Welcome to this week’s Market Wrap Podcast, I’m Mike Gleason.
Coming up we’ll hear from Economist Daniel Lacalle, professor of Global Economy at IE Business School in Madrid, Spain and author of the Escape from the Central Bank Trap, among other books.
Daniel offers his well-studied insights on the state of global inflation, how that inflation has become the accepted policy by central planners around the world, and gives us one of the best explanations about how governments benefit from this and use it to stay in power and control the masses.
Daniel also weighs in the recent cries from Kamala Harris and her allies about how all of the price inflation in recent years is simply a result of price gouging and corporate greed. You'll definitely want to hear what Daniel and others in Europe are saying about that theory. So, be sure to stick around for another great Money Metals exclusive interview, coming up after this week’s market update.
As central bankers from around the world gather in Jackson Hole to foist their agendas into the media spotlight, investors are counting down the days until the Federal Reserve starts cutting rates.
Minutes from the Fed’s last meeting showed several officials were sympathetic toward easing immediately. Although Fed Chairman Jerome Powell opted to hold off on cuts, he left little doubt that he intends to act in September
A massive downward revision in the jobs numbers on Wednesday gave Powell and company additional leeway to opt for a potential 50 basis point rate cut instead of the more typical 25.
The Bureau of Labor Statistics announced that the economy created 818,000 fewer jobs than it had previously estimated. That’s no minor downward revision. In fact, it was the biggest one since 2009. And it didn’t go unnoticed by former President Donald Trump.
While on the campaign trail, Trump accused the Democrat administration of putting out fake statistics on the economy.
Donald Trump: The Harris-Biden Administration has been caught fraudulently manipulating jobs statistics to hide the true extent of economic ruin that they’ve inflicted on America. The new data from the Bureau of Labor Statistics shows that the administration padded the numbers with an extra – listen to this one – 818,000 jobs that don’t exist. So, they said they existed, and they never did exist.
She gets four more years you’re going to see more jobs vanish… millions and millions will vanish, and inflation completely will destroy our country. We’ll have inflation worse than they’ve given us. You know, when I gave it to them I had virtually no inflation. And now their number’s up to 22, 23%. But their real number is probably 40 to 50%.
Trump isn’t wrong to question the employment and inflation figures being reported by the government. Over 800,000 jobs that didn’t actually exist were arbitrarily modeled into existence by bureaucrats. As for the inflation data, it gets put through a series of adjustments and substitutions that have the effect of understating real world price level increases.
The cumulative inflation that has occurred under the Biden administration is barely over 20% when going by the Consumer Price Index. But as Trump suggested, alternative measures of inflation – including the government’s own pre-1990, unmanipulated CPI formula – show consumer prices rising at about double the official rate.
It’s true that inflation by all measures has come down in recent months from previous highs. But despite claims in some circles that the inflation problem has been conquered, it continues to run above the Fed’s supposed target of 2% -- even by the official measures.
The U.S. fiat dollar continues to lose purchasing power against hard money, as evidenced by gold’s ongoing ascent. After surging to a fresh record early in this week’s trading, gold prices turned lower by Thursday. As of this Friday recording, the monetary metal is ticking back up again and now checks in at $2,520 per ounce – essentially unchanged on the week.
Turning to the white metals, silver, thanks to a nice gain here today, now shows a weekly gain of 2.4% to bring spot prices to $29.89 an ounce. Platinum is virtually unchanged at $968. And finally, palladium is off a very slight 0.3% for the week now to trade at $982 an ounce.
Precious metals bulls see higher prices ahead as the economy deteriorates and the Fed pivots toward monetary easing. We could ultimately see silver, platinum, and palladium all follow gold’s lead to new records. They each have a lot of catching up to do.
In the meantime, gold is commanding a lot of newfound attention from the investing public. Unfortunately, high spot prices are also attracting sketchy opportunists and scammers into the market for physical gold products.
A Beverly Hills-based gold firm is facing a class action lawsuit and potential federal charges after it sold customers on promises of securing their retirement assets – then took off with those very assets. Customers were pitched aggressively on high premium coins – and urged to store them in a depository, only later to discover that the metals were never actually stored on their behalf.
The company had allegedly paid people to post fake reviews on the internet in order to build up an apparently sterling reputation in a short amount of time. But a reputation that isn’t organically built and maintained over a period of years isn’t worth much.
Other types of scams now flourishing include the pushing of counterfeits, overpriced numismatics, and too-good-to-be-true offers that turn out to be bait-and-switch schemes or Ponzi schemes. On the other side of the industry, so-called “cash for gold” middlemen are setting up shop to try to lure people to exchange real value for fiat – often with lowball offers that inflate their profit margins.
The lesson for precious metals investors is that in the precious metals industry there is no substitute for trustworthiness. Regardless of whether you are looking to buy or sell precious metals, you can always expect an honest, fair, no-pressure experience when dealing with Money Metals Exchange.
Well now, without further delay, let’s get right to this week’s exclusive interview.
Mike Maharrey: Greetings. I'm Mike Maharrey, a reporter and analyst here at Money Metals, and I'm here today with Economist Daniel Lacalle. Daniel is the professor of Global Economy at IE Business School in Madrid, Spain. He's also the author of numerous books, including Escape From the Central Bank Trap. How are you doing today, Daniel?
Daniel Lacalle: Thank you very much for having me. I'm doing very well. I hope that all of the people that are watching us as well.
Mike Maharrey: Well, I really appreciate you taking time out of your day to chat with me a bit. And I kind of want to start off and talk a little bit about inflation because that's a big topic of conversation here in the United States, probably in Europe as well, and a lot of people are still frustrated with inflation, but the narrative seems to be that inflation is now pretty much under control, I'm using air quotes there, and that the central banks can kind of go back to a little bit easier monetary policy. What is kind of your thought on the inflation front? Is it really under control or are they maybe overstating the case a little bit?
Daniel Lacalle: I think that everybody that is watching and hearing us knows that inflation is not under control. Inflation is accumulative. So the fact that the rate of annualized inflation is coming down is not doing anything to people that have to bring food to the table and that have to make ends meet. Furthermore, inflation is not under control when services inflation, when shelter are at 4, 5% on an annualized level. So if we look at all of the items, particularly what we in economy call non-replaceable goods and services, in reality, inflation remains exceedingly elevated and concerningly high because you have to remember that economists have all sorts of ways to try to find something positive in a piece of data. And we look at headline inflation, core inflation, super core inflation. Now the fact that the parts of the inflation basket that should be not just not as volatile as energy or food, but that should actually have not moved for years are rising at 2, 3%, 4%, 5% levels on an annualized basis.
That is extremely worrying. So what I would say is that the narrative is shifting to inflation is under control because markets want rate cuts at any cost. So even if the same piece of data that was published with services inflation at almost twice the level that it should be, with shelter inflation way too high as well, all of those elements, the same data that worried markets in the past because it was going to mean higher rates is actually now a very good piece of data that is suggesting rate cuts. So no inflation is not under control. And to cut a long story short, we must remember that if inflation had been caused by COVID, the so-called supply chain disruptions, etc. Today we should not have three and change percent inflation, two point something percent inflation. We should have no inflation because inflation is accumulative. So I think that the narrative is shifting to make people accept higher levels of inflation as a positive, and that is obviously creating quite a significant level of discontent in the Euro area, in the United States. I think it's very obvious now in consumer confidence, etc.
Mike Maharrey: I've pointed out to folks that the policy is to have inflation. Not having inflation is not the policy. They say 2%, which I always wonder where they came up with 2%. But this is an intentional policy, right?
Daniel Lacalle: Oh yeah. Inflation is a policy. Of course inflation is a policy. There's one thing that has always amused me now when I hear that central banks need to combat deflation. And I've always said to my students, "Have you ever left the supermarket saying, I cannot tolerate this, meat is cheaper? Have you ever left a service station saying this is intolerable, gas prices are down? Never." The concept that this inflation is negative is completely ludicrous.
And the idea that this inflation is negative comes only from the fact that governments want to dilute their fiscal imbalances at the expense of citizens and their real wages, their savings, and their purchasing power. That is why. So 2% inflation looks like something that is an acceptable quid pro quo that was set up because what economists at the time were thinking is that the nominal level of growth of the economy would be around 5, 5.5. So therefore 2% inflation would be a good sort of quid pro quo in which we collectively would accept the loss of purchasing power of our wages and our savings because the economy would be stronger and because unemployment would be lower. So it's basically just a made-up figure, but it is a made-up figure of a policy that is looking to erode the purchasing power of the currency in order to disguise the fiscal imbalances of governments. Yes.
Mike Maharrey: Can you explain in simple terms that the average person can grasp how governments and the political class benefit from inflationary policies? We know we don't because we have to go to the grocery store, but I don't think a lot of people understand how governments benefit from this and why they do it.
Daniel Lacalle: Okay. How governments benefit from inflation, numerous ways. Number one, the government spends more than it collects in taxes and is financing that with the printing of money. Therefore, it is basically imposing a tax on you and I that we don't see. So if they were to say to us, "We're going to increase taxes on everybody." People would be very angry, but they can go and say, "No, we're only going to increase taxes on the wealthy." While inflation is a hidden tax that is eroding the fiscal imbalances of the government in real terms and is paid by everybody and is actually paid most by the poorest. So inflation is a hidden tax. That's number one.
Number two is that it creates the incentive to present yourself, government and politicians, as the solution to the problems you create. So I implement inflationist policies, prices go up. What do I come up and say? I'm going to give you a subsidy. I'm going to give you a subsidy so that you can make ends meet, so that you can bring home food to the table, and how am I going to do it? By printing more currency. So it's basically.... Ronald Reagan had this fantastic sentence that said that inflation is the price of the things that the government told you were for free. It is literally that.
There's another important way why governments and politicians benefit from inflation, which is a fiscal benefit. You go to the grocery store, you're paying indirect taxes, you go to different parts of the, particularly in Europe where there's enormous indirect taxes, but in the United States you also have significant indirect taxes. And without knowing, you are actually paying a higher tax on top of the fact that you're paying the hidden tax of inflation, you're paying a higher tax because the price of the good or service that you're purchasing is higher, and the tax on top of it is a percentage of the final price.
So ultimately there is a fiscal benefit, there is an imbalance in real terms benefit, and there is a political benefit. That is why inflation is a policy, and that's why in many cases I hear debates among economists of countries in which inflation has gone completely wild, and thinking that it's because of incompetence of governments. No, it's not incompetence. It's a tremendous way, and this is another way, another benefit for governments. If you think about it, if I want to steal part of the items that you have in your house, your background right now, or your house itself, it's not easy. It's very difficult. It's very difficult even if you have a totalitarian government. However, via inflation, you can actually confiscate the wealth of the private sector economy little by little and blame it on somebody else. You blame it on supermarkets, you blame it on OPEC, you blame it on corporations, and actually it's a benefit for the government. It's literally the government absorbing the wealth created by the private sector and paying for it in a currency that loses purchasing power.
Mike Maharrey: That's a great explanation. So you mentioned the government solving the problems that it created to begin with. You actually wrote an article about this not too long ago. What do you think of Kamala Harris's plan to stop price gouging as a way to combat inflation?
Daniel Lacalle: To start with, the concept of price gouging is ludicrous.
Mike Maharrey: What is that? Right? How do you define it?
Daniel Lacalle: Exactly. What is the concept of price gouging? That companies are actually delivering the goods and services that people demand at the best possible quality? Is that price gouging? In America price gouging where you have a store in front of the other that has sales and that has the best possible prices. There's tremendous competition. Corporations are competing against each other and trying to reduce the market share of the competitor, to talk about price gouging in the United States is such an aberration that, and it's also preying on the ignorance of voters and citizens, because I always say to my students, even if the economy was controlled by one monopoly, one company, that had the quality of being stupid and evil, because it has to be both, it would not increase CPI every year. Why? Because you can be stupid and evil one year, but you cannot be stupid and evil every year and increase prices every year of goods and services, because you would die by working capital.
That monopoly would have suddenly in its storage facilities, goods that were unsold eating away their balance sheets. And a big why, because citizens, even if there was only one evil and stupid company, would not be able to purchase all those goods and services provided by the company. So even a stupid and evil monopoly cannot increase aggregate prices every year, which is what the inflation measure reads. So the only thing that can make prices increase, consolidate that increase, and continue increasing even at a lower pace, is the destruction of the purchasing power of the currency, and that can only come from governments. A lot of people say, "Ah, it's evil central banks that are printing money." Central banks don't print money that the government has not deficit spent before. Central banks have no possibility of printing money unless the government has increased its imbalances significantly prior or at the same time.
Mike Maharrey: Right.
Daniel Lacalle: So that is basically the problem. First, price gouging is a stupidity. It's a stupidity in any country, but particularly in America where the grocery sector has margins of 1.6%, 1.6%. I mean, seriously, it's almost insulting to say that stores are rising prices to increase their margins, but it doesn't even matter. I think that the problem of the Kamala Harris plan is that it's doubling down on something that has been incredibly negative for the budget. We have seen that in a period of growth, let's remember that the Biden administration came in January, 2021. A lot of people, for some strange reason, think that the Biden administration had to suffer the effects of COVID, no effects of COVID there. It was already a growth economy. It was already bouncing very, very significantly, etc. So January, 2021 to August, 2024, real negative wages, a massive increase in deficit spending with a growing economy, with a growing economy, and with record fiscal receipts.
And at the same time, a massive deficit that is not just a very large deficit this year, it's sticky. The CBO projects that the deficit, if policies continue to be the same, will be from 1.9 trillion per annum to 2.6 trillion per annum. So what is Kamala Harris doing? She's presenting a plan that is increasing expenditures by 1.7 to 2 trillion according to the Congressional Commission Committee of Fiscal Responsible budget, and 1.7 to 2 trillion to 2.5 trillion more spending that she intends to offset by higher taxes on corporations and higher earners.
However, that is the most classic, there's a classic of any election, a classic lie of any elections. Anyone that makes the calculation knows that it's impossible to achieve $1.7 trillion of additional annual tax revenues through revenue measures. Everybody, anyone, do the calculations, do whatever you want. It's literally, literally impossible. So the problem that the United States faces is that what is already an unsustainable level of deficit spending that is expected to be 6.9% of GDP in 2034, according to the CBO, it's actually going to balloon higher because remember that the CBO and the Committee for Fiscal Responsibility don't estimate in the next years a recession, a crisis, any type of slowdown.
Their estimates come from very, let's say, optimistic assumptions, 2% growth in the economy, 4.5% unemployment, real wage growth, everything fine. So that is exceedingly dangerous because what people need to understand is that what Kamala Harris is doing is threatening the US dollar as the world reserve currency. This is what they need to understand. You look at the money in your pocket, the US dollar, which is the most used and most valued currency in the world, and she's basically threatening the value of the dollar for the future.
Mike Maharrey: Well, that dovetails into my next question because I was going to ask about why so many central banks are buying gold, and I think that you just hinted at that answer.
Daniel Lacalle: Yeah, exactly. Now, think about this. For decades actually, central banks all over the world have done something that no prudent family would've done, which is to reduce their exposure to gold and to increase their exposure to the US dollar or the Euro. But what many people think when they read that central banks have X trillion dollars of reserves, they think that they have currency, that they have coins and notes.
Mike Maharrey: Right.
Daniel Lacalle: No. They buy is treasury bills. So those treasury bills in the balance sheet of the central banks of the world were supposed to be the elements in the asset base that generated stability, strength, and confidence in their own currency. However, when the fiscal and monetary imbalances of the Euro and the US dollar have exploded the way that they have Chinese Central Bank, Indian Central Bank, so many central banks all over the world are saying, "Look, this asset, treasury bills, is not something that has given me strength, confidence, and value for my reserve base." It's actually something that is losing value because 2019 to 2024, the real value of aggregate US bonds has risen something like 4%. But in the case of treasuries, in the case of European sovereign debt, it's negative.
So for those central banks, the only way to maintain a reserve base that generates enough confidence for their own currency, local currency, is to increase their exposure to gold that is actually an asset that has proven to be something that gives strength and value and a reserve of value in periods of uncertainty. So the worse that the fiscal situation of the United States becomes because of these inflationist policies, the worse it is for the US dollar to keep its reserve status.
Mike Maharrey: And you've noted that gold has actually outperformed bonds over the last 50 years.
Daniel Lacalle: Oh, I mean, it's not even debatable. If you look at the traditional portfolio that investors were told gave, let's say the best returns, 40% bonds, 60% stocks. The bond part has been very, very negative, particularly in the sovereign side since 2019 in particular. So gold is outperforming bonds, but it's not just outperforming bonds, which one could even understand as all this monetary policy activity is becoming more and more acute, it's that it's outperforming the MSCI World, the Stocks 600 in Europe, the only thing that it is not outperforming is the NASDAQ because obviously the NASDAQ captures monetary destruction faster than gold, and by little by little, the S&P 500. But if you think about it, what all of that is telling us is that the world is seeing that we are in a process of monetary debasement.
Mike Maharrey: Do you think that de-dollarization is something that could pick up speed over the years? I think a lot of people feel like, "Well, the dollar is the reserve currency, and sure, there's these problems, but everything's fine." What's your view on that? Is this a potential problem for the United States down the road?
Daniel Lacalle: It is a potential problem. It's not an immediate problem. What worries me about the people that say that everything is fine is that it's the following argument. It's like going down a highway at 200 miles an hour and saying, "We haven't killed ourselves yet, accelerate." The fact that nothing has happened yet, first is false because we have persistent inflation, and that was supposed to be out of the equation. I remember even reading papers from academics saying that inflation had disappeared from the estimates, very typical Keynesian analysis. So first, we have persistent inflation and constant debasement of the currency. But the other element is that you never know when a currency is going to lose its reserve status. You know if it is on the path of losing it.
If we had, obviously, if technology existed and we have had this type of technology some decades ago, the British would've never thought that the British pound would lose its position as the world's reserve currency. And it lost it. And it lost it. And the way that you lose it is by precisely ignoring the warning signs, which is what I get from my fellow Keynesian academics is that they say, "Ah, but hey, the 10 bond is below 4%." Well, it's below 4%, but it is showing you that it is higher than the estimated inflation that you have for the next 10 years. So I think that a lot of the warning signs are being, let's say, ignored.
The reason why de-dollarization is difficult now is only because the competing currencies that could actually dethrone the US dollar are actually implementing the same mistaken monetary policies that the United States implements. So basically, if I am going to choose between the Euro and the US dollar, and the ECB is doing exactly the same mistakes of the Federal Reserve, but without its independent institutions, it's freedom of economy in the economy, it's open markets, et cetera, then I'm not going to change the reserve currency. But that can happen, and that can happen quite rapidly once legal investor security and independent institutions are put under question in the United States. What keeps the reserve value of the US dollar right now ultimately is that whether I'm in Spain or in Singapore or in Sri Lanka, if I want to go to an arbitrage and reach agreements with business partners, the United States gives both of us confidence. That can change very rapidly.
Mike Maharrey: What's the old saying? Things happen slowly and then all at once.
Daniel Lacalle: Yeah, exactly. Exactly. Risks accumulate slowly. So that's why people... Think about this. It's so incredible that a candidate in an election in which one of the key elements is inflation and the reduction of real wages that many Americans have suffered, it's so incredible that a candidate can go out and say, "Oh, and by the way, I'm going to print $2 trillion more." And people are saying, "Yeah, that sounds good. That sounds pretty good to me." I'm amazed.
Mike Maharrey: And I don't think people realize that Trump was a big spender too. I mean, he was running nearly a trillion dollar deficit even before the pandemic. So he's not necessarily a solution to the problem. I want to get you out-
Daniel Lacalle: No, that is a very good point, is that it's unbelievable to me that in these elections with record levels of national debt and with the deficit in the first 10 months of the fiscal year at 1.5 trillion, which is insane in a growth economy, it's amazing that none of the candidates are talking about balancing the budget.
Mike Maharrey: Yeah, nobody talks about that anymore except for a few, the people that are considered cranks in Congress, like maybe Thomas Massey or Rand Paul. That's about it. One final question. I'm curious as to something that you see that's going on in the economy or in the financial system that you think is a significant player, a significant factor that other people are likely missing. What's something that you see that other people are missing?
Daniel Lacalle: Well, obviously I'm sure that a lot of other people are actually looking at it, but if you look at disaggregated figures, what we have is a very concerning discrepancy between the headline figures in the economy in the developed, particularly in the developed economies and in the United States in particular, compared with the disaggregated figures that citizens live day by day. GDP, CPI are very aggregated figures and very broad. There's like, and you need to look into the details. So I think that there are quite a few people that are showing every, for example, I talked about the term of a private sector recession. What I was showing is that small businesses and families, which are the fabric of the United States economy, are actually in a recession. The fact that super giant multinational corporations in the tech sector and the government are doing well doesn't mean that the economy in itself is doing well.
So I think that that is, to me, the biggest concern is how mainstream economists and governments are ignoring the warning signs that come from the streets. That they stick to the strongest economy in years, they stick to the headline figures, and they're not paying attention to the fact that it's more difficult to make ends meet. It's more difficult to send your kids to college. It's more difficult to pay the healthcare premiums. It's more difficult to pay for gas to go to and from work. All of those things, not paying attention to that then generates a tremendous level of discontent, as we have seen in the European elections.
Mike Maharrey: Yeah, absolutely. I don't know if you saw it, there was a guy that found an old basket of goods that he bought from Walmart, I think it was in 2021, and then he just bought that same list again recently, and it was like, I can't remember the exact percentage, but way more than any CPI measure would say was how much more that basket of goods actually cost in real life.
Daniel Lacalle: Oh, absolutely. I remember I was giving actually a lecture in Arizona a year ago, a couple of years ago, and somebody came to me and said, "Look, I basically buy the same things in the grocery store every month, more or less. And what I have seen is that it is not true that inflation has been in the past four years, 20%. It is around 40, 45%." And I say, "Absolutely." Look, I'm forced to use official figures, but what anybody that buys stuff understands is that it is not true that inflation is slightly below 3%. It's not 3%. How can it be 3% when everything, I have a friend who says that everything that he earns is lower, and everything that he pays is higher. So what I'm trying to say is that everybody understands that inflation, even in the years in which they said that there was no inflation, was very elevated.
In the years in which they said there was no inflation, the cost of non-replaceable goods and services, healthcare, education, shelter, all those things rose like 20, 25% already. So that is something that we need to pay more attention because this is something, and I'm not going to dispute that CPI is a good measure to analyze inflation. It's irrelevant to me. What I'm trying to say is that ignoring what matters to people, just because the aggregate of a basket created by a governmental body says that inflation is relatively stable, that is very, very dangerous. Very dangerous. And we already see, we saw that in France as a clear example.
Mike Maharrey: Right, right. Well, I really appreciate, again, you taking time. Can you let folks know where they can follow your work?
Daniel Lacalle: Okay, thank you very much. Yes, you can follow me on Twitter. My Twitter handle is @Dlacalle_IA. You can also follow me at my website. It's Dlacalle.com/EN in English, and it's relatively easy to find me. You put Daniel Lacalle on Google and you find me. I always say that it's easier to find me than to avoid me. So I think that folks will find it relatively simple to find my work.
Mike Maharrey: Well, I definitely encourage folks to do that because you write in a way that is very accessible to the layperson. You don't have to have a PhD in economics to understand the things that you're saying, and that's definitely a gift. You don't lose people in jargon. So people should definitely follow what you're doing and your analysis is outstanding. So appreciate that.
Daniel Lacalle: Thank you very much, Mike.
Mike Maharrey: Well, thank you again for joining me, and hopefully we'll talk to you again soon.
Daniel Lacalle: Yeah, it has been a pleasure. Thank you very much. Looking forward to it.
Well good stuff there and it was great to get Daniel Lacalle's perspective on the state of global politics and economics, and I hope you enjoyed that interview.
And that will do it for this week. Be sure to check back next Friday for our next Weekly Market Wrap Podcast. And remember to tune in as well to the Money Metals Midweek Memo, hosted by Mike Maharrey and airing each Wednesday. To listen to any of our audio programs just go to MoneyMetals.com/podcasts or find that on whatever podcast platform you prefer.
Until next time, this has been Mike Gleason with Money Metals Exchange, thanks for listening and have a wonderful weekend everybody.
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