Trump's supporters will continue to support him or not, is possible that they will. His argument is that we are going to have to take some short-term pain, possibly. But if we don't, China is going to destroy us in the long run. I'm curious, Richard, do you think that his best approach, considering what he's

Starting point is 00:43:46 trying to accomplish and considering the fact that he probably wants to get reelected, do you think that his best approach is to almost like the Fed use this forward guidance thing where it's a lot of talk with slow action of the tariffs actually kicking in? Because as soon as those tariffs do start kicking in, it starts having a major impact on the U.S. economy simply through the, cost of goods going up? That's an interesting question because we have the congressional midterm elections coming up in November. If the Republicans lose control over the House, and that will greatly weaken President Trump's power in general. And so perhaps he won't impose tariffs on the $200 billion worth of goods before the congressional elections,

Starting point is 00:44:35 or maybe just shortly enough in advance of them so that they don't yet higher prices and inflation and interest rates. But it's hard to know really how this will play out because people voted for President Trump because he told them he was going to do this to China. And if he had not done it, he would have broken his promise. And this is not something he seems to have just concocted to win the election.

Starting point is 00:45:00 This really seems like this is something that he has believed for decades. He's been very vocal about China's aggressive trade policies for the U.S. for a very long time. So it seems that this is something that he truly believes in and that his supporters also truly believe in. But again, he didn't win the majority of the American votes in the election. And he won the electoral college vote. But if his supporters, even if 10% of them abandon him, then he may not be reelected.

Starting point is 00:45:34 He may not be in office long enough to actually carry out a significant trade war with China. And it's not sure that whoever follows him would. They probably wouldn't. But having said that, so it's possible this trade war may end before it really gets started. But even if it does, that probably will not be the end of the story. Because the American public has lost faith in free trade. They voted for protectionism, and they have done it once. They are likely to do it again.

Starting point is 00:46:04 This so-called free trade paradigm that we have, which is really not free trade, since other countries manipulate their currencies. With the collaboration of large parts of the wealthiest parts of American society, the United States could have declared China a currency manipulator any time in the last 20 years, but they never did. Why didn't they? It was clear China was manipulating their currency. Why didn't they?

Starting point is 00:46:29 Well, you had the Treasury Department. Most of those time, most of that time, Treasury Department's in charge of calling China a currency manipulator. the Treasury Department was run by a series of people from Goldman Sachs and Citigrud returned to a time when this so-called free trade paradigm is allowed to fully play out because the American public has already made it clear that they don't like it. And the Europeans don't like it either. So we talked about the impact on China. It would be severely damaging for the U.S. economy as well. But we also should mention that it would be equally damaging for the rest of the world. Because since China has had such a large trade surplus with the United States year after year,

Starting point is 00:47:13 this has given them money to buy things from other countries. So just since 1995, I looked at this the other day, China has imported $20 trillion of goods from other countries, not including the U.S. And so $20 trillion is a very big number. It's bought enormous amounts of metals from Australia and commodities, agricultural products, and copper and other metals from South America, but oil from the Middle East and Iran and Russia, if it were forced to reduce its trade surplus by $200 billion a year with the U.S., that would be $200 billion a year. It doesn't have to buy things from other countries. So this would be a severe blow to the price of all commodities. You see copper has been tanking, but it would be a severe blow to all the commodities,

Starting point is 00:48:04 and therefore all the commodity producers and the currencies of all the commodity producing countries. And it would also be a severe blow to Germany, for instance. Germany has been selling China a lot of capital goods. It would be a severe blow to France. France has been selling China enormous amounts of luxury goods. It would be a blow to Japan, Taiwan, South Korea. So the rest of the world would be pulled down with China and the U.S. So there is a very real danger that a all-out trade war would lead to a real global great depression.

Starting point is 00:48:40 Richard, back in March, you wrote this blog post about why the Fed was changing their schedule or why they were behind their schedule on quantitative tightening. Could you talk to us more about why that was happening and what? What is really happening now? When I wrote that blog, there had been a little wobble in the bond market, as I recall. The bond yields had moved up quite quickly and significantly. And so it appears that the Fed temporarily backed off on its quantitative tightening. In fact, it even expanded its balance sheet one week, which is not completely unheard of.

Starting point is 00:49:18 They do tweak their balance sheet depending on what's going on. in the bond market. And this was Russia, right? Just so people understand, I think it was Russia that was selling off pretty much their entire position or 90% of their position. Is that when this timing happened? At the time, we didn't know that Russia was doing that. So perhaps that was the reason.

Starting point is 00:49:37 But there were other good reasons for the interest rates to go up in the U.S., the much larger budget deficit. I think the thing that really sparked off that jump in the bond yields at that time was new estimates were coming out about how much more the U.S. government was going to have to borrow in the first and second quarter than had previously been expected. That spooked to market. But probably at the same time Russia was selling. Combination of both. Yes. So after that, the Fed then got back with the program, which they had previously published,

Starting point is 00:50:11 a schedule of what their quantitative tightening would be. They started off with quantitative tightening of $10 billion per month in the fourth quarter of last year. that increased to $20 billion in the first quarter, and then $30 billion in the second quarter. Now we're at $40 billion. And they've been sticking with that schedule. But even still, the total amount that they've reduced so far has been relatively small compared to the $3.5 trillion that they've created

Starting point is 00:50:38 through quantitative easing. However, if they move on into $50 billion a month, the quantitative tightening starting on October and carry on with that, it won't take long before those numbers do become very significant. But the thing that has changed recently is we've suddenly seen some hints from the Fed and the new Fed chairman how they are beginning to wonder or consider at what point they should stop quantitative tightening. The Fed never comes out with sudden pronouncements. They gradually warm the market up by dropping hints that we're thinking about this or maybe we'll do this. So the hints have started that quantitative tightening is not going to go on as long as people had anticipated.

Starting point is 00:51:26 Because the quantitative tightening, as it destroys dollars, would push up interest rates. And that would push up when interest rates, when U.S. interest rates go higher, then the dollar goes higher. And when the dollar goes higher, commodity prices go lower. And that includes gold. And that's why we've seen gold moving lower is because the dollar has been moving higher. And if they continue with quantitative tightening, then the dollar is going to move much higher, and U.S. interest rates are going to move much higher. And then the problem is, whenever the dollar moves higher, that causes global commodity prices to go down. That deals a very serious blow to all the countries in the world that produce commodities, and their currencies drop, and their economies go into recession.

Starting point is 00:52:09 So the last time we had a big bout of dollar strength was between the middle of 2014 to the first quarter of 2015. the dollar moved up 23%, and that sparked off a huge sell off and also, you know, the global economy essentially went into recession. Yeah, that's when Taragi came out and said he'll print until the cows come home. What it takes. Yeah, whatever it takes. And that worked very well. Yeah.

Starting point is 00:52:39 And it provided more global liquidity because that statement, the ECB started printing very aggressively just about the time that the Fed stopped printing. So ECB has been providing a great deal of global liquidity and the Bank of Japan, even more so. The Bank of Japan, so now the ECB, they're still doing their quantitative easing, but now that's been reduced from a peak of 80 billion euros per month. Now I think they're down in the up until now it's probably still 30 billion euros. euros a month. But starting in September, it goes to $15 billion a month, and then it's supposed to end at the end of the year. So there'll be no more money creation coming out of Europe, but the Bank of Japan is still creating money very aggressively and holding the Japanese government bond yields at just now there are 10 basis

Starting point is 00:53:32 points, 10% of 1%. Or even though Japan's government has 250% government debt to GDP, Japanese government can still borrow money for just 10 basis. points a year on 10-year government bonds. So the last topic for today, that's about Japan. And we saw this very interesting news just a week ago that when the Bank of Japan came out and said they were not sure if they fully understood the implication of quantitative easing. And they were likely not continue, at least not to the same extent. Then you saw a huge sell-off.

Starting point is 00:54:08 And then only two days later, the Bank of Japan came out again, said that they were continue to buy and support the market. What are your thought process about that, Richard? It should be viewed as one of the most extraordinary experiments in the history of monetary policy. At the peak, they were printing 80 trillion yen a year and using it to buy government bonds. And they've now bought up roughly 40% of all of Japanese government debt. So when we think that the Japanese government has 250% debt to GDP, a lot of that 250% bank of Japan actually owns 40% of it. And since the Bank of Japan is essentially a branch of the government, that means the government has acquired 40% of all its debt by printing money from thin air and buying the debt. The Bank of Japan has effectively cancelled 40% of all Japanese government debt by printing money and buying Japanese government bonds.

Starting point is 00:55:07 Now, by buying so many bonds, they had pushed the yield on the 10-year government bond down to 0%. If you buy and have bonds, you'll push the price up so high that the yield goes down to zero. And in fact, they even push the yield into negative territory for some months. Now, that means that this enables the Japanese government to borrow as much money as they want, a 0% interest, which is something the world has never seen before. Now, this also has global implications because when the Japanese government bond yields only yields nothing, then, of course, people in Japan would bar rather buy a U.S. government bond yielding 2.9%. That seems like a lot of money relative to nothing. And so money coming out of Japan then puts downward pressure on interest rates in the United States and Europe and everywhere else in the world. So, some time back, a year and a half, even perhaps two years ago now, the Bank of Japan found that his program of buying $80 trillion a year was far too much. They didn't have to buy that many government bonds a year

Starting point is 00:56:19 in order to hold the interest rates at 0%. They could buy far fewer bonds, $30 trillion, $40 trillion a year. That would still be enough to keep the interest rates at 0%. You buy the bonds, you push up the price, that pushes down the yield. So they didn't have to create $80 or $90 trillion. year to hold the yields at 0%. Now, why did they make this announcement in the last week or so? In this announcement, they said, okay, the new policy is we're not going to hold the interest rates at 0%. We're going to let them move up a little. We're going to hold them somewhere around 10 basis points and certainly no higher than 20 basis points. Now, why do they do this? I think that this may be part of a globally coordinated strategy among global central bankers to try to push up interest

Starting point is 00:57:09 rates a little bit around the world because there is concern that inflation is coming back and that the global economy is in danger of overheating. We have very low unemployment in the U.S. And generally, the global economy has recovered. So by allowing the Japanese bond deals to move up 10 or 20 basis points, that should make it easier for the U.S. government bond yields to move up 10 or 20 basis points. Acting as something of a break on the U.S. economy, which many people fear could overheat because of big tax cuts and spending increases by the government. So my interpretation would be

Starting point is 00:57:49 that we saw the Bank of England increase interest rates in the last week or so, and the ECB is now winding down its quantitative easing program. It's a kind of globally quavering. coordinated tightening a global monetary policy. This was just another aspect of that, I suspect. You know, all this talk about Japan and how these central banks are buying bonds and pushing rates to zero. It's absolutely fascinating. You know, there's a organization called the Ardenny research organization. And monthly, what they do is they publish a chart that looks at the total assets of the major central banks around the entire world. So the ones that they look at are the Fed, the People's Bank of China, the ECB, Bank of Japan. And what they do is they overlay all of these

Starting point is 00:58:41 balance sheets for all these central banks. And they've been doing this since 2008 during the start of the last credit cycle. And what I find fascinating, you brought this up in your response where you said it looks like it's a coordinated, you know, central banking event. And when you look at the way that the assets of central bankers balance sheets has moved, it's almost a perfectly straight line when you combine all of them. But when you look at one or the other, it's kind of lumpy and all over the place. But when you combine all of them, you see like this perfectly straight line. And what I find fascinating, and this is where I want to hear your opinion, is recently in the last three months, you've seen the total assets of all of these central banks combined

Starting point is 00:59:27 stop climbing and you're actually seeing it start to contract for the first time in the last 10 years. So if that trend would continue, which based on the forward guidance that we're hearing from all these different central banks, seems like that's the case. I think that's a very negative sign for the markets moving forward. But I don't want to be the bear. I want to try to have a balanced opinion. I'm kind of curious to hear what you have to say about that idea.

Starting point is 00:59:55 Well, you're right. If this trend were to continue and that line were to start to dip, then it's very likely there would be a severe global recession. As global liquidity tightened and interest rates moved higher. But as ECB president Draghe has made clear, quantitative easing was not a one-off deal. It has now become a permanent part of central banks' toolkits. So the next time we have a global downturn,

Starting point is 01:00:24 then interest rates will once again be cut back to zero very quickly. And at that point, there will be another round of quantitative easing. Draghi could not have been more clear. This is a permanent part of our toolkit going forward. However, that is only possible so long as globalization persist, because globalization is very deflationary. So globalization is putting downward pressure on wages and the cost of manufacturing. goods is putting downward pressure on prices and completely offsetting all of the inflationary pressures caused by paper money printing by central banks.

Starting point is 01:01:04 Well, if we now see globalization reverse, then we will once again be back in a world of much higher rates of inflation. And it will no longer be possible for central banks to stimulate the economy by printing trillions of dollars, as they did after 2008, because that would be extremely inflationary. It would throw fuel on the already blazing inflationary spiral that would follow the collapse of globalization. So it's very interesting. Again, this is why this trade war between the United States and China could be a turning point in history. Not only would it stop China's rise, but it could also result in a severe global economic depression if it causes a sharp spike in global interest race. through higher rates of inflation. So, Richard, the thing that Stig and I just love about having you on the show is I know

Starting point is 01:02:02 I learn a ton every time you come back on. So we cannot thank you enough for making time out of your day to come back on the show. I'm sure people listening to this are going to want to know more about you. Please tell people where they can find you. Give them a hand off to your webpage and all that good stuff. Preston, Stig, I always enjoyed talking with you guys because you allow enough. time so that we can actually go into some details on these very important topics rather than just a few sound bites. So it makes the interview really much more satisfying.

Starting point is 01:02:36 MacroWatch is a video newsletter. Every couple of weeks I upload a new video. It's essentially me doing a PowerPoint presentation. Each video is normally about 20 minutes long. Normally it has 30 downloadable charts. and I explain developments that are occurring in the global economy, how they're likely to impact asset prices like stocks and bonds and currencies and commodities. And then, of course, on government policy, because it's government policy that determines the amount of credit, growth, and the amount of liquidity that's injected into the economy. So if your listeners would like to check out MacroWatch,

Starting point is 01:03:20 They can go to my website. They can find at Richard Duncan Economics. And there they can subscribe for my free blog or they can subscribe for Macro Watch. All right, Richard. Well, we really appreciate your time. And thank you so much for coming on and sharing your wisdom with our audience. Thank you, Preston. It's Dave.

Starting point is 01:03:43 It's always a pleasure talking with you guys. And we should do it again sometime soon. You bet. All right, guys. that was all that Preston and I had for this week's episode of The Investors Podcast. We see each other again next week. Thanks for listening to TIP. To access the show notes, courses or forums, go to theinvestorspodcast.com.

Starting point is 01:04:03 To get your questions played on the show, go to Asktheinvestors.com and win a free subscription to any of our courses on TIP Academy. This show is for entertainment purposes only. Before making investment decisions, consult a professional. This show is copyrighted. the TIP network. Written permission must be granted before syndication or rebroadcasting.

We Study Billionaires - The Investor’s Podcast Network - TIP207: Tariffs & China with Richard Duncan (Business Podcast)

There aren't comments yet for this episode. Click on any sentence in the transcript to leave a comment.