Episode Transcript
[00:00:00] Speaker A: Foreigner Itadsy. And welcome back to Going Underground, broadcasting all around the world from the UAE where trilateral Russia, usa, Ukraine talks could be held amid US backed turmoil across this region. The UN General Assembly's general debate starts tomorrow in New York with Brazil's Lula who has been on this show flying first to address world leaders. After Lula comes a Trump mired in catastrophes of his own making. The genocide in Gaza and war on Russia through Ukraine with US weapons continues. And his Epstein Netanyahu war in the 250th year of the USA's independence has transformed the balance of world power forever. Billions are suffering from the war on Iran. Ahead of GOP defeat in November midterms comes this week's White House Trump Xi Jinping meeting. American global dominance is now gone. And to tame inflation fueled by Washington, Washington's failed war in Iran, the Fed has hiked rates for the first time since 2023. Meanwhile, Western Europe has now been geopolitically and economically defeated by Russia and the global south is beginning to avoid the dollar. As for the US's non kinetic power, its sanctions are routinely violated all around the world. Remember, their sanctions killed 38 million in 152 countries between 1971 and 2021. Joining me again is one of America's best known economists who has advised governments from Argentina and Venez to the usa, Russia and the uae. Professor Steve Hanke joins me from Baltimore in Maryland. Thank you so much, Professor Hanke, for coming back on Going Underground. Let's kick off with what the impact of US higher interest rates are going to be on the world. An imperial tax of dollar hegemony, some might call it.
[00:01:49] Speaker B: Well, that just occurred for our viewers as we cranked up for this interview.
It was anticipated the markets had priced in a rate increase of the federal funds rate, the one that's controlled by the Federal reserve in Washington, D.C. of 25 basis points. And they had a 93% probability that that would occur. So it's not really a surprise.
But it's very interesting because the new chairman of the Federal Reserve, Kevin Warsh, really the day that either makes him or sinks him, because of course, Trump, the president is not wanting the interest rate to go up, he wants it to go down.
So we'll see whether he attacks his new appointee as chairman of the Fed and if he does, at the time
[00:02:46] Speaker A: of this recording, I should say at the time of this recording, Kevin Walsh still is running the Fed. But my question more is what should people around the world be doing? Should people be selling long term bonds at a loss? What would be your advice given this rise in interest rates that your data long predicted since you were last on this show? Actually.
[00:03:10] Speaker B: Well, the U.S. bond market is in a real slump, but it's partly the factor that it doesn't really have that much to do with the fed funds interest rate. It has to do with the money supply and what's going on with the money supply. And if you broadly measure it correctly with what's called Divisia M4 that measured the money supply that's produced by the center for Financial Stability in New York, where I'm a special counselor, that's running hot.
Last year it was running at 5.4% annual growth and now it's running at 7.9% annual growth. So it's going up, it's surging up.
And to be consistent, to have a monetary growth rate consistent with hitting a 2% inflation target, Hanke's golden growth rate is 6% or a little bit lower than 6%. So they've exceeded that and the whole thing is accelerating.
So this means that the inflation genie is out of the bottle and it will stay out of the bottle because once you change the rate of growth in the money supply action, there's a lag between that change and the time inflation kicks in.
So we've had this increase, increase, increase and that means that the inflation's going to be around for a while simply because there's a lag between those increases and, and the inflation rate.
[00:04:49] Speaker A: So can I take it you're telling people to, can I take it you're telling nation states to sell their long term bond holdings in U.S. treasuries?
[00:04:58] Speaker B: Yes, I wouldn't want to be holding them.
If I was a private investor, I wouldn't want to be holding them. And I've indicated now for months to stay away from the bond market in terms of long term bonds. 10 years or longer, like 30 years, because I said they would be tanking and they have been tanking.
But part of it is due to this inflation underlying problem.
Increase the money supply too much and you get too much inflation. That's one factor. Then you started the show by mentioning what's going on with the war in Iran as well as the one in Ukraine.
And those factors are negative for these long term bonds.
And then a third factor, you've got the US Secretary of Treasury Besson, who's trying to manipulate the markets by buying and supporting these long term bonds.
So he's buying back long term Bonds that are already outstanding and of course, that artificially props a price up and pushes the yield down on those long term bonds. But the trick is he's still got to finance the deficit that we're running in the United States, which means he has to sell more as a short term bonds. And when you sell more, the supply goes up, the price goes down and what happens? Bingo, the yield goes up on the short term bonds.
So there's no escape from the trap that he's in.
He's manipulating the thing around. He's trying to keep the interest rates artificially low on the long term bonds, but that means he must adjust and push them up on the short end.
So it's all a loser's game.
As I say, he's trapped and he's lost a considerable amount of credibility, I think, by trying this manipulation game that he's in, which by the way, is not working.
It's not working.
The bond vigilantes don't like what he's up to and they punished him last week by actually going against what he was doing on those long term bonds. The long term interest rate didn't go down as he announced that it would. It actually went up.
[00:07:36] Speaker A: You don't have to be an Austrian school fan, a fan of Hayek, to be fascinated by your work on CFS Divisier M4 indicators, because Marxists might like it. Countries all around the world need to study it clearly because you've been proven correct this year. But one scary element then is in February 26, February of this year, your Divizia figures looked surprisingly high.
I mean, do you believe they predicted the war in Iran, the mass killing of schoolgirls in Minab because the Divizia showed. I mean, we know that increased financial permissiveness allows governments to launch wars.
And your figures, they were out of line with other indicators, but they showed something was wrong.
[00:08:33] Speaker B: Well, let me just say that in this regard, correlation doesn't imply causation.
Of course, the divisia going up didn't cause the war. What caused the war is Netanyahu convincing Trump that he should go to war.
When Trump's old intelligence people, as well as the Secretary of State told him, no go, and the former head of Mossad said, no go, this is not going to work. You had the new head of Mossad and Netanyahu who basically took Trump to the cleaners and he went and he went to war.
[00:09:18] Speaker A: Yeah, but this goes to the heart. This goes to the heart of the relationship between economics and political decision making. For wars, doesn't it? Because if there's more money supply.
[00:09:28] Speaker B: Yes, yes.
[00:09:29] Speaker A: I mean, that is the other take aside from the Austrian school. Increased money supply allows for political expression in different ways.
[00:09:43] Speaker B: It allows for. It's exactly right. What we're talking about here is to figure out what's going on in the world. It's always good to follow the money.
And what's happened, the money supply was elevated before and now it's even more elevated after the war. And why is it more elevated? Because the deficits are larger. You know, they've just come out with this report of the Defense Department that, well, you know, the war is costing, you know, 30, 32 billion and they've asked for supplemental budget requests and it's going to go higher. Well, my, my estimate given, given the old estimates that were made with the Iraq invasion, remember they, they told us, Paul Wolfowitz told us that was going to be a cakewalk.
And the first estimates of the cost of the Iraq invasion were 200 billion. Well, it ended up, you had to multiply that by 25 to get the actual number.
So it was way off. So if you multiply the current estimate of the 32 by 25, you get about a trillion.
And what's going to happen?
Either that's going to be coming out of taxpayers pockets directly by increasing taxes to pay for it, or more likely it will be an inflation tax where the Fed monetizes part of this deficit as they did during the COVID pandemic in 2000 and 2021. And what did that do? That gave US June of 2022, the highest inflation rate we've had for a long time, 9.1% per year.
So that's all of this war, by the way, is behind ultimately increasing the fiscal deficit, increasing the rate of growth in the money supply, making it too exaggerated, giving us more inflation. And then you come back to well, would you hold these bonds or not? And the answer to that is no, because bond yields follow the rate of inflation. If the rate of inflation goes up, bond yields go up, and if bond yields go up, that means the price of the bonds go down.
[00:12:11] Speaker A: But isn't the point that raising interest rates, which will make businesses suffer and homeowners suffer and the middle classes suffer across the world, that isn't necessarily the best way to curb inflation.
Not having a war would have curbed inflation.
You know what I mean? Yeah, that is the Marxist critique of your approach because you're saying, okay, hike the interest rates because inflation's going up. And my God, the CFS is now raising all of its, it's upgrading all its percentages for June and July up from.
[00:12:54] Speaker B: Yeah.
And we should mention, isn't that the point?
[00:12:57] Speaker A: Don't have wars on Iran. Don't have the war in Iran. Don't start the war on Russia through Ukraine.
[00:13:02] Speaker B: Of course. War, war. From an, from an economic point of view. Name one war that's ever been a good thing from an economic point of view.
Just looking at it from an economic point of view. I'm not talking about other points of view. But you know, they cost a lot, they waste a lot of money and there's tremendous collateral damage. I mean, look at what's going on right now in the Middle East. We've got two choke points, two straits that are basically shot and one of the biggest oil producers. Look at the Saudis.
The Saudis were producing last year about 9.5 million barrels of oil a day.
Then in August that was reduced down to 3.2 million barrels a day. That's a 66% decline.
And now the hooties have basically shot them down.
[00:13:58] Speaker A: Professor STEVE Professor STEVE Hagee, I'll just have to stop you there for the break.
We'll have more after the break. From the Johns Hopkins Applied Economics professor after this break.
[00:14:12] Speaker B: Foreign.
[00:14:16] Speaker A: Welcome back to Going Underground. I'm still here with the professor of Applied economics at Johns Hopkins University, Professor Steve Hanke. Professor Hanke, I rudely interrupted you in part one when you were talking about the decline in Saudi output. I should add to that that Saudi Arabia recently killed off Oman meeting between Iran and GCC countries. I mean, what does all this mean for truck drivers in Iowa, let alone the entire global South?
[00:14:44] Speaker B: Well, it's basically on our theme. It's a war tax. It's an Iran war tax.
Truck drivers, if you go up the i95 corridor, the big highway on the east coast, it's just filled with semi trucks. They're all running on diesel and that's how goods are moved around from store to store. So they're hit. Now also the state that I grew up in, Iowa, that's where the tall corn grows. That's where the richest soil in the United States is farm country.
It all runs on diesel.
All of it runs on diesel and fertilizer. By the way, speaking of two items that the price has shot up because of the war and other war costs.
Interestingly enough, the environmentalists, the left wing environmentalists, by the way, never talk about the environmental damage associated with the war. The rice go was sunk. The US sunk that there was a huge oil spill associated with it that is about eight times more larger than the oil spill associated with the Exxon Valdez. Remember the Exxon Valdez up in Alaska? That was a catastrophic spill.
And this one looks like it's going to be eight times larger than that.
And you don't even read about it in the paper.
[00:16:20] Speaker A: Yeah, the environmental effects, that's the cost. I mean, you said in part one, war doesn't benefit people. Of course it benefits GDP figures, because there'll be cleanup of that which will be required to save the marine life and the environment in this region after what Trump and Netanyahu have done.
[00:16:37] Speaker B: And I would argue that that should be deducted from gdp. That's a cost, not a benefit.
So. So the gdp, remember Afshan, that's a gross number that, that's the value of all goods and services that are sold in the economy.
But some of those, for example, cleanup costs, everything associated with the cleanup, you'd have to subtract that to get a net number to see if you actually were better off or not.
So there's a lot of drag on gdp.
[00:17:10] Speaker A: Not the way the World Bank.
Not the way the World bank calculates it. Alas.
Sorry, go ahead.
[00:17:22] Speaker B: Oh, that's okay. Well, I mean, actually that's not the way they calculated and kind of the top level number. But a lot of the researchers, let's give them credit, they actually get into this kind of thing.
But those research reports are not reported in the mainstream press.
They're the kind of things that academics look at.
[00:17:51] Speaker A: Yeah, I mean, if a couple divorces famously and splits up the assets, it's good for gdp.
That's what GDP also measures famously.
But so do you think Trump is increasingly acting as if he is some sort of agent of brics. He's prolonging the war on Russia through Ukraine. He's uniting brics around Iran.
I mean, what is the Trump plan? And I don't know whether this is connected. I mean, why did he so need to prop up the yen?
De facto borrowing to pump up the yen.
[00:18:29] Speaker B: Well, let's get the big picture. Number one, we don't know exactly what's in his mind and he clearly has no strategic plan.
We already know that. But his plan and his modus operandi, it's a Roy Kahn, remember that infamous lawyer, Roy Cohn, who ended up being disbarred?
McCarthy's chief lawyer and big troublemaker.
[00:19:01] Speaker A: Helped to execute the Rosenbergs. Helped to execute the Rosenbergs.
[00:19:04] Speaker B: Yes, yeah, exactly. That's the guy we're talking about. But what was his template? His, his modus operandi?
Attack, attack, attack.
Point number one. Point number two. Deny, deny, deny. Point number three. I won, I won, I won.
That's Trump.
So that's all you need to know to understand Trump. Now, let's go to brics. Let's just take these one by one.
Trump is making so many enemies that all these foreign groups, brics, no one would care anything about brics, but Trump has put oxygen into the thing.
So BRICS has had a meeting and now it's a big deal and they come out with a joint communique where everybody, even all the parties in brics, by the way, don't wear the same shirts and pants.
They're quite different, actually.
[00:20:04] Speaker A: Although many of them have been advised by you. Although many of their governments have been advised by you, I should add. Sorry to interrupt there.
[00:20:11] Speaker B: Well, yeah, that is true, but the fact is they signed, which I would have advised them to sign.
All of them signed the communique from the last meeting.
And the communique actually was, in rhetoric anyway, fairly tough, that they would be opposed to any unilateral wars like the war that was started, a war of choice by the US and Israel on Iran. They would condemn that going forward.
The problem with bit BRICS is they haven't condemned the war in Iran.
So there's a gap between the rhetoric and reality. So we don't know whether all these statements in the communique will have much teeth, but at least there was a communique and it said the right thing and they all signed it. And why?
Because they have, shall we say, a negative feeling towards Trump. It isn't warm and fuzzy.
[00:21:31] Speaker A: Venezuela, of course, is famously not allowed into BRICS because of a veto by Lula, who's speaking at the UN General assembly first on tomorrow.
I was shocked when I heard that you were somehow involved in the dollarization of the Venezuelan economy with Antonio Ikari. Just tell me a little bit about that. I mean, we all understand Delsey Rodriguez has a gun to her head. I think you've even said that when it comes to privatizing the entire economy.
How do you think that's going to work?
[00:22:03] Speaker B: That story really starts in 1995 when I was President Rafael Calgar as chief advisor and why he was worried about the stability of the Bolivar, the money. And he wanted me to design a system similar to the one that I put in place In Bulgaria in 1997, a currency board. And the currency board, you just issue a Bolivar it would trade at a fixed exchange rate freely with the anchor currency, the US dollar, and be backed 100% with US dollar reserves. So in that case, the Bolivar would just be a clone of the US dollar. Well now move fast forward to today.
Given everything that's happened since Chavez came in 1999, the disaster that's occurred down there, and the lack of any kind of rule of law, et cetera, et cetera. Now I've been proposing and advocating getting rid of the Bolivar once and for all, getting rid of their inflation problems once and for all, getting rid of their instability once and for all, and just replace the Bolivar with the US dollar. And Antonio Ikari, congressman in the National Assembly. I'm his advisor, the special advisor on economics, monetary and Energy affairs. And he was just in my office and we're pushing ahead with this idea.
[00:23:31] Speaker A: Surely there'll be. I lived in Venezuela. I'm sure there'll be mass violence against any attempt to dollarize the Venezuelan economy. Chavez improved the lives. Chavez improved the lives of millions of people. How on earth, especially in the context.
Chavez did not destroy.
[00:23:50] Speaker B: He destroyed the country.
We disagree fundamentally here. Empirically. He destroyed the country empirically on facts
[00:23:57] Speaker A: like literacy, homelessness, hunger, housing, medical systems. On every human indicator.
[00:24:05] Speaker B: You must be kidding. You must be kidding. Look it up.
[00:24:08] Speaker A: World bank statistics on JavaScript. But it depends on what one thinks of as human indicators, doesn't it?
[00:24:15] Speaker B: I'm not going to get in our argument with you on air. We can discuss this off air.
And I firmly and totally disagree. It's a complete fail state at present thanks to everything that Chavez did. The guy was a complete disaster and put in a huge corrupt system.
Corruption up to the eyeballs.
[00:24:40] Speaker A: You should have seen the corruption under Carlos Andres Perez when I lived in Venezuela. I got to tell you, who was the US back then?
[00:24:47] Speaker B: There was a lot of corruption.
[00:24:48] Speaker A: We're running out of time.
We're running out of time. Professor, I just got to ask you about China.
[00:24:53] Speaker B: Precisely why Caldera brought me in in 1995 to put in a sound currency system that would mitigate the corruption problems that were occurring even back in 1995. Now we just did a survey that was just released in and 82% of the adult population in Venezuela is 100% for dollarization.
And it doesn't surprise me because it's a squeezed economy.
[00:25:22] Speaker A: It's a squeezed economy whose president has been kidnapped after all. But we're running out of time. I'm just going to ask you about China because the Xi Jinping meeting is coming up with Trump.
What scope do you think Xi has of threatening Trump on rare earth metals? And how careful does China have to be as it unwinds its US treasury holdings now?
[00:25:43] Speaker B: Oh, I think the ramp up to the meeting will be that the Chairman Xi holds all the cards.
He's going to run the show. It's not going to be a Trump show.
I mean, maybe it will be for the public, but she will be, she isn't going to be threatening anything.
He just has the cards and he will be running the show.
And international opinion is behind him because everyone, look at brics, they're all pivoting. Towards what? They're pivoting away from the U.S. that's a general thing. But inside they're pivoting towards China.
Even India and China are mending fences.
You've got Modi kissing Xi's ring.
Why?
Because Xi is running the show.
The cutting edge of what's going on is China.
[00:26:45] Speaker A: Professor Steve Enke. Thank you.
[00:26:48] Speaker B: You're most welcome. I left you speechless. That's the first time that's ever occurred on Going Underground.
[00:26:53] Speaker A: For the record, that's it for the show. Our condolences, of course, to all those of you bereaved or affected by Washington's wars of aggression. We'll be back Saturday with a brand new show. Until then, keep in touch via all our social media, if it's not censored in your country. And head to our channel, going underground TV on rumble.com to watch new and old episodes of Going Underground. See you Saturday.
