In this hard-hitting episode of the Gold Exchange podcast, Daniel Lacalle—Chief Economist at Tressis—exposes the fault lines in today’s global economy. He explains why mimicking U.S. policy is a trap for the rest of the world, why the 60/40 portfolio is no longer viable, and how China’s rise is reshaping the rules for economic superpowers.
Lacalle offers a no-nonsense outlook on inflation, monetary policy, and reserve currencies—and where gold fits as this new economic era unfolds. Investors looking for clarity won’t want to miss this conversation.
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Transcript
Monetary Metals:
Welcome back to the Gold Exchange podcast. My name is Ben Nadelstein of Monetary Metals. I am joined by our good friend Daniel Lacalle. Daniel is the chief economist at Tressis and author of his most recent book, Freedom or Equality? Daniel, welcome back to the show.
Daniel Lacalle:
Thank you very much for inviting me.
Monetary Metals:
Thank you, Daniel. It’s always fun having you on the show. You bring a very different perspective than many of our other guests. So I actually want to start outside of the US there’s been so much interest in the US and how the US Is doing. Can you look first and give us kind of a. Not even a 50 foot overview, but maybe a 50 million foot overview? How is the globe handling what came out of the pandemic, the rise of Trump, this nationalism, this kind of a global trade war? Where do you see the world’s economy today?
Daniel Lacalle:
I think that the world economy is basically moving in a process of secular stagnation that we have seen. It was already happening prior to Covid. Huge debt, elevated government spending, massive money printing and central bank easing. So that is sort of, if you want to look at the picture, the world is the world economic growth. We have been accustomed to the idea that world economy, the world economy is going to grow at lower rates than it did in the 2008 crisis. No, it’s interesting how we think of, of sort of solid growth with massive government spending coming with, with, with figures that are, that would be considered atrocious in 2008. So the world post Covid is basically, number one, a world that we were told was a world of free trade, but in fact was a world of statist intervention, of picking winners and losers in the, in the global trading landscape. So what we have seen since COVID in particular, but also a little bit earlier, has been a massive increase in protectionism all over the world with a distinct feature. No. Which is governments pick winners and losers, introduce trade barriers, and with the objective of reducing the pressure of United States companies or trying to eliminate or limit the risk of rising US intervention or growth in exports, and at the same time exonerating other countries according to political perception of those trade barriers.
So the arrival of Trump is, I would say, is a response to, to the failure of statism, the failure of globalism. As we hear a lot this word globalism, I don’t like it at all. I think it’s more statism, which was these decisions of global governments deciding to get together in summits, deciding what would be the future and what would be the policies for 30, 40, 50 years without even Being consulting without the citizens even being consulting? No. Consulted, Davos, the 2030 Agenda, the All these summits? No. So Trump is a response to all of that. Trump is a response coming from the discontent of a middle class that has been eroded by inflationism and constantly raising taxes, printing money. Raising taxes, printing money, and that has reduced the purchasing power of salaries, has made people feel, rightly so, that they are worse off than they used to be. And this rising discontent with that statist global policies is probably the reason why Donald Trump was obviously elected in the United States, because very specific US Centric challenge of inflationism, but also the reason why Milei Meloni, so many other leaders are coming back. As a response to that, I do.
Monetary Metals:
Want to ask you what do you think about the fact that there is this, if you want to say de globalization, maybe looking more inwards, less statism. On the one hand, you have a Javier Melaye who basically said, hey, there’s all of these connections that we have and yet our country is doing worse than ever. We have inflation like we’ve never seen before. I’m going to focus on my country, do what’s right for my country. I’ll turn it around. Whether I have to dollarize or cut regulation or fire people, whatever I got to do, I’m going to turn this country around. And he has. What are some other success stories? Because obviously that was a successful one. Is Trump trying to do the same playbook or is there a different playbook? Whether you’re in the US or an emerging market?
Daniel Lacalle:
It is similar because the situation in the United States is not as dreadful as it was in Argentina. Now remember that Milei inherited 25 monthly inflation, 50 poverty, a central bank that had 12.5 billion of negative reserves. No, that’s a big difference with the United States. But, but it, but the policies are similar, which is you. We, if we really want to focus on something that is good for the world, we need to focus on what is good for us. The idea that we need to agree on everything at a global level. First of all, it wasn’t. Was a, was a, an adult created a very, very, let’s say, optimistic view of central planning. Central planning never works and obviously it didn’t. The reason why, why, why there’s such discontent with these statist global policies is because of that is because you cannot make policies for the world. You need to make policies. Policies need to be as close to the citizen as possible. And government needs to be very, very close to the taxpayer. The further taxpayer and government is the more that totalitarianism and authoritarianism happens. Success stories like malaise, obviously not as, not as, let’s say, headline grabbing, because the situation wasn’t as dire.
But Italy is, Italy is a very significant one. El Salvador is a very significant one. We’re seeing how other countries that are doing pretty well, but without very significant, very, very relevant headlines in Asia. So they’re, you know, we are seeing quite a few things that are, there are at least lead us to be a little bit more optimistic.
Monetary Metals:
And where do you see this issue of tariffs? So some people say, hey, this is 40 chess. Trump is trying to use the tariff as a negotiation tactic. It’s really more of a geopolitical weapon than it is a monetary or a fiscal weapon. Do you agree with that? Do you think that the tariffs are more of a different play than purely a financial one? Or do you think that the tariffs are truly meant to try to bring manufacturing back to the United States? And if there’s, if there’s an issue, whether it comes to the fiscal, that, hey, that’s just kind of how it’s going to play out.
Daniel Lacalle:
For the moment, there is an objective to bring back part of manufacturing back to the United States, the part that can be brought back to the United States. I don’t think that the Trump administration is as naive as to believe that the entire manufacturing of emerging economies is going to go to the United States, because it doesn’t make sense. Even J.D. valance was saying, we imported bananas, we don’t expect to grow bananas here. No, obviously, I think it is a negotiation tactic, and I think it’s a negotiation tactic. From the premise of what I said before is that we were not living in a world of free trade. We were living in a world of statist interventionism and governments picking winners and losers. Therefore, what the United States, the administration is doing is acknowledge the fact that the trade deficit of the United States is not the result of the free cooperation, spontaneous cooperation between open economies and free companies. It is, it is the result of the barriers imposed on US Companies and at the same time, the facilitation or the, or the, or the ease to Chinese companies. It’s been basically that, no, for example, the European Union has these gigantic trade barriers against the United States in the automotive, in the agriculture, farming and chemical sector, but they exonerate those limits to Morocco and to Turkey.
So, as I said, it’s a Statist winners vs losers decision based on political adherence. No. And what the Trump administration is basically saying is, look, the trade deficit is unsustainable the fiscal deficit is also unsustainable. And that’s another thing. But we need to look at it from a geopolitical perspective. It’s, it’s not just a question of trade, it’s a question, it’s a monetary question. And it is also a fiscal and an international, an international monetary and capital system issue. No. So trade negotiations, knowing that some countries are not going to accept bringing down their non tariff barriers and their trade barriers, what they’re saying is okay, fair enough, let’s reach an agreement. But you’re going to pay almost an exporting tax if you don’t want to. Because let’s remember that the reason why the European Union has all these limitations on the US Automotive sector is because it is a protectionist measure to, to make it impossible. I live in the European Union. You go down the street, try to find a GMC or a Pontiac, it’s not going to happen. No, that’s not because they, they’re not nice cars or affordable or good quality cars.
That’s because they’re literally forbidden in the worst possible way. Because if I, if I make a law and I say it’s, it’s forbidden to, to import Pontiac cars, that is very explicit. But if I start to put limitations that make it impossible for that company to export to the European Union, then it’s, it’s sort of like a vague way of banning, which is what, what happened with China, the UK so many countries. So the United States doesn’t have the opportunity and thankfully so the, the European Union and other countries have of, of imposing the 2030 Agenda or the Green, the, the Green agreement, all these things. No. So what do the, what, what can it do? Threaten with tariffs? Negotiate. If you want to negotiate, then both will be benefited, as did the UK as did China. And if you don’t want to negotiate, you will pay for, you will pay for the privilege of selling to the United States. I, you know, I don’t like tariffs. I’m a libertarian. I want open borders for trade on everything. But I, but I’m not as naive as to circumscribe my debate about the tariffs of the United States.
I want to talk about all of the enormous trade barriers that exist globally.
Monetary Metals:
Should citizens, whether they’re in the United States or in the European Union, should they be thinking, well, if there is going to be this kind of tariff, whether it’s negotiations or trade negotiations, should they be expecting higher prices back home, at least in the short term, because there’s this kind of disruption from tariff trades? Or do you think that no, actually this is going to be beneficial because there’s going to be trade agreements that lower prices in the future. So let’s say Vietnam went from a tariff from X to Y. Or do you think that people should say no, at least because of this disruption, we should expect higher prices going forward?
Daniel Lacalle:
Well, obviously you and your audience understand this perfectly. Tariffs don’t cause inflation. What causes inflation is the artificial creating creation of currency. And that can only come from higher government spending. No, tariffs may be criticized for numerous reasons, can be criticized because of the disruptions of, of trade, because of diplomatic issues, a lot of things, but not, don’t say that tariffs cause inflation because tariffs don’t mean more units of currency in the system. And tariffs don’t generate an increase in aggregate prices, which is what is inflation, let alone an increase, consolidation and continued increase, which is what is annualized inflation. So tariffs aren’t from any monetarist, any, anyone that’s watching us right now. It’s going to be a very easy argument from my side. I find it very difficult when I talk with people that don’t understand money is that tariffs don’t mean more units of currency and they don’t mean more velocity of money. Therefore inflation is not the, the, let’s say the risk with tariffs. Other things are risk of tariffs. Okay? The other thing that people fail to talk about in the debate about tariffs is that the elephant in the room of global trade is overcapacity.
There is, there is an overwhelming overcapacity in the entire world. That is the reason why so many countries have an enormous surplus with the United States. The, they need to sell their over capacity to the United States in order to reduce their cost of capital and their working capital requirements. So all of that is something that we need to take into account. That’s why I was so surprised to hear the Chinese leaders say, oh, we’re happy with a 55% tariff. What are you happy with a 55% tariff because your ports are full of containers, completely impossible to sell them, which is causing a gigantic working capital problem for the port. Gigantic capital, working capital problem for the exporter. Gigantic working. You know, people don’t talk about working capital and overcapacity in economics. They, they talk of, of inflation and tariffs in a very simplistic way, which is to think that the trade world is supplier and buyer. And that’s not the case. Between supplier and buyer there are dozens, dozens of other parts of the chain and all of them with different levels of over capacity, adopt, adapt to this environment in order to address the working capital issue and not die from it.
And therefore I don’t see the risk of inflation from tariffs. I see the risk of generating sort of. This is the risk that I see. The risk that I see is that it works beautifully for the United States. And then other countries decide hey, protectionism is the way ahead. The biggest risk is not that it’s going to generate inflation. The biggest risk is that it may massively reduce the US Deficit, maintain the economic growth and, and not cause inflation. Therefore a big success for the United States. And a lot of countries when they see the United States at least succeeding with their policies, they say let’s copy it. And then it doesn’t work like with quantitative easing. So, so it’s, so it’s something that, that, that I think we need to be, we need to be very careful as economists to go out and do what academics did in February, March, which was to make these fear mongering estimates that made absolutely no sense, then prove to be wrong and obviously end up with egg on your face.
Monetary Metals:
Now yeah, I do want to now ask you about that tension because for a lot of things that can be done, whether they’re monetary or fiscal or trade, the US has this advantage. Sometimes people say it’s unfair that they have this advantage. But we should talk about reality which there is this advantage. When you have a global reserve currency and a strong economy, you can do things that other countries can’t do. So what would happen if other countries did try to do this? Are you in the camp of the dollar milkshake theory where people say well if another country tries to, whether it’s inflate their currency or to do these tariff barriers, the capital will flee their weak economy and go to a strong economy like the US or what should we expect to happen if these other countries try to copy what the US Is doing?
Daniel Lacalle:
Yeah, you would get a sudden stop, which is pretty much the milkshake theory. No, you get a sudden stop. Capital moves directly. Think about this. Right now markets are not buying massively into the US Dollar because interest rates set up by the Federal Reserve are above the, the, the, the normal rate. No. And therefore the cost of hedging for international investors to purchase U. S securities is, is very high. So interestingly enough right now because of the incorrect policies of the, of the Federal Reserve, it is more attractive for international bond investors to purchase German or, or Japanese bonds than U.S. bonds. Now think about this. The moment that the Federal Reserve cuts rates by 50 basis points. The amount of capital that goes out of emerging markets and European, Japanese markets into the United States is enormous. Think about it. Right now the 10 year is slightly below 4.5%. Now the only thing that makes you, makes it unattractive is how expensive the hedging is for the currency. Now bring down the cost of hedging, boom. It’s going to be a flood of money into the US economy. So the risk that you very well say is that, and it’s happened in the past if you think about it, the Tequila crisis, the Korean crisis, all of that came from adopting the same policies as the United States, but without the legal investor security and the, let’s say, the benefits, but also the responsibilities of being the world reserve currency.
Being the world reserve currency is not an easy task because you need to have super exceedingly open financial markets. You need to have enormous liquidity, very, very safe legal and investor security frameworks. All of that is a big responsibility. Independent institutions, all those things. You cannot play to be the world reserve currency without independent institutions, legal investor security and an open financial system. Therefore, what happens is that suddenly those countries liabilities need to be refinanced and there’s no capital that demands because it’s safer to buy Treasuries. So that obviously is one of the risks of playing the same game as the United States without understanding the, the, the benefits that you said, but also that come with the enormous responsibilities of being the world reserve currency.
Monetary Metals:
Where does a geopolitical player like China play into this? We’ve talked about overcapacity, we’ve obviously talked about large economies. China would obviously love to have the reserve currency or maybe they would. Maybe they’re happy to have their currency not be the reserve. Where do you see China standing? Do you think they, hey, we’ll just keep growing our economy. The US will deal with the money problems, they’ll deal with the inflation, they’ll deal with the tariffs. We’ll just keep growing. Whether it’s our capacity, whether it’s our economy, internally, externally. Do you see that as kind of a silent growth? They’re happy to play second or do you think no, they have ambitions to be in first?
Daniel Lacalle:
I think that they have ambitions to be first, but they don’t want to be the world reserve currency because the Chinese government does not want to have first freedom of movement of capital, does not want to have, does not want to lift capital controls, does not want to lift the fixing of the currency, and certainly does not want an open and transparent financial system. If China had an open and transparent financial system, there would be no headline today about the United States debt. Everything would be about the Chinese debt, about the Chinese collapse of the, of the real estate sector, the bankruptcies of the Belt and Road initiative lender borrowers. It would be beyond, not beyond 2008. So I don’t think that China wants that. I don’t think that they want it at all. What I think that they do want is that they know that they have a very weak currency. The yuan is a, is a currency that is used in less than 4% of global transactions, which means that not even the Chinese use the yuan. Just think about it. The China is about 17 of the world’s GDP and it’s only used in 4% of global transaction.
Not even the multinationals in China use the yuan. So I think that they want to improve the use of their yuan with trading and capital partners that have similar, let’s say, systems, in my opinion, disadvantages. Russia, Brazil, India that don’t have Russia has capital controls as well. Russia has a closed financial system as well. Brazil has a very, very, let’s say not as open financial system as one would imagine. So I think that they want to sort of find a way to square the circle without opening the economy. It’s not easy and it’s not. And in my opinion it’s not going to work because it never works. The only reason why I, when I that why I have confidence in the US dollar or why you have confidence in the US Dollar is precisely because of those factors that I ment before. Open open financial systems, legal security, investor security, and, and, and the, and the, and the knowledge that it’s going to be a widely used reserve currency. I think it’s going to be very challenging for China. In terms of China, I think that they are. Obviously the growth in technology, the growth in high added value sectors is phenomenal.
But China is a bit like India is a country that is an enormous economy. But it’s a very poor country in terms of GDP per capita. It’s a very, very poor country. Once you move out of Shanghai, Dalian, Beijing, a few cities, you see how truly poor China is, huh? So it’s not easy to go from an exporting nation to a consumer nation. And there’s another important factor in China that plays out and that makes it very difficult, which is demographics. It’s an, the population is diminishing and aging and the economic impact of demographics because in China a citizen’s pension is his or her son or daughter. So that makes it very difficult to move it from an exporting nation to a consumption nation. I remember a discussion with a Chinese official who said, think about this, if the average Chinese consumer doubled their expenditure, China would not have to export anything. And I said, fair enough. What does that mean for their savings and for their future and the future of their parents? And that is obviously a big challenge. So demographics, the real estate bubble, the overcapacity challenge will continue. But still it’s a phenomenal economy, very hard working people, huge entrepreneurship, very, very strong human capital, very strong human capital.
Lots of great things that continue to make it an economy to consider. But I don’t think that they want and I don’t think that they can be a world reserve currency.
Monetary Metals:
And how does gold play into that whole playbook? Because on let’s say the Chinese side, you have gold as an asset that people are allowed to buy. They’re interested in buying for many of the reasons you just mentioned. Real estate market’s not great, stock market’s not great, currency is not great. So gold is a great play for a lot of Chinese investors for those reasons. But on the other side of the world, in the west, we have very similar problems. Whether it’s the debt problems or the deficit problems, the spending problems. And yet gold is not as big of a fascination in terms of an asset class or part of a portfolio. Who do you think is going to change first? Do you think that basically the west is going to look more like Chinese and their interest in gold because of these problems? Or do you think the Chinese are going to say, yeah, what do we need gold for? Let’s get our crypto and let’s get our other assets. Who do you think moves first?
Daniel Lacalle:
I think, I think that the west is going to move to the, to the way in which China is looking at. And fundamentally, because the way that China is looking at the monetary system is the right one, is that is the fact that developed economies, sovereign debt has stopped being a world reserve asset. And that is some. And, and the Central bank of China, but not just the Central bank of China, Central bank of India, Central bank of Oman, Central bank of Poland. So many countries are saying, hey, you know, we don’t need sovereign debt, that is, that is losing value on, on real terms every year because inflation is persistent. The yield is to the, the yield is too low. It’s not, it’s not covering the, the risk. No. So we don’t want sovereign debt from developed economies. We’re going to go back to gold because gold we Know that is money. And that’s, that’s basically. Yeah, so we’re basically in a, in a, in a. So almost, I would say it, it’s like a reckoning day. It’s like we’re starting to understand that the mirage of the 1998-2022 period in which sovereign debt was the safe asset that generated a certain real positive return for investors has gone.
The 60:40 portfolio is over, in my opinion. So I think that the west is trying. Is starting to get the gist of that. No, doesn’t want to because I live in the financial world. You live in the financial world. You know how many of market participants are hooked on the monetary expansion machine? That’s why they’re every. Everybody is so glued to their screens the day that the Fed is talking. Please, please, please ease, no print more money. But you’re starting to see in, in pension funds, in portfolios how gold, silver, even platinum are starting to play a significant role. And developed economies, debt is being. Not saying that it’s disappearing, but is losing as a percentage of reserve assets. The Euro, obviously, European debt, the euro has moved from being the second to the third largest asset in central banks, which means that gold is number two. The world is moving that way. I think that crypto is a second phase that requires a completely different mindset. It requires a view that is obviously not generalized right now, that decentralization generates better returns than centralization. And obviously no central bank and no, at least right now, and no pension fund, which at the end of the day are like, like a limb of central banks are going to purchase cryptocurrencies in order to offset the negative impact of sovereign bonds.
Monetary Metals:
Yeah. First of all, to remind everyone they’re called central banks, the whole decentralized currency thing would probably be quite at odds. And the benefit of gold is that if you do have it, you do own it, you can melt it down, it’s at your place. There’s no sanctions that can be put on it. They can’t confiscate it from your accounts. It’s not digital. And so for a lot of reasons, central banks have been of course, adding gold to their reserves. I want to ask you, in terms of the question on the Fed, do you see them A, lowering rates and B, do you see them lowering back towards zero or are we in an environment now where people still want real positive nominal numbers on their Fed funds rate or in their central banks?
Daniel Lacalle:
No, I think that they’re going to go back to zero. I think that they’re Going to go back to the, to the zero bound level. Why? Just read the beige book. I mean they say that they’re data dependent, but if they were data dependent and they read their own beige book in which every one of the central banks is talking about the weakening of economic growth and job creation, then what the hell are they talking about of keeping rates at least 100 basis points above the neutral rate? No. So I think that the, right now the, the Federal Reserve is very comfortable, is very comfortable because they can blame everything on tariffs and they can blame everything on, on Trump and that’s obviously, you know, the trump card is the easiest card in global economics and politics, but I think that they will because I don’t see any signs of inflation. Look at, look at, look at oil prices and every commodity prices, even look at copper. So I think that that is an important factor. What I do think in any case is that the Federal Reserve has the luxury of maintaining rates in an environment in which the economy is significantly stronger than many of them feared.
Monetary Metals:
Why do you think the economy remained so strong when so many analysts were expecting because of potentially high rates or because of inflation, that the economy would either slip into a recession, there’d be a stock market, you know, crash, and yet stock markets are, are all time high, there’s solid growth, there’s low unemployment. So many analysts were saying basically the exact opposite would happen. Why do you think the economy stayed so strong and put the Fed in this current position?
Daniel Lacalle:
Never trust Keynesian economists or analysts. Not because they’re ill advised or because they’re misguided or because they have ill intentions, but because models never work. Never work. So it’s obvious that they’re going to make enormous massive mistakes on overestimating the alleged positive impact of demand side policies. Because if you have a model and you move one figure, government spending, it looks like it’s going to generate phenomenal growth. Fantastic. Fantastic. Oh, it’s going to generate hundreds and Thousands of jobs, etc. Etc. These models never work because the two most dangerous words in economy are ceteris paribus, which means everything else remaining equal. And ceteris paribus is the norm in these keyn models. So what happens is that they get frustrated because every time that they have demand side policies, government spending, huge debt increases, public stimulus packages, they predict these incredible improvements in productivity and growth in jobs, et cetera, that never happen. And the same way, but the opposite way. When there’s tax cuts, when there’s tariffs, when there’s supply side measures, they massively underestimate the positive impact. Why does that happen? Because the whole Kenjin narrative and the way they, in which they, they think is ignoring human action.
No, and if you ignore human action, then you’re basically ignoring that. The United States is a very complex economy that has a tremendous entrepreneurial activity that you, you saw it in Covid. You have a big increase in unemployment and it goes back to, to full employment in a period of very few months. Huge entrepreneurship, huge innovation, tremendous technology improvements, all of those things. So I don’t, I’m not saying that you don’t use models to sort of give you a framework, but don’t use them as a, as a magic wand. And the problem is that Keynesians, look, they say, oh, there’s going to be 50% tariff on all goods and services. So they immediately, they input and they say, oh, the average, I remember this headline. The average breakfast of an American is going to increase threefold. You’re an imbecile. Sorry, sorry, what the hell are you talking about? No, and they say, no, but we have dynamic models, obviously we have dynamic models that take into account the intricacies of the economy. They don’t work. They don’t work. They didn’t work in 2020, they didn’t work in 2008, they didn’t work in 2009. They don’t work in 2021, 2025.
So that is the problem. The problem is academia is. The problem is, is that if you’re a scientist, if you think of economics as science, you use models to give you a framework, but you don’t negate human action. The problem with academics recently a very specific type of academics which are also very close to governments. Hello. Because they’re very. Is that they just simply. If the model doesn’t work. I don’t know if you remember this beautiful article from Krugman saying we had these incredible models on inflation. They didn’t work. But that doesn’t mean that the models were wrong. It means that reality was different. Okay. This is beautiful. Is, is to, is to deny the reality of the economy. And that’s, and that’s a, that is a very specific group of economists and analysts which are unfortunately the ones that are more vociferous and more, let’s say, media, media close. Because there were a lot of myself, but many, many others that said exactly the opposite.
Monetary Metals:
By the way, what is another thing that maybe these analysts have been saying? For example, I remember one. Oh, inflation’s good for you. Yeah, don’t. Yeah, there’s no inflation, but inflation’s good for you. Or the tariffs are going to triple prices and then they haven’t. So what are some other things that maybe people are hearing in the media, whether it’s financial news or pundits or journalists that they should also maybe take with a grain of salt?
Daniel Lacalle:
Oh, number one, any tax cut is going to destroy the the economy and it’s going to be incredibly bad for deficits. It’s ridiculous. Think about it. They in, in a model, in a, in an Excel spreadsheet, a tax cut is. It has the exact same effect as an increase in expenditure. That’s ridiculous because a tax cut is giving the people that earn their money more of their own money and an increase in expenditure is creating new money. So the fact that in an Excel spreadsheet a tax cut and a spending increase have the same effect is already such a phenomenal out of control mistake that everything else that the model brings is going to be a disaster. But hey, what can I say? 2020, the European Union is going to get out of the COVID crisis stronger and better than the United States because it has furloughed jobs, because it has the massive stimulus public package and because it has a huge safety net coming from Social Security. Gosh, I mean could have been more wrong. No, so many others. 2021, there is no risk of inflation increasing money supply by 27% and dedicating it all to government spending programs in current spending.
So many, so many ones. My, my favorite in, my favorite is actually the, the growth and jobs Plan of 2009 of the European Union which basically flooded the European Union with useless roundabouts and completely unnecessary infrastructure, bridges and airports. And in countries like Spain you have airports that look like the death Star and the countries are in stagnation obviously. So it’s basically just glorification of anything that means government spending, higher taxes, more government intervention and denial of the positive effects of supply side economics.
Monetary Metals:
Daniel, as we head towards the end of our interview I want to do a rapid fire round. I’ll ask you questions from all around starting with do you think debt to GDP matters now? So obviously at some point people were saying oh, at 100% debt to GDP there’s going to be this crisis. Then we passed that. Now we’re 130 depending on what you count as debt. Do you think debt to GDP is still a metric investors should be focusing on?
Daniel Lacalle:
I think it is. I think you need to understand that the impact is not what people think is that there’s going to be a massive crisis. But the rate, the reason why we are in secular stagnation and why so many countries are basically unable to lift themselves from stagnation is a result of reaching those levels of debt to gdp. So it does, it does matter a lot. Because ultimately, as you and your audience know very well, but so many people don’t, higher debt means more taxes or more inflation or both in the future.
Monetary Metals:
Next one for you. Do you think a country at this stage of the game can grow its way out of its debt? So for example, can the US let’s say using AI will have this incredible GDP growth or restructure the economy? Do you still think there’s a chance that we can grow our way out or do we have to do something different like print our way out?
Daniel Lacalle:
Absolutely. Absolutely. The reason why we grow accustomed to very low levels of growth and nobody asking themselves why is because we also grow accustomed to the idea that the size of government in the economy goes from 40 to 50 to 60%. And we don’t understand that that is a huge burden on economic growth. No, of course the United States can grow at 4%. What it needs to do is to massively reduce the, the size of government in the economy in order to, to do so. What you cannot do and coming back to to economists and academics is the reason is that they justify low levels of growth because they don’t consider that the enormous size of government and the economy is, is a burden. But if you look at France, France is a country that could be growing at 2 and a half, 3%, no problem if government spending to GDP was not almost 60%.
Monetary Metals:
Next one. Do you think central banks have gone from data dependent to just truly political? Do you think that the Fed is basically just a political tool now where either they hate the President, won’t do what he says no matter what and they’ll throw a tantrum, or on the other side they’ll be completely sycophantic. If the President says jump, they say how high do you think we’ve kind of ended the data dependent or the neutral type of central bank and are now in a full world of political central banks.
Daniel Lacalle:
We are in a full world of political central banks that have completely stopped paying any attention to monetary aggregates, which is already a joke in itself. Monetary authorities that don’t pay attention to monetary aggregates and that justify every and any government imbalance as long as it means higher spending. No, that is one of the of the big, big problems. The other thing is that when people say that they are political, they think that they are partisan. No, no, no, no, no. When they are political is that they are, is that central banks have been co opted, have been overtaken by neocacians that always finance and benefit higher government spending, higher debt and higher taxes and always act negatively against those that reduce the size or try to reduce the size of government and try to reduce taxes. So if you think about the bank of England, think about the Fed, think about the ecb. The, the, the. What is political is not partisan. Is the viewpoint of what the world, the economic world should be. And it’s, and it’s driven by statism.
Monetary Metals:
Next one for you. You mentioned you think the 60/40 portfolio could be dead. What do you think might rise in place of the 60/40 portfolio?
Daniel Lacalle:
Oh, I think that everybody should start reducing the weight in fixed income, particularly sovereign debt. Maybe have some high yield, quality, high yield, that kind of thing, but not sovereign debt. And have gold, silver, platinum and depending on your tolerance on volatility and your ability to discern the opportunity the, the crypto assets that are likely to succeed, which will be very few. But they, that’s why you need to be very focused on those that are actually generating their own liquidity.
Monetary Metals:
Obviously we don’t give investment advice. Always talk to a financial advisor on that one. Now let’s talk about gold and silver. Do you think that silver is going to outperform gold this year or do you think gold takes the cake in terms of performance?
Daniel Lacalle:
It is very difficult because with silver and gold there’s a huge difference of utilization. Silver is very much driven by manufacturing while gold is more driven by central bank demand and therefore understanding secular stagnation and the challenges of manufacturing. Obviously silver demand is not going to be as robust as that of central banks that need to go from hugely underweight gold to equal weight gold, which means a level of purchases that was unheard of a few years ago.
Monetary Metals:
Now I want to ask you about the other metals as well. So you mentioned platinum. Where do you see them in the world? So obviously gold and silver are monetary metals. There’s of plenty. Platinum, that’s a precious metals. Do you think that gold and silver are going to continue to be monetary metals or do you think for example silver will slowly become more of an industrial metal and gold will remain a monetary metal?
Daniel Lacalle:
No, I think, I think it’s, it’s the other way around. I think that more precious metals are likely to move to be monetary metals. No, as we, we need to and once we understand that obviously the, the availability of gold is finite. You cannot simply just expect the central banks to continue to, to purchase something that maybe they don’t have any access to, but what they can actually find is, let’s say, alternatives that have the same qualities in terms of reserve value, but that have more availability and certainly more value midterm. So I think that we’re likely to see more gold continuing to be a monetary metal and some of those moving gradually to be more monetary.
Monetary Metals:
I want to ask you, earlier we talked about demographics and population. Obviously there’s kind of an aging of either the US or the Chinese population. Do you think that could potentially spell bad news for hard assets like gold or real estate, where maybe younger investors are more interested in, interested in crypto or the stock market or dogecoin? Do you think that there’s a educational aspect that needs to happen for gold to kind of stay favored? Or do you think that gold is going to be timeless regardless of the demographic shifts?
Daniel Lacalle:
I think that gold is timeless regardless of demographic shifts because we know it’s timeless and we also know something that I find fascinating is that for centuries governments and, and the equivalent of central banks all over the world have tried to convince their citizens that gold is not money and that everything something else is. But there’s something about gold and that obviously, you know, I’m not going to be the one to say exactly what it is, but there’s something about gold that people understand will give you reserve of value. The same way that hard assets like real estate people understand the difference between real estate in your hometown where, where you understand supply and demand dynamics and demographics compared with commercial real estate or second home real estate? No.
Monetary Metals:
I now want to ask you about central banks. Do you think that we’re going to see an issue with central banks maybe outside the US like a Japanese central bank or a Chinese central bank? Do you think that we’re going to see more intervention going forward? Of course, as different currencies or the US uses its kind of monetary or fiscal powers to shake up a lot more of the global kind of economic sphere? Do you think we’re going to be seeing more interventions by different central banks and if so, which ones?
Daniel Lacalle:
Oh, certainly, absolutely. Central banks are caught between a rock and a hard place because what they have done is to open a can of worms that cannot be closed. It’s like the Pringles advert. You once you pop, you cannot stop. No. So the problem is that central banks don’t have any tool right now to moderate fiscal policy. The Japanese central bank cannot Go to the Japanese government and say, oh, and by the way, we’re going to increase rates to 5%. No way. What the hell. They would be fired in a second because the, the Prime Minister is going to say how are we going to pay the pensions? No. So monetary and fiscal policy are two sides of the same coin. When you have governments that have exceeded the economic, fiscal and inflationary limit, the central bank doesn’t have any power to really curb their expansionary intentions. So I think that we will see more intervention, I think we will see helicopter money and I think we will see direct monetization of government spending. Think about this. The Rearm Europe program is a direct monetization program. Nobody’s talking about it because it seems like very high level discussion, but it is something that is going to go directly out of government budgets and into the central bank in a very short period of time.
Monetary Metals:
I want to ask now about Europe. Perfect transition. Do you think that the United States is basically going to pull away from Europe in terms of economic growth and Europe will stagnate or do you think there’s a catch up play where Europe grows while the US stagnates?
Daniel Lacalle:
No, I mean it is very difficult for the European economy to grow because of demographics, because of the elevated level of government spending and also because of the lack of technological leadership. Okay. And it’s, and we’re now almost a year since the Draghi plan was announced and nothing has been done. So I don’t see that the European Union has any, let’s say, willingness to really change its course and eliminate the excessive level of, of regulation and, and, and, and taxation. The United States, the United States was on its way to Europe. I, I said in a, in a similar podcast a few, a couple of years ago that I come back, I come from the future, that if you could, that if the United States continued the way that it was going, it was going to go to the stagnation of France. I am hopeful, hopefully you never know. But I am hopeful that the supply side measures that are being implemented right now could lift economic growth at a higher level and that would bring a stronger, a stronger United States.
Monetary Metals:
What do you think about the impacts of AI, artificial intelligence and technology on our different economies? So one area is that maybe I will grow us out. We’ll of course be able to help pay off that debt. We’ll see things like nuclear and energy policy change because AIs need energy. Where do you see that AI play in terms of these different economies, whether it’s the US Or Europe. Where do you see AI?
Daniel Lacalle:
I see that AI is a tremendous tool for those economies that will use it to boost productivity, adapt to the, to the great benefits that AI brings and create larger companies that are more efficient and more and more productivity driven. But it’s a tool and it’s also a tool that can be used for social control, for the perpetuation of government imbalances and for the repression of freedom. So hopefully I think that the United States is going down the first, the first path and I hope that nobody, or at least in the developed world goes down the second path.
Monetary Metals:
What’s a risk that most investors might not be aware of? So there’s known knowns, there’s known unknowns, there’s unknown unknowns. What’s something that you, Daniel, are looking at? Do you think most investors aren’t pricing in?
Daniel Lacalle:
The biggest risk is sovereign debt. The. I always look at the, at the asset that people see as the least risky. And, and that’s where you’re going to find your next crisis. When people said that there was no risk in real estate, that’s where you had the crisis. When you see it, when people say that there is no risk in sovereign debt, that is where you have the crisis now. But a crisis of sovereign debt is not as the same as a real estate crisis. A crisis of sovereign debt is a, is a stagnation and, and loss of productivity crisis. But that’s where I’m more concerned about and we have already had some alarm bells on that side. We’ve had Japan twice, we’ve had France, we have the UK twice. You know, there are, the market is already giving you signals that are being ignored by governments, but it’s giving you the signals given. It’s telling you pay attention to this because these bond yields are telling you that your, your sustainability and the, the ability to repay this debt is under question. And a significant question.
Monetary Metals:
Daniel, what’s a question I should be asking all future guests of the Gold Exchange podcast?
Daniel Lacalle:
Oh, great, great question. I think that the, the, the question that all of us need to ask ourselves is how do we as investors participate and support the environment that will lead to use these tools that we have mentioned to improve productivity growth instead of, instead of bloating the monetary system to expect some multiple expansion Now I think that the, my, my biggest concern about the financial world is so many people that are so hooked on monetary expansion to just expecting a little bit more of pe, a little bit more ev, but valuation that, that are losing the sight of what capital markets are for which is to finance and to and to promote productive growth.
Monetary Metals:
For those interested in earning a yield on gold paid in gold, they can check out monetary-metals.com Daniel where can you people find more of you and more of your work?
Daniel Lacalle:
I always say that it’s easier to find me than to avoid me, but. So it’s easy to find me. Just, just look. Daniel Lacalle I have an X account in Spanish and one in English. I have a YouTube channel in English and a YouTube channel in Spanish and a website in Spanish and in English. So. So you don’t have any excuse not to find me.
Monetary Metals:
In that case, I guess it’s hasta luego. We’ll see you soon. Daniel thanks so much for joining the podcast.
Daniel Lacalle:
Thank you very much. Have a great weekend.
