Deciphering the Global Economic Puzzle | David Rubenstein

[00:00:05] I wanted to understand what is going on in the economy, in the United States, in the world.

[00:00:13] Are we in a massive crisis?

[00:00:14] Some people suggest are we doing okay?

[00:00:17] Did the Fed raise interest rates too much?

[00:00:20] What's going on with the US dollar and oil?

[00:00:22] What's going on with unemployment?

[00:00:25] Are we going to enter a recession?

[00:00:27] And of course no one has all the answers and I've done a lot of reading on this

[00:00:30] and you, the listeners and I have already had these discussions a little bit.

[00:00:35] But I brought on a guy who is definitely one of the...

[00:00:39] He might not consider himself as but he's definitely one of the experts in the world.

[00:00:42] He's David Rubenstein, been on the podcast several times before, runs the Carlisle Group

[00:00:47] which is one of the biggest private equity funds on the planet.

[00:00:50] I mean, manages about a half a trillion dollars.

[00:00:53] So he sees where the economy is going.

[00:00:56] He's got a half a trillion dollars worth of investments, which means trillions of dollars

[00:01:01] worth of businesses overall that he's involved in and then he's got his finger on the pulse

[00:01:05] of and he's been in and involved with the economy and the political system since the 70s.

[00:01:11] So there was no better person to call and say what is going on?

[00:01:16] And David was nice enough to come on and answer all the questions I had.

[00:01:20] So here's David Rubenstein.

[00:01:26] This isn't your average business podcast and he's not your average host.

[00:01:31] This is the James Altesher Show.

[00:01:43] So David, I really wanted to just ask you about your opinions on the economy.

[00:01:50] Just from my own perspective, everything seems to me with my limited experience more unpredictable

[00:01:56] than I've ever seen it before.

[00:01:58] This time things are different in terms of the circumstances that led up to this.

[00:02:02] You've said that the Fed might raise their inflation rates.

[00:02:04] You've been optimistic at times pessimistic.

[00:02:07] Like what's your overall feeling?

[00:02:11] My general view is that the Federal Reserve is being very cautious as you saw from J.

[00:02:17] Powell's most recent statement in Grantiton's retreat in Jackson Hole.

[00:02:24] I think he's very afraid of being seen as too dovish and saying, well, we've

[00:02:30] lost concrete inflation.

[00:02:31] It's down to 3% or so and we can definitely next year reduce interest rates.

[00:02:37] He made it clear that we're not out of the woods yet and therefore the market is assuming

[00:02:42] the chance of another 25 basis point increase this year is reasonably good, though it's

[00:02:48] not guaranteed.

[00:02:50] The Fed does not want to be in the embarrassing position of saying inflation has gone down.

[00:02:55] We can begin lowering interest rates and then they have to backtrack.

[00:02:58] That's the last thing they want to do, get destroys their credibility.

[00:03:02] So their credibility is premised on in basically taking us in direction that they said they're

[00:03:07] going to get us to and that is 2% inflation rate.

[00:03:12] I think that's very difficult to do, but certainly we're not there yet.

[00:03:15] So I would expect that probably another 25 basis point increase at some point this year

[00:03:21] and probably not a lowering at least until we're past the first two quarters of next

[00:03:25] year.

[00:03:26] Well, I'm curious because before the pandemic or right around the time of the pandemic like

[00:03:31] March 2020, the Fed's biggest concern was deflation.

[00:03:35] They couldn't seem to lower interest rates enough.

[00:03:38] And so at some point they decided, hey, we don't need to be at 2%.

[00:03:45] We need to be around there.

[00:03:46] We're going to overshoot a little to try to get inflation rather than deflation.

[00:03:51] And then of course they overshot too much.

[00:03:53] Could it be that they're overshooting too much on the downside?

[00:03:56] Given that we really don't know the actual future effects of the recent rate hikes?

[00:04:03] Well, of course as the Japanese and others have learned over the years, getting out of

[00:04:07] deflation is much more complicated than getting out of inflation.

[00:04:11] I think the Fed did not want to increase interest rates at this level to get some

[00:04:18] inflation into the system.

[00:04:20] I think the COVID basically scared the policymakers in the Trump administration and the Biden

[00:04:25] administration into taking action because they thought the economy would be so slow and

[00:04:31] so low that they had to inject enormous amounts of liquidity into the market.

[00:04:36] They did so thinking it would be transitory and then it turned out it wasn't transitory.

[00:04:40] So then they have to live with the consequences of injecting so much money through various

[00:04:46] programs into the economy.

[00:04:47] So at the moment as we talk today, I'd say there's always no complete consensus

[00:04:53] in Washington, but I'd say a reasonable consensus is that we may have dodged a bullet on a hard

[00:04:59] landing.

[00:04:59] Now there are some people who say a hard landing is inevitable and that when every time you

[00:05:04] increase interest rates as high as they have done here, you ultimately get a so-called

[00:05:08] hard landing or a recession.

[00:05:10] But at the moment, we don't seem to be going in that direction because the unemployment

[00:05:14] rate is very low.

[00:05:16] The GDP is holding up.

[00:05:18] We don't see evidence of massive concern about the ability of the consumers to be willing

[00:05:25] to spend money.

[00:05:27] And so as a result of this, you're probably going to have GDP this year at somewhere around

[00:05:31] 1.5%, 1.7%, which is better than you would get if you were going to get into a hard

[00:05:36] landing.

[00:05:37] I interviewed a person recently named Jeremy Grantham who you probably know.

[00:05:42] He's a fairly bearish person generally.

[00:05:44] He's always looking for bubbles.

[00:05:47] And he did tell me in the interview I did with him that he thinks we still will have a recession

[00:05:53] at some point as a result of all the increases in interest rates.

[00:05:57] But most people would say right now, the consensus so-called is that we may have dodged a recession

[00:06:04] or a so-called hard landing, but it's still a little early to tell.

[00:06:07] Yeah.

[00:06:08] I mean, it's interesting because unemployment is at historic lows.

[00:06:12] Could it be the case that people are just completely leaving the workforce?

[00:06:17] They're either retiring if they're older or they're doing more freelance and kind of what

[00:06:22] we call it side hustle type jobs as opposed to participating in the workforce?

[00:06:29] There's three things that people should think about.

[00:06:32] First, the unemployment rate appears to be very, very low in light of how high

[00:06:37] interest rates are going.

[00:06:38] Typically if you increase interest rates, you get unemployment to go up as employers stop

[00:06:42] hiring.

[00:06:43] The reason it probably hasn't happened here are three reasons I think.

[00:06:47] One is that a lot of people dropped out of the labor force, workforce when COVID came.

[00:06:54] Older people 55 and older basically they stayed home and then they didn't want to go back

[00:06:57] to the office and they ultimately retired.

[00:07:00] Younger people went back to school or started living with their parents and they haven't

[00:07:03] really rejoined the labor force.

[00:07:05] As you know, we usually have about 66% of adult males and females in the labor force and now

[00:07:11] we've got about 62%.

[00:07:13] We have a smaller percentage of theoretically eligible workers in the workforce.

[00:07:18] Second, we don't have a lot of immigration going on right now.

[00:07:23] Let me put it in this terms.

[00:07:26] For a population to stay the same, a population needs to have women of childbearing age

[00:07:30] have 2.1 children on average when they're in their fertile years.

[00:07:34] Our population, our women in the United States are reproducing at 1.6 children per woman of

[00:07:41] fertile age.

[00:07:43] We're reproducing at a lower rate than we would just to keep the population the same

[00:07:47] and we're not letting immigration come in very much.

[00:07:52] Immigration has been thwarted under the Trump administration and the Biden administration.

[00:07:56] You don't have a lot of legal immigration.

[00:07:58] As a result, a lot of the jobs that would normally be filled by immigrants, jobs

[00:08:03] at restaurants, service stations, pharmacies and things like that, drug stores, food stores,

[00:08:10] you don't see those jobs being filled so much by new immigrants anymore because the new

[00:08:15] immigrants aren't here.

[00:08:18] That's another factor.

[00:08:19] A third factor is that you have to remember what the unemployment rate really is.

[00:08:23] It's a compilation of how many people look for a job in the last 30 days.

[00:08:30] The data may not be completely accurate, but I know from my own experience in business

[00:08:36] now it's very hard to get employees at certainly the lower economic levels of compensation to

[00:08:44] come to work and to hire these people.

[00:08:46] A lot of factors are going on that probably make it unlikely that we're going to have

[00:08:50] high unemployment anytime soon.

[00:08:52] Right.

[00:08:53] I don't know if I really count those numbers in some sense in terms of whether we're

[00:08:58] going to be in a recession or not.

[00:09:00] I mean, another way to look at it is with interest rates having moved up so fast, the

[00:09:05] cost to buy a home for a middle income family that requires a mortgage has basically doubled

[00:09:11] because of the monthly payments.

[00:09:12] Yes, dramatically higher.

[00:09:14] As a result of that, developers, to the extent there are still real estate developers

[00:09:18] who have money left, what they're really doing is building rental housing and apartments,

[00:09:25] not so much houses for sale because it's easier now to get people to rent something

[00:09:30] because people are having a hard time getting mortgages.

[00:09:33] Right now, people who have mortgages and want to sell their houses and move elsewhere are

[00:09:37] having a hard time doing so because they can't find the many buyers out there that can get

[00:09:42] a mortgage.

[00:09:45] These people can't really easily get new mortgages themselves at the rates that they

[00:09:50] would have to pay today if they were buying a new house.

[00:09:52] The housing market is very, very slow and very inactive at the moment.

[00:09:57] The rental market is where you're seeing much more real estate activity.

[00:10:01] Right, but the housing industry and building homes is a huge part of the economy.

[00:10:05] It has historically been and that's why people are worried about whether we're going to

[00:10:10] go into some kind of quote recession in part because real estate often leads you

[00:10:13] into a recession.

[00:10:16] One of the things we haven't yet seen really good data on is how bad is the urban office

[00:10:21] market?

[00:10:22] For example, in large cities, New York, San Francisco, Chicago, you have very high rates

[00:10:29] of people not coming to work.

[00:10:31] In other words, they don't come to work.

[00:10:33] They work at home five days a week or three days a week or whatever it is.

[00:10:38] Employers have had a hard time getting employees to come back to work and it may well be

[00:10:41] that we're at the beginning of a four-day or three-day in-the-office work week

[00:10:47] that's permanent.

[00:10:48] If that's true, then what you're going to see is that fewer leases are going to be renewed

[00:10:53] at the space that people had because they're going to need less space and they're going

[00:10:57] to also be able to try to get them at lower rents.

[00:11:01] You're going to have a very big, distressed real estate debt market soon because the

[00:11:05] debt on major office buildings in New York, Chicago, Los Angeles, Houston, they're

[00:11:12] going to have very high default rates, let's say, and they already beginning to

[00:11:14] have default rates and the banks don't really want to take back the debt at this point,

[00:11:19] but at some point they may be forced to do so.

[00:11:21] What will happen then?

[00:11:22] I mean, when all these commercial real estate investors and developers start going bankrupt

[00:11:28] and the banks don't want the bill...

[00:11:29] I mean, in San Francisco, they're literally just handing over the keys and saying,

[00:11:33] you take it now, we can't deal with this.

[00:11:35] Well, typically what you do is you can't service the debt,

[00:11:39] you're foreclosed by the bank.

[00:11:41] The bank takes it back and then they ultimately sell it probably at a 15%,

[00:11:47] maybe 20% discount to what they had carried it for.

[00:11:51] Today, one of the reasons the banks don't want to take the debt back and they're not

[00:11:55] rushing to take it back is the discount would be 35 or 40%, if not 50%,

[00:12:00] and therefore they would have to reflect that on their balance sheets,

[00:12:03] whereas right now they might be marking it down by 10 or 15 or 20%

[00:12:07] not fully to where the market would take it.

[00:12:09] So the banks are not dying to take these buildings back right now,

[00:12:12] but at some point they probably will.

[00:12:14] At some point, the regulators will say you've got to recognize the real value of the mortgage.

[00:12:19] It's a big problem for banks and it's a big problem for real estate developers.

[00:12:23] I mean, one of the things that happened in 2007, 2008 is that banks started to

[00:12:28] realize the potential losses from the personal real estate market.

[00:12:34] And that's what all these banks then went out of business,

[00:12:37] all these derivatives collapsed.

[00:12:39] Could something similar happen in commercial real estate?

[00:12:43] I could.

[00:12:44] I'd say when the government, right now,

[00:12:49] the major banks in the United States have more real estate on their books than they really want.

[00:12:53] But it's not easy to dispose of it.

[00:12:56] At some point, I suspect you'll see a market in distress debt in real estate

[00:13:01] in commercial buildings that hasn't yet happened yet in any major way.

[00:13:05] In terms of being analogous to what's happened before, it's possible.

[00:13:09] I don't know.

[00:13:10] When the SNL crisis happened in the late 80s, that was a situation where we had so

[00:13:15] much real estate that the government, in fact, had to take it over and ultimately sold it.

[00:13:20] It turns out probably at lower prices than they probably should have.

[00:13:23] In 0708, you saw a lot of people buying back debt at discounts

[00:13:28] and they made money in the end.

[00:13:29] Right now though, we're talking about that discount

[00:13:33] that are so much higher than what we saw in 0708,

[00:13:35] that it's not quite clear what's going to happen.

[00:13:37] It's one thing to say that that is worth 85% of what it once was,

[00:13:41] but to say it's worth 50% is another factor.

[00:13:44] And the reason it's so much lower in terms of the value is this.

[00:13:48] One, interest rates are higher.

[00:13:49] So when interest rates go up, almost by definition,

[00:13:52] the value of a building goes down.

[00:13:54] And secondly, people are coming back to work as I noted earlier at lower levels

[00:13:59] and therefore you don't need as much office space.

[00:14:02] So when people are going to renew leases,

[00:14:04] they're not going to renew them at the same space that they probably had before.

[00:14:08] Right. So is this kind of a problem that we're closing our eyes to?

[00:14:14] Or is there going to be potential solutions?

[00:14:17] Well, people are not closing their eyes to it,

[00:14:19] but I'd say it's not yet on the front pages of the newspapers as a crisis

[00:14:25] because you have a lot of people who have other problems to worry about.

[00:14:31] But I think in the real estate community,

[00:14:33] if you talk to people in the real estate community,

[00:14:34] they see this as potentially one of the bigger crises

[00:14:37] they've ever seen in commercial real estate.

[00:14:40] Right. And so what could happen,

[00:14:42] like compared to 2007, 2008 and the economy almost collapsed?

[00:14:46] However, maybe the Fed under Bernanke developed a playbook

[00:14:51] which is more involved early.

[00:14:55] Well, we'll have to see where we are when the crisis hits.

[00:14:59] It's not likely to hit in a dramatic way for another one or two years

[00:15:03] because it's going to take a while for this to play through the system.

[00:15:06] At that point, the interest rates may be lower

[00:15:08] and therefore the problem may be ameliorated

[00:15:11] by lower interest rates to some extent.

[00:15:13] But I think the biggest factor overall

[00:15:16] is that fewer people are going to work in offices

[00:15:19] than before five days a week.

[00:15:21] Now, some of the financial service firms in New York

[00:15:24] are telling their people they have to come back five days a week

[00:15:27] and some other employers, Amazon recently said,

[00:15:29] we want you back five days a week.

[00:15:32] But getting employees to come back five days a week

[00:15:34] in a very tight labor market isn't often that easy to do

[00:15:37] because employees can go elsewhere.

[00:15:56] So could this lead to a potential deflation

[00:15:59] if banks start suffering, perhaps lending less?

[00:16:02] Commercial real estate starts trading all its distress debt.

[00:16:06] And a lot of those employees you mentioned

[00:16:07] aren't necessarily going back to office buildings.

[00:16:09] A lot of the Amazon employers are going back to warehouses,

[00:16:11] for instance, where real estate is not really in a crisis.

[00:16:15] I would say historically the United States

[00:16:18] hasn't struggled with deflation that much in recent years

[00:16:21] because it's been a reasonably dynamic economy.

[00:16:24] Japan had a very bad decade or so of deflation

[00:16:29] because the economy wasn't growing very much

[00:16:30] and wasn't a lot of entrepreneurial activity.

[00:16:33] I think in the United States,

[00:16:34] deflation is not one of our one, two, three, or four,

[00:16:38] five biggest problems we have to worry about right now.

[00:16:41] Right, although before COVID hit,

[00:16:44] I mean that was what the Fed was worrying about

[00:16:46] because they couldn't really inflate things.

[00:16:49] Despite lower...

[00:16:50] That's different.

[00:16:51] I mean the world's changed

[00:16:52] and so as a result of having deflation hit as high as 9%,

[00:16:56] now it's probably at a core rate

[00:16:58] of maybe three and a half or 4% so-called core inflation

[00:17:02] but deflation is not something

[00:17:05] that they're worried about today.

[00:17:07] And does it worry you on the inflationary side

[00:17:09] that the BRICS country is considering currencies

[00:17:12] other than the US for purchasing dollars?

[00:17:16] I mean purchasing oil.

[00:17:18] That is a potentially serious problem

[00:17:21] for the United States in this sense.

[00:17:23] We are the only reserve currency in the world.

[00:17:26] We don't have a sovereign wealth fund

[00:17:27] unlike of many other countries

[00:17:29] but we have the printing press

[00:17:31] and we can print as many dollars as people are willing

[00:17:33] to buy and for the last 50 years or so

[00:17:36] we've been the only reserve currency

[00:17:38] and people have been willing to buy our dollars.

[00:17:40] We've been willing to buy it so easily from us

[00:17:42] that we've run up about $32.7 trillion of debt.

[00:17:47] So how can you run up that much debt?

[00:17:49] Well, you run it up because people

[00:17:50] are willing to buy your dollars.

[00:17:51] If the dollar goes down in value in part

[00:17:55] because there is another reserve currency,

[00:17:58] yes, we surely will have a problem.

[00:17:59] I don't see that in the near term.

[00:18:02] I don't see any currency really competing against the dollar

[00:18:05] in a serious way in the near term

[00:18:07] but 10 years from today may be different.

[00:18:10] But in the next five years or so,

[00:18:11] the dollar is likely to be the only reserve currency.

[00:18:14] Yeah, is it fair to say like, for instance,

[00:18:16] a few weekends ago India bought oil in rupees

[00:18:20] but is it fair to say that Saudi Arabia

[00:18:23] and other countries don't really want to hold rupees

[00:18:25] that much compared to the dollar?

[00:18:28] I think that's an understatement.

[00:18:29] Yes, that's true.

[00:18:30] Look, India has been buying a lot of oil

[00:18:33] and I think China has as well

[00:18:35] at discount rates from Russia

[00:18:38] and sometimes they've been buying them in rubles.

[00:18:41] But if buying them in 20% discounts,

[00:18:45] what they're doing is the oil ultimately

[00:18:47] is being refined in the United States or elsewhere

[00:18:49] and sold back to the United States

[00:18:51] or in Europe at the market rate.

[00:18:53] So for India and China,

[00:18:56] the Russia need to find markets

[00:18:58] has really made it profitable

[00:19:00] for a lot of people in the oil business

[00:19:01] in India and China.

[00:19:03] But in terms of them replacing the dollar

[00:19:05] as kind of the reserve currency to buy oil with,

[00:19:08] you don't think that's happening?

[00:19:11] Well, in the reserve currency world,

[00:19:13] to be a reserve currency,

[00:19:14] you have to have enormous amount of public disclosure.

[00:19:18] And that's one of the reasons

[00:19:19] the Chinese have said for many years,

[00:19:21] they don't really see the need

[00:19:23] to make the RMB a reserve currency.

[00:19:25] They don't want to disclose

[00:19:26] all the kinds of things you have to do

[00:19:28] if you're a reserve currency.

[00:19:30] People might from time to time buy oil

[00:19:32] in other currencies,

[00:19:34] but I suspect they will quickly convert it into dollars

[00:19:37] as soon as they can.

[00:19:39] You know, on the optimistic side,

[00:19:41] the one thing it seems in each case of a recession

[00:19:45] that the US always has going for it

[00:19:46] is that we innovate new industries out of nothing.

[00:19:50] And so, you know, the internet,

[00:19:52] biotech, genomics, right now AI,

[00:19:55] does this give hope for, you know,

[00:19:58] the increases in productivity

[00:20:00] that each one of these new industries gives us?

[00:20:03] Does that give you hope that we can sort of weather

[00:20:06] any sort of crisis, economic crisis?

[00:20:10] Well, the United States,

[00:20:12] you're correct, has found many new ways to innovate

[00:20:16] and make our economy more productive.

[00:20:18] AI will probably be a quantum leap in productivity

[00:20:23] when it's fully implemented in many ways.

[00:20:25] I don't worry about the US economy in that respect.

[00:20:28] I think the United States economy

[00:20:30] will innovate sufficiently

[00:20:32] to overcome some of these challenges,

[00:20:35] but there's always a difficult transition period of time.

[00:20:37] And some people will lose their jobs,

[00:20:39] other people will get jobs they wouldn't know otherwise had.

[00:20:43] So, you know, the transition is always difficult.

[00:20:46] In China, one of the curses that people give

[00:20:49] to other people is to say,

[00:20:51] may you be condemned to live in a time of transition

[00:20:55] because transitions are so difficult at times

[00:20:58] and it will be for workers in the United States

[00:21:00] and many people who have to transition

[00:21:02] and learn new job skills.

[00:21:04] Right, so the US by innovating in productivity

[00:21:09] is essentially maybe it doesn't need as large a workforce

[00:21:13] or maybe it doesn't need the inflation

[00:21:15] that usually comes when you don't have these increases

[00:21:17] in productivity.

[00:21:18] I'm just trying to think if the innovation itself

[00:21:20] is replacing what typically lower interest rates

[00:21:23] or higher money supply would do.

[00:21:26] Well, innovation is no doubt a factor

[00:21:29] that can overcome some other challenges

[00:21:31] that have in the economy.

[00:21:33] In the United States has been the leader

[00:21:34] in entrepreneurial activity for sure,

[00:21:37] but you know it's just hard to tell

[00:21:39] during a transition period of time

[00:21:41] who's gonna benefit and how much the United States

[00:21:43] will benefit.

[00:21:44] As Warren Buffett likes to say,

[00:21:46] nobody's really made any money

[00:21:47] over the last 100 years or so

[00:21:49] betting against the United States economy.

[00:21:51] When you tend to bet against the United States economy

[00:21:53] you tend to lose.

[00:21:54] Now there's no guarantee

[00:21:55] that the United States economy

[00:21:56] will be the biggest in the world in our lifetime

[00:21:59] and probably China will surpass us at some point.

[00:22:02] But I think the United States economy

[00:22:04] is still in reasonably good shape

[00:22:06] and likely for the next 25 to 50 years

[00:22:08] there'll still be a dynamic large economy,

[00:22:11] one of the most important

[00:22:12] if not the most important in the world.

[00:22:14] What about the debt?

[00:22:15] Like you mentioned the $32 trillion in debt.

[00:22:17] Like when does for my entire life

[00:22:20] I feel like people have been saying

[00:22:21] the debt is a problem,

[00:22:22] the national debt is a problem

[00:22:23] but it never really has been a problem.

[00:22:25] So what is the issue?

[00:22:27] What could be a problem?

[00:22:28] Okay, there are five ways to solve this problem.

[00:22:32] Number one, you increase taxes.

[00:22:34] Well that's very unpopular.

[00:22:36] Number two, you cut spending even more unpopular

[00:22:39] particularly because 85% of the budget

[00:22:41] is defense spending entitlements and so forth.

[00:22:43] So it's very hard to cut or any interest.

[00:22:45] Number three, you can go to the IMF

[00:22:47] and say we need a bailout.

[00:22:49] Well obviously we're too big for that.

[00:22:50] Four, you can say,

[00:22:51] looks, we're sorry we borrowed too much.

[00:22:53] We default, obviously can't do that either.

[00:22:56] So there's only one alternative

[00:22:57] and that's to do what we're now doing in effect

[00:22:59] inflate your way out of it.

[00:23:01] The only way out of this is for your children

[00:23:03] and my grandchildren and so forth

[00:23:05] be paying this debt off 20 years down the road

[00:23:09] at inflated dollars.

[00:23:10] That's the only solution.

[00:23:11] United States has had debt since it started.

[00:23:14] The country started,

[00:23:15] we had about $70 million

[00:23:16] in post-revolutionary war debt

[00:23:18] that we had to pay off.

[00:23:19] During the clean years,

[00:23:20] we had three years of surplus.

[00:23:23] And for your listeners,

[00:23:25] a surplus is when you take in more money

[00:23:27] than you actually spend.

[00:23:29] Many people in my children's generation

[00:23:30] don't know what that is

[00:23:32] because they haven't seen a surplus

[00:23:33] but a surplus did actually exist a couple of times

[00:23:36] in the 1990s

[00:23:37] but I don't think we're gonna have that anytime soon again.

[00:23:39] We were running about a $1.6, $1.7 trillion

[00:23:43] annual deficit now.

[00:23:45] So a 1.6, 1.7, yeah, trillion annual deficit.

[00:23:49] And we ran up,

[00:23:51] I think under President Obama

[00:23:52] who was in eight years,

[00:23:53] we ran up about,

[00:23:54] I would say,

[00:23:55] I think it was roughly $8 trillion of additional debt

[00:23:59] under President Trump

[00:23:59] in four years,

[00:24:00] about 9 trillion of additional debt.

[00:24:02] It's so in this century

[00:24:04] we've run up enormous amounts of debt

[00:24:05] under President George W. Bush as well.

[00:24:08] And I don't think we're gonna pay that off anytime soon

[00:24:10] but the reason people talk about it

[00:24:12] and don't do anything about it

[00:24:13] is because the bond markets are still willing

[00:24:16] to sell US debt

[00:24:18] because it has an advantage.

[00:24:20] It's a large amount of money

[00:24:22] and when you buy these treasury bills

[00:24:24] you know you're gonna be paid back.

[00:24:26] You don't have to worry that the dollar

[00:24:29] is gonna be deflated

[00:24:31] or devalued in very many ways

[00:24:33] or, and you know the government's gonna pay it back

[00:24:36] but why don't you go buy Argentina's debt

[00:24:39] or go buy Brazil's debt

[00:24:40] or go buy many other countries' debt

[00:24:42] because you're not sure

[00:24:42] they're gonna be able to pay it back?

[00:24:44] What about Japan?

[00:24:45] Japan can pay its debt back

[00:24:46] so why are people moving their Japanese debt as a substitute?

[00:24:50] Because their economy isn't big enough

[00:24:52] to sell enough or need to sell enough treasury bills.

[00:24:55] One of the advantages that our economy has

[00:24:58] is that we borrow so much money

[00:25:01] we have so many treasury bills out there

[00:25:03] that if you're China or you're Saudi Arabia or Japan

[00:25:06] and you need to park lots of money

[00:25:07] and get a reasonable interest rate

[00:25:09] get your money back.

[00:25:10] You know US dollars is about the only game in town.

[00:25:14] You mentioned that the fifth way of getting out of inflation

[00:25:17] was to, I mean out of this debt

[00:25:19] is to inflate our way out of it.

[00:25:20] Again, could innovation be a sixth way

[00:25:23] in the sense that okay you can't raise taxes

[00:25:25] but you can collect more taxes

[00:25:27] if your industries are exporting enough

[00:25:30] to the rest of the world

[00:25:31] because they're new and they're great?

[00:25:34] Well let me put it this way.

[00:25:36] Under President Biden,

[00:25:39] I think one of the early bills that was passed

[00:25:42] was a bill to get, I think it's maybe 80,000 more IRS agents

[00:25:48] or employees.

[00:25:49] The theory is that you have more IRS agents and employees

[00:25:52] you collect more taxes

[00:25:54] but that's now very subject to criticism

[00:25:57] and the Republicans are very much against that.

[00:25:59] And so sure you can always collect more taxes

[00:26:02] and there's a lot of more taxes

[00:26:03] that can be collected legally

[00:26:05] and without raising interest rates

[00:26:09] but there's a big resistance in Washington DC

[00:26:11] in certain political circles

[00:26:13] to increasing the ability of the IRS

[00:26:16] to get more money back.

[00:26:18] But not just by collecting more taxes

[00:26:21] that currently exist

[00:26:22] but by creating industries that just make more money

[00:26:26] so more revenues are generated

[00:26:28] so more taxes are collected.

[00:26:30] Well sure, of course that's always a good way to do it

[00:26:33] just takes a while for it to happen

[00:26:34] so take artificial intelligence

[00:26:37] and always really gonna produce a lot

[00:26:38] and more tax revenue in the near future, hard to know.

[00:26:42] Because in this country, we tend to defer taxation

[00:26:46] when things increase in value

[00:26:48] but there's no liquid vacation event.

[00:26:50] So if you invest in the leading artificial intelligence company

[00:26:54] in the world and it, you know

[00:26:57] and you just hold onto the stock, you don't sell it

[00:27:00] then there's no big integration taxes.

[00:27:03] Right, but the company itself will generate revenues

[00:27:05] and profits and export technology to other countries

[00:27:07] and so on.

[00:27:08] That's true and it's a good thing

[00:27:10] but remember if you look at the tax bills

[00:27:13] being paid by some of the largest companies in the United States

[00:27:15] they don't seem to be paying as high a rate

[00:27:18] as you might think.

[00:27:20] And we also have some of these exponentially growing industries

[00:27:23] like genomics where it's small now

[00:27:26] compared to the rest of the healthcare industry

[00:27:28] but for all we know in five years, 10 years

[00:27:30] it could be curing every disease.

[00:27:32] Oh sure, it could be.

[00:27:33] I mean when I worked in the White House

[00:27:34] in the 1970s healthcare was 7% of the US GDP.

[00:27:38] Now it's 22% and it's growing

[00:27:41] and it's growing because not only of new things

[00:27:43] like genomics and other kinds of incredible marbles

[00:27:47] biotech and other things

[00:27:48] but you find that people are living longer.

[00:27:51] In 1934 when the Social Security Act was passed

[00:27:54] the average life expectancy was 65.

[00:27:57] In 1900 the average life expectancy

[00:27:59] in the United States was 49.

[00:28:01] Now if you're white in a reasonably prosperous area

[00:28:05] you're likely to live in your early 80s or not longer.

[00:28:10] And could this aging population

[00:28:15] and higher rates of retirement

[00:28:17] could this make the bill come due earlier

[00:28:19] in terms of entitlements like on Social Security

[00:28:22] and Medicare?

[00:28:23] Oh it's already coming due.

[00:28:26] For example, in 1934 the average life expectancy

[00:28:30] as I mentioned was roughly 65

[00:28:33] and you could retire and collect your Social Security benefits

[00:28:35] when you were 65.

[00:28:36] So most people didn't live that long

[00:28:39] after they were starting to collect benefits.

[00:28:41] Now if the average life expectancy

[00:28:43] of certain sectors of the economy is 82, 83, 84

[00:28:48] you're taxing people at an insufficient rate

[00:28:51] to really pay for all that.

[00:28:54] We have what we call in this country

[00:28:56] a Social Security system that's called pay as you go

[00:28:58] which means that when you get your W

[00:29:00] payroll check every week or every other week

[00:29:04] there's a deduction for FICA, Social Security.

[00:29:07] Well that's going to pay your grandmother's

[00:29:09] Social Security needs or benefits right away.

[00:29:14] In Canada or Australia they have different systems there

[00:29:17] where they actually have real money

[00:29:19] that is designed to be available to pay the benefits

[00:29:22] that are due to people when they retire.

[00:29:24] We don't have that.

[00:29:25] It's a big problem in our country

[00:29:27] but we're not gonna solve that anytime soon.

[00:29:29] Right, so that could lead to more debt

[00:29:31] or more printing or whatever you call it

[00:29:32] and that's a problem because eventually

[00:29:35] the debt comes due or it doesn't

[00:29:37] because it seems like this has always been a problem.

[00:29:40] Chickadon the Road is basically our model for a long time.

[00:29:44] What they did in Canada about 20 years ago or so

[00:29:47] they started a system where they actually had

[00:29:50] money set aside from I guess tax revenues

[00:29:53] and then from employer contributions

[00:29:55] and employee contributions and they have

[00:29:58] a dedicated fund that's now very, very large

[00:30:01] that's available to pay the pensions that are due

[00:30:04] but we don't have that.

[00:30:05] We just, as I say it's pay as you go.

[00:30:23] I wonder and I know solutions like this

[00:30:25] have been bandied about but I wonder if

[00:30:27] a federal national sales tax on the one side

[00:30:31] and a lower flat tax on the income side

[00:30:34] would raise the money because a flat tax

[00:30:36] on the income side would make it simpler

[00:30:38] for people to pay particularly for a lower

[00:30:41] and a federal sales tax allows you to kind of

[00:30:45] well, tax almost decisively.

[00:30:47] First, well the states which make

[00:30:50] get a lot of their money off of sales taxes

[00:30:52] don't want a federal sales tax

[00:30:53] because that would basically mean

[00:30:55] they would cut into probably the revenue

[00:30:58] that they're gonna get.

[00:30:59] Secondly, sales taxes are seen as regressive

[00:31:02] which is to say wealthy people

[00:31:03] the sales tax doesn't mean as much

[00:31:05] but the poor people it's a bigger problem

[00:31:09] and also flat taxes are seen as

[00:31:12] well as the Democratic Party is basically

[00:31:14] a giveaway to wealthier people

[00:31:16] because you want the wealthier people

[00:31:18] to pay a higher rate

[00:31:19] and if you're paying a flat tax

[00:31:21] it's gonna be the same for everybody

[00:31:23] so the result is gonna be

[00:31:24] you're gonna probably in the view of many Democrats

[00:31:27] you're gonna basically let wealthy people pay less taxes

[00:31:30] and you probably won't collect as much revenue

[00:31:32] but some presidential candidates have tried that

[00:31:35] as part of their platform when they run

[00:31:37] and it doesn't get very far.

[00:31:39] I wonder why because the math probably does add up

[00:31:41] to more money collected

[00:31:43] because more people would pay

[00:31:44] it would be simpler to pay

[00:31:45] more people would simply pay.

[00:31:47] Yes, but if you say it should Bill Gates

[00:31:49] be paying the same rate

[00:31:50] the same rate as the guy working in the post office

[00:31:54] most people would say probably not

[00:31:56] but that's what a flat tax does

[00:31:58] everybody pays the same rate

[00:31:59] now obviously some people have more income

[00:32:02] but there's a general sense in our country

[00:32:04] for many years now

[00:32:05] that progressive taxation is a good thing

[00:32:08] and as a result you have higher rates on wealthier people

[00:32:11] I think it's very difficult to get Congress to change that

[00:32:14] Yes, so on the one hand we have real problems

[00:32:17] and on the other hand there are people

[00:32:18] for political purposes

[00:32:20] sort of avoiding solving all the problems

[00:32:22] and it seems like the only thing

[00:32:23] that could really help solve the problems

[00:32:25] that you outlined or the five solutions

[00:32:27] that you outlined is innovation

[00:32:30] and I don't know how you...

[00:32:32] What's the innovation helps for sure

[00:32:35] but in the end we basically have a social net

[00:32:38] for people in this country

[00:32:39] Medicare, Medicaid, Social Security

[00:32:42] that is a gigantic part of the budget

[00:32:44] and we don't have the growth rates in our economy

[00:32:47] to really justify everything today

[00:32:49] and therefore that's why we have

[00:32:51] a kick it down the road approach

[00:32:52] which is to say we'll borrow more money

[00:32:56] so we can borrow more money for foreseeable future

[00:32:59] and until the markets won't buy the debt anymore

[00:33:02] we can keep doing this

[00:33:04] but I don't know if it can continue forever

[00:33:06] So what happens then?

[00:33:09] Well, if you read books about this

[00:33:12] generally what happens is

[00:33:14] and Ray Dally wrote a very good book about this

[00:33:17] not long ago basically saying in effect

[00:33:20] that throughout history countries

[00:33:22] which have the only reserve currency

[00:33:23] such as the Gilder that the Dutch had

[00:33:26] or the Sterling or Pound that the British had

[00:33:30] ultimately they take advantage of it

[00:33:32] by selling so much debt

[00:33:33] because it's the reserve currency

[00:33:35] and people want to buy it

[00:33:36] that they borrow too much

[00:33:37] and they borrow too much

[00:33:38] ultimately you have a high inflation

[00:33:41] and the value of their reserve currency

[00:33:42] goes down and people don't want it anymore

[00:33:45] So at some point if we keep borrowing

[00:33:47] at the rate we have

[00:33:48] at some point I don't know when

[00:33:49] it may be not be in my lifetime

[00:33:51] but we will not be the only reserve currency

[00:33:53] or we will have

[00:33:56] a situation where people just won't want to buy the dollars

[00:33:58] because they're not worth as much

[00:33:59] as they thought they were when they were buying them

[00:34:01] and this does on the one hand

[00:34:03] the way you describe it

[00:34:04] it does seem like a catastrophe

[00:34:05] on the other hand England and Japan

[00:34:07] both have survived

[00:34:09] or let's take a look at England in particular

[00:34:11] they survived not being the world's number one economy

[00:34:13] I mean they were for a long time

[00:34:14] and now they're not

[00:34:15] but they're doing pretty good

[00:34:17] So okay I mean United Kingdom now

[00:34:20] is roughly 3% of the world's GDP

[00:34:23] we are roughly 18 or 19%

[00:34:26] something like that

[00:34:27] so we're much bigger economy

[00:34:28] The UK amazingly controlled the world for many ways

[00:34:31] and they had 20,000 soldiers in India

[00:34:33] they controlled India

[00:34:35] they had a fleet that basically

[00:34:37] was the largest fleet in the world

[00:34:38] So if you live in London now

[00:34:40] you don't have the kind of per capita net worth

[00:34:44] and wealth that you had

[00:34:46] under years ago in effect

[00:34:48] but people seem to be as you suggest doing okay

[00:34:51] the United States is used

[00:34:52] to being the biggest economy in the world

[00:34:54] we've been the biggest economy in the world since 1870

[00:34:57] and we probably will be by GDP

[00:34:58] for another 20 years or so, 25 years

[00:35:01] China is bigger than we are now

[00:35:03] by purchase price parity measurements

[00:35:04] but still it's something that I'm not as worried about

[00:35:08] as you probably are

[00:35:09] because I'm older than you

[00:35:10] and I'm not gonna live to see the problems

[00:35:11] You're kicking the cans of me and my kids

[00:35:15] Well, yeah my kids too

[00:35:17] and my grandchildren they're gonna deal with it

[00:35:18] but I'll be watching from somewhere I hope

[00:35:22] And Dave what are you currently working on?

[00:35:23] Is there another book on the horizon?

[00:35:25] Yes, I'm working on a book on the American presidency

[00:35:28] I've done a lot of interviews

[00:35:30] with people who have been presidents of United States

[00:35:32] or people that studied presidents of United States

[00:35:34] and I have my own views on it

[00:35:36] so that'll come out I hope next year

[00:35:37] And what's the idea of the book?

[00:35:40] What's the...

[00:35:41] Well the theme is that

[00:35:43] it's the most important job in the world

[00:35:46] and maybe we can find better ways to

[00:35:49] either elect this person

[00:35:50] or to deal with some of the consequences

[00:35:54] of not allowing the system to work

[00:35:56] as way the founding fathers wanted it to work

[00:35:58] but there's no perfect easy answer

[00:36:01] Like in terms of elections

[00:36:02] how come they've never adopted the internet

[00:36:05] or some form of secure internet to make votes?

[00:36:08] This way we don't have any of these issues

[00:36:10] that we see popping up in every election

[00:36:13] Well because the internet is very subject to hacking

[00:36:18] and so you're gonna give the Russians

[00:36:21] or the Chinese and North Koreans

[00:36:23] complete access to our election system

[00:36:26] if you do that

[00:36:27] You know the thing that's most interesting is to me

[00:36:29] is when this country was started

[00:36:32] we had in 1776

[00:36:35] we had 3 million people in it

[00:36:36] 3 million people

[00:36:38] A half a million of those 3 million were slaves

[00:36:41] and they couldn't be in government

[00:36:42] and one and a quarter million

[00:36:44] of the remaining people were white

[00:36:46] were women and they couldn't be in government

[00:36:48] And then if you were Jewish

[00:36:50] you couldn't be in government either

[00:36:51] and then you had about 500,000 people

[00:36:54] who didn't own any property

[00:36:56] So you have about 500,000 white Christian property owning men

[00:36:59] who could participate in government

[00:37:01] Out of those 500,000

[00:37:02] you got George Washington, John Adams, James Madison

[00:37:05] Thomas Jefferson, Alexander Hamilton, Benjamin Franklin

[00:37:08] among others

[00:37:10] Now we have 330 million people

[00:37:12] And what do we have?

[00:37:13] Well we don't see a lot of George Washington

[00:37:16] and Thomas Jefferson do we?

[00:37:18] So we're all the great people

[00:37:19] Well my theory is they all went into private equity

[00:37:23] Which conveniently is where you are

[00:37:24] and you went from politics into private equity

[00:37:27] Right

[00:37:29] But I mean they'd be very serious

[00:37:31] You know I wish it would be good if we could get people

[00:37:34] to come into the political world

[00:37:35] who haven't been professional politicians

[00:37:37] or people who seem to be more attentive

[00:37:41] to some of the real issues we have to deal with

[00:37:44] But now there's so much money involved

[00:37:46] to elect a president

[00:37:48] that everybody has to cater to special interests

[00:37:50] Alexander Hamilton didn't have to cater to any special interests

[00:37:53] George Washington didn't have no special interests

[00:37:56] In the last campaign

[00:37:58] Biden versus Trump

[00:38:00] roughly on the entire election

[00:38:02] for everybody counting all the dollars

[00:38:04] almost six billion dollars was spent

[00:38:07] Right

[00:38:08] That's why you don't see

[00:38:09] you have to be skilled at other things

[00:38:11] than statesmanship and governing in order to win

[00:38:14] You have to know how to raise money

[00:38:15] You have to have

[00:38:16] I have to do it

[00:38:17] It's different

[00:38:18] I mean over the weekend

[00:38:18] in an event

[00:38:20] I interviewed a candidate

[00:38:22] who was running for president

[00:38:23] who was very different

[00:38:24] I don't support candidates

[00:38:25] where I stay out of politics

[00:38:27] but I interviewed him

[00:38:28] His name is Vivek

[00:38:29] I'm Sami

[00:38:30] So he's a case where

[00:38:31] he's not

[00:38:33] he's not coming from a political background

[00:38:35] and some people are supportive of that

[00:38:37] some people are critical of that

[00:38:38] But what did you think overall?

[00:38:40] He's a very smart guy

[00:38:43] Well I would say

[00:38:45] clearly getting people

[00:38:47] not from a political background

[00:38:48] may have buses

[00:38:49] you know there are a lot of talented people

[00:38:50] who aren't in political backgrounds

[00:38:53] He is young

[00:38:54] he's only 38

[00:38:55] and has not served in government at all

[00:38:57] but he's obviously very articulate

[00:39:00] and as I pointed out to him

[00:39:01] doesn't lack in self-confidence or self-assurance

[00:39:04] Yeah so it'll be interesting

[00:39:06] in a couple elections

[00:39:06] in the next few elections

[00:39:07] and I really look forward

[00:39:09] to this next book

[00:39:10] when is it coming out?

[00:39:11] Sometime

[00:39:12] I hope in the spring

[00:39:13] Excellent

[00:39:14] Well I look forward to talking to you about it then

[00:39:16] and thank you so much David

[00:39:18] for joining us on the podcast

[00:39:19] Thank you

[00:39:20] Thanks a lot

[00:39:20] Good luck