The text below is a transcript of the audio from Episode 47 of Onward, "How to Break a Country (and Maybe Save One), with Rob Johnson".
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Ben: Rob Johnson, welcome back to Onward.
Rob: It's a pleasure to be here. Once again,
Ben: So before we dive in, I thought it'd be useful for people to just get a little thumbnail of your background because I can think a few people who could give better insights into what's going on in the world than you today. How do you usually describe yourself?
Rob: just a quick thing. I grew up in Detroit, so I know what suffering's about, and with automation, machine learning and globalization, I saw a lot of distress. So I don't believe the economy is always, I. At its highest and best place, and
some of the tensions that we see in America now are vivid. I remember going to college, I went to MIT and the first time I was in an economics class, I was not trying to be a smart lec, but I was listening to this guy and he was talking about equilibrium and I raised my hand and I said, I grew up in Detroit.
I don't have any idea what you're talking about with equilibrium. I. Because it was just continuous turmoil and a lot of my parents' friends were either alcoholics, there were suicides, there was a lot of distress. As businesses associated with manufacturing were were being crushed. Subsequent to that, I did degrees in electrical engineering and another degree in economics, working with Morris Edelman famous oil economist in Charles Kindleberger as research assistant.
I also took a nice series of courses but didn't finish a Master's degree in Arms Control and Disarmament, which was a big theme at MIT. Part of the reason for that is I got a scholarship, so I went to Princeton, did a PhD in economics, focusing on international finance and international trade, and worked very closely with Professor Bill Branson, Alan Blinder, Joseph Stig, and a couple of others.
But probably the best luck I had was there was an international professor named Peter Kennon who used to take me fishing, and he had this big, tall buddy that went fishing with us. His name was Paul Volker. And Paul Volker eventually gave me access while writing my dissertation to income, working at the Federal Reserve, and I was there for a little while.
I guess I would say I became engaged to the woman who in the eighties was the head of Japan analysis and she was very, very powerful, capable, and Volcker said, you shouldn't be in the same place as your wife and I need her. So he helped me get a job with Pete Di minute. She is a senior economist of the Republican majorities at that time, Senate Budget Committee when they lost control of the Senate in the 86, I moved across and became the chief economist of Senate Banking Committee.
Through the time of the 87 stock market crash and the savings and loan bailout, when Senator Prox Meyer retired after a number of I'D had about seven years experience on the hill, I moved up to Bankers Trust Company working in foreign exchange trading, starting as a strategist, and then evolving into a partner with a man named Norman Weinstein, who was a grandma master in chess, and we became a asset management team in international currency work.
And in the scheme of that, I had met George Soros along with all kinds of other people like Warren Buffet and others during the 87 stock market crash. 'cause these people all wanted to give me advice about how to run the hearings to illuminate what had taken place that led to that crash. I stayed in touch with George Soros.
He brought me over and met with him and his extraordinary partner, Stanley Druckenmiller, who I always said was the Michael Jordan of traders. He was better at macro than anybody that did equity, and he had better at equity than anybody that did macro, and he was a really extraordinary talent. And about a year later, because of things going on in the European system.
Soros had detected at Bankers Trust. I had been involved in a finished market devaluation. They invited me to join them, and then we went through very quickly within a few weeks, the British Pound devaluation and then some other things related to Spain, Malaysia, and the Swedish Croner. And I guess I would say I stayed with that for a few years and then I jumped out, went back to the things that inspired my mother and father, which in Detroit was music.
My dad was a physician, but very involved with Barry Gordy and Marvin Gaye and that whole crowd, and my mother was executive for the Detroit Symphony. So I went and worked in blues music and worked in documentary film related to musical artists. And then ended up teaming with Alex Skidney, who we made a film called Taxi to the Dark Side.
It was about the use of torture, and we were recruited by members of the military JAG officers and stuff who said. The use of torture is a bad thing. Many of our soldiers, when they're deployed overseas know that they would be tortured too if we adopt that. So they asked us to illuminate why that was a bad thing.
Ben: I love hearing your stories because you're just so connected to so many people. You're an insider, but you're also an iconoclast, and that's usually where I feel like most people, especially these days, there's so much skepticism of elites and of institutional power. I. Here you are. I'm gonna just say probably I'll describe you as an elite from institutional power, and you've done more than most people to try to shake up the system.
Rob: I just wanna ask to find within yourself, what's your sense of purpose? And I felt perhaps as I started this conversation, the scar tissue of growing up in Detroit, watching Dr. King give a speech three weeks to the day before he was
murdered, hit the place I'd eventually go to high school, being around gunfire and sandbags and military officials during the 67 riots and seeing the depression associated with the disintegration of the auto industry.
I don't mean it fell apart entirely, but it was under compression through the pressures of globalization. Obviously people were buying more European cars, but particularly Japanese and Korean automobiles, and nobody in Michigan felt like the federal government was trying to help them. They watched them bail out Wall Street, but they didn't feel like they got any help.
Ben: It happened a few more times in your lifetime. 2008. The interesting thing about Detroit, people don't realize that Detroit was the richest city in America in the fifties.
Rob: By the late sixties did, it had more cabinet level officials from Detroit than any other city in the country over the history of the Republic, basically from Henry Ford since the 68 election, I. Michigan people were always appointed to top level places. Robert McNamara, secretary of Defense, he was a neighbor when I was a kid, lived across the street.
Ben: Every time I talk to you, you seem to have good neighbors. I'll chop bring up the one you just mentioned.
Rob: Maybe I oughta go work for State Farm then.
Ben: So.
Rob: Like a good neighbor.
Ben: I wanna ask you about the country and some of your maybe policy recommendations to deal with the challenges of today, because as you were saying, Detroit was the engine of America and went through decline. And maybe I'll even ask you counterfactual, what the federal government ought to have done in retrospect.
But lemme go back to something you skipped because you were sort of modest about it. But you and Druck and Muer and Soros broke the British pound famously. The last episode, we talked about that, so I won't get too much into it, but it's an incredible story. And also the last episode, off the record, you talked about how you did it again two months later with a Swedish Corona.
And that story wasn't really, you said the lesson learned was you didn't talk about it the second time. So there's not much out there.
Rob: I think there were two. Mentions. One is the British Pound used to be the central reserve currency of the world system. The Swedish kroner was never that global store of value, so it wasn't as vivid as when the British pound came down. And the second was with all the things going on in Europe about creating a Euro and the strength of Germany from the World Wars and all of the polarities that had been healed.
UK Germany thing was symbolic of a transformation where Sweden was just considered, which you might call an adjunct to a system where the politics and controversy had taken place elsewhere. I.
Ben: Reserve currency. Well, let's come back to that one too. But before I wanna ask you about, well just do the Swedish 'cause I feel like you promised me that.
Rob: It's relatively simple. The Swedish companies were inside of Sweden, but also investing around the world. They were becoming multinational, cutting edge companies, Volvo cars, but there were many, many companies that were competitive internationally. I. The second thing was the, I guess because it was a smaller country and not well known, the interest rate at a certain illiquidity or risk premium associated above and beyond things like uk, France, and Germany.
So that created what we call a carry trade. If you borrow Deutsche Marks and invest in Swedish Groner, you earn three or 4% per year just by hanging out. So a lot of Swedish people in big growing multinational companies funded what they did in Deutsche Marks rather than funding their investments from their domestic currency.
And as time went on, and this is really at the core of the ERM failure, Germany has had a wicked experience during Weimar with inflation, and Germany doesn't want to inflate. Reunification after the collapse in the Soviet Union meant East Germany to be integrated with West Germany, had to be brought up largely through fiscal stimulus to build the infrastructure and make Germany what you wanna call more wholesome and continuous.
So you have a fiscal stimulus in Germany and a resistance that's very strong to rising inflation.
You have a country like Sweden that's suffering a little bit from the collapse of the Soviet Union, not as much as Finland, but they're under stress 'cause they had relationships up in that part of the world. And they're essentially funding in German for Swedish denominated, what you might call assets.
But the problem you have is that when the Germans wanna raise interest rates. The scale of the multinational investment by Swedish companies funded by deutschemark, meaning the currency exposure was very high in relation to the reserves that the central bank had. So when the Germans would tighten policy, you could just start seeing everybody trying to unwind these carry trades.
And by the way, the carry trades, because of the softness of the Swedish economy related to the end of the Soviet Union and the strength of the German economy related to fiscal stimulus, you had a negative real shock in Sweden and a positive real shock in Germany. So the interest rate differential was narrowing.
All of these people had very large positions, and as they started to cover them, I could see the, what we call foreign exchange reserves of this what's called the Ricks Bank. The Swedish Central Bank, coming down quite a lot, and by adding to that energy now as a famous firm in terms of currency speculation, after the British Pound Soros fund management, we might call turbocharge that acceleration.
It led to an exhaustion and a decision by the government to devalue rather than maintain the fixed exchange rate. That gave people comfort and guarantees, meaning with a fixed exchange rate, they could borrow Germany, invest in something three, 4% higher, and now all of a sudden there was a risk of devaluation and narrower interest rate differential.
So we, what you might call, took the initiative. We had built up a pretty substantial position, but then as it accelerated, we added to it, which fomented the acceleration and the devaluation.
Ben: You mentioned to me last time that you actually made more money breaking the Corona than the sterling.
Rob: Yeah, because it was a larger position in a bigger fall off both. But how would I say the, that led to British Pound. Was relatively rapid, like a few weeks it was having seen what happened with the British Pound, even a couple of months. It was a much longer on-ramp, and because of my previous time at Bankers Trust, I'd spent a lot of time, I'm a Johansson.
My family on my father's side is from parts of Sweden, so I'd spent a lot of time there with my dad sailing, and I knew a lot of people there, et cetera. In an ironic way, I was more familiar with Germany 'cause my mother's family was from Scotland and Stuttgart and my dad's family was from Berlin and parts of Sweden.
So I was very tuned in to the mindset and Sweden and spent a lot of time there, et cetera. And I think I had more confidence personally than I had vis-a-vis the British pump.
Ben: Yeah, because. When I looked at it, the devaluation of the KNO was about 25%, and the British sterling devalued 15%. So that's a much bigger devaluation.
Rob: It actually went beyond that. Holding onto the position into the middle of next year. It went down much more than 21%.
Ben: I want to come back to the US now. The US dollars in decline has fallen about 10% and it looks like it's gonna fall decent amount more. So you're talking about. Potentially a similar devaluation as what happened with the British Sterling, although without the fixed exchange rate. So I wanna come back to the weak dollar 'cause I wanna ask you about the present, but just to trying to establish your bonafides because here you are, it's one of those famous dream teams in finance.
You, Soros, Druckenmiller breaking the British Sterling and the Cronin, and you said all over the world. Every time I mention a country, you seemed to know a lot about it. So.
Rob: Scott was also based in London, our now Treasury Secretary, and he was a very important part along with a man named David, David Central. In Europe very well, and he was from Washington, had worked with Jack Kemp through Alan Greenspan and others. But Scott was an equity analyst based in London as part of Soros fund management, and he really understood after a devaluation.
Interest rates would fall and interest sensitive sectors would do well and the exchange rate would fall. So export and import competing industries would do well. He was very instrumental in the scope and scale money that we made in the British pound, not just from the currency, but from the other dimensions of it.
Ben: Yeah, on the way down on that, way back up. So do you think that's what happens in the United States over the next 12 months?
Rob: I would say in a qualitative sense, yes. If things stay here, and we'll talk about other dimensions in a moment, but the scope and scale of what I'll call the open exposure of the US economy is smaller than it was in Great Britain. So as a, what you might call disruption of the whole country, the British pound was much more internationally interwoven.
And the United States just has, we might call lots of domestic sectors and non traded goods and so forth. So I would just say. In dollar terms or pound terms or whatever it might be as, or a larger part of money because of the size of the sectors that are affected. But as a proportion of America, it would be slightly smaller because America isn't as trade exposed, if you will, in its GDP as Britain was in those days.
Ben: Come back to this one. So you worked with Scott now, secretary of Treasury. What was he like?
Rob: In my opinion, very pleasant to work with, very curious, very lucid, not what I'll call dogmatic ecocentric, or irritating at all. He was a very, very pleasant colleague to explore with and learn from and try to impart other insights too, and I thought he was a really good teammate. And I've known him in years.
Subsequently, for a little bit of time, our daughters went to the same school and I just, I find him very high integrity and very solid guy.
Ben: I talked to, who knows him, says that, so it's comforting. Why do you think he wanted to be Secretary Treasury?
Rob: My sense is, and this isn't coming from a conversation, this is my conjecture. I wanna be clear about that. But Scott has done lots of things in making money. He's done lots of things like adjunct professor at Yale, and I think he saw, which many of us could see we are in a stressful, unsustainable situation, and that he could bring his experience and his insights to help heal it.
And I think that sense of devotion to public purpose, creating a better platform for his children, et cetera. Was a very powerful part of his spirit.
Ben: I get that. So then how does he get from here to there? Do you have a sense of what the playbook might be?
Rob: Well, obviously he's not chuma, call the Prime Minister. He's a member of the cabinet, and there are in the, what I'll call the world of the Potomac. There are a lot of crosscurrents and stresses and lobbyists, and then there's the. Legislature, meaning the Congress and Senate and the courts. So you don't have what you might call carte blanche, green light, do whatever you want to do.
You gotta be credible and persuasive. You're working identified as a leader, a worthy leader by being the treasury secretary, but you still have to collaborate with other people who are powerful in the governance system. And understand what they wanna achieve and how it relates to what you wanna achieve and try to create win-win games.
Ben: I feel like I haven't heard a good articulation of even what it would look like. Obviously, to succeed, you have to compromise and there's trade offs. How would you get from here to there? You're Scott Besant.
Rob: I think the interfaces that I would think mattered a great deal. Is the multilateral institutions like other central banks, the IMF and World Bank, and places where the United States, not a member, the Asian A IIB Bank, which is the World Bank in another region, and learning to work with your counterparts.
Finance ministers are the name usually given to what we call the treasury Secretary Collaboration with the Central Bank within your country. Working to create what I refer to as win-win situations. Though I believe that there is a strong sense, this is my Midwestern ghost echoing that there is a lot of belief that we did lots of things for multinational enterprises that didn't help the American people.
And there is a mistrust that you referred to earlier in elite officials. There is a notion that a rising tide doesn't raise all boats. Lots of people are worse off, so a few people made a lot of money. Same thing is now being explored in AI and technological innovation. So Scott, I think, has conveyed that he understands the stress and the unsustainability.
I worked with our friend David Smit, who I mentioned earlier on a movie that came out recently called America's Burning. Is this the second Civil war? It was about the symptoms of discord and what to do about it. What's the healing
process entail? And the only reason I bring it up, not to advertise the movie, but people like Scott are taking on a position.
I'll put it simply when you don't wanna see the next republic. You wanna see a restoration of the democracy and the positive and sometimes romantic vision of the United States. Martin Wolf, the extraordinary columnist with the Financial Times of London wrote a book, which I worked with him on, along with handful of other people called The Crisis of Capitalist Democracy.
During Donald Trump's first term, and you could see this Donald Trump when he was campaigning, say in 2016, I was in Michigan 'cause I was holding a Detroit conference three days after the election. And he's doing ads where he is saying, the only people that can fix this are the American people. Please join me.
The system is broken. And all kinds of people, whether they believe in the depth of his strategy, insight or what have you. They said he's calling it out. We've been feeling this pain and people haven't talked to us like we matter for a long time. And I think that that sense of despair that led to Trump's election, Trump has this training, I have heard from many named Scott Adams that makes the Dilbert cartoon.
He had a whole bunch of little website things, which I can share with, you know, about a man named Milton Erickson who created a thing called neurolinguistic programming, and how all kinds of people like Steve Jobs and others were mentored by Milton Erickson's proteges, as well as reading his own writings.
And that I came to understand in 2015 that Donald Trump had had this training. The famous world life coach, Tony Robbins has had this training. But the point is, Donald Trump caught fire in an unsustainable, very stressful time by acknowledging that we were in that place. And now what you could say is that catnip, that yearning that is satisfied then has to be followed through with coherent, intelligent policies.
I think Scott's joining creates a much higher probability in that regard 'cause he understands the trade-offs and ramifications of this financial plus real economy and global economy and all the intertwined crosscurrents and side effects so he can work to create win-win games that are credible. And as obviously many
people could see in the Weimar years, Adolf Hitler inspired people who felt. Abused going back to World War I in the First Eye Treaty, but he made an awful mess out of things. And there are a lot of people who are afraid
that America's in a place where it could become authoritarian war zone rather than a win-win leader. And I think this is what you and I talked about once before, qua Yu saying there's a wonderful book that's written about us and China that I wanna recommend.
A man named Orville Shell, who's a friend of mine, and John Ulai, wrote a book called Wealth and Power, and it was the study of how China experienced tremendous psychic damage going from being a leading world economy to the humiliation that started with the Opium War and ended up with the Japanese invasion.
They call it the century of humiliation. And when I read Qua Yus, various thoughts over time, or Henry Kissinger and others who he knew. You see a sense that people believe because of the century of humiliation, there's a danger that if the US plays too tough in the world system, this new big economy is gonna get resentful and break away if the US leader, but gives the other a seat at the. They can be called partners and co architects and the Chinese will feel that the century of humiliation is now over and be inspired to do constructive things. I think there was a time I mentioned to you, uh, meeting some of the leaders in China when I used to go to the Asian Development Forum every year, and one of those leaders said to me in a private meeting, Donald K is screaming at Mexico.
He's screaming at China. This was 2016. He said, there's a problem with this when you have a US Senate advisory committee. That suggests to the US Senate that they ought to pass legislation or demanding that China allow its currency to appreciate, or Japan to make its currency appreciate as opposed to continuing to buy treasury bonds and therefore run a trade surplus, but keep the balance of payments from reflecting that and requiring a change in the exchange rate.
And he said whenever that group. A friend of mine who used to work with me on the Senate Banking Committee was on this committee. His name was Pat Malloy. Whenever that group makes a recommendation, you see all the multinational companies, whether it's Apple or Walmart or whoever, lobby the US Senate not to pass legislation to make the dollar fall and the embi rise.
Because that reduces the profit from the plants that are making things in China to be exported to the United States. But our American headquartered multinational companies, and what he was basically saying is, in American monetary politics, citizens united money more than votes, America is not serving.
And this leading Chinese said to me, Robert. I've studied international trade theory like you would get as a PhD, w Arthur Lewis and all these other people, and I said, okay. He said, it always says free trade can make everybody better off and nobody worse off if you make the adjustments. The United States of America doesn't make the adjustments.
Now I go back on the other side saying it isn't all about America and American lobbyists and all that kind of stuff. There are people in China who benefit tremendously from an undervalued exchange rate and big profits. So unless the United States understands that China is almost four times the size of our population, as this gentleman pointed out to me when we started the integration in the early eighties.
The per capita income in China was one 40th of what it was in the United States. So there was going to be what you might call labor market shock as this unfolded, but there needed to be some adjustment assistance and cooperation. And you probably remember around 20 15, 20 16, the Chinese put out a thing called the 2025 report.
And in it they talked openly about, well, we'll invite all these people in. They'll set up foreign direct investment here. We'll study what they do and then we'll go build replicas of that, and then maybe we'll shut them down and go on and have a developed economy having learned from tolerating foreign direct investment for a time.
But eventually it'll all be Chinese and places like the Council on Foreign relation, many of the people that were involved in the Biden administration took exception to that. It was a very aggressive non-cooperative statement initiated by China. So some of the polarity, some of the tension that we've seen is not just America's fault.
Ben: For sure. What would've happened if the corporations hadn't, the multinationals hadn't stopped it.
Rob: Well, my sense is this is a little bit where people like Scott are now, which was they would demand a lower recycling into treasury bills and allowing an appreciation. There have been lots of chapters to this. When Janet Yellen was the Federal Reserve Chairman, I remember reading that she went to China to tell them, you guys gotta be careful because we're gonna have to start to raise interest rates soon.
And at that time, there were a whole lot of companies that were borrowing in dollars and doing carry trades in the. And people came to me after she said that, 'cause I was experienced in the unwinding of carry trades like Sweden and Finland and others. But she was essentially saying to them, when we start to raise interest rates, you're going to get a deflationary shock in your economy because you'll unwind all those carry traits, which is like a negative monetary shock.
And you gotta be prepared for that. Right now we're at a different place, which is we've had so much outflow into the United States. I mean, a very good example to study now is Japan, because Japan went through long, long periods of trade surplus and redeployment of the assets overseas. In first it was in US treasuries.
Then it included direct investment in the Asian, what they call the Ossian neighborhood. For direct investment in Malaysia and Thailand and other places and in China and in 19, I think it was 93 or 94, when the Chinese devalued, it's what led to a crisis in the rest of the Ossian countries because everybody wanted to put their foreign direct investment into China, not into the regional countries, and it created an intra Asian stress.
But as I look at it now, it feels to me like what America needs to do. Who was the gentleman? I think his name is Mohan, head of the Council of Economic Advisor. I have not met him.
Ben: Steven Moran,
Rob: Steven Moran. Yeah. He talked about going up slow, foreshadowing,
Ben: gradual tariffs,
Rob: gradual tariffs, saying if you guys don't start changing course, this is gonna go, as opposed to monster size.
Ben: overnight tariffs.
Rob: The media tariffs and then we will rescind them if you back off or if you change. And at some level, that notion of the sensory of humiliation that Orval Shell and others had. If you go play super tough, the Chinese who are scarred
by the sensory of humiliation aren't going to capitulate. They're gonna play tough too.
But trying to do things that are more gentle in a win-win situation. Like that slow climb of tariffs where you are reorienting things, but you're not devastating and shocking business enterprises all around the world. I.
Ben: It's such an unexpected turn of the conversation for me because I know you as not a supporter of this type of administration. So how I think of you.
Rob: I think there's two sides to that coin. One is acknowledging that we are in a crisis situation is a good thing, and pretending everything was okay was not because it wasn't true, and it leads to a buildup of tension and it leads to the, what I'll call temptation. Of the next Weimar Republic. I wanna see things happen that change our big course and trajectory, non-transient, but really substantial so that my children can understand why I once admired America 'cause it's coming back.
But I think that tension once acknowledge it has to be resolved. What Alfal gain theoretic mind of how to create win-win outcomes and not to feel like beating up the people who you think caused the pain for your citizens. I'm talking about overseas. People are disliked, say in Michigan or Ohio. Well, if you go beat up those people, people may feel some gratification that they're finally being represented.
They're not being represented in a way that's gonna get them out of the ditch unless a win-win approach is taken off.
Ben: Let me just see if I can summarize what you're saying. What you're saying is the actual aims of many of the administration were right, but the execution, the weight that it's being done is likely to actually cause maybe more problems because it's not creating a win-win. Environment to get to the aims that they started with.
Rob: The other thing is, I mentioned this man, Milton Erickson, the neurolinguistic program. You can trigger people who are sad that, I know you're sad and I'm on your team, but to actually be on the team that's going to, in the medium term, make for a better country, you gotta do things that are constructive, not just hoot and holler, demonizing the foreigners and act like they'll be humiliated and they'll accommodate your strength because.
Those nations need to have dignity and pride vis-a-vis their own constituents, not be looking like they are a subordinate to a rough and tumble leadership of the United States.
Ben: So could you give me two scenarios of how you think it plays out?
Rob: I think the reaction of many leaders, some from the hedge fund industry and banking Bill Ackman, and the people at places like Goldman Sachs and JP Morgan. May have startled the president and now he's seeing the negative side effects of having been too strike. And then he'll hand the ball to people like Scott who understand the impact of policy changes of different variety and let them work to create something that's more constructive.
There are other dimensions to this. I think there's a lot of concern that what they call red tech. People who are hawks in the military industrial complex, but also working in Silicon Valley and want big federal grants, just like the defense weapon makers have lobbied the ment fear and then lobbied to get big allocations from the federal budget.
I think there's a concern now that red tech billionaires in this world of money politics have enough enormous amounts of power. And they can get things to fortify them, but perhaps to the risk of America. And even though they talk about it as being for defense, but also the exacerbation of the inequality within America by subsidizing the wealthy and powerful.
May reignite discord and uh, I think there is a lot of concern about that. Now, there's a lot of statistics. Economic Policy Institute about how since 1985, we're talking about 40 years, almost 80% of American people have a lower standard of living, and about three to 5% have an enormously rising. And when you look at productivity statistics.
You look at wages in America, wages have been flat and productivity statistics have taken off. And where this is now in a new zone with AI of tremendous attention is people are paying three, $400,000 for college education and are now acutely afraid that they're gonna get replaced by machines. And I don't think you wanna fort innovation.
I think you need to have a second dimension of how innovation is deployed in a way that the many benefit and that role of money in politics plays into the despair and the suspicion and the discrediting of governance these days.
Ben: So what does a deal look like with China in a successful outcome?
Rob: I would say it's a little bit tricky in the sense that it appears to me. I've spent a little time in December over in that part of the world and was just at a conferencing room. Learning from people from China about where they're, it feels to me like their education, particularly technological engineering, education, ai, and so forth, has accelerated a great deal in the last five to years.
I saw a study done by an institute in Australia that said, in the patent world. The Chinese are now equal to and sometimes surpassing America in the number of new creative patents. So I think you're gonna see China continuing towards what I'll call the intellectual development, and you're gonna see fear about whether it'll be deployed for military uses that make them a more formidable adversary of the United States.
Ben: It will be, it's going be.
Rob: The other trick here though, is, and a lot of the people that I know that are working arms control and disarmament will tell you, everybody knows that a mutual destruction is horrible. So what you might call the deterrence, even between the United States and Russia is very effective because they're both aware of how much they be hurt and how much they could hurt.
But you don't wanna see. I call stresses in political economy about who owns property rights and who makes things and so forth, leading to a military conflict, that's so dangerous because you get lobbyists, say, I talked about Red Tech. You get lobbyists in America saying, the Chinese are developing this stuff.
We gotta get ahead of the curve again. And maybe that's true for safety or maybe that's a way of marketing for profit that makes the world even more dangerous.
Ben: Go back to this, what a successful partnership with China look like.
Rob: Well, I think reestablishing mobility of people working on deployment of money into US treasury securities and maintaining. Therefore, an overvalued dollar cannot be sustained.
Ben: Does that mean Revaluing? The Rebi by 20, 30%?
Rob: I don't know in the sense that I'd have to explore that in the context of the sectors that would be damaged and the sectors that could still thrive. 20, 30% is quite a big scale of adjustment.
Ben: You can't weaken the dollar if the is pegged to the dollar, and then it just keeps declining.
Rob: We are seeing, there's another dimension to this, which I want to come back to, which is the US debt to GDP ratio is very high. Now, if the US ceases to be a reserve currency. The availability of funding for our deficits goes down. Our interest rates go up. The interest on the debt, given the high debt to GDP ratio starts into a spiral that can lead to the need for restructuring or a default.
That fear of a restructuring a default reduces the likelihood that the US is a reserve currency. My former neighbor and friend, Ray Dalio is writing a book that will come out I believe in June, so about a month from now on how countries go broke, and I think the United States is at a threshold with a debt to GDP ratio of 125%.
That having the US aggressively diminished as a reserve currency could lead to a spike in interest rates and a refinancing 'cause. So much of the US Treasury debt has now been very short term, two years, and under that, you could see an unsustainable spiral take place. And I know a lot of people now are talking about the so-called bricks, Brazil, Russia, India, China, South Africa, and more going to gold.
We've seen gold going up. We've seen all kinds of questions about what will be the reserve currency of the future, and there's some anxiety about the Japanese still holding huge amounts of treasuries. And that maybe the Japanese currency needs to appreciate as well.
Ben: At all time high, what dollar is to the end, but I'm with you on a lot of your aims and a lot of your values, but I still don't see what the policy. Implementation is to get back on track.
Rob: When I look at the news, what I see Scott Besant doing is talking to the IMF and so forth saying you don't just talk to the deficit countries, you gotta talk to the surplus countries too. We gotta create a ree equilibration, a balance point. I think seeing Chinese or Asian, or even some Latin Americans keeping their currency low and running on export led growth is critical to what we still call the swing states in America, whether it's Georgia or Pennsylvania, Michigan, Wisconsin.
There's a very strong feeling in those places that the international economy is what's devastated them. We've gotta alleviate that stress to stabilize America. But how we do that without destabilizing other places is the nature of it. And that's where the head of the Council of Economic Advisors talking about a gradual climb.
Mark Carney, who I know that worked with in different contexts over the years. Mark is saying, we're not gonna take this rough and tumble punch from America. We're gonna resist that. We're gonna fight back. And he just won as Prime Minister for what I'll call standing strong. I think if the US softens, they can figure out things that are closer to win-win games or longer time horizons for adjustment that don't create such acute distress in some of the other countries.
Show that America is on the right path.
Ben: So if you were advising my company, let's say we have a lot of interest rate exposure. We have real estate, we have different investments, and say, okay, what does the US economy look like a year or two from now?
Rob: I sense a lot of concern now relates to two things. People like Warren Buffet are talking about the ratio of stock market capitalization to GDP. The,
Ben: Way too high.
Rob: the pendulum is way to one side,
Ben: The buffet indicator.
Rob: so you need to rebalance. Then the second thing, and I alluded to this before, but the former head of the Office of Management budget under the time of Ronald Reagan, David Stockman and Stockman runs a website now called Country Corner.
And he just wrote a book about how to take $2 trillion out of the budget deficit. And what he's essentially saying is, unless we get the budget deficit under control and these interest rates start to go, we'll go into that spiral of the interest rates leading to a bigger deficit, which leads to an restructuring if.
The risk premium and interest rates would go up. And secondly, the deflation from cutting other spending or restructuring debt, creating wealth losses would turn eventually on all investment markets. So I think we are in a very stressful time because we basically had a big boom from 2010 to 2024 of rising equity, very low interest rates.
And if that, not so much unwinds but rebalances, it either takes price movements down or time until the economy grows up into it and changes the ratio. But the problem is the economy depends upon finance to grow. But I think people reading Stockman's newest book and understanding Ray Dalio's sense that he puts together in his new book where he talks him out, you have an international crisis and you have a domestic crisis and you have a reserve currency that has a very high debt to GDP ratio.
And then you have the technological change related to AI and so forth. And then you have the challenge of climate change. How are we going to integrate all of these things? Ray is very deep in understanding the sequences of economic history and his new book I think, illuminates things that all come back to your question about what happens to real estate.
But what happens to real estate is a symptom of what's going on in other places that are out of balance.
Ben: I rephrase the question, just what happens to investments and GDP unemployment? What's the US economy look like in one to two years? It sounds like we're at a turning point. It depends on the success of this rebalancing strategy, and you're saying it could go either way.
Rob: I think aggressive, frightening policy raises risk premiums and makes it more likely. There's a slow down in the United States and around the world. I think a thoughtful, conceptual, win-win strategy like someone like Scott Bessett can envision diminishes those risks of downfall in excessive financial injury.
Ben: I often say this to my friends who we debate this. Question and that execution matters. So you send Scott Besson to accomplish these aims. You might be successful, someone else goes too aggressively or alienates the other side. You can't get to a good deal, and then it gets worse.
Rob: There's two to that coin. One is just what you described, but the other side is if Scott does stuff that's cooperative. Do the wounded people in the Midwest say, oh, they sold us out. In other words, like Donald Trump did say, these are the enemies who wanna kick their butt. Those people feel relieved 'cause they haven't been taken care of in 20 or 30 years.
And lots of people are now very concerned about the expense of education. There's an enormous concern in America, in a comparative sense about the cost of healthcare as the baby boom is aging out. America, according to the World Health Organization, provides the 32nd best quality of healthcare compared to the OECD nations.
Our prices are twice as high, so could you cut prices in half and have better quality? That matters when you're thinking about Medicare and Medicaid and a baby boom, aging out. So the ratio of retirees to the underlying workforce is at an all time high. So I think there are some huge structural challenges for the United States related to pharmaceuticals, nutrition, and hospitalization, and all of these areas.
Ben: So what should I be watching to see if this is gonna break to the positive or to the negative?
Rob: Well, you have different dance cards. I would watch what the people in and around Scott be and the feedback he gets from other cabinet ministers and what acknowledgements you get at congressional hearings. I. I would watch the Office of Management and Budget quite closely because of some of the fears I was talking about, the interest rate dynamic and funding and the high debt to GDP ratio.
But when you put that baby boom healthcare thing on there, on the other hand, if after we've subsidized Wall Street and done all kinds of other things and the military industrial complex and all the suspicion of K Street lobbyists. If you cut Medicare and Medicaid, when people have spent 30 or 40 years of their life contributing to Social Security and Medicare, that's gonna make, as I call it in the movie, America Burning.
So I think there's things to watch on both sides. My sense is that you also wanna watch what the president says. 'cause as the leader, people take seriously what he says. It's probably a reflection of his own instincts and what he's experiencing within his cabinet. It felt like some of his cabinet ministers and some outside powerful people like Jamie Diamond and others, tried to get him to calm down a little bit with regard to the announcement of tariffs.
I would say if you had some settlements in the Ukraine, in Gaza, and a treaty vis-a-vis Taiwan. That might create the basis for reducing military budgets and helping, as David Soman said, getting rid of $2 trillion a year. But I don't know if that's viable or that's feasible. When I mean feasible, I'm talking about lobbying power.
Ben: Lemme ask you a final question here. So, if you were a benevolent dictator of the United States and you could implement whatever policies you wanted. To address these problems you've been outlining, what would they be?
Rob: Well, I'd probably, I. As I just spoke about, do several things, but I'd go to the military question and saying, right now we can't afford this, so let's do things with the Ukraine. Let's do things with regard to the Middle East to create stability, create peace treaties, create nuclear disarmament. A lot of the wealthiest people in America keep their money offshore.
I think if you want to reduce the budget deficit, you can't have the people that may all the money not pay any taxes or the stress on others becomes acute. I would want to take on, not in the short term, but in the medium term, the Citizens United decision about the role of money relative to the MO of people and common good and therefore votes.
I think that would help rebalance the republic. I think the medical industry and private equity related to medical industry needs to be scrutinized for why these costs are so much higher than what is even more successful in other places. We always talk about the free market economics. If you leave it alone, the innovation will raise us all up.
So if you say, I've got something costs twice as much, but it's five times as good, well maybe that's better value. When something's twice as costly, like our healthcare, and we're at the bottom of the list for the quality, we got some changes that need to be explored and particularly as it relates to federal financing.
I think the final recommendation goes back to the experience that we've had from the time of the savings and loan bail out, that what some are saying is that we have the mother of all moral hazards. Banks can take risk. And if it is good, they keep the upside and if it goes bad, they get bailed out. And the taxpayer assumes that responsibility.
It affects how the Federal Reserve can operate relative to inflation in the goods market. Because if it resists too much and it leads to distress like the SVB episode or whatever, then it leads to the need to bail out.
Ben: Silicon Valley Bank.
Rob: Yeah. Silicon Valley Bank. So you have a lot of questions now about how j, the incentives that are created in a highly leveraged financial market and whether that is healthy.
I. Or even safe for the health and wellbeing of our country. And then you have an international system where the bank for international settlements has worked during previous crisis in conjunction with the United States to create what I'll call dollar credits around the world so that you don't have liquidation crisis of people using the dollar as their reserve currency.
But I think looking at that system and looking at the benefits and the costs, and then looking at the distributional ramifications within the United States related to this stress that we're now talking about China and globalization. But I'm saying the sources of this stress can be many different aspects.
And I think my friend Alex Gibney I mentioned, and David Sarone did a. Audible program. There was an audio book about five episodes called Meltdown. What they were talking about was the meltdown of finance. It was the meltdown of confidence in governance when we kept bailing out Wall Street and not taking care, say of the Rust Belt and things like that, and they didn't prescribe a cure.
They alluded to the dissatisfaction that many citizens would have related to say, the federal support for education not being there. But this federal support for aggressive bank speculation is vivid. So how you recompose the policy structure of the nation so that it feels like it's morally grounded. It views the economy as a tool, not as a deity.
I think it's important
Ben: Well, it was fabulous to see you again.
Rob: and likewise. I think your curiosity is a gift for a song.
Ben: Well, at least keeps me up at night, so I really appreciate it. It was fabulous and onward.
Rob: Hope to see you again soon.
Ben: You have been listening to Onward, featuring Rob Johnson. My name is Ben Miller, CEO of Fundrise. We invite you again to please send your comments and questions to onward@fundrise.com.
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