[Music] [Music] I'm Charlotte McLoud with investing news.com and here today with me is Keith meter founder and CEO of monetary medals thank you so much for being here today great to talk to you thanks for having me really good to be catching up with you it's been a while and we're here at the New Orleans investment conference so you've done a couple of talks here already and sadly I missed them both so we're going to talk about that I know it's so sad this is what I get for
flying in a daylight so when you're doing your precious metals panel yesterday I think I was still on the plane so I wanted to ask you about that see see what are some of the topics that were coming up during that one because it sounded pretty interesting so one of the topics that um sometimes frustrates me as people talk about GDP I think too much and I've written in ton about why GDP is a terrible measure it doesn't measure the economy and so um I think it was yesterday the uh I say I think it was
because I've been doing a lot of travel I flew in from Europe the day before so I've my head's in another time zone I've been spending a lot of time on planes and not necessarily reading financial news but the GDP number came in at 4.9% and um everyone was you know discussing is this mystifying is this baffling why why such a strong growth the economy doesn't feel very strong Etc Etc and um I think people lose sight of the fact GDP includes government spending and also includes credit card
spending so if the government borrows and spends or if people you know take out loans on their credit cards or take home equity lines out or whatever that all adds to GDP so GDP is kind of production plus destruction like you have the sign wrong destruction should be subtracted not added but as long as the government is spending and adding I don't think it's going to continue at this pce about a trillion dollarss a month to the debt well that's adding a trillion to GDP so of course the GDP
number is up that doesn't mean the economy is good I mean GDP is a terrible measure very interesting so this is one of the things that came up or maybe didn't come up on this panel so I guess the the question to ask after that is what what's the better measure what would you prefer that we look at i' I'd rather look at something like a national balance sheet so you know GDP is measuring essentially cash flows but doesn't say whether the cash flows are productive or unproductive destructive
borrowing to consume you know you load up your credit card to go on a bender to Las Vegas okay that adds a lot of spending that is true and undeniably so it's not fake you don't need to go to some shadowy website to tell you that's it's not real but it's not productive it's not constructive and it's going to leave you with a hell of a hangover for years or decades as you try to slowly struggle to pay that off um you know if you look at something more like a balance sheet so every presumably
everybody's you know working or have some sort of income and that's adding to their net worth and then they're spending or subtracting from the net worth did you go up or down by the end of the month there a much better measure of something than how much did you spend without caring whether it was on your credit card or whether it was your salary you're spending um even you know looking at balance sheet is problematic because as the interest rate changes that changes the value of every asset
but at least it would be a better you're looking in the right area looking at in the right direction okay okay and so you know if you do start looking maybe more in that balance sheet direction or at other measures that are not GDP what does the health of the US economy then look like to you we have an awful lot of borrowing to spend going on and um there's a saying that I've always thought so I'm not a baby boomer I'm Gen X um and I don't know the mix of your audience I'm
guessing you're Millennial uh but I I think of the this as a baby boomer expression which is is not a problem until it's a problem so all those borrowing you know what is what is 33 trillion mean right so assuming there's about 100,000 people who work in the productive private sector so people who work for the government obviously not on net paying off the debt because their salaries coming from the government itself so let's say 100 million people in in the US working in the productive
sector 33 trillion is $330,000 for every working person % so if you have a married couple that are both working their debt burden for just the federal government level is $660,000 not counting most of the states are deeply in debt most of the cities and Municipal Water districts are in debt then there's also corporate debt business debt obviously personal credit card student loan Auto on and on and on and on with with debt is there any way that the average you working couple could advertize $660,000 of debt there's
no way so what cannot be paid will not be paid this is going to be a horrific crisis but not today today everything's fine but the economy gets more sluggish the economy gets weak more and more of what we borrow goes into nonproductive purposes so people look at debt to GDP and that's a very worrying number they should be looking at marginal productivity of debt so marginal productivity that npod as I call it is a measure of each fresh new dollar that is bought borrowed how much does that add
in GDP so for every squeeze how much juice do you get that number has been declining since at least 1950 people should be worried about that it's not a crisis right now it's not a problem now but this this is getting worse is the economy healthy hell no it's not healthy does that mean people don't have jobs at the moment no people have jobs at the moment um we'll see what what Powell's interest rate hikes eventually do to that is a whole another topic that that is another topic and I
think we can go down that path so we did we did get the latest fed meeting recently they left rates unchanged they are still high so yeah let's let's hear your thoughts on that because you may have a different idea about what's going to happen than others so most people think um you know hike interest rates to deal with inflation and I said wait a minute you're hiking the cost of capital so lockdown and and the Whiplash from Lockdown destroyed companies all over the economy from small restaurants to
you know Logistics and supply chain and shipping companies there's obviously demand for the good so Those comp you either those companies have to be reformed or those entrepreneurs have to form new companies or other companies have to somehow raise capital in order to replace the capacity that was lost we're now hiking the cost of that Capital massively is that what you want to do just when everybody's trying to replace the capital that was destroyed um you know anyways if you care about
consumer prices you shouldn't want to do that but there's a whole another problem and so I I published something an article was called Keith Weiner's macro economics equation and most of what you see for equations in macro rubbish um I you know I call it physics mvy so physics has PV equals nrt you know the ideal gas law and the monist have MV equals PQ which sort of looks like that it doesn't really work but my macro equation is R is greater than I it has to be so R is a return on Capital has to
be greater than the cost of capital you can't borrow money at 10% to um to open up a hamburger shop that makes 8% return on Capital it's a losing it's a losing deal so if you hike the cost of capital then return on Capital has to go up how does that happen by by liquidation and destruction of all the supply out there so that Supply is reduced sufficiently that what's left can raise their prices enough to get return on capital above cost of capital so we're hiking the cost of capital Capital right now with a lag
you know liquidations bankruptcies asset fire sales all are coming and lofs um but there's a lag and um you know the lag is variable the lag can be long um I think one of the things that's happened just talking about that lag is you know if you re if you're a CEO and you realize there's a business cycle or really the fed's credit cycle but whatever you want to call it and you realize that the smart thing to do when you see the downturn is do the layoffs as early as possible into that downturn
preserve your Capital then when you see the things turning and on the upswing you hire before everyone else so you save money as everyone's going down and then you spend to grow ahead of everyone else and grab market share into the rise so the had the FED has had a number of head fakes uh since 2009 where everyone thought you know recession interest rates going up whatever and companies did the layoffs and because it wasn't real it was a head fake every one of those companies regretted it and 6 months later they
were calling back all the employees they tried to they just laid off and said please would you come back please you know and then they're paying them huge bonuses and doubling their salaries and all this stuff so now this one is different from you know 2015 for example but companies I think and there have been some layoffs but companies I think have been reluctant because it's like pavo's dog you know you ring the bell 17 times by the 18th time the dog knows what to do only this time is different and the dog
doesn't realize it yet but all that's coming and so that's we stand at that at that moment right and so not now but in the future and and probably so we have this lag effect that's going on right can we can we say with any accuracy really like when that catches up with us or is this to be determined so so one thing you can do is you can look at the maturities of all the debt that's out there right so the the the problem comes so let's take Residential Mortgages for example the US is kind of a unique
Market I don't think really exists in most other countries a few maybe I don't know sure about Canada the mortgages are fixed rate mortgages really long terms in like 30 years most people 30 year fix so if interest rates go up it doesn't affect people living in the house already now if the value of the house goes down people might walk away if if they're underwater in terms of equity but if they could afford the payment last month they could afford it this month but in most countries in the world
they're they're on variable rate mortgages which means if the interest rate goes up the mortgage payment goes up so imagine you're paying $2,100 a month okay I can afford that and then the the the rate on your mortgage resets and now you owe $3,800 a month yeah no I've I've seen that happen to people that I know so yeah talk and and it may not be optional may not be a choice the person may be forced to default because they simply can't come up with that pay payment or it would so you know Crush
their lifestyle that you know they they would be eating ramen noodles and and macaroni and cheese seven days a week in order to make the payment and so they walk away well the same thing happens to businesses how many hamburger restaurants out there how many pizza shops how many whatevers uh puts in in uh in Quebec Province um you know we're we're they just barely make a little bit of profit margin and then if if the interest expense goes up they're dead and so you know in the process of trying to
deal with that they may try to lay off some staff and see if they can you know save money but of course then revenues go down you have fewer fewer staff usually means less revenues and um so you get that spiral the last time this really happened was 200 2008 so that's what we're looking at but not today but perhaps soon perhaps 6 to 12 months out it's very hard to note the timing but that's the sort of cycle that that that occurs right and is it if if we're comparing kind of back to 2008 is it a
similar type of scenario that plays out or is this this worse well the magnitude is worse I mean so the last time around we had a crisis of too much debt so what they did is they fixed it by pumping out more debt so the magnitude is worse but I think there's there's a key difference which is today the FED if if you ask them about the fed's performance in 2007 they would say the that the 2007 fed was as sleep at the switch or sleep at the helm and so today I think the FED is hyper proactive whereas in
2007 they were in the previous mode which was to try to be um a little bit more distant and aloof from from markets so today um I don't know if it's the fed or other Regulators but as I talked to people who know the space let's say annuities for example you know if you're if you're an asset manager running an annuity each asset you buy you have to reserve a certain amount of Capital based on the risk of that asset so if you're buying short data T bills very little to no Capital has to be reserved
if you're buying 20e junk bonds you have to reserve a lot of capital because there's a great risk that that will fail so what's happening right now is the the spread between junk bonds and treasuries hasn't really blown out like junk bonds cost you know have higher interest rates than treasuries but the spread between the two should have wied massively with this hiking cycle and it didn't and so a lot of people are asking why why is this not become a problem The Regulators um are I love the word nudge
from Cass sunstein when he sold Obamacare The Regulators are nudging uh the market by giving them a green light to buy like annuities for example to buy junk bonds and not Reserve Capital against them the way they the way they should and so the annuities are are becoming un sound or more on sound as a result of the regulator saying we encourage you wink wink nudge nudge to to buy all this you know toxic waste U because it pays three and a half% better than treasury bonds right so there's an
incentive to do it and if the regulator gives you the nod well why not right and if you don't do it all your competitors are doing you're not competitive so um that's very perverse and so you haven't seen junk bonds blow out the way they did leading up to the last crisis so it'll take a different flavor um but at the end of the day it's a crisis of we've borrowed too much there's too much de the debts not productive there's too much malinvestment the malinvestment has to
be liquidated somehow and as the pressure builds it will find an outlet and if you want to plug this Escape valve and you want to plug backup Escape valve something will happen you know somewhere as the pressure grows right right and you started to talk about treasuries and before we turned the camera on here you were telling me a little bit about some misconceptions that people might have around what's going on in that situation so I don't know if you've covered it as much as you'd like to is there anything
you would add there yeah so you know people look at there's two things they think about the treasury bond market one that the treasury is going to not be able to pay interest because you know at this interest rate and all those debt obviously the interest payment is much higher to that my my answer is the treasury US Treasury will be the absolute last data in the world to default after everyone else has already defaulted they will be the last on in the end so of all the problems we have to worry about us government defaulting
is not one of them number two people are saying well with all this treasury bond issuance look at how fast the debt is growing there's going to be insufficient demand to meet Supply and this is one of those uh for people that are familiar with gel Man Amnesia this is the phenomenon that people read on page one of the newspaper some stupid stories that absolutely doesn't make any sense and they laugh at it and say these are idiots and then they turn to page two and they forget that the paper was
idiots on page one and they're completely credulous on page two so um Michael kryon uh had a comment about this and he said um the newspaper is full of stories where they say wet Street causes rain like they've got it backwards at a mechanical level before we even get to their Theory they don't even understand what caused what happened first and you what the effect was and so you know every dollar it's just a slice of the government's debt every dollar recycles into the treasury bond market there's no
such thing as too much demand too much Supply and not enough demand that's mechanically impossible there's no such thing as the street getting wet somehow and then causing rain as a consequence of that you've got it backwards there's always demand for treasury bonds because to hold the dollar is either to buy treasury bonds directly or give it to a bank who's going to buy treasury bonds with your dollars so um no matter how big it cats there's always enough dollars to to buy the treasury bonds
that's not the problem the problem there's a lot of problems with the system but that's not one of them okay okay I think that hopefully will help people understand a little bit better what's going on there I I hope we can maybe move over to gold and kind of explain what all of this means for gold so we have gold is still historically High people wonder why the price isn't higher what are your feelings on the gold price right now does the level make sense to you yeah I mean at a very
simple level I mean the prices I mean by definition it's the balance of sellers and buyers right so if more people suddenly sell with urgency then they keep pushing the bid down and if more buyers are buying with urgency then push the bed up but the fact that somebody famous let's say Central Bank bought doesn't really tell you which of those two is happening is it that there's I call it the famous buyer fallacy oh yeah we talked about this right you know so the Central Bank of whatever country
bought okay do they bid it up or was there excuse me 100,000 Anonymous not famous sellers and they happen to be the buyer that put in the bid you know to get that gold but um I think right now you have a combination of two enormous forces and it's been this way for a year a couple years which is there's a lot of people that are forced sellers they don't necessarily want to sell like you talked to a lot of the bullant dealers here and people who bought gold from them you know maybe earlier this year or
last year the year before are now coming back to sell it and some of them maybe they're selling it because they think price went up and they got their gain and that's it I I think most people buy gold you know gold coin thinking they're going to sell it if the price goes up 100 bucks I think a lot of them are under stress financially and gold is the liquid which is the reason why they bought it it's the liquid asset that you can sell um when when you need to sell something so I think there's Force
selling and at the same time there are people that are buying because hello The Madness of central banks I mean do you really want to be a creditor to the fed and own dollars a creditor to the treasury and own Treasury re bonds it's absolutely nuts and it's nuts worldwide the US is not unique in any way and having gotone mad all the countries have so um in the US right now the gold trade is I necessarily call it Moran but slower but not so in the Middle East not so in India not so in Turkey not so in
Asia they're buying because you know they see what the dollar is doing they're on the they're on the receiving end of of that it's not doing any good for them they don't trust their local currencies what do they do they buy gold so gold is being bought massively in certain parts of the world gold is being liquidated in many cases involuntarily and then you see a gold price that doesn't seem to want to get out of a range of 1900 something to 2000 something um but I think we're not in
the bare Market of 2012 to 2018 we're in a bull market maybe with volatility and you know uncertainty and a lot of sideways motion but I think we're in a buy the dips Market not which is not what we were in 2012 to 2018 that was a sell the blips Market okay and on the note of gold I know one of the other topics you're speaking on here is what's going on with the bricks and their possible currency so I wanted to at least bring it up see see your thoughts there any any points you would mention so um and this this is
basically what I said uh in my talk this morning um I met with somebody in the gold trade in the Middle East who was of Indian origin not a fan necessarily of America and our L on our foreign foreign policy but even our monetary policy very nationalistic patriotic to India very loyal to Modi Prime Minister Modi but when the topic of the bricks so-called bricks currency came up he he laughed he said it's a joke he said have you seen her chart of the uh rupe Have You Seen Her chart of the Yuan have you seen a
chart of the ruble have you seen in chart of the Brazilian roale he said they're all falling and this one is 67% and this one is whatever he said you're going to combine four small falling currencies into one big falling currency he said it's a joke he was just laughing and uh what I think they're going to do is not try to make some sort of new currency which I don't think they can agree on that anyway um gold is the one thing that doesn't require agreement if I put gold on the table anybody is happy
to deliver oil wheat Electronics you name it no questions no further discussion is necessary and nobody has to trust anybody because gold is gold so I think you know as as those countries try to do B bilateral trade so Russia is selling oil to India and and at first it was oh yeah all for one one for all we'll do Curren we'll do trade in their own currencies so India was paying Russia and rupes and probably stickering up their sleeve suckers um Russia announced actually said to the world
that we we're not going to accept rupes anymore because we've stacked up a pile of useless was their word rupes um so they were thwapping their trade partner uh you know verbally with that but you know India has Capital controls rupes are not useful outside of rupe out outside of India nobody wants them China has Capital controls you want are not useful outside of China um Russia has Capital controls of the four Brazil is the only one that doesn't it's an open Capital Market so none of them
want their own currencies what I think they're going to do is they're going to pay in Gold um you know to settle the differences so country a sends something to Country B country B sends something to Country a but this was slightly more valuable so the difference is settled in gold and I think at first obviously they're going to put bricks of gold on an airplane and fly it over because that's what you're going to do right that's how the gold market works it's a physical delivery kind of system but I
think fairly quickly maybe that takes a few years maybe that's faster everyone realizes man what a waste what if we all had a jurisdiction that we could agree on that we could all have gold in the same jurisdiction even the same Vault within that jurisdiction and now if I need to Peg you a th000 ounces of gold um I just send an order to transfer within the Vault to you um so I'm I'm Russia you're India or whatever um so I think that's what happens next and then um the question is what's the
jurisdiction I think the answer to that is Dubai okay Dubai is neutral it's not Switzerland I mean Switzerland took the side of uh you know the United States and sanctions against Russia so Russia's not going to not going to go for Switzerland and Switzerland wouldn't accept Russian gold at this point um I think it's Dubai I think will be that jurisdiction I think the gold will come there it's already coming there anyway for other reasons and um I think you begin to see organically feature by
feature evolving not because some fancy Economist including myself has a theory that says this is how it's supposed to work but just because everyone has a need to accomplish a certain goal in the transactions they're trying to do and that's going to be accomplished by building a gold standard from the ground up so they're going to have the gold there they're going to be trading Warehouse receipts rather than actual bricks flying on airplanes from there Finance is going to come up from there
earning return is going to come up that's what monetary medals do we pay yield on gold so um we intend to be there uh and within the limits of the law obviously um we can't deal with Russia as a counterparty but um you know to facilitate that for finance and pay a yield on it and so on and I think that's going to evolve cuz nothing no paper currency can replace the dollar not even remotely close um a dollhouse can't replace a skyscraper not even remotely close gold is the one thing that can and
nobody really wants it to at the official sector level but they're going to end up using gold because nothing else works it's the old uh Winston Churchill quote when he and during World wari too he said God Bless America and there was a very backhanded compliment because he said God Bless America because after they've tried everything else they'll do the right thing you know God bless the world because after they've tried everything else they'll go to Gold okay okay I'm glad I asked because
yeah I've heard a lot of different bricks gold ideas and that's that's one that I haven't heard before so so just one followup and that is what what effect does this possibly have then on the gold price if if any so as gold becomes more and more of a monetary system asset people are going to want to own it and so extrapolate from there I I wouldn't care to make a price prediction on it but as you go to a gold standard price of gold gold being money the dollar being some failing dying currency
that's fading away the price of money in terms of failing paper becomes less and less relevant so it's more are you going to get rich buying gold I mean you never did you know rich people own gold but they didn't get rich because they bought gold they bought the gold to preserve the the rich that they already had so you know if the paper currency is failing so imagine you're on an elevator that's about to drop from the 27th floor into the basement and crash and you step off the elevator onto the 26th floor are
you skyrocketing while you're standing on the floor no you're not but you avoided crashing into the basement and perhaps dying in in the accident that's what that's what gold always did people are going to get richer by holding gold perhaps um but they're going to get poorer by holding dollars that's for sure so um that's really why I think people should be owning gold if you want to speculate on something that's going to Skyrocket that's not really what gold
does anyway yeah I think that's that's a really good distinction and I think I think this is a nice note to to wrap it up on I think yeah this is really good thanks for going through all your different thoughts and some of the things you said at the conference here it was really good all right cool thanks for having me of course and once again I'm Charlotte McLoud with investing news.com and this is Keith weiner with monetary medals thank you for watching if you like this video make sure you subscribe
to our Channel we'd also love to hear your thoughts so leave us a comment below we'll see you next time [Music]
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