August 23, 2021
American Consequences contributor Dan Ferris interviews some really dynamic guests on his podcast, Stansberry Investor Hour.
And recently, Dan sat down with Lawrence Lindsey, former member of the Federal Reserve’s Board of Governors, to talk about what’s happening in our country right now with the dollar, the Fed, and inflation…
Lindsey was also an economic adviser to multiple presidents, has a Ph.D. in economics from Harvard University, and is the author of an exciting new novel called Currency War, a fictional economics-oriented international thriller.
One of Lindsey’s goals in writing Currency War was to reach a broader audience when it comes to U.S.-China relations. The book explores China’s deliberate attempt to weaken the U.S. by dislodging the dollar as the world reserve currency.
Lindsey also discusses potential real-world consequences of that outcome… including China overtaking superpower status and the greater difficulty of financing U.S. deficits.
He paints a grim picture of the next decade for the U.S. – one marked by inflation, a fraying social fabric, and uncertain global status. In this case, life may indeed imitate art…
Today, we’re sharing part one of Dan’s interview with Lindsey.
Dan Ferris: Larry Lindsey, welcome to the show, sir. You’ve been a busy man over the years. You were the governor of the Federal Reserve system for five-and-a-half years – boy, the stories you must have from inside the belly of the beast.
Larry Lindsey: My experiences have taught me that what really drives public policy is institutional self-interests, not necessarily individuals… The Fed acts to preserve itself and expand its power. And while delivering good outcomes is part of that process… sometimes it has and sometimes it hasn’t. But I think it matters less who the chair is, and more what the institution thinks it should do.
DF: So that tells me there’s consensus involved in all these decisions. We’re not just getting the Jerome Powell version, in other words.
LL: The Federal Open Market Committee is more like a board of directors, not a legislature. And so most votes tend to be unanimous, as they are on a board of directors, but that doesn’t mean the people sitting around the table are potted plants.
DF: Hopefully, “not potted plants” is not the best thing that we can say about the Federal Open Market Committee. When I saw your bio I thought, “Wow, we’ve never had such a guest on the program,” so there has to be something juicy that you can tell us…
LL: Well, I was a troublemaker… definitely not a potted plant. I was like a fast-growing vine, and at that point I was sort of a record-setter in terms of dissent. I dissented four times out of 41, and that made me virtually an apostate. So I paid the price… The chair [at the time], Alan Greenspan – who, by the way, I consider a good friend – wanted to make sure that I knew I was being a troublemaker, and hoped to keep me out of mischief as much as possible. So he gave me the two assignments no one really wants to do…
First, I had to head the division called Consumer and Community Affair, which involved things like anti-discrimination legislation, Community Reinvestment Act – things no one in their right mind would want to touch. Because even back then, anything you said made you a little bit toxic. And my other sanction was that I got to be the Fed governor who traveled to Japan all the time, 14-hour flights, and that kept me out of the country.
So, those two experiences taught me a lot, because when the U.S. housing bubble and crash hit, I had already seen a bubble firsthand when I traveled to Japan. And when I worked with Consumer and Community Affairs, I was right there in low-income housing markets, and I could see what a housing crash would do. So, in the end, when I finally got a real job in the private sector, my experiences really helped me out.
DF: We should dive in and start talking about this new book of yours, Currency War. And I should note it is a work of fiction, not just a pure economics book. First of all, what possessed you to write a fiction book?
LL: So most people tend to think of economics as being a dry subject, and I wanted to reach a broader audience with this book’s very important message. It’s about credibility for currencies, and it’s about what China is up to in trying to replace the dollar. Lathering that up with action, suspense, and sex seemed like a good way to sugarcoat it and make it go down more easily. And that was intent No. 1. The other thing is, you can say a lot more in a fiction book than you can in a nonfiction book, because things are much more easily implied.
Ken Langone, the co-founding billionaire of Home Depot, went on CNBC recently to explain the biggest threat for Americans and their money.
DF: So, as soon as I saw the title of the book, I thought of James Rickards’ book Currency Wars, which came out I think about 10 years ago. He says that the measures that Nixon took in 1971 were to try to end a currency war that was hurting the U.S. dollar rather badly. And it makes me wonder about the nature of the current currency war that you are writing about. Obviously, it’s a work of fiction, but we assume the currency war is real.
LL: Nixon got us out of the bind that we’d created after World War II. We became “the” currency, and everyone else based their currency against the U.S. dollar. Well, that meant they could move their currency values up and down (generally down) to gain competitive advantage, but the U.S. was stuck. And what Nixon did was get us out of that arrangement. I’m not sure it was much of a war, because it was really more of self-defense… The alternative would’ve been to run a much tighter monetary policy, and that just wasn’t politically in the cards.
The other difference – and this is more important – is that this war is deliberate. This is a war of aggression. Xi Jinping is quite different from his predecessors in that his primary goal isn’t to make China rich… it’s to make China powerful and to keep the Communist Party completely in charge of China. And so one way of dislodging America is by dislodging the dollar as the world reserve currency.
DF: So, in other words, to keep the Communist Party in power and to keep China in power, you must dislodge the dollar… That’s the nature of the currency war.
LL: The stated goal of the Communist Party of China is to become the world superpower, no later than 2049 – let me stress the word “the” world superpower, not one of the world’s superpowers – and that’s bad news for us. If part of that process is taking the dollar down, and if they succeed in doing that, then the U.S. is going to lose a big advantage that it has. If we’re not the world’s reserve currency, it’s going to be a lot harder for us to finance our deficits.
DF: Which are growing in leaps and bounds as we speak.
LL: Right, we peddle a lot of them to foreigners, and if we’re not the world reserve currency, we are a lot less attractive as a place for investment.
DF: It sounds like I know the direction you’re headed here… But since our audience is an audience of investors, mostly self-directed investors, maybe you could spell it out a bit… It sounds like the tangible outcome is inflation, that’s the key worry. Do I have that right?
LL: Sure. Here’s our problem… As a country, we have been trying to prop things up, now, for about a dozen years, by having an extremely accommodative monetary policy. Back in 2009 when all this started, it kind of made sense, because we were having a crash in the real estate market, and crashing prices are not good. So stopping the crash was the goal of the first round of quantitative easing. What followed was, “Gee, we stopped the crash – maybe we could do a little bit more.” And so what they tried to do was not just stop prices from falling, but increase employment and GDP growth by printing money.
It worked a little bit, but it becomes addictive… And we are now totally addicted, and when COVID-19 hit, we had very large deficits to finance. And it would’ve shot interest rates through the roof if the Fed hadn’t stepped in and become a much more aggressive buyer of Treasurys. So, they’re in full bore. I don’t think they’re going to be getting out of this process quickly. Given the size of the deficits, if the Fed doesn’t buy the bonds, it’s going to be a scramble to find other people who will.
Right now, the U.S. has a federal debt relative to GDP of about 120%. The yellow light goes off at 80%, the red light goes off at 100%, and we’re beyond red. We’re at red with the sirens screaming behind us… So how do you solve this problem? Well, it’s tough. What you have to do is get GDP growing faster than the debt. And I don’t mean real GDP, meaning after inflation, I mean nominal GDP. Nominal GDP has to grow faster than the nominal debt.
And if you do that, then you ease the burden of the debt on the economy. Well, that’s what we’re trying to do right now… Nominal GDP this year is probably going to be growing something like 9% or 10%. The debt is growing just slightly less than that. And if we pare down the debt growth a little bit and pare up the inflation a little bit, we’ll be able, over the course of the decade, to get rid of a lot of this debt burden.
Investors might think about it another way… Right now, the 10-year bond is yielding about 1.35%. OK, inflation, as reported on the date of this morning, was 5.4% in the last 12 months. So, let’s do some simple math. You just paid 4% to the government for the privilege of lending to it. Now, if we can get that up some more, so that you are paying the government 6% or 7% a year for the privilege of lending to it, then things get really easy for Uncle Sam. So, again, we started by talking about institutional self-interest. It’s in the Fed’s self-interest, and it’s in the government’s self-interest to run inflation up, all the while telling everyone interest rates are not going to go up and the rise to inflation is transitory.
DF: It sounds like stuff that’s good for these institutions, the Fed, and the government might be really bad for the rest of us.
LL: Look, all institutions behave in their own self-interest. The one advantage that we have that many other countries don’t have, is the ability to throw the bums out who aren’t doing a good job and put a new set of bums in their place. And so, that is ultimately how the inflation process is going to end, just like how the inflation process of the ’70s ended. In 1980, inflation was the voting issue, Ronald Reagan was considered a rather risky choice, but at least he seemed to be more willing to tackle inflation than Jimmy Carter was, and so the country went with it. At some point, the public here will make the same decision. I don’t think it’ll be soon. I think we have roughly a decade of inflation ahead of us, and the price level is going to double between 2020 and 2030.
DF: The idea of throwing the bums out used to really appeal to me… And what you said about the institution being more important than the folks in it is the same in government – in the executive branch and in the legislative branch, as well. The institution just seems to steamroll in one direction, which is its own growth and its own power. And the narrative can change from things like inflation and deflation, or a loss of some civil liberties or gaining some civil liberties, over time. These narratives change, but the overall direction does not seem to change, and again, I worry about that. I worry that all empires kind of evolve in one direction, and it’s not good for us little folks.
LL: Yes, that is what history suggests, and we just had a very good example of what you’re talking about. The country got fed up with the way the ruling class was operating… They put in a guy who was obviously a kind of risky person, and what did the ruling class do? They tried stomping on him from day one. Donald Trump was a threat to the swamp, to the institutions, and that’s why we had Russiagate right away, which turned out to be a farce. And the rearguard action that the permanent bureaucracy had went on and on and on. So, yes, the swamp, the ruling class, whatever you want to call it, is not going to go down easy in terms of fighting for its own self-interest.
DF: Right, and historically, growth in that institution is the only rational expectation.
LL: They certainly have all the advantages, that’s for sure, and the Founding Fathers are not given enough credit. They realized exactly what you’re talking about. And what they decided was, “So, how can we set it up so that at least it’s as tough as possible for them to do that?” And that’s what federalism is all about… that’s what the constitution is all about, the Bill of Rights, and having separate executive, legislature, and judicial branches… So that way, the various players have to fight among themselves, and hopefully that will exhaust them, so they can’t fight us instead. I don’t have a cynical bone in my body, by the way…
Editor’s Note: We’ll publish the second part of Dan and Lindsey’s interview tomorrow morning. He’ll talk in detail about why he believes the next decade in this country will be a “scramble for survival.”
Lindsey has found a way to turn economics into a gripping thriller of a story… You can find out more about his book right here.
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Managing Editor, American Consequences
With Editorial Staff
August 24, 2021