Jim Rickards: Demflation Will Kill The Middle Class
Summary
➡ The article discusses the current economic situation, focusing on inflation and its impact on everyday life. It explains how rising costs of oil, food, and housing, which make up a large part of people’s spending, are causing inflation. The article also mentions geopolitical issues and supply chain problems as contributing factors. It warns that if inflation persists, it could lead to a situation called stagflation, where there’s high inflation and unemployment at the same time, which happened in the 1970s and 80s.
➡ The U.S. economy has been growing at a slower rate than its potential, which is referred to as a depression. This is not due to the Federal Reserve’s money printing, which doesn’t really affect the economy, but rather due to government spending. However, this spending is causing the national debt to increase faster than the economy is growing, leading to a high debt-to-GDP ratio, which is a concern for the future of the economy.
➡ The article discusses the U.S.’s high debt-to-GDP ratio, which is currently at its highest in history. It explains that in the past, the U.S. was able to reduce this ratio by growing the economy faster than the debt. However, now the debt is growing faster than the economy, leading to less growth for each dollar spent. The article suggests that this could eventually lead to slow economic growth and possibly hyperinflation, with the rich getting richer and the middle class suffering.
➡ This text talks about how the rich keep getting richer while the average person struggles. It criticizes the use of averages in government statistics, saying they hide the truth about wealth distribution. It also discusses the disconnect between politicians and the middle class, using examples from the Biden and Trump campaigns. Lastly, it advises middle class people to diversify their investments to protect themselves from economic instability.
➡ This article suggests that to protect your money during financial stress, you should diversify your investments. This means spreading your money across different types of assets like stocks, cash, real estate, gold, and other alternatives. The author also recommends reducing your exposure to stocks, investing in sectors like defense, healthcare, and natural resources, and considering safe instruments like treasury notes. The key is to not put all your money in one place, but to spread it across different areas that can grow and protect you from inflation and other economic risks.
➡ YouTube is sending a reminder to take action now and promises to catch up with you later.
Transcript
It could just keep getting worse. We’re joined today by Jim Rickords, former advisor to the CIA and Pentagon and a man that knows fiscal monetary policy. Some of the big picture things that are going on in the world, and one of them has to do with the rising prices that we’re seeing across America and also the purchasing power of our dollars just getting erased. It’s happening to the middle class, and there is something secret going on behind the scenes that if you don’t know it’s happening and you’re not taking action right now, you could be left behind.
So, Jim, get us caught up. What’s happening with this inflation story that no one’s telling? And how bad could it get? Sure, and you’re right. We’ve been talking about this in our publications and interviews like this for months or longer. And this was at a time when the Fed was saying, inflation is coming down Wall streets. Inflation is coming down. Theyre going to cut interest rates. The Fed was still saying, we expect three interest rate cuts between now and the end of the year.
They were saying this in the beginning of April, 3 interest rate cuts between now and the end of the year. Everyone thought that there would be no cut at the May meeting. Nobody thought that. But you still had June, July, September, November, December. That’s five meetings. The Fed is on a crazy schedule. They don’t meet every month. It’s like every six or seven weeks. But eight meetings a year is what it boils down to.
So there is no meeting in August, no meeting in October. But, so you had five meetings June, July, September, November and December, and you talk about three rate cuts. Okay, no problem. Five meetings, three rate cuts. That seems to work. Except, and this is what we said a while ago, inflation is not coming down now. That’s the story. That’s the narrative. That’s what Wall street likes to talk about, because they just want to sell your stocks.
So it goes by a couple of names. The first name is the pivot. When would the fed pivot from rate hikes to rate cuts. That’s the infamous pivot. They stopped hiking rates in July 2023. That is true. Theyre just on hold for the time being, but theyre not even close to a rate cut. And thats what weve been saying. But Wall street started talking about this two years ago.
It was the summer of 2022. Remember, the Fed started raising interest rates in March 2022. At the time, rates were zero. When I say rates, were talking about the Fed funds target rate. So its a very, really short term overnight rate. Were not talking about five year notes and ten year notes. Those are different. But the silver night rate that the Fed targets, it was zero at the beginning of March 2022.
Well, they just started hiking in March 2022. They finished in July 2023. So about 15 months of rate hikes, and they got it up to 5. 5%, which is where it is now. But the Wall street started talking about the pivot in the fall of 2022. Now, they didn’t say it was going to be that month, but they said early 2023, the Fed’s going to come cut rates.
Well, then that turned into, like mid 2023, and then it turned into late 2023. And then it turned into early 2024. Here we are in mid 2024. And they were still talking about it. But they’ve been wrong for almost two years. And we said they were wrong. We didn’t say the Fed was going to raise rates, although you can’t take that off the table. But we said they were definitely not even close to cutting rates.
So what’s the kind of backstory on inflation? Inflation peaked in June 2022, 9. 1%. And by the way, Matt, let me just do a quick foot on the definition of inflation. It shouldn’t be complicated, but people make it so. When I talk about inflation, I’m talking about the consumer price index. CPI comes out monthly, computed by the Bureau of Labor Statistics Consumer Price index. And it’s measured on a year over year basis.
So you look at the monthly index and you say, what was it a year ago? That month? And then that’s it. That’s how they compute it. Now, that peaked in June 2022 at 9. 1%, by the way, the highest since the early 1980s. You got to go back over 40 years to find inflation up at, was 9. 1% by June 2023. So a year later, it had come down to 3%.
So remember after we marched in Baghdad in 2003, that President Bush went to the aircraft carrier and they had that big sign, mission accomplished. Well, the mission was not accomplished. You had basically two years of massacres in Iraq between sunnis and Shia. And the US pretty much got out of there under Obama, although we still have bases there. But the Fed was putting up the mission accomplished banner.
Well, it wasn’t mission accomplished. Yeah, 9. 1% down to 3%. Nice job. But it wasn’t two. I mean, they were trying to get to two. They had what they call the last mile. How do you get that last little bit down? Well, the problem is it hasn’t, it’s been going up ever since. So, okay, 3% in June 2023, but by August it was 3. 7, and then in September 2023, it was 3.
7. And it’s been running, it’s been up and down 3. 2 some months, 3. 4. The most recent reading was 3. 5. So here we are in, that was from March 2024. That data came out in early April. So here we are, nine months, almost ten months after that low of 3% in June 2023. And its higher. Inflation is higher than the prior month, the prior six months, and this point, the prior year.
Inflation is not just stuck, it is stuck, but it’s actually been going up. All you have to do is look at that and say, all right, well, if you’re worried about inflation, if that’s your job, you’re the Federal Reserve. Your job is to get inflation under control. And inflation has stopped coming down and it’s starting to go up. How on earth are you going to cut interest rates? Well, the answer is you’re not.
You can’t do it. So even at the March meeting that Jay Powell was like, well, we’ve seen, weve seen good data and we need a little bit more. He said were not quite there yet, were just about there, but we need some confirmation, I think was the word he used. So a couple of months like that, then boom, were ready to cut rates. They never got the confirmation it went up.
Why was it going up? Well, oil prices were a big contributor. When oil prices go up, it filters through the whole supply chain. So gas at the pump is an obvious one. By the way, if you go to AAA gas prices, just google AAA gas prices. AAA has a really good chart. And of course they get their finger on the pulse and they show regular gasoline nationwide average.
They can break it down 100 ways. But I just look at regular gasoline nationwide average, that number is higher than it was last week, last month and last year. That has been going up. Of course, just in time for the election. This is not something that Joe Biden particularly wants to see. But it’s not just gas at the pump. That’s the most visible sign. People they know, you pull up their gas pump and say, price went up again, it’s costing more to fill up my Ford F 150 or my suv or whatever it is.
But that price filters into everything you buy because everything involves transportation. In other words, if gasoline is going up, diesel is going up. Well, everything moves by truck or train, as the case may be, mostly trucks. Everything you buy in the store, every loaf of bread, canned goods, fresh vegetables, whatever, it gets there by truck. And if the trucks have to pay more for their diesel, then somebody’s got, they have to charge more for the freight and then someone’s going to have to raise the price of goods.
So because of the transportation effect, which I just described, and a lot more airfares, jet fuel, etcetera, the price of oil and the price of refined products, gasoline, kerosene, which is jet fuel and diesel, go up and then everything goes up. So that’s one of the drivers. It’s not the only one, but it’s one of them. And how’s it going to change in the short run? The two of the three biggest oil suppliers in the world are Russia and Iran.
Sorry, Russia and Saudi Arabia. Russia and Saudi Arabia. US is the other one. Well, Russians and Saudi Arabia, and by extension OPEC, they call it OPEC plus, are cutting down on production now. They’re fighting a tide. I mean, the world kind of wants to deflate or disinflate. That’s what the world wants to do. And that is happening around a lot of the rest of the world. It’s not happening in the United States, but there are other reasons for that, including concerns about the geopolitics.
Iran just hijacked the cargo vessel in the Straits of Hormuz. The hoodies have shut down the Suez Canal. The big oil tankers are going around the Cape of Good Hope in South Africa. So a long way the oil is still getting through. Im not saying that youre not going to be able to get gasoline. Im just saying that if you add transportation costs and time delays and geopolitical uncertainty and other factors on top of what weve already seen, this is what you get.
Now you can get into some really esoteric discussions. I think theyre best avoided because they dont add much. The economists, I would say, when they dream up these things, its because they dont have enough to do. When I talked about CPI, well, they invented CPI core. What’s CPI core? Well, that’s when you take out energy and food, and that’s a little more well behaved. Well, thanks, guys. Energy and food is what most people spend most of their money on.
So if you can, you can take them out and get a different time series if you want. But that’s not what people actually pay. They pay CPI, and then they came up with something called supercore. Well, what’s supercore? Well, supercore, you take out food, energy and housing. Okay, so if you live in a tent and eat canned goods, fine. But those are three. Those are the three biggest things that people spend money on.
Food and energy. Gas at the pump, food at the grocery store, and housing costs. And then of course, the energy price feeds into home heating, air conditioning, whatever you have. This is like 70% of the average household budget, maybe more. And they said, well, we don’t count that because we’re eggheads and then take everything I just said. And there’s another inflation index called PCE, personal consumption expenditure. That’s the one the Fed uses.
Same thing, PCe, PCe core, PC, supercore. It’s all garbage. I mean, you can compute it. I understand it. I can look at a spreadsheet or an equation and understand it, but I. But I also understand that that’s not what people pay. People pay CPI. That affects their attitude towards the economy, that affects their political outlook, that affects everyday behavior, it affects other consumption. If I’m spending more at the gas pump, okay, I have that much less to go out to dinner, buy a show ticket or some new clothes or whatever it is.
So this has ripple effects that are enormous. Some people, I would say, theoretically, you can distinguish between supply side inflation and demand side inflation and the difference really quickly. Supply side is what we’ve been talking about. So oil shipments are reduced, bottlenecks go back to 2021, 2022, when the supply chain broke down. And there are concerns about that. Economic sanctions coming out of the Ukraine war, new economic sanctions on Iran.
Those are all things that affect the supply side. But a funny thing can happen, which is if it persists long enough, it leeches over, spreads over to the demand side. The demand side is psychological. It’s people saying, this inflation, it’s hanging around longer than we thought. It’s getting worse. I was going to buy a new refrigerator in six months. Maybe I better buy it now before the price goes up and then a new car or furniture or whatever it might be.
I better go get it now before the price goes up. That is a psychological, behavioral factor. But if enough people do it, guess what? Again, you start bidding the price up, the manufacturers cant keep up, etcetera. I think were in a very dangerous place, meaning the inflation. Right now, what we just talked about is coming from the supply side. So thats pretty clear. But at what point or does it tip over into the demand side? Were starting to see that.
Were starting to see pretty good. Union contracts are getting pretty good raises and other minimum states are raising minimum wages, et cetera. A lot of this counterproductive. Certainly the minimum wage tends to lose jobs. But in the short run, if you have to pay people more, you’re going to raise your prices. Somebody went into a McDonald’s in California the other day and ordered have a normal meal, I don’t know, twelve piece chicken, Big Mac, whatever.
And it was like $25. You don’t go to McDonald’s to spend $25. You must go to a restaurant. But that’s how the California minimum wage law is starting to filter through into prices. So it may tip over to the mass side, but in the short run, Wall street, I’ll just wrap up by saying the following, Matt, Wall street has been wrong for two years. By the way, the expectation today is that there may be no rate cuts through the end of the year.
I think that’s probably right. Certainly not in May, not in June, probably not in July. And then, of course, the Wall street is Wall street bill. They’re always out of touch. They’re staring at the screens all day. So they say, yeah, okay, you’re right. Not June, not July. So they’re going to raise in September. Are you kidding me? The September Fed meeting is five weeks before the election.
Do you think that the Fed wants to walk into the election bus up? They cut rates in September after not doing it for last time they cut rates. Let’s see, 2020 was the last time they cut rates. So they don’t cut rates for over four years, five weeks before the election, they cut rates. That is such, so obviously trying to help or appears to be helping Biden and hurting Trump.
And by the way, right now it looks like Trump’s going to win. That’s the last thing the Fed wants that people say that the Fed says we’re not political. They are highly political. Trust me. I’ve worked with senior Fed officials and partners with former Fed vice chairs. I spent a lot of time with the Fed as a regulatory lawyer. They’re highly political. They read the papers as the saying goes.
So they’re not going to cut in September, just for political reasons, then now, November, December, if you just look at inflation, you’re not going to cut. But if you’re looking at if we’re in a recession, which we may be, that’s a separate topic, you may have to cut because of the recession, because of rising unemployment. But the Fed thinks that can’t happen. And Wall street thinks that can’t happen.
I have news for you. It can happen. It has happened. So what do you call the combination? The feds assumption is if unemployment is low, inflation gets high. If unemployment goes up and inflation comes down, that’s the Fed’s assumption. They actually don’t mind if unemployment goes up a little bit because it’ll bring inflation down. But what happens when you have high unemployment and high inflation at the same time? The Fed thinks that can’t happen.
It has happened. It’s called stagflation, stagnant growth with inflation and prices. I lived through it in the late 1970s, early 1980s, I think around 70, 919. 70, 919 80. Unemployment was 10%, but interest rates were 15%. So dont tell me unemployment and interest rates move inversely. Sometimes they do, but sometimes they can both go up together. Its called segflation. I see early signs of that. So its a little bit troubling.
But all I can say to our readers and our, my viewers is Wall street always gets this wrong. The Fed always gets it wrong. The reason they get it wrong is because their models don’t work. Their models are garbage. But the inflation is real. It’s going to stick around, but growth seems to be slowing. So we may end up in this stag, inflationary episode. Yeah, I think that’s what everyone’s feeling at home, too.
They’re seeing the numbers. But then when they look and they live their daily lives, they’re like, wait, nothing’s letting up here with inflation. And its interesting you talk about the seventies and eighties because that was a period in time where inflation went up and the Fed tried to stop it, and then all of a sudden they didnt, and it went real high. So we could be in something like that.
I want to dive into this because its a topic that a lot of our viewers, theyre asking more questions about it. So I want to dive a little bit further in. And one of the things that you taught me, and Ive now repeated it several times in the last a month or two, is video. What were seeing here isnt. I think this is, what youve said essentially is this isnt QE.
But the government is just spending so much money thats getting into the economy and inflating things. Is that correct? Can you break that theory down because government spending is just off the charts? Preston sure. So QE, which doesnt work, by the way, they printed $10 trillion and the economy was flat to down. It was down sharply in 2000, but it was flat for the ten year period from 2009 to 2019.
So coming out of the global financial crisis in 2009 until COVID, which is 2020, but until COVID 2019, that ten year period, 2009 to 2019, average annual growth in GDP was 2. 2%, 2. 2 during the Reagan administration, 1980 319 86, the US economy grew 16% in real terms, that was over 5% a year for three straight years. That’s growth. That’s what the american economy can do. And even if that’s not totally sustainable, you should be able to grow 3.
253. 5% on a consistent basis. That’s what a developed economy should be able to do. So 2. 2% is pathetic. I mean you can get out the pompoms if you like, but that’s really pathetic growth. That’s what we have for ten years. And my view is that the US economy has been in a depression since 2007. And people say, oh wait a second, Jim. Recession is two consecutive quarters of declining GDP and that is the rule of thumb.
It can last three quarters, sometimes longer, but they tend to go six to nine months of declining GDP, two or three quarters. Thats the technical definition of a recession. And it is, people say well, depression must be worse than a recession. So if recession is two quarters, the depression must be ten quarters of declining GDP. And we have not had that. But thats not the definition of a depression.
A depression doesnt mean continual declines in GDP. It means below trend growth. It means depressed growth. And it was what I was just saying earlier, if growth potential is 3% and you’re growing at 2%, that gap between 3% and 2% over time is trillions of dollars of lost growth. So has the economy been growing? Yes, it grew in 2023 and so far in 2024. But it’s depressed growth relative to potential.
And that’s what a depression is. And if you want an example, just look at Japan. I mean Japan has been in a depression since 1989. Well really 1990, December 31, 1989, they rang that New Year’s Eve bell and then boom. The stock market fell out of bed. It declined I think 75%. It just got back, by the way, about a month ago. The Nikkei index just got back to where it was in 1989, which is about 40,000.
It’s going, guys, took you 34 years to recover your meltdown and that’s all they’ve done is recover. It hasn’t gone up much since then, but Japan has had nine recessions since 1999. Technical recessions. Well, you can chart the recessions, but I caught one long depression. It’s a 34 year depression. And I would say the US has been in a depression since 2007. So that’s what, 17 years. And we got, maybe we have 17 more years to go.
But that’s why everyone’s out of sorts. That’s why real incomes are not going up. That’s why income distribution is. The rich get richer, as the saying goes, and they do. And every day Americans are falling behind and the middle class is getting wiped out. But you can still look for a technical recession within that time series. So. But getting to your point, Matt, QE. So Qe doesn’t work.
You talked about government spending and deficits. That’s correct. That’s fiscal policy. Securely is monetary policy. That’s what the Fed does. And deficit spending is fiscal policy and that’s what the Congress does. So let me spend a minute on QE. How does QE actually work? Well, everyone says the Fed’s printing money and the Fed’s printing money. Well, what’s your definition of money? I mean, the Fed has four definitions of money.
So start there. They have m zero, m one, m two, m three. Some people think bitcoins money. You get to a point pretty quickly where no one really knows what money is. By the way, I have a chapter on that topic in my new book, which is coming out in November. How does Qe actually work? How does the Fed print money if thats what they do? Well, the way they do it, they buy bonds from Wall street.
They call up the primary dealers. I used to be general counsel, one of the biggest primary dealers. They call up the primary dealers and they say, offer me ten year notes or offer me five year notes. So its your Goldman Sachs or Citibank, whatever, you quoted an offer, and the Fed says done. And then the dealer delivers the bonds to the Fed and the Fed pays for it with money that comes out of thin air.
So the Fed gives the money to the dealer to buy the bonds and that money comes out of thin air. That’s m zero based money, printed money. The question is, what does the bank do with the money? The bank just sold the bonds to the Fed. They got paid. What do they do with the money? They give it back to the Fed. They give it back to the Fed as a deposit, something called excess reserves, and the Fed pays them interest.
It’s the same way you get interest on your bank account. The Fed pays interest. It’s called interest on excess reserves. Ioer. So all the Fed is doing is building up the balance sheet. The asset side is being built up with bonds or buying bonds? Buying bonds. And the liability side is being built up with deposits from the banks, which are liabilities from the Fed’s point of view. So you’re expanding the balance sheet, but the money is not going anywhere.
All the QE money, $10 trillion, never went anywhere. They paid the dealers and the dealers gave it back to the Fed. It was sterilized and never did anything. So was the money printing? Yeah. If youre using m zero to measure but didnt do anything for the economy, it doesnt stimulate growth. Ben Bernanke was full of it. Jay Powell is a little more honest. Janet Yellen, shes kind of an affirmative action dunce.
They didnt understand any of it and it definitely did not work now. So why is the economy growing? I painted a gloomy picture from the supply side and real incomes, a lot else. But the economy is growing. That shows up in GDP. Why is it growing? The answer is fiscal policy. Deficit spending. Thats completely different than monetary policy. That works because, well, it works in the short run.
It can be inflationary. It works because when the government spends money, theyre giving it to somebody. The money that the Fed created, they give it to the banks, the banks give it back. End of story. The money that the Congress spends, the deficit spending, its going somewhere. Its buying weapons, its going to food stamps or welfare or Medicare or Social Security checks or the greener scam. A lot of this wasted.
But it’s going out into the economy. People are getting paid, corporations are getting paid, they’re paying their workers. That money actually does create growth now, but there’s another problem associated with that. So the short answer is monetary policy doesn’t work. It’s a joke. We follow it, we report on it. But I’ll tell you as an analyst, it’s a joke. Fiscal policy does work, but at a very high cost.
And here it is. So the US economy in the fourth quarter of 2023, and we’re seeing something similar in the first quarter of 2024. We won’t have that data for a couple more weeks, but it looks like it’s growing about 2. 4%, 2. 5%, which it’s low compared to potential, but it’s decent growth. But how much is the debt going up. At the same time, the debt’s going up faster.
That’s going up like three, three and a half percent on an annualized basis. So are you running deficits? Yes. Are you getting some growth? Yes, but the debt is going up faster than the growth. And so this shows up in a measurement called debt to GDP take, because people throw around big numbers and they are big numbers. $37 trillion of national debt. Thats about right. But you cant really make sense of that number unless you put it in the context of economics of the size of the economy.
I always simple example. If you owe $20,000 on your mastercard, is that a lot or not? Well, if you make 20,000 a year, it’s a lot. You’re probably going bankrupt. If you make $500,000 a year, you can just write a check. You can’t really learn much from the number, from the size of the debt. You have to compare it to the size of the economy. So whats that number? Well, that number, its over 130% right now, which, by the way, is the highest in us history.
Thats a very helpful chart, Matt, that goes back to the late 1960s. So its a good timeframe. The last time, by the way, the number we have today, 130%, a little bit higher, is the highest in us history. The last time it was even close was the end of world War two, it was about 120%. Today it’s about 132%. So it’s the highest in history. Highest at the end of World War two.
But even in world War two, I like to say, well, we won the war. We spent a lot of money, we ran up a lot of debt, but we won the war with our allies. And the US was a global hegemon. Our percentage of global production, global capacity, automobiles, whatever, it was off the charts. And we had a long run as the superpower. Today, we’ve got a higher debt GDP ratio, but we haven’t won any wars lately.
We’re losing on Ukraine, losing in the Middle east. No one really respects the United States. We got brain dead leadership, et cetera. So we’re not getting anything for our money. We’re wasting the money. But it does have that effect I described. But the problem is at lower levels of debt. So let’s say the debt to GDP ratio. Look at 1980, for example, 80, 81. Around there, it’s about 30%.
Yeah, it’s a really good. Okay, so 81 30%. So that’s when Ronald Reagan was sworn in. The beginning of 1981, he was sworn in. That was the low. That was the lowest since world War two. I said it was 120% at the end of world War two. Yeah, but it was 30% in 1981 when Ronald Reagan and was sworn in. So how did you get from 120% to 30%? Because we had a lot of deficits.
There were some surpluses, but mostly deficits during that time period. Well, the answer is we grew the economy. That, yeah, the debt went up. It’s not that the debt went down. The ratio went down. Even as the debt was going up, the economy was going up faster. So it’s 7th grade math. If you have a numerator and denominator, if the denominator is growing faster, the denominator is GDP.
If the denominator is going faster than the debt, then the ratio is going down. What we have now is the opposite, where the numerator is growing faster than the denominator, the debt is growing faster than the economy, which means the ratio is going up at a certain level. By the way, the level is around 90%. That’s a GDP. So where do we hit 90% around 2012? Yeah, there it is.
Okay, 2010. Welcome, Obama. So below 90%, heres what happens. You borrow a dollar, you spend a dollar and you get more than a dollar of growth. So you borrow a dollar, you spend a dollar and you get $1. 25 of growth. Thats actually good. Assuming you dont waste the money, thats a separate issue. But as long as the growth is greater than the debt, then your ratio is going down and your economy is solid.
But as you get closer to 90%, that payoff that called the keynesian multiplier, gets smaller, it starts to shrink. So you start out when you’re down, we were in the eighties, even the mid nineties, you borrow a dollar, you spend $1, you get maybe $1. 25, but then it’s like $1. 20 and it’s $1. 10. And then as you get higher and higher, as you get closer and closer to 90%, it shrinks until you get to a point where you borrow a dollar, you spend a dollar and you get ninety cents of growth.
You don’t get your dollar back, you don’t get the dollar of growth, you get maybe $0. 90 now, it’s still growth. It’s still growth. Somebody got paid, somebody got a job, etcetera. But your death’s going up faster. And as it goes up even higher, that multiplier, which is once it goes below one, you’re digging yourself into a hole. But it shrinks very rapidly in the fourth quarter of 2023.
So not that long ago, that multiplier was 68, meaning you borrow a dollar, you spend a dollar, you only got sixty eight cents of growth. Not even close to a dollar. I’ve seen other studies that show it could be as low as 40%. So, okay, so now the debt to GDP ratio is at an all time high. We’re not getting a dollar’s worth of growth for a dollar spent, but you’re still getting growth.
And see, this is the part people don’t understand. This is the part the politicians don’t bother to explain. They point to the growth figure, say, look, we got some growth, and we did, but they ignored the debt figure that’s going faster than the growth. So how does that end? So I just described the problem. How does it end? It ends in one of several ways. For most countries, it ends in default.
They just default. Argentina is a good example. You can set your watch by argentinian defaults. They happen every ten years like clockwork. But that’s because Argentina, but a lot of other countries as well, we say, why can’t they just print the money? Well, the problem is they print pesos, but they borrow in dollars. So if you owe dollars, you can’t print the money because you don’t have a dollar printing press, you have a peso printing press or any other currency that you want to name.
So you can’t print the money to pay back the debt because you owe it in a different currency. You owe the debt in dollars, but you print pesos. So that doesn’t do you any good. So what do you do? Well, you just default. That’s all right. Not paying you. Too bad. Banks have a nice day. Now, the US, so that’s usually what happens. The US doesn’t have that problem because we can print the money.
So I don’t expect the US default because we owe $37 trillion. It’s like, fine, print up $37 trillion, ship it over, but good luck buying a loaf of bread because what you do get in that situation is hyperinflation. So there’s no reason for the US to default. There’s no reason for the US to restructure. We actually can print the money to pay off the debt, but that has consequences.
And there are two. One is what I just described, which is really slow growth. The other one is hyperinflation. So right now, and that threshold, by the way, is 90%. That’s 90%, approximately, is where you tip from. Getting more than a dollar’s worth of growth to getting less than a dollar’s worth of growth. That’s why it’s a red line. We’re way past that. We’re under 30 or 7% or assuming the mid 130s.
We’re with who’s at our lunch table? Lebanon, Greece, Italy, Japan, the super debtors of the world. That’s where we are. So how do you get out of it? Well, in the end, it’s hyperinflation, but not right away. I’m not saying hyperflation tomorrow or next month or next year. What you really get is slow growth. It’s just a slow grind down. The rich get richer, the middle class gets demolished.
Younger people can’t afford, can’t save. They’re stuck in their parents homes, can’t get their own homes. Investment drives up, productivity declines, and you get this slow growth, occasional recession stage that lasts for a long time and again. Japan is the example. Japan is the monolith. We are Japan. This is why I say we’ve been in a depression since 2007. We’re in the slow growth phase. It’s getting worse.
But if somebody says, hey, Jim, we had 2. 6% growth in the fourth quarter of 2024. Where’s the recession? Or, sorry, 2023. Where’s the recession? I’ll say, well, it’s coming, but the problem is you got that growth by borrowing more than you grew. Yeah. A number that’s been swirled around in the paradigm offices is that 130% debt to GDP. I believe 51 out of 52 countries that have ever hit that level have defaulted.
And the only outlier is Japan. And like you said, they had 34 years of just nothing. So it’s a very bad number as a country to hit. So I completely agree with you. The other thing I want to dig into, sorry to interrupt, but the reason Japan, the US is the best model, the best way to understand the US, Japan is a country that borrows in a currency it prints.
Japan’s debt is in yen, japanese yen, and they print yen. The US debt is in dollars and we print dollars. So if your debts in the currency you print, you’re not going to default. Yeah. But you are going to walk into hyperinflation. Yeah. This is why we like it. Youre deep in the weeds, and you know exactly what youre saying here. And thats 51 out of 52 is the real number.
And if youre printing your own currency, youre not going to default. Okay, one more into the weeds question on what you just said to the rich getting richer, the middle class getting erased. Is it as simple? When I think about it, its terrifying because the government is spending all this money. And if you think about how the government spends money other than 2020 stimulus, right, here you go.
People have $1,200 the way they spend money, it starts at the powerful rich related elites. The money is just going directly to them because I’m making it up. But like Joe Biden’s third cousin owns a construction company. It’s like, hey, the government’s going to increase the budget on building spending. Give it to, give it to the third cousin, that guy gets richer and the money never ends up in the middle.
It gets, it’s gone. Well, first of all, you’re not making up. That’s exactly right. That’s exactly what’s going on. And to just, just kind of explain that there’s an old joke, but I’ll tell it just because it’s funny if you haven’t heard it, but it’s actually true. So the old jokes, there’s 100 guys in the bar, Bill Gates walks in and on average everyone’s a billionaire. But there’s actually only one billionaire in the room, his name is Bill Gates.
Everyone else is just having a beer. So the point being almost all the government statistics, not all of them, but almost all of them are averages. Okay? It’s information. You can do trends, you can do all your analysis, your regressions and all that stuff, but averages hide as much as they tell you. They tell you something, but they hide a lot. What they hide is called the degree distribution, meaning an average of what is any average? Well, it’s a bunch of numbers.
Add them up, divide by the number of numbers and that’s the average. Okay, so when you see unemployment or you see CPI or you see real wage increases, etcetera, or, you know, I’m going to say CPI or inflation number or a lot else, those are averages. Well, what’s in the average? Let’s just take CPI for example. I mean you have to be a geek like me, but go to the Bureau of Labor Statistics and look at the press release and look at the calculation.
And so the CPI might be the commerce department, but I said Bureau of Labor Statistics, but the commerce department, it’s government website, it’s easy to find. Well, in that CPI calculation there are a hundred or so sub components, big ones like gasoline, but eggs, bread, butter, clothing, automobiles, furniture, that even broken down more finely than that, some of them are going up, some of them are going down.
That’s normal. But you have to look at that when it comes to income, people say real wages went up by whatever, 1%. Nominal wage increased minus inflation, real wages went up 1%. Sounds good. It’s not a lot, actually, but sounds good. But what you discover is that some people, the real wages are soaring and everyone else is falling behind. So the average may be up 1%, but when you look at the degree distribution, you say, okay, what are the top 10% making? How’s the bottom 10% doing? What about the middle 60%? How are they doing? You can even break it down, like you say, 10% brackets or whatever and look at each bracket separately and then bring it out further.
But what’s happening in urban areas, rural areas, et cetera? Again, I’m down in the weeds. But my point is, while the average may be kind of okay, the degree distribution is awful, all of that money is going to leave it to stockholders, CEO’s, government officials and some tech entrepreneurs, etcetera. But that’s a relatively small slice. Whereas everyday Americans, blue collar workers, small business owners, restaurant workers, healthcare workers, nurses, etcetera, they’re just struggling.
I mean, they might be getting a raise here and there, but it’s not much. And then when you subtract inflation, it might be negative. So the only caution I would drop, Matt, is that the numbers arent great. Theyre okay. But the reality is worse, because when you go behind the average to look at how its distributed between the rich and everybody else, youll find that so much of that is going to the rich again.
CEO’s, stockholders, money managers, defense contractors, government officials, Nancy Pelosi, you know, a small slice, and everyone else is being left behind. And that’s why there’s so much discontent. You know, Biden. I mean, I can’t, I had difficulty attributing anything to Biden because he’s so cognitively impaired right now. He doesn’t know where he is. I don’t know if you saw the clip of him in the wawa the other day.
By the way, I live in New England, but I kind of grew up and spent a lot of time. My family still lives in the mid atlantic states, you know, New Jersey. Or I went to high school, Baltimore, where I went to college, you know, went to law school in Pennsylvania. So I know that area pretty well. And they have this store called Wawa. But if you say that, and they’re, they’re great, they’re great stories, but if you say that to anybody anywhere else in the country, they’re like, what are you talking about? Is that like a native american tribe or whatever.
So, uh. So Biden, or, sorry, Trump, the other day, Trump can’t leave New York because he’s on trial. In a criminal trial. You have to show up. You can’t just wander around. So. But he’s been campaigning in New York City, which is about as blue as you can get. And the other day, he went to a bodega in the Bronx, and they loved him. We went to a couple of bodegas and they loved him.
They’re like, oh, Mister President Donald Trump, yay. And by the way, these are black and hispanic voters. Those are the people who live in these areas who Trump’s visiting and go to the bodegas. Jill Biden, by the way, doctor Jill Biden gave a speech a couple years ago, and she said, bodega. And I was like, what the heck’s bodega? But I realized that she couldn’t pronounce bodega, which is Spanish.
That’s how you say it. But I say, man, I don’t want you got your PhD in. But it wasn’t linguistics. So she’s like, the bodegas. I’m like, what? But that shows you how out of touch the Bidens are. So. But anyway, this campaign visit for Trump was a big success. And the Biden campaign is freaking out. Like, wait a second. Blacks, Hispanics are coming to Trump, and they are.
That shows up, particularly black men and Hispanics across the board. That shows up in the numbers. So the Biden campaign said, well, we’ll do the same thing. Well, so they go to a wawa. First of all, wawa is not a bodega. They’re nice stores. I shop online when I visit my family down in Cape May. But, but they’re kind of large. They’re not particularly crowded. They got a fresh food section, whatever, but they’re not bodegas.
But if you go to. I went to one in Miami, and it was late at night. I needed something. I just went into one. And the aisle was so narrow that only one person could go in the aisle at a time because it wasn’t one for two people to pass each other. And the stuff was piled up. That’s a bodega. But wildwoods are kind of big. But they actually had a rehearsal.
The employees rehearsed what they were going to do when the president came in. Nobody was in the place. I guess for security reasons. Okay, well, you need security, but in a big store that’s empty, it’s not exactly a crowd that’s trying to hug you and say, way to go Donald Trump. This is like, it was completely empty. It looked like a twilight zone episode. Then Biden had his tip in his hand in advance because he couldn’t do the math or reach his pocket and make a tip.
They had to put it in his hand and say, mister president, here’s your tip. And it was just, the whole thing was pathetic. But the point is, that’s how these campaigns are playing out. Uh, no, I mean you, the Biden administration doesn’t have a clue. Um, they don’t, uh, they don’t, they don’t understand anything we’ve been talking about on this, uh, uh, on this interview. So it’s uh, it’s pretty bad.
Yeah. Zero touch with the actual middle class. Yeah, and that’s true. So one last thing and I’ll drop it, even though I’m, this is where I’m laser focused because I think this is the number one threat to Americans in the middle class and they don’t know it. What can someone in the middle class that’s like, uh oh, I’m about to get erased. There’s tons of money being printed.
It’s not making America more productive by each dollar and it’s going to politician and Wall Street’s best friends and not me. Right? What can they do? What’s like the number one investment they could do, or number one way of thinking about it, what could someone do right now? Well, this is going to sound obvious, Matt, but people actually say it then people are otherwise going, I know that, but they actually kind of dont.
It’s diversification. Now Im not going to go through the economic theory. Diversification, it actually works to get higher returns with less risk or the same risk. But people dont understand what diversification is. They say, oh, Im diversified, I own 50 different stocks in ten different sectors, semiconductors, minerals and mining, retail, consumer, discretionary spending, 50 stocks in ten sectors that are fully diversified. I say, no, youre not, you may have 50 stocks in ten sectors, but you have one asset class, its called equities or stocks or whatever you want to call it.
You have one asset class, youre not diversified at all. Youre all in the stock market. And in normal times when you dont need protection, they do behave idiosyncratically. But in stressful times, in a financial panic or monetary panic, they all correlate, they all go down together and you lose a lot. You lose 40% of your net worth or whatevers in your investible assets. Real diversification. You can have stocks, theres a place for stocks but have some cash, have some real estate, have some gold or silver, precious metals, have some alternatives.
If you have a slice of each one of those, thats real diversification. Those asset classes do not correlate to a high degree in financial stress. So thats the answer. So lets just take stocks. Im not saying get out of the stock market. Im saying I would dial down my equity exposure and then maybe if youre 80% in stocks might be smart to go to 40%. And then within the stocks you pick whats going to perform well.
Its pretty clear defense stocks are going to do well because the US is behind the eight ball in a couple of different wars and we’re going to have to bring up our game a lot and they’re going to have to spend more money in defense. The US might as well just follow up its set and go home. Health care driven by demographics to a great extent. Natural resources.
Oil has been beaten down by this green new scam. The Biden administration is just completely hostile to oil and natural gas. I’m sorry, you’re not getting away from oil and natural gas. First of all, the greenhouse scam is a scam. The science is very clear. Not only does CO2 not cause global warming, it’s the opposite. If you have a global warming trend that causes more CO2 to be released.
But the scammers, the green scammers have it backwards. So like CO2 causes climate change? No, it’s like climate change causes CO2 releases but it’s not harmful in any way. It’s a trace gas. They cant, scientists cant even figure out what it does except its plant food. Plants inhale CO2 and produce oxygen. We inhale oxygen and produce CO2. Its a nice virtuous circle. You get rid of enough CO2, the plants are going to die.
And then were going to die. Theres a lot more to climate science than that. I mean if there is a slight warming trend it might be cooling at this point by the way. But to the extent there was any warming which is very slight, its caused by solar cycles, volcanoes, ocean currents, and clouds. Clouds are actually the biggest factor. I’m not talking about CO2 clouds or emissions, I’m talking about just humidity in the air.
Water droplets would be a more technical name. But what’s the Biden administration doing? They’re in their misnamed fraudulent inflation reduction. The Inflation Reduction act that Nancy Pelosi ran through in 2022. August 2022 was actually the green new scam. It was AOC’s green new scam. It took a couple of years to get it done, but that’s what it was. And there’s a billion dollars, about 900, sorry, almost a trillion dollars.
I misspoke. About $900 billion allocated to green new scam projects. Goes back to what you were saying earlier, Matt. If you’re an insider, you’re like Nancy Pelosi or husband Paul. If you know thats coming because youre the one writing legislation, you go out and buy the stock. Thats one way to be worth 25, 30 million on a government salary. And the Congress are in on that. Its all wasted money.
Its all very damaging to the economy. Its not actually a problem, its a fake problem. But people can make an awful lot of money out of it. So that means oil and gas are not going away. They’ve been beaten down because of the greenish scam propaganda. So that’s a very attractive sector. So I would say oil, natural gas, defense stocks, healthcare are areas that will do well. But I would dial down my overall equity exposure.
40% seems a lot more comfortable than 80% given what’s coming. So this is going to sound really boring, but if you go to a good bank in your neighborhood and get a CD, theyre paying 5%. People would go back to the ten years we talked about. 2009 to 2019, the banks were paying practically zero, maybe a quarter of 1%. Weve got to be an idiot to put your money in the bank because theyre not paying anything.
Go get some stocks or whatever. Well, there are reasons to have cash anyway, for protection, diversification, liquidity in a crisis, etcetera. But the critics were right. They weren’t paying you anything today. They are now. You have to get a CD. CD. You might lock your money up for a year, so it’s not like a checking account. So don’t put any money into a CD unless you can wait a year, six months or a year, whatever it is, because you’re not going to be able to get it back without paying a penalty.
But assuming you have the cash and you want the cash and you don’t plan to spend it in the near term, go get a one year CD. Theyre paying close to 5%. Stocks are yielding about 3% in terms of dividends. So cash is outperforming dividends today. So you put in $100,000, you come back a year later, you got $105,000. You didnt have to lift a finger. So thats attractive gold.
What can I say? Its up 30% in the last three months. I expect that to continue. Know we’ve done a lot on gold in the past, but for geopolitical reasons, it’s obviously a good inflation hedge, but gold is more than that. We’re calling in our publications, Matt, we’re calling gold the everything hedge. Does it protect you against inflation? Yes, it does, but it also protects you against war, geopolitical risk, financial meltdowns and a lot else.
So gold is the everything hedge. People are starting to realize that, like I said, it’s up 30% in the last three months. And then there’s some real estate now, not commercial real estate. I think commercial real estate has not hit bottom, but farms and companies from real estate just buy a bigger house, put an addition on your house. Don’t over leverage it. But that’s something you can sit on and that will pay off over the year.
That’s stocks or treasury notes. Treasury notes are first of all yielding ten year. Treasury notes are yielding close to 5%, not quite, about 4. 6%. The five year note is a little closer to 5% because we have an inverted yield curve. So those are very safe instruments. Youre going to get your money back from the US treasury. You have to worry about inflation, but thats where the gold comes in.
See how diversification works. Like, oh, I bought a treasury notice, its got a 5% yield. But what if interest rates go to 10%? They might, but thats where the gold comes in. The golds going to soar and itll protect you. So thats how diversification works. But those things have attractive yields, around 5%. But if interest rates go down, which they will in a recession, youll have big capital gains, those things, because bond map on the one, interest rates down, bond prices up.
So buy here. If interest rates go down, youre going to have big capital gains on the stocks. So cash, treasury notes, stocks selectively, natural resources, defense, healthcare and energy, a slice of gold. I recommend 10% and real estate. That will serve you very well. Awesome. Thats a great breakdown and diversifying. Again, thats the key to, again, if were talking about the middle class getting a race, thats the key.
If you can put some money to work in these other places, other areas, and not just leaving in cash and not leave it all in the market, that puts you at risk with what we’re seeing. Come down the road. All right, everyone, you heard it right there. If you don’t want to get erased in the middle class and you don’t want to get shoved down in the big gap between the rich and the poor, a lot of folks are going to get shoved down to that poor level if they’re not keeping an eye out on inflation and the different things that are happening to the US dollar spending from the government.
Again, it’s going to a circuit group of people, and that might not be you. Uh, you heard it from Jim, that the one way to get away from that is getting some diversification, getting some money in spots that, uh, can grow while this is happening and keep you, uh, keep you out of the crosshairs there. Um, go ahead. We’re going to be covering this topic and what’s going on in the next couple, a couple of weeks, days, months.
It’s happening and it could get nasty with inflation and what we’re seeing there doesn’t seem to be an end in sight and it could just lead to more and more endless inflation. If you want to be caught up on that, give us a like on this video comment below. Start a discussion. What can you do? What questions do you have? And as always, please subscribe to the channel.
When we have new videos that come out, you’ll get an alert from YouTube. Now’s the time to do it and we’ll see you next time. .
See more of Paradigm Press on their Public Channel and the MPN Paradigm Press channel.
