monetary system.

Currency Wars, The Death of Money, The Road to Ruin.

I have a new book coming out and of October called Aftermath.

And these four books together are what I call the International Monetary quartet, or almost

the four horsemen of the monetary apocalypse.

My view is that the world has been in a depression since 2007, and will remain so for an indefinite

period of time.

And when you say that people are, wait a second, we know the definition of a recession.

The technical definition of a recession is two consecutive quarters of declining GDP,

rising unemployment.

There's a few other bells and whistles, there's a little bit of subjectivity to it.

The National Bureau of Economic Research are the unofficial but widely followed referees

on when you're in a recession and when you're not.

Well, we're in the ninth year of an expansion.

The expansion started in June 2009.

Here we are in the summer, 2018, nine years behind us, in our 10th year.

So wait a second, how can we be in a depression if we're in the 10th year of an expansion?

And the answer is, that people don't really understand the definition of a depression.

They assume intuitively, well, if a recession is two quarters of declining GDP, and a depression

sounds worse, it must be quarters of declining GDP.

Well, we haven't had that.

As I say, we're in the 10th year of an expansion.

But that's not the definition of a depression.

The definition of a depression is a sustained period a below trend growth with no particular

tendency to collapse or getting back to trend.

In other words, if trend growth-- I'll use the United States, but you can apply this

more broadly to the world-- if trend growth is three 3%, 3.5%, and that's probably the

long term potential of the United States, higher nominal growth with inflation, but

we're talking about real growth-- if trend is three 3%, 3.5%, and you're running at 2%,

that gap between say 3.5% and 2%, that's depressed growth.

So yes, you have growth, you're not in a technical recession.

But you're in a depression because you're not getting back to that trend.

And people say, well, 2%, 3%, 1 percentage point, who cares?

No, that gap is huge.

And because of the compounding effect, think of it as a wedge.

There's the trend line.

Here's the actual line.

That wedge gets bigger.

So we're 10 years out.

We've left $5 trillion of potential growth on the table.

That's the output gap or the growth gap, the difference between depressed growth and trend

growth.

That's how much wealth has been lost because of this depressed growth.

By the way, that definition I gave, a sustained period of below trend growth, that's not my

definition.

John Maynard Keynes came up with a definition in the 1930s.

It was good enough for him, it's good enough for me.

I think it's accurate.

But being objective using the numbers I mentioned, we're in a depression, we're going to stay

that way.

The United States is Japan.

You know, Japan had the famous lost decade.

Well, the lost decade was 20 years ago.

Started in 1990 through 2000.

Japan is now almost at the end of their third lost decade.

The United States has had a lost decade from 2007 to now 2018.

If something doesn't change either in terms of policy or a collapse, something gets worse,

but absent that, we're going to remain in this kind of pumped 2% growth as far as the

eye can see.

People say, well, second quarter GDP, Atlanta Fed predicts 4.5%.

Yeah, but we've had 4% and 5% quarters in the last nine years.

They don't last.

You get these spikes.

You get it real good you know 4% print, and then the next quarter's 2%, and the one after

that is 0.5% or maybe even negative quarter.

So a year and a half into the Trump administration, he's producing the same kind of growth as

Obama, and I don't think it's policy driven.

I'm not saying one guy is a good guy, one guy's a bad guy.

What I'm saying is that the headwinds, demographic, technological, productivity, psychological,

et cetera, haven't changed, and there's no reason to expect they'll change.

So combine this world depression, because what I just described is true of Japan, it's

true in Europe- - not so true in China, but China is a special case.

They cook the books.

Maybe we can talk about that.

Their 7%, 8% growth that they've been printing, cut that in half, because 45% of that growth

is infrastructure, most of which is wasted.

So if you apply generally accepted accounting principles, made them write off all that wasted

investment, they'd be a lot lower than it appears.

But the whole world is caught in this trap.

Meanwhile, debt is going up faster than the growth.

Is debt good or bad?

Well, it depends debt can be good, if you can afford it, if you can pay it off, and

you can use for productive purposes.

It's bad if you can't afford it, it's not sustainable, you're using it as a substitute

for real growth, and it's all going to crash and burn.

So you can't understand debt in isolation.

You have to understand debt relative to income.

And that debt to GDP ratio, which is something I spent a lot of time looking at, the GDP

is kind of chugging along, not going up very much.

But the debt is going like this, the debt to GDP ratio is getting worse.

It looks like we're heading for a global debt crisis.

Not quite there yet, but it could happen sooner than later.

Very little doubt that Fed is going to tighten in September.

The baseline scenario for the Fed is straightforward.

They're going to tighten four times a year, every March, June, September, and December,

25 basis points each time, until they get interest rates up to you know 3.75%, 3.5%,

somewhere in that range.

Unless one of three pause factors applies.

The pause factors are disorderly decline in the stock markets.

Employment starts to go down, they basically lose jobs, unemployment's going up.

The third one, disinflation or deflation spins out of control.

Meaning core PCE goes down to 1.4%.

Right now, it's at 2%.

Right now, none of those three pause factors applies.

The stock markets, they're going sideways, but they're not crashing.

The Fed doesn't care if the stock market goes down 15% in six months.

They do care if it goes down 15% in six days.

That's disorderly and that's the kind of thing where you would see the Fed pause, but that's

not happening right now.

Job growth is strong.

Inflation is ticking up.

I don't think it will spin out of control, but we're out of that disinflation danger

zone.

So none of the three pause factors applies.

Therefore, you should expect the Fed to just keep raising.

So my forecast for September would be yes, and then at this point, December, more likely

than not.

But there's no doubt that Fed is over tightening because in addition to trying to get interest

rates back to normal, they're also reducing the balance, they're trying to normalize the

balance sheet.

But now the Fed has a dilemma, which is, what are they going to do if the US economy goes

into a recession.

As I said, we're in the 10th year of an expansion.

The old cliche, expansions don't die of old age is true, but they do die.

And history shows that it takes about four percentage points of cuts, 400 basis points,

in other words, to put the Fed to get the economy out of a recession.

Well, how do you cut interest rates 4% if you're only at 2%?

The answer is, you can't.

You cut them to zero, and then you're stuck.

You're at that zero bound and the evidence is good that negative rates don't work.

So then what do you do?

Well, then you go to QE 4, we're going to print some money again.

But there, if you had the balance sheet at $4.5 trillion, how high can you go before

you destroy confidence?

$5 trillion, $6 trillion, $7 trillion?

Well, the modern monetary theorists would say, yes, I disagree, and I think the Fed

disagrees, as shown by their own actions in trying to reduce the balance sheet.

So what the Fed is doing.

They're trying to raise rates to 3% or 4%.

They're trying to get the balance sheet down to maybe $2 trillion, a little bit less so

that when the recession hits, they can run the playbook again.

They can cut rates, and if necessary, do QE.

But here's the dilemma.

Can you normalize interest rates and normalize the balance sheet without causing the recession

that you're preparing to cure?

That's the conundrum.

I think the answer is, no.

I think that actually in trying to tighten to get ready for the next recession, they're

probably going to cause the recession.

There's no data, no time series that tells you how this is going to play out.

Except during QE, what did we see?

We did not see a lot of inflation, but we saw asset prices blow up, stocks, real estate.

Other asset categories.

They all went up a lot.

So it seems at least the kind of first order intuitive that if you print money, asset prices

go up.

If you destroy money, asset prices are going to go down.

So what the Fed is doing, they're destroying money, reducing the money supply.

So they're really double tightening.

In addition to the four rate hikes a year, this reduction in the balance sheet is probably

equivalent-- this is an estimate-- probably equivalent to four more rate hikes per year.

So they're actually tightening on a tempo of about 2%.

Probably going to throw the economy into a recession.

The Fed has never forecast a recession.

They have a terrible forecasting record.

This will happen before they know it.

Of course, we all know that stocks go down.

So based on that, I'm not bullish on growth and bearish on stocks.

Bullish on the euro.

Gold is actually doing fairly well, considering the headlines.

People said, well, gold has gone up a lot.

It's true.

I'm surprised it hasn't gone down more given the tightening environment that we've described.

So gold has actually performed fairly well, given the environment.

Now what I do expect is in time, as the signs of a recession emerge, yield curve inverts,

growth slows.

Job creation slows down.

Not a full scale recession or crash, but just enough warning signs, and the Fed reverses

course, that all of a sudden, they do pause at one of these meetings, gold's going to

skyrocket.

Because that's an admission.

At that point, the Fed is throwing in the towel to say, you know, we really can't escape

the room.

We can't get back to normal.

Because when we try, we sink the economy.

And we have to back off from that.

And that's when gold will shine, no pun intended, because it'll be very clear that the Fed cannot

get out of this easy money mode.

One thing I never do-- I never make a forecast or make a claim without backing it up.

Maybe there are people out there that are a dime a dozen, this is going to crash, or

this is going to go up, or growth is great, or it's so whatever.

That's fine, but you need to back that up with some kind of analytics, some kind of

data, some kind of analysis that you can do.

And I always do that, I'm always happy to kind of drill down on that.

So the methodology I use is quite different from what Wall Street forecasters use.

But actually, recently, with some partners, and some scientists, and other investors formed

the company to do this.

This is a third wave artificial intelligence.

First wave is just big data crunching, correlations, and regressions.

That's fine.

Second wave is what they call machine learning.

So as the machine is running these, it actually gets data itself, and begins to, in effect,

reprogram itself based on what is learned from the correlations it's finding.

Third way.

So we do the first two.

Third wave, which is what we're doing, is actually closer to cognition.

It's teaching the computer to actually kind of think, use inferential method.

You know, the frequentist statisticians-- and Janet Yellen is a classic example-- they

say, more data, more data, more data.

Well fine, but what do you do when you don't have the data?

You're trying to solve hard problems.

You don't have the data.