This is the transcript for my Demographic Doom Podcast episode #56, released on 30 March 2021. The "home page" for this episode—with annotations, links, corrections and a place for comments—is the YouTube version (39 minutes). The audio version is housed at Podbean and is available on most major podcast platforms, including iTunes and Google Podcasts. The main website for this project is DemographicDoom.com. Twitter: @DemographicDoom. Glenn's home page: Glenn-Campbell.com
This is the original script, written before recording, corrected after release to reflect the final version.
I'm Glenn Campbell. I call myself a demographic philosopher. I'm looking at life and trying to predict the future through the lens of demography, or the study of human populations. I'm trying to view humanity from a distance, like aliens would see us from space.
In this episode, I'm looking at the giant elephant in the room that threatens us all: That's a massive monetary collapse caused by rampant government debt and money printing. I have a new theory about why there is no consumer inflation in spite of all this created money, and it suggests a mechanism for the final collapse.
My inspiration for this episode is the recent Biden Administration Coronavirus Package, which is supposed to provide aid to the most vulnerable Americans after the economic devastation of the Covid-19 pandemic. I'm not going to analyze the contents of the package except to note that it involves sending direct payments of $1400 to most US taxpayers and the fact that it costs $1.9 trillion. I'm mainly concerned about that cost. How it's going to be paid for, and the bottom line is: It won't be paid for—not now or ever.
This $1.9 Trillion is borrowed money that can never, ever be repaid. It is physically impossible, because the government hasn't balanced its budget in 20 years, let alone paying down its debt.
There was a time, around the turn of this century, when the government did balance its budget, albeit briefly, during the Clinton Administration, but it can't do it again due to our deteriorating demographics. Twenty years ago, the Baby Boomers were at the peak of their earning power and their taxpaying power, and today they're just a drain on us all, paying less tax and drawing on more government services, so the idea of a balanced budget just isn't possible anymore. This condition is destined to persist indefinitely: that is, there are going to be too many old people and not enough young people to replace them, and as long as that's true, the government can't balance its budget and the debt just grows and grows.
Official government debt has grown from about $22 trillion before the pandemic [correction: ~$24T] —already an unsupportable amount—to something like $27 trillion now and certainly well over $30 trillion by the end of 2021. In addition, there’s unofficial debt, called “unfunded obligations”, which is debt that we know is coming down the line at us but that isn't on the books right now. By some accounts, the US government is $50-100 trillion in the hole, with that debt growing rapidly, and its income is only about $3 trillion—that's the [annual] amount it collects in taxes. In the end, all this debt will be funded by money printing—that is, the government or Federal reserve just inventing money out of thin air.
Every government that issues its own currency is tempted to print more money to pay its bills. This sin dates back to the Roman era, when the currency was silver coins called the Denarius. Back then, the government cheated the system by progressively reducing the silver content in the Denarius, replacing it with base metal—in other words, a physical debasement of the currency. 20th Century governments did the same by simply printing more paper currency to pay their bills, and in modern governments, money is created electronically without the inconvenience of actual paper.
Historically, this has always resulted in inflation, even hyperinflation, as happened in Venezuela, in Zimbabwe and Weimar Germany and countless other banana republics. In our banana republic, inflation hasn't really happened yet, at least in consumer staples, and it has been a bit of a mystery why not, since the US government is printing money on similar scales.
That's where my theory comes in. I call it the "Zero Inflation Theory" because it proposes that large amounts of money can be printed without inflation. Now I'm not talking about Modern Monetary Theory here, which seems to propose endless amounts of money can be printed with no negative consequences. I am suggesting disastrous consequences for money printing, but it doesn't have to involve consumer inflation.
The alternative would be a massive asset crash. Imagine stocks, bonds, real estate and other assets all collapsing at once or in rapid succession—I mean like falling 60% or more in dollar terms. This would be devastating for the people who own the assets, but it would not result in the debasement of the currency. On the contrary, it could result in the strengthening of the currency as investors desperate to get out of the market scramble for cash instead.
Under this theory, all the new money the government has printed has flowed into assets markets—like stocks, bonds and real estate—creating these huge asset bubbles instead of consumer inflation. The end game is that all those asset bubbles is that they simply pop. Markets will collapse just like they did at the beginning of the Great Depression.
Now this isn't a new prediction. I've been making the same prediction on this podcast since the beginning a year and a half ago, and many experienced investors have been doing the same. Due to policies of the Federal Reserve—including both money printing and artificially low interest rates—stocks and other assets are vastly overvalued right now, at least by any traditional metric. Whenever assets are overpriced, there's going to be a reckoning—a crash of some kind—where prices return to reasonable and supportable levels.
My only new insight came to me about a week ago. I'd like to say I was in my bathtub when it happened and I jumped up and cried, "Eureka!" but I don't know where I was, and I haven’t taken a bath in a bathtub for ages now.
My insight was, "Eureka! That's where the money is going to die: in the stock market!" So what will happen is that everybody and his brother will put all of their money into the stock market, as they are doing now, and all of a sudden prices crash and everybody's money goes away. It's like—Poof!—by magic, all that money that the Federal Reserve printed suddenly goes away. It vanishes.
So in other words, to avoid inflation, you have to have a balance of the creation and destruction of money. If something creates money, then some other process has to destroy money, or you get inflation, because you've got more money chasing fewer goods.
Now we know that the government and Federal Reserve create new money, but they generally don't destroy it. The Federal Reserve is capable of destroying money, by selling bonds it already owns, but the Fed isn't the only entity capable of [it]. And you and I can destroy money simply by burning it. Let's say you take all the paper money in your wallet, crumple it up, set fire to it, and—Violá!—you've done your good deed for the day by reducing the money supply.
Of course, people won't burn their own money voluntarily, so the markets have to do it for them. Another way you can destroy money is to put it into stock markets just before the markets crash. I had friends who did this just before the Dot-Com bubble and the Global Financial Crisis. I remember trying to warn various friends when they talked about the hot stock market they were into, and I don't think they heard me. The Siren's call of a rising stock is too powerful for the average investor to resist.
Traditionally, what's bad for one asset is good for another, but I think it's possible for all assetsto crash all at once. Imagine stocks, bonds, real estate, gold and even bitcoin all collapsing simultaneously or in rapid succession. Given all the creation of money, a corresponding destruction of money needs to happen to restore stability to the monetary system, and this is how it could occur. If the Federal Reserve doesn’t have the discipline to to it, then Nature will step in and an asset crash to take care of things neatly.
In the sort of broad-based crash I’m proposing, nearly all investors lose, but the buying power of the US dollar holds steady, because the fall in assets would effect remove from circulation all the new money the government has created.
How would a crash happen? All you really need for it is a stock investors lose faith, which can happen in an instant. There may be precipitating events—some sort of world crisis—but that main thing that fuels financial collapses is shift in thinking by investors—from greed to fear, so to speak—and this can happen rapidly and without warning. I could even happen in a period that looks optimistic on the future, like the one we're in now.
Right now, in late March 2021, it appears that the pandemic is drawing to a close, with vaccines being widely distributed. I got mine about a month ago as a former cancer patient, and soon everyone will be eligible. This ought to be good news, right? The assumption now is that life will go back to normal—but only in the sense of the animals returning to the forest after the forest fire. The Covid Relief Bill is supposed to help get the country back on its feet by providing various forms of direct and indirect aid to Americans.
For example, most Americans and their dependents are getting $1400 direct payments—added to their bank account or sent to them in a check. This is what economists call "helicopter money", where money is dropped from figurative helicopters to try to stimulate the economy. The most important issue to me is the fact that the $1.9 trillion is completely unfunded. None of it is coming from collected taxes. It is 100% borrowed, and that money theoretically has to be paid back by future generations.
So how much is $1.9 trillion? First of all, let's be honest call is $2 trillion, which is close enough for government work. No government program even comes in under budget, so $2 trillion is the minimum the government can be expected to spend, above and beyond what it normally spends in a pre-pandemic year.
For perspective, before the pandemic, the US Federal government spent roughly $4 trillion every year while collecting $3 trillion in taxes. That means that the government has been borrowing $1 trillion every year, even in supposedly good times. In 2021, as in 2020, the government is on track to spend roughly twice as much money it collects in taxes—that is, spending about $6 trillion on a tax income that's barely $3 trillion, and the entire shortfall is borrowed and ultimately printed.
The mechanism for this is that the government issues bonds—or pieces of paper promising to pay in the future—and investors buy those bonds, giving the government cash in return. Sometimes, the Federal Reserve will buy the bonds itself and issue new currency in exchange, and this is formal money printing, but to me this final step is inconsequential. In my view, the money is created the moment the bonds are issued [see caveats in video description], because investors trade these bonds among themselves as though they were cash—like $10,000 bills. You hardly get any interest on them, so that's all that bonds are nowadays: $10,000 bills where you can store your cash in a supposedly "safe" form.
Since the government had been spending more money than it makes for two decades now, a mystery among experienced investors and economists is why there hasn't been any consumer inflation, and that’s the question I’ve been pondering for months now.
Now in my own little world, my own gauge for inflation is the Dollar Tree stores that I visit every few days while traveling. Everything in the store is one dollar—absolutely everything—and these stores have been selling roughly the same products since the 1980s. If there were significant consumer inflation, they'd have to change their pricing model, which they haven't had to do so far. In fact, Dollar Tree stores seem to be prospering. There's more of them now in America than McDonald's restaurants, and they are especially well patronized in bad economic times like these.
My latest theory says that Dollar Tree will NOT have to change its pricing plan anytime soon. Eventually it might have to, but not on the near term. Although the government is printing money at breakneck speed, an asset crash will soon take care of the excess, and dollars themselves—at least the paper kind—will hold their value.
Now I remember inflation from my own youth, when I saw the price of a standard candy bar, like a Snickers, go from 5 cents to 7 cents to 10 cents to 25 cents, and eventually stabilize at about $1 at the checkout, or a lot less if you buy in bulk. That's where prices have stayed for consumer goods since the 1980s, as long as you shop at Walmart and not some high-priced neighborhood supermarket.
On that other hand, there has been substantial inflation in things like rent, health care, higher education and assets like stocks and bonds. The cost of buying a house or renting an apartment has gone through the roof, at least in the most desirable cities, so it isn't accurate to say there's been no inflation, just no inflation in mass-produced consumer goods.
And this is a key distinction. Consumer goods have held steady, while anything that you might buy and hold for investment purposes has inflated. Assets like stocks, bonds, real estate, fine art, gold and bitcoin have all exploded, and rents are high mainly because landlords have had to pay huge prices for their properties. All of these investable assets have gone up, commensurate with what you'd expect with all the money creation. Asset prices are in Zimbabwe territory, even if Dollar Tree prices haven't changed.
Symbolic of asset inflation is stock prices. As I speak, US stock indexes like the S&P, remain near all-time highs, in spite of the pandemic that has severely depressed the underlying businesses that the prices are supposed to reflect. Of course, that may not be true by the time you listen to this podcast, sometime in the future, but it's true as I speak.
So the economic disaster of the pandemic has led to the counterintuitive rise in stock prices, which I never would have predicted when the pandemic began. When stocks first dipped in March 2020, I was thinking, "This is it—this is the crash I was expecting," but the rout didn't last. Stocks didn't just rebound from their lows but surged to all-time highs. It was utterly insane.
So why has there been inflation in assets but little in consumer goods? I think I finally have a mechanistic theory to explain it, and to explain my theory to you, I want to go back to those $1400 checks that the US government is sending out to people.
The theory of helicopter money is that once people receive it, they're going to go out and spend it in the consumer economy, thereby stimulating it and putting people back to work. As a side effect of all this spending is supposed to be moderate inflation, since more moneywould be chasing fewer goods.
But I believe that's not how real people are spending their $1400 checks. Most people are doing one of two things with their $1400: either they're paying down existing debt, or they're investing money in assets like stocks and bitcoin, neither of which simulates the economy or generates inflation.
Now for the sake of this argument, either you're rich or you're poor, and I define rich and poor in this context by how you use your stimulus check. Poor people have stayed alive during the pandemic by going deeply into debt. They've charged food to their credit cards, or they've paid for food by delaying on mortgage or rent. When their $1400 comes through, they're not going to buy more food. They're going to use their money to pay down back rent or pay down their credit cards. In fact, that's what I'm going to do, because I charged up my own credit cards during my cancer treatment last year. The $1400 is not going to change my buying habits, which remain pretty frugal.
Now this is something that has changed since the Great Depression. During the Great Depression, consumers did not have access to credit. If they didn't make any money, they starved. They didn't have credit cards to charge the food onto. They didn't have mortgages to a large extent. They had rent, and if they couldn't pay the rent, they got thrown out in the street.
Today, what is different is everyone has credit, so in hard times everyone spends up their credit cards, and things don't work like traditional economists think they should. You've got this credit card buffer. So when the government sends out $1400, people just apply it to their credit cards and it doesn't stimulate the economy.
Now if you happen to be rich, you don't need the $1400 check, but it comes in anyway. Your credit cards are already paid, so what are you going to do with the money? You could spend it on something frivolous, like a vacation, but people are still hunkered down now and aren't taking many vacations yet. Spending even among the rich is pretty conservative right now. So what are these people going to do with the extra money?
Well, they're going to invest it, of course. "Investment" is seen to be a good word, because it implies that you are being sensible with your money and saving it for a rainy day. Today, it actually implies the opposite. It implies speculation: You're putting even more money into markets that are already in bubble territory.
These investments can take various forms: You can put your money into the stock market, which is easier than ever thanks to idiot-friendly apps like RobinHood. You can buy gold or bitcoin or some other vehicle that is supposed to preserve value—although it's still only the perception of value, since you can't eat gold or bitcoin or do much else with them. Even if you just leave your money in a bank account, you're making a speculative investment of sorts, because you're really loaning money to the bank so they can speculate with it.
Alternatively, you could take your $1400 out of the bank, turn it into 14 crisp $100 bills and store them under your mattress. Even this might seem like a speculative investment because you're gambling that $100 holds its value and will continue to buy you the things that it always bought you, but I'm actually beginning to believe that's the safest place for your money, as crisp $100 bills stored under your mattress.
There's a risk that inflation will diminish the value of those bills, but I think an even greater risk is that the institution you trust with your money simply collapses and you don't get your money back. This isn't supposed to happen with regular bank accounts, because they're insured by the government, but what if the government fails and can't fulfill its obligation? I say that's not out of the question, and failure is certainly certainly possible for any kind of investment fund, which has no insurance by the government.
I think the mindset of the average citizen right now is to put their money into stocks. They see the huge recent price gains and think, "I want a piece of that!" In theory, stocks are a hedge against inflation, because as the price of consumer goods goes up, so should stock prices. I can't give you a percentage, but many of the so-called rich people who don't need the $1400 are going to be putting it into stocks or bitcoin or something else ridiculous. Even some no-so-rich people are going to do it because of the huge apparent gains of recent months. It seems so much sexier to put your money in places where it can earn huge returns, rather than just pay off your debt. Some people are even borrowing money to play the stock market, and we all know where that usually leads.
So what will all this new investment do to the stock market? I say it's going to inflate it even more! In the next few weeks, as the $1400 hits people's bank accounts, I'm expecting even more stock market highs. The simple fact is, there are only so many marketable assets you can buy, and if there's more money chasing those assets, naturally prices are going to rise.
The destination of those $1400 checks gives me insight into why government money printing causes asset inflation but not consumer inflation. Money printing over the past decade has put more cheap cash into the hands of the investor class, who are tempted to speculate with it, while artificially low interest rates have pushed people out of so-called "safe" investments like bonds and into more speculative ones. The money gets plowed into various assets markets, from stocks to Bitcoin. So the speculative mania has been going on for several years, and now the government is making things even worse by sending out these $1400 checks.
I don't think there's any mystery about where manias end: They always end in tragedy. You just don't know when. Could be tomorrow. Could be months from now. Certainly the rise in stock markets in 2020 was something I never expected, and it has delayed the timeline, but it's still going to happen. Now in the past year, I've learned my lesson and now refrain from predicting when assets will crash, only that they will. As the old adage goes: "Markets can stay irrational longer than you can stay solvent."
My only insight lately is that now I see how a market crash—when it happens—can neutralize inflation by destroying money. The government creates money and asset markets will soon destroy it. We certainly have plenty of things to worry about when markets collapse, but I don't think inflation is one of them—at least at the beginning. Now after markets crash, if the government keeps printing, then there could be inflation, but during a panic, cash will be king.
And I have a related prediction: I'm thinking that there could be a shortage of paper currency coming soon, coinciding with the crash in markets. In fact, there was a shortage of coins a few months ago, near the start of the lockdowns, and many stores were asking people to use exact change or credit cards. That shortage seems to have been abated lately, perhaps as people get out more and start spending coins from their piggy banks. In any case, I don't see signs in the stores anymore asking for exact change.
What I'm looking ahead to is a time when paper bills—especially $100 bills—are in temporary short supply. This would happen when some store or other entity offers to give you more than $100 in value for your $100 in bills. For example, stores might charge one price if you pay by credit card but give you a substantial discount if you pay with paper cash. Some gas stations have been doing this for years, because it helps them avoid credit card fees, but if there's crisis, this policy could become a lot more widespread.
The reason I'm thinking this way is that when there's a panic, there's a race by investors to redeem their assets and turn them into cash, and if you’re really scared [and] you don't even trust your bank, you're going to want cash-cash, or paper money you can hold in your hands. That's when the $1400 you saved under your mattress might command a premium.
That's not deflation, per se, because eventually the Bureau of Engraving and Printing will crank up the physical printing presses and produce more $100 bills, but there could be short-term shortage of paper currency in a time of panic.
So what kind of panic am I predicting? An 80% drop in stock prices is not implausible. It has happened before—from the Roaring 20s to the midst of the Depression—and it can happen again. The key issue to me is that there is far more perceived wealth in the world than actual wealth.
I've discussed this in earlier podcasts—like Episodes 52, 40, 20, 7... If you think you're wealthy, it's because you own virtual title to money-producing assets, like rental property or ownership in a company or a government bond. And these things realistically cannot produce the future income that the current price implies. It's like a stock selling for 40 times annual profits when 10-20 times is more the norm. Sooner or later, markets have to settle back to a rational price, and it typically happens in a disorderly way—in other words, in a panic.
One of the factors that could help accelerate the panic is the ascendency of index funds—also known as passive investing—where people put their money in a single fund that buys all the stocks of a certain index, like the S&P 500.
These funds are supposed to mirror the performance of the index—which might have been true when they were a tiny portion of the market. Today, roughly 50% of stock market investments are now held in these kinds of vehicles. [See correction in video comments.] I repeat: roughly 50% or half of all investments in the stock markets are held in index funds. That's a huge amount. That means these funds aren't mirroring the market anymore. They are driving the market.. Their presence greatly amplifies any shift in prices—for better or worse. Index funds helped inflate the market during the past boom, and they will help sink the markets in the coming bust.
So if you don't know about index funds, let me give you a little primer. They hold only the stocks that constitute a market index, like the S&P 500 or the Dow Jones Industrial Average. If you put your money into these funds, the fund managers have no discretion. They have to go out and buy the underlying stocks, regardless of the price. Presumably, they do this on a daily basis, based on the cumulative inflows and redemptions on that day. Their demand for stocks in the index has nothing to do with how well each of the individual companies are doing. It's strictly a function of new investments comin into the fund. That's why it's called "passive" investing. No one is making any decisions—compared to active investing where a fund manager is looking at the actual performance and prospects of the company they are buying.
In the past few years, passive funds have vastly outperformed active ones. I think it's because active managers see how irrational current markets are and are sitting on the sidelines while passive funds are completely blind. The index funds form a self-reinforcing loop. As long as these funds go up, small-time investors keep putting money into them, forcing these funds to buy more stocks, which continues to inflate the prices of those stocks far beyond any normal valuation.
This is great for index fund investors in the upward side of the roller coaster, who experience these huge gains on paper. They don't realize that the same thing can happen in reverse: As soon as investors get a scared and start pulling money out of index funds, these funds will be forced to sell, which will accelerate the downward trend. As the market falls, more investors get scared and pull their money out, which forces more sales and further depress prices. It will be a self-reinforcing cycle that could really, truly end in a 80% collapse.
So that's what I confidently predict will happen. I just can't tell you when. One scenario says it will be soon. The pandemic generated a paradoxical asset boom, and solving the pandemic could do the opposite: triggering a massive bust in all asset classes. Huge amounts of wealth will be wiped off the face of the Earth, but in the process, a semblance of equilibrium will be restored to the monetary system.
What this would mean, in effect, is that all the past deficits of the US government will eventually be funded by the investor class, in the form of loss of wealth. All the rich people with asset investments will suddenly become a lot less rich—maybe 80% less rich. In effect, this will be their involuntary contribution to the US deficit.
There may seem to be some poetic justice in this—seeing the rich get their just desserts—but there will be plenty of collateral damage among the poor and the nation as a whole. First of all, asset markets aren't just funded by the rich. Your parents and grandparents probably have their retirement savings tied up in asset markets, mainly stocks and bonds but also the house they're living in. Think of the terrible position they'll be in if all of their investments crash by 80%.
Even bonds will not be immune. As I speak, bond markets are also in a bubble. This is represented in ridiculously low yields for both government and corporate bonds. For example, the interest rate you might expect to earn on a 10-year government bond in times of low inflation is 5-6%. Today, it's less than 2%, or right around the official inflation rate. In other words, if you loan the money to the US government, you're getting virtually no return on it, despite the substantial risk of inflation sometime in the future.
A bond is little more than a $10,000 bill that you can store under your mattress, yet it's even less secure than a $100 bill, because the market value of a bond can fall. For example, you can buy a $10,000 from the government for $10,000 today but if the market yield subsequently goes up—say to 5%—the book value of the bond you already hold will go down to something below $10,000. So if Grandma and Grandpa are invested in government bonds instead of stocks, they could still lose money in a crash, just not as fast. And if they're invested in corporate bonds, the issuer could default altogether, and Grandma and Grandpa lose everything.
Once the crash begins, the end game is also hard to predict, but I'd say that a good reference point is the historical bond yields and asset prices of a fairly sane period, like the mid 1990s. Back then, yield for a 10-year bond was about 5-6% and stocks were trading at normal PE ratios—let's say between 15 and 20 times earning compared to about 35 or 40 times earnings today. That's what we can expect in a "rational" world, and it is not unreasonable to expect markets to eventually revert to that rationals level, and that means today at least a 40-50% drop in stock markets.
The trouble is, a rational world has simply become unsupportable now. For example, the current level of Federal debt is sustainable only if interest rates remain 2% or below. If the rate the government pays rose to the historical norm of 5-6%, most of the government budget would go to interest payments alone—dwarfing other expenditures like the military or social spending. Personally, I think the government should be paying even more than 5-6%, because it's a dodgy creditor. It's not that the government would default, because it can always print money to pay off creditors, but eventually there will be inflation, enough to wipe out at 5-6% interest rate.
My Zero Inflation Theory only suggests that there may be little inflation during a crash. There could be inflation after the crash, if the government keeps printing money, because it has no other way to fund itself. When all confidence in the government is lost, that's when you're in Zimbabwe territory.
The key issue is what happens to the US government if it doesn't have access to dirt-cheap credit. How will the government survive if it can't borrow affordably anymore? What happens if investors begin to realize what a dodgy creditor the government is? In that case, the government won't be able to rescue anyone anymore, and it won't even have the money for its normal operations.
Governments have gone through crises like that before, and it hasn't been pretty. There's Weimar Germany before the rise of Hitler. There's Argentina, Venezuela and most of the countries in Africa at some point. Right now, the prospect of a government debt crisis is a little too much for my overloaded brain—and maybe yours, too—so I'll put it off to another episode. What happens to ordinary Americans and society at large if a government truly can't pay its bills and can't borrow money anymore.
The only thing I can say right now is, that according to my Zero-Inflation Theory, rising prices may not be an immediate crisis. Inflation is always possible, but I would bet that the Dollar Tree stores will continue to sell the same range of products for only a dollar, at least for as long as assets markets are crashing. Once everyone is wiped, then inflation might be along to finish us all off.
Written, recorded and edited by Glenn Campbell. For annotations, links and corrections, see the description on the video version of this podcast. You can also leave comments there. See here for all my podcast scripts on this blog.