The end of the U.S. dollar gold standard in 1971 had unexpected, far-reaching consequences for the United States and its adversaries, ones that are central to today’s economic and geopolitical realities. What happened?
Jeffrey Tucker is the senior economics columnist at The Epoch Times and the founder and president of the Brownstone Institute.
“You’re gutting your entire industrial base and turning yourself into a whole country of indebted and stupid consumers. And you’re not making anything anymore. This is a crazy system,” said Tucker.
In this episode, we dive into what’s really going on with the U.S. economy. Are we in a recession? Are prices and unemployment rising or falling? What about domestic goods and imports? And what is the data really saying?
“You need to adjust this data by inflation, which is easy to say. But if you’re going to do that, you need an accurate reading of inflation. And if you don’t have that, you’re going to end up with inaccurate data,” said Tucker.
He claims that many financial indicators we use to measure economic growth are inaccurate. Watch the video:
“So now, we’ve got the highest rate of multiple job holders we’ve ever seen. Some people are holding two full-time jobs, which is extremely strange,” he said.
Views expressed in this video are opinions of the host and the guest, and do not necessarily reflect the views of The Epoch Times.
FULL TRANSCRIPT
Jan Jekielek:
Jeffrey Tucker, such a pleasure to have you on American Thought Leaders.
Jeffrey Tucker:
Thank you, Jan. Thanks for having me.
Mr. Jekielek:
Let’s talk about the new employment numbers. People are suddenly yelling recession, even though everything seemed fine.
Mr. Tucker:
Yes, it’s strange to watch. Just one set of numbers, released on Friday morning, showing a small increase in the unemployment rate, completely shifted the attitude in Washington, Wall Street, and the mainstream media. We went from celebrating a booming economy and the absence of inflation to suddenly believing that a recession is probably already here. The world seems to be falling apart, and panic selling begins. It’s an overreaction, to say the least.
First, the data is already a month old, so the recession didn’t just happen on Friday. It was from the previous month. Secondly, the numbers weren’t particularly bad compared to the past. It has been obvious to me and many others for at least two years, if not longer, that we never fully recovered from the lockdown period. Worker participation ratios and labor participation rates are still below 2019 levels.
When we analyze the jobs data, we see a growing gap between the household survey and business payrolls, indicating potential double counting in the establishment survey. This gap never existed before, but now it’s widening. It’s becoming more extreme, with one set of data dropping and the other rising. This has been happening for several months over the past year.
Additionally, there have been revisions to the jobs data every month. For example, they would initially report 220,000 jobs, but then revise last month’s 190,000 jobs down to only 90,000 jobs. Where did those jobs go? It seemed like all the jobs were being pushed forward a month and taken out of the previous month’s count. There have been illusions in the data all along.
I lost interest in the headline unemployment numbers because they don’t include discouraged workers or account for people who have dropped out of the workforce. The unemployment data only counts those who are actively looking for jobs and can’t find one. While that number may be relatively low, it doesn’t mean a healthy job market.
In other words, the job market has not been healthy. For a very long time, there was something that shattered the psychology of denial on Friday morning. It had something to do with Wall Street and the attachment of Main Street Media to the headline unemployment number. Once that news broke, everything else crumbled, and suddenly someone shouted, “There’s an elephant in the room!” and chaos ensued.
Mr. Jekielek:
Why are these numbers so different? You’ve been covering this issue and examining various types of data.
Mr. Tucker:
I can’t stop writing about it; I’ve become obsessed. As an economist, I have always been taught to trust the data. Economists trust the CPI [Consumer Price Index], GDP [Gross Domestic Product], and jobs numbers, much like epidemiologists put their trust in vaccines. It’s an integral part of our profession. If these indexes are compiled incorrectly and cannot be trusted, then what can we trust? It’s like a professional doctrine and I have never doubted them.
However, in the past four years, I started scrutinizing these numbers more closely, with a genuine curiosity. Sometimes, you don’t notice something until you have a reason to look for it. In recent years, I have become somewhat obsessed with deconstructing these figures.
What I have come to realize is that they have always been approximations, but it feels like they have become highly politicized and muddled, especially since the lockdowns disrupted everything. The labor numbers, the output numbers, the trade data, everything fell apart. It has taken a long time to regain more accurate data collection, and during that time, trust has eroded. For instance, fewer businesses are willing to participate in surveys, resulting in fewer responses and less accurate data.
We can delve into each of these numbers, but I want to quickly touch upon the issue of unemployment. We typically observe business cycles, believing that economic activity fluctuates with periods of growth, followed by corrections and recoveries. This has been a widely held belief for centuries, and it has proven more or less true for a hundred years.It is crucial to accurately date the business cycle.
When did the recovery start? When did the recession begin? How long did the recession last? How significant was the recovery? How long did the growth period continue? These questions are of great interest. Why do we ask them? We are curious about whether the world beyond our personal experiences is truly functioning.
What kind of world are we living in? Are we becoming wealthier or poorer? What is happening to the status of others? How is our country faring? Are we expanding or contracting? We seek answers to these questions. The only way we can truly find these answers is by collecting and analyzing data.
We conduct what may be considered as a form of science, feeding information into machines and waiting for the results. We label the outcomes as recovery, recession, growth, shrinkage, or whatever the case may be, and we use these labels to ascertain our current situation. However, to make these determinations, we need standards. Traditionally, a recession has been declared when there have been two consecutive quarters of declining real GDP.
Now, let’s consider GDP numbers, which measure output. Output is a broad term encompassing various elements. Let’s assume we can measure it accurately. Real output requires adjusting for inflation. If the output numbers only reflect increases in prices, they are not useful. This presents another challenge because precise measurements of inflation are also necessary.
By combining accurate measurements of output and inflation, we obtain real GDP. We can then examine two consecutive quarters, which equate to three months each. If both periods show zero or negative growth, we conclude that we are in a recession.
This is the rule we follow, though it is one we have established and largely invented. Nonetheless, we have always adhered to it. However, in the first and second quarters of 2022, we faced a serious dilemma as we experienced two consecutive quarters of declining GDP. But no one wanted to acknowledge a recession at that time. Having a recession right now seemed like a terrible idea, terrible timing.
As a result, people began to argue that there was no recession. But how do we determine this? There has always been a caveat, and that is the condition of the labor markets. They must remain healthy for us to assert that there is no recession.There needs to be a rise in unemployment. If you have two consecutive quarters of declining real GDP and increasing unemployment, then it would be considered a recession. That was the explanation for the first and second quarters.
People like me are saying, “We’ve had two consecutive quarters of declining real GDP. That’s a recession. You can’t just come along and say it’s not a recession.” Well, apparently you can, because every previous recession has been accompanied by higher unemployment. What can you do about that? I guess you just have to accept it.
This continued until Friday, when we encountered a problem. We now have an uptick according to the so-called SOM rule, which says that a 50 basis points increase in the unemployment rate compared to the previous year is a recession, so now we have an additional problem—this shattered market psychology. My point is, nothing really changed except people’s perceptions. Suddenly, on Friday, everyone was screaming ”recession.”
Mr. Jekielek:
You’ve been asking questions about these unemployment numbers for some time.
Mr. Tucker:
Yes, I have. The jobs numbers have been really unreliable, especially because of the two surveys: the payroll survey and the household survey. Let’s say the bakery across the street fires a full-time employee and hires two part-timers. The phone rings, and someone asks, “How many jobs did you create this month?” The response might be, “We used to have one employee, now we have two.” But in reality, that still counts as one job.
On the other hand, if you ask the households, they will report how many people are working in that household. If you ask businesses, they will report how many people they employ. This is where the discrepancy arises. Over the past four years, after the lockdowns and when the economy started to recover, there has been a significant increase in the number of people holding multiple jobs.
This is due to various factors, including the impact of the hospitality industry during the lockdowns. They started hiring more and more part-time workers. As a result, we now have the highest rate of multiple job holders ever seen. Some people even have two full-time jobs, which is highly unusual.
I recently shared a story in my Epoch Times column about an incident at the grocery store. Normally, it’s considered rude to strike up conversations with strangers in line or comment on their groceries. However, I couldn’t help but notice that a lady in line had two collapsible clothes hampers, which I found intriguing. Being a bit chatty, I asked her about them, wondering why she bought two.
To my surprise, she explained that she was shopping for someone else through Instacart and didn’t know much about clothes hampers. Curious, I inquired further about her experience with Instacart and discovered that many people in the store were shopping for others through the service. This made me wonder about the prevalence of this phenomenon.
On a subsequent visit to the store, I encountered several more individuals shopping for others. I asked if they were shopping for themselves or for Instacart, and they confirmed they were indeed working for Instacart. I was struck by the fact that these individuals, many of whom had university degrees and full-time jobs, were dedicating their nights and weekends to this gig.
It seemed odd to me that despite having decent salaries and education, they still needed second and third jobs to make ends meet. This observation made me realize that there are larger issues at play in our country’s job market. Speaking of larger issues, I want to touch upon this inflation number, which ends up being really important.
Mr. Jekielek:
The amount of money injected into our system over the past four years is staggering, and it’s difficult to believe that there would be no inflation as a result.
Mr. Tucker:
Thank you for recognizing that. It puts you in a rare category of a person who actually understands the cause of inflation. In fact, I recently shared a chart in my Epoch Times column. I used the PPI, [Producer Price Index], which is a more reliable indicator than the CPI. If you look closely, you‘ll see that they are rising at exactly the same pace, just with a slight lag.
Now, let’s talk about M2. M2 refers to the fungible money, which essentially means it can be easily converted into cash. This includes checking deposits, checkable deposits, and other such assets. It’s quite fascinating how closely correlated these factors are. The correlation is almost exact. I was particularly intrigued to see this unfold because we have never witnessed a six trillion-dollar cash infusion over a span of 24 months. Actually, it was even less, more like 20 months.
Such a massive amount of money being pumped into the system is truly astonishing. This infusion happened because Congress spent an enormous amount of money, almost recklessly doling out trillions here and there. As a result, the Treasury found itself short on cash to comply with these spending mandates, so it resorted to issuing IOUs. These IOUs were then put on the market, seeking buyers.
The Federal Reserve, being responsible for managing the money supply, stepped in and said, “No worries, we’ll take them.” How did they do this? By buying these IOUs with newly created money. Essentially, they were using this money to purchase bonds, and this newly created money was injected directly into people’s bank accounts.
This situation is quite different from what happened in 2008 during the financial crisis. At that time, they implemented what was known as quantitative easing, although it didn’t cause price increases as many of us had anticipated. I personally thought it would lead to significant inflation, but I now understand that there was more to it. The Federal Reserve, through quantitative easing, created trillions of dollars and recapitalized the banks with it. Then Ben Bernanke came up with his supposedly brilliant solution, which we can discuss later.
But for now, let’s acknowledge that it served its purpose. They kept the money within the Federal Reserve itself as deposits, paying more than market rates to prevent it from circulating freely. It’s similar to the way they stored money in a giant mattress during the Great Depression. Consequently, it didn’t cause inflation.
However, in 2020, things were different. It was like a metaphorical helicopter flying over every city and county in America, dropping money from the sky. We had no idea what the outcome would be; predicting it was extremely difficult. But now, looking back, it seems glaringly obvious that it would generate an enormous and concerning level of inflation.
When Janet Yellen made her statement in the spring of 2021, she said, “We have transitory inflation,” and people interpreted it as temporary. However, transitory means we are transitioning from one thing to another. The problem is, nobody asked what we are transitioning to. What she should have said is that we are transitioning to a world where the value of the dollar is significantly less than before, as we have to pay for recent events.
The real question is, how much less? According to official data, it is a 20 percent decrease over four years. One dollar in 2019, it is now worth 80 cents. These figures are hard to believe, and anyone listening to this interview would most likely be shouting that it is not true. But they have seen their current grocery bills and know what they used to pay.
They know how expensive eating out has become. They are well aware that a lunch that used to cost $20 now costs $80. This is evident in personal experiences, such as replacing an air conditioner unit and paying three times the amount compared to ten years ago. People know this, whether it’s about shopping for cars, houses, car insurance, home insurance, health insurance, or the interest rates they have to pay.
Mr. Jekielek:
You have also addressed this issue in your writing. Some products have seen astronomical price increases, as you described. However, there is another category of products that have remained flat, and they show no signs of inflation. I haven’t seen anyone examine why this is the case.
Mr. Tucker:
Let me give you two examples—one related to domestic products and the other to international exchange, which is a complex matter in itself. First, let’s talk about the sector with the lowest price increase, which is wine, beer, and liquor. Their prices have gone up maybe 5 percent, perhaps 10 percent, or maybe not at all. I often visit local merchants and engage in conversations about their pricing strategies, profitability expectations, and the difference between retail and wholesale prices. I find it all very fascinating. I can still find a fantastic bottle of wine for $12, just as I could four years ago.
The reason for this is that profit margins have always been very high in the wine industry. The profit margin difference between a $1,000 bottle and a $30 bottle is not significant. They have always had hefty profit margins. It’s not that they are reducing their margins to keep prices low. The goal is to keep people buying, because nobody wants to raise prices on consumers, contrary to popular belief. It’s not corporations ripping people off. Businesses dislike charging consumers more money because it risks a decline in demand.
Unfortunately, they don’t know the price elasticity of demand for their products. There’s no guarantee in the universe that tells them how much they will sell at a higher price compared to a lower price. That’s just the law of demand. They want to avoid testing those limits. If they can maintain low prices while still making a profit, they will. Now, let’s talk about restaurants.
Restaurants are the least inclined to raise prices because the customers will complain. For example, your typical pizzeria has been selling the same pizza to the same customer four times a week for 10 years. It’s incredible how well customers know the menus and prices, and they will certainly protest if prices increase. However, restaurants operate on tight margins, and they face challenges such as rising costs for rent, transportation, and other inputs. How do they address this issue? The solution lies just down the street at the liquor store.
Liquor stores have always had higher profit margins, although they have now become tighter. Restaurants buy alcohol at wholesale prices and sell it at a retail markup because they know that the price elasticity of demand for drinks is different from that of food. For example, a person who wants a glass of wine with dinner is likely to also order a cocktail or a beer. Price doesn’t deter them in this case.
Consequently, the prices of liquor, wine, and cocktails at restaurants have skyrocketed. It’s unimaginable that five years ago, the house wine at a restaurant would cost $25 per glass. This change in pricing is driven by the fact that customers are more tolerant of higher prices when it comes to drinks compared to food.
Restaurants have reduced their profitability from 50 percent to 10 percent or 5 percent and compensate for this loss by charging more for drinks. Those who have observed this know that it’s true. This explains why, when you go to a restaurant, the waitstaff often ask if you want a cocktail. If you decline, they will try to move you along because they won’t make much money on you. It’s also the reason why you’re paying more for sparkling water, sodas, and everything else. That’s where the profit margin lies.
Let me clarify that this discussion is about domestic prices. The general rule is that if you had high profit margins before the onset of the great inflation, you’re now having to dip into those margins just to survive. You try to minimize passing those increased costs onto the customer. This is why fast food prices have risen by 80 or 100 percent. Their profit margins are already very tight, so they are highly affected by inflation.
However, other things, like liquor stores for instance, are not impacted as much. That’s just one example. But what I find most intriguing is the price of imports. They have experienced almost no inflation at all, which has been a saving grace amidst the great inflation.
Although it’s not possible to exclude import prices entirely from the CPI, doing so would significantly change the dynamics of the CPI.
Discovering these dynamics takes time. The other day, I needed to buy some bedsheets and checked on Amazon. I noticed that I could buy a set of high-quality, all-cotton sheets for only $45. How is that possible? Then it hit me—we no longer have a textile industry. We drove it out, and now it’s all based in China.
There’s a specific index for import prices that remains nearly flat. Meanwhile, we are dealing with massive inflation. Any goods that are produced in the U.S. from start to finish, and sourced entirely in dollars, have experienced something close to hyperinflation over the past four years. On the other hand, prices for all imported goods have remained steady. It’s truly incredible.
Mr. Jekielek:
When observing the overall numbers, the extent of domestic inflation is hidden.
Mr. Tucker:
I wonder if that’s true. While I know there is some truth to it, I’m unsure of the extent. It would be interesting to see the impact that flat import prices have had on the CPI. There must be a reason why the CPI is low, otherwise it doesn’t make sense. When you see significant increases in car prices, housing prices, fast food prices, and grocery prices, but the CPI remains low, something doesn’t add up.
It’s important to analyze things in more detail. While import prices do matter, there are also peculiarities within the CPI itself. For example, instead of including medium home prices, the CPI uses a measurement called owner-occupied rent. This distorts the real picture of home prices.
Similarly, the CPI uses hedonic adjustments for car prices, which can manipulate the perception of quality and impact the overall price calculation. These adjustments always reduce prices, even when quality degradation occurs. Furthermore, interest rates are entirely excluded from the CPI and housing insurance is not considered at all, despite its impact on affordability.
Mr. Jekielek:
We’re accustomed to relying on certain indicators to predict outcomes, but perhaps these indicators are no longer appropriate.
Mr. Tucker:
They may not be. This is easily demonstrated by utilizing various other tools. I have a friend who is a quantitative economist and worked for a healthcare company. He made two simple adjustments to the figures over the past few years. He replaced medium home prices with owner-occupied rent and included interest rates. With just these two adjustments out of 18 possible, he quickly calculated a figure of 127 percent inflation over four years. He showed all of his work, demonstrating that it’s just math. It’s quite intriguing.
Let me provide another fascinating example regarding the increase in health insurance prices. Many people might not be aware of how much health insurance has risen because a significant portion is paid by employers. However, the prices have dramatically increased. Interestingly, according to CPI, they were initially flat and then falling for two years before leveling out. This conclusion was reached by comparing the premium paid for health insurance to the amount of medical care consumed.
Surprisingly, during 2020, there was a one-third decrease in the consumption of medical resources, which future historians will find perplexing as it occurred in the midst of a pandemic. Nonetheless, from 2021 onwards, there was a significant rise in consumption. The CPI records a notable decline in health insurance premiums, even though they were increasing, because it measured the increased premiums adjusted against price. There could be arguments made about this approach, as it seems peculiar.
To say the least, 2020 was an unprecedented year, as it altered the dynamics of various equations. You are right about the problem with the CPI. In the past, the things excluded from the CPI didn’t create significant issues as they were not a substantial part of the index. However, if the most rapidly changing element is the one that was already most distorted in the CPI, then the model is broken.
Unfortunately, this is precisely what has happened in the last four years. The things that have experienced the greatest increase were already the most distorted in the CPI, such as interest rates. For 25 years, they remained flat, and then suddenly skyrocketed.Well, it doesn’t matter if we excluded them in the past. What matters is that we exclude them now.
The same applies to housing prices, health insurance prices, and cars. Hedonic adjustments may not have been a big deal in the past, but when cars suddenly increase by 50 percent or 70 percent, the hedonic adjustments become significant. All the things that have significantly increased in price, which were already problematic in the CPI, have been exposed even more during the post-pandemic period.
Sometimes, when I talk about this, people ask why we need an accurate measure of inflation. It’s because we use the data for other purposes, such as collecting data on retail sales and wholesale factory orders. If we only collect nominal data on retail sales, we won’t get useful or accurate information.
For example, if I got a haircut last month for $20 and now it costs $25, an economist might incorrectly say there was a 20 percent increase in spending on haircuts over a month. In reality, I got the same haircut, but the price increased, so we need to adjust this data for inflation. But to do that, we need an accurate reading of inflation. Without that, our data will be inaccurate. Even if we use the current CPI data and adjust it against retail sales, which are usually not reported in real terms for some reason, we won’t get an accurate picture.
My colleague at the Heritage Foundation, EJ Antoni, routinely adjusts retail sales and wholesale factory orders against a conventional reading of CPI, and shows they are not up, but rather down. This has been the case for the past four years. Once we start accurately measuring inflation, and I won’t speculate on the exact number, but we know it’s at least 127 percent over four years. You can verify this yourself by replacing owner-occupied rents with median housing prices and including the increase in interest rates as part of the CPI. If you continue and add real health insurance costs and real increases in house prices, where will it lead us?
I hope people are following along because the implications are truly significant. We began this interview with the question of whether we are recovering from the business cycles. Are we in a recession? That’s where we began this interview because we want to track and understand. We want to know in real terms, so let’s adjust these numbers for inflation.
What happens if we take the last four years of GDP data and correct it for inflation? How does that affect real GDP? I’m pretty sure it would show a negative rate for many years, possibly dating back to March 2020. It’s very possible that we never actually recovered from the supposed brief one-month recession. This is an alarming realization, which is why there’s now a sudden frenzy about the recession on the streets. I’ve been closely watching this for four years, and I’m not sure the recession ever truly went away. However, I do believe things are getting worse.
Mr. Jekielek:
You mentioned that imports have remained flat when adjusted for inflation, while locally produced manufacturing has significantly increased. Over the past few decades, the manufacturing sector has been greatly weakened, with much of it moving to China. The impact of what you’re describing might further devastate productivity in the heartland. Do you see it that way? It seems like this is an emergency that needs to be addressed.
Mr. Tucker:
I regret to say that this emergency dates back 40 years and it’s only worsening. We’ve destroyed a truly significant number of major industries, probably around 12 if I were to count them in my head. All of this started when we moved away from the gold standard. It’s not normal to have a country with numerous industrial sectors completely decimated. It doesn’t make any sense. Driving through New England today just breaks your heart.
How is it possible that a country known for its expertise in apparel, textiles, toys, shoes, watches, pianos, steel, consumer electronics, machinery, and so much more suddenly doesn’t produce any of those things anymore? We had the knowledge, the resources, the markets, and the supply chains. Is it right that we let all of that go to waste?
My point is that this isn’t true free trade. It doesn’t meet any standard of free trade. Someone might argue otherwise, but I can explain to you a theory presented by the great Scottish philosopher, David Hume, who wrote a letter to the great political theorist Montesquieu. The issue at hand was mercantilism. Does a country require an industrial policy to hoard gold and impose tariffs?
David Hume disagreed and stated that it was unnecessary. According to him, the process takes care of itself. When a country exports numerous goods, they import a significant amount of money, ultimately driving up prices. As a result, their goods become less competitive, leading to decreased sales and an incentive to import more.
This principle, known as the price-specie flow mechanism, was described by Hume and proved effective for 200 years. Specie refers to money based on real substances such as gold, silver, or copper, limiting its availability. Additionally, if a country were to release excessive paper money and experience inflation, Hume argued that it would self-correct over time. This point has proven to be accurate.
Other economists, such as Adam Smith, David Ricardo, and Frederick Bastiat, acknowledged and built upon Hume’s theory. Post-World War II, the theory was further developed and formed the basis for the General Agreement on Tariffs and Trade (GATT). However, in 1971, Richard Nixon abandoned the gold standard, resulting in fluctuating exchange rates and the creation of a global fiat currency market.
This shift had far-reaching consequences, sparking deindustrialization in the United States. Efforts to address the issue, such as James Baker’s attempt to stabilize exchange rates in 1985, were unsuccessful due to a lack of discipline and a solid anchor. The accounts no longer settle and deficits persist. Paper money is used to finance assets, which are often synthetic in nature.
These assets are predominantly purchased by China, who further inflates them, creating an enormous and ultimately unsustainable industrial base that lacks economic basis. This has led to China selling us products we used to manufacture without any adjustment. David Hume would likely question this approach and the consequences it brings about. He would say, “This is insane. You’re gutting your entire industrial base and turning yourself into a whole country of indebted and stupid consumers. You’re not making anything anymore. This is a crazy system.”
Mr. Jekielek:
Robert Lighthizer, the former U.S. trade representative, was one of the first to actually put the Chinese regime on notice with his policies. If any trade relationship runs in deficit in one direction and surplus another for too long without equilibrating, then that’s a problem. Someone is gaming the system.
Mr. Tucker:
That is true. By the way, I didn’t always understand this and I didn’t always believe this. I used to think that trade deficits and national income accounting were just mythical, but they’re not. Free trade doctrine, the idea that accounts settle over time, includes a built-in settlement mechanism. The exporters become importers, the importers become exporters, and everybody cooperates together for mutual benefit. That’s a beautiful world and how modernity was built.
However, you cannot have a system like the U.S. has with China where we print all the fake paper and send it out to the world because we happen to be the world reserve currency, thanks to the petrodollar system. This system was hammered out in 1976 to save the dollar from disaster and it lived on until last month. Where we have dollars, the world reserve currency, we produce a bunch of debt and export it to the world.
Their central banks buy it and inflate it to build industrial structures that compete against all the productive capacity in the U.S. They sell us cheap things and get us addicted to cheap products because, God knows, we like cheap products, and we don’t make anything anymore. That’s where financialization comes from. Debt is the leading export of the U.S. and a leading product that we make. This is not sustainable; it’s just not going to work.
You’re right, it’s getting worse, and it’s a tremendous emergency. Granting China, under the communist party, permanent trade relations status and then accession to the WTO in 2001 was the one-two punch that worsened the situation.The decline we’re witnessing was caused by a punch, and what you’re indicating is that there is another system at play here.
It’s not just trade, but rather the problem lies in the Federal Reserve’s creation of an excessive amount of money. This issue dates back decades and has worsened considerably over time.
Financially, there has been an influx of money and numerous dollar-based assets circulating the world. This situation allowed certain countries, like the one you mentioned, to peg their currency at an extremely low rate against the dollar, thus enabling them to become strong exporters and acquire our products at a disproportionately low cost. While observing from a distance, it becomes apparent that they are not producing iPhones, electric cars, or solar panels as expected.
Instead, they take advantage of credits assigned to their industry, underprice our goods, and then poof, our industries disappear one by one. This is happening because they are using treasury bills from their central bank, which they have inflated by 15 percent per year for the past 20 years. It’s important to note that this is the People’s Central Bank, and the inflation is based on dollar-based assets stored in their central bank, assets that were created by our Federal Reserve.
Mr. Jekielek:
In recent discussions, TikTok has been considered as one of the most powerful weapons in the Chinese regime’s arsenal against the U.S. and the free world. The subject you’re bringing up may also be vying for that same title.
Mr. Tucker:
I hate to say it, but the entire industrial structure of China is the arsenal. It’s not because China reformed its economy, despite what my dear free market, free trader friends may believe. It’s because the yuan was artificially kept low by using dollar assets held in the central banks. They manipulated the system with great success. Wake up, my friends, and take a look around this country.
Drive around America and observe. What do you see? The toys, the furniture, the textiles are all gone. Steel? Forget about it. We have lost everything. We used to be a nation of makers, producers, and manufacturers. We were the best in the world. We were not solely an export economy; we had imports too, just like others. That’s how the world prospered until it all fell apart.
The signs are everywhere—American industry has been gutted. This, my friends, is not a free market; this is not capitalism. It is a rigged currency system where one country decimates another’s industrial base. Now, you may be wondering, what can we do about it? I know that’s the question you have.
Mr. Jekielek:
We have been aware of some aspects of this for some time now, as we have witnessed the devastating social effects. Furthermore, the Chinese regime has added to the turmoil by waging a drug war on the very communities that lost all the jobs. Initially, we talked about a recession, but the economic reality you just described goes well beyond that.
Mr. Tucker:
Yes, it goes well beyond a recession. It goes beyond a typical economic cycle. This is a distraction. I am glad that people are acknowledging the recession, and I am even pleased to see that Wall Street financials are under pressure. But the problems we are facing are much more significant.
Let’s go back to David Hume for a moment. According to him, if a country becomes an importer, it is exporting money and importing goods. Under those circumstances, what should happen to the price level in your own country? It should increase, right? The remaining money should gain value because there is less of it. This should result in downward pressure on wages, prices, and everything else in your country. This should naturally lead to a production base that enables you to become an exporter.
But all of this hinges on the price-specie flow mechanism, so your prices have to be adaptable. We never allowed that to happen in this country. Instead, we wanted higher and higher prices for everything, and that’s what we’ve been seeing for over 40 years. As a consequence, we became an import-dependent country and stopped exporting, except for dollars and debt.
Even if this recession runs its course and we recover, we still need to address this problem because we can’t continue functioning this way. There are solutions for our nation. There are fixes. There are fixes. I believe we should look at what Milei did in Argentina. He cut the budget by 1.5 percent of GDP. He scaled it back.
We need to stop creating more debt. Just stop it. Stop printing money and reduce the budget. We need to prevent Congress from making reckless decisions. It can be fixed. But if we want to save American manufacturing, we need to start there.
Mr. Jekielek:
We need to make a decision to stop that.
Mr. Tucker:
Recently, I’ve had thoughts about how to prepare the public for the necessary steps to restore our industrial base and make our country a productive sovereign nation again. How do we prepare the public for what needs to happen? I believe honesty is necessary. We need to explain what went wrong and provide charts and graphs showing how China built its industrial infrastructure on top of U.S. debt. We need to illustrate the growth of U.S. debt and how much of it was funded by printing money. We need to tell the truth and say that this needs to stop because we'll end up without any jobs, especially well-paying ones.
Mr. Jekielek:
It reminds me of the term “austerity.”
Mr. Tucker:
Yes, I agree with that, and I don’t think it’s impossible. Forty years ago, we had a president who explained that we would go through a period of austerity in this country. That president was Ronald Reagan. He appointed a new Federal Reserve chairman who tightened monetary policy and allowed interest rates to rise naturally. Our savings rates are running at 3.2 percent, which is unusually low.
But Reagan prepared the whole country for this, acknowledging the past mismanagement and the need for suffering to get it right. He believed that if we went through this, we would come out prosperous on the other side. They were on a clock since American elections happen every four years, so there was a four-year deadline. Reagan knew this, and going into the 1982 midterm elections, the country was in a deep recession, and the Republicans suffered significant losses.
They were heavily impacted in that election due to the deep recession the economy was facing. Some argue that Reagan’s policies caused it, but I believe it was simply a result of shutting off the money printing presses. That’s the gist of it. Additionally, Reagan also implemented tax cuts, which was nice. However, by 1983, everything had bounced back remarkably quickly. We endured a relatively short period of suffering.
Economies are resilient and robust and they respond rapidly. When I mention economies, I’m not referring to some distant machine. It’s about people’s responsiveness. When people believe they will be rewarded for their work, when they see the government living within its means, when they feel trust is being rebuilt and the truth is being told, they become motivated. They engage in enterprising activities, invest, and help in the swift rebuilding of the country. I genuinely believe that the rebuilding process could take place relatively quickly. It’s not a hopeless situation. I recently highlighted this in my column in The Epoch Times.
Mr. Jekielek:
There’s another important factor to consider here. The discussion about decoupling from China has gained traction due to the significant vulnerabilities in the global supply chain. Reports indicate that the Chinese regime is preparing for possible conflict and isolating itself from the global economy on its own terms. This is indeed currently happening, but it doesn’t serve the interests of the free world. This context is crucial in understanding everything we are discussing.
Mr. Tucker:
Absolutely. If something were to rupture the financial relationship between the United States and China, this ongoing monetary finance Ponzi scheme that has been in place for several decades, China’s industrial structure would have to undergo a complete reconfiguration. The current system would no longer be sustainable.
Should U.S. debt no longer be perceived as a valuable asset, and should the U.S. lose its international markets for its debt, which is entirely possible, it could be the end of the petrodollar that ultimately breaks it all. A noteworthy development occurred on June 4 of this year when Saudi Arabia chose not to renew its commitment to the petrodollar.
Additionally, we see BRICS [Brazil,Russia, India, China, South Africa] making moves to fill that void. Just recently, Saudi Arabia joined BRICS, which is essentially a proposed currency union and trade agreement.
If this change to the petrodollar happens, it would dethrone the U.S. dollar as an international reserve currency, and that would be a game-changer, altering the current dynamics. The reason is that you can trust the dollar to settle your accounts, whereas trusting the yuan would be insane. The only reason why anyone trusts the yuan is because of the dollar’s reserves held by the central bank. If the dollar were to be lost or pulled back, it would have a profound effect on China as well.
Clearly, they don’t want that, and neither do the U.S. elites. The dollar’s status as the international reserve currency can be attributed to two reasons. Firstly, the petrodollar status, and secondly, the fact that the U.S. always pays its bills. It’s widely known that there is no default risk on U.S. debt and that the U.S. would simply print money to resolve any financial crisis. However, this promise of the dollar’s status as an international reserve currency comes at the potential expense of American citizens.
We have experienced a significant wave of inflation, but the exact percentage is uncertain. Over the past four years, I believe it to be at least 127 percent, but it could be even higher depending on the domestically produced goods, not imports. Currently, we are discussing lowering interest rates to mitigate an impending recession that the Federal Reserve plans to do in September.
After 1971, we saw a surge of inflation that eventually subsided, leading the Federal Reserve to lower rates. This pattern repeated itself with another wave of inflation and rate adjustments. Then, in 1978 and 1979, the third wave hit, reaching double digits, and devastating American savings and capital. This period ultimately led to a significant political revolution in the country.
My concern is whether the recent inflation over the past four years, which has subsided to some degree, will be our first wave. Are we going to risk experiencing two more waves and recreate the turmoil of the 1970s? This would be a terrible idea. Therefore, I strongly oppose the idea of lowering rates at this time. Instead, the U.S. government should focus on living within its means, stop excessive money printing, and hold Congress accountable.
Mr. Jekielek:
There are these incredibly low interest rates that came from the third wave and got the capital markets addicted to such cheap money. It changed how Wall Street works. We’re still living in that reality where money is created by manipulating money, because the money is so cheap, the risk is so low.
Mr. Tucker:
Indeed, this situation intensified greatly after 2008. After rescuing the financial crisis, we experimented with zero interest rates, subsidized entirely by money printing that stayed off the streets, as I described earlier, and remained in the bank vaults. However, this also inflated capital for financing and led to a surge in higher-order production goods. It was during this time that we witnessed significant corporate consolidation and the creation of massive pools of white-collar professional jobs, which reached ridiculous levels.
During the lockdowns, to preserve the economy, we dumped trillions of dollars on it. Everybody thought this was great, as they could stay at home, relax, and receive money from the treasury. Even though nobody was working, it felt like nirvana. Of course, we paid the price with inflation, which was the biggest head fake in economic history, in my opinion. The wealth seemed to vanish.
My concern is that this bubble in professional services and the credentialed white-collar class earning six figures or more without actually producing anything has a long way to go before it becomes normalized again. When Elon took over Twitter, we got a glimpse of what that might look like. He immediately fired four out of five employees, and despite a few hiccups, the platform started working better than ever. Many serious business people in the United States were watching this development, thinking that we might see similar changes. We have already witnessed significant layoffs in the technology and information sectors, as well as widespread job freezing in hospitality and other industries.
However, things could get even worse. Perhaps we could get back to a time when we focus on building things in this country. People desire that. Sitting around as a white-collar employee, pretending to work all the time but not actually being productive, is unsatisfying. Our lives need more than just debt and money; we need mission, purpose, and achievement.
Making something at home that we are proud of is gratifying. Imagine if our entire lives were spent making things again. That would be a good life. To get there, we might have to endure years of setbacks, suffering, and readjustments. But I believe in our resilience as Americans. We can handle it. Let’s remind ourselves of who we are and what we are capable of accomplishing.
Mr. Jekielek:
The Chinese regime holds substantial amounts of U.S. debt instruments, which has been driving this entire situation. There is some interest in decoupling, but it has implications for the global economy. Are you suggesting that we should just take action without knowing how things will change? Should we take a risk and see what happens?
Mr. Tucker:
Let’s start by focusing on sound finance and fixing the money system. I’m not suggesting that we go back to a hard money standard like in the 19th century. I would love to do that, but I’m not sure how to achieve it. If someone put me in charge, I wouldn’t even know where to begin.
However, I do believe that if we can implement sound fiscal and monetary policies, stop assisting China in their price-fixing schemes and industrial pillaging of America, it would be a step in the right direction. The situation could improve if we get our house in order. Currently, China is counting on America never taking action. They think we will continue to be ignorant and rely on TikTok and credit, while they laugh at us and produce everything we consume.
I believe this country can regain its productivity and become a mission-driven producer of goods made by Americans, for Americans, or anyone who wants to buy them. I think the decoupling part of your story will naturally happen. I don’t even like using that word because it implies the absence of relationships. I don’t care who the U.S. trades with, whether it’s Vietnam, Mexico, Canada, or any other country.
As long as we have a genuine market with true settlement and no country relying on debt to inflate and take advantage of others, we can fix what’s wrong. The problem lies in our addiction to cheap products and financialization, which has resulted in the decline of the American manufacturing industry and work ethic.
My message especially to white-collar intellectuals who believe they are above it all is to open their eyes and see what has happened to American industries over the years. We need to question if this is the way it’s supposed to be. It doesn’t make sense, it’s not justified, and it’s not sustainable. But the reasons behind this can be addressed and fixed, and then we can go back to having genuine free trade, just like we used to.
Mr. Jekielek:
I recently talked with Greg Autry, and we discussed the space industry in America. It’s one of those industries that has performed exceptionally well. Former Congressman Frank Wolf passed legislation that prevents the U.S. from cooperating with communist China on space-related technology and manufacturing.
Mr. Tucker:
I understand this impulse, and I’m not as opposed to this industrial policy as I used to be. I understand where it comes from, just like I understand the reasoning behind tariffs.
Mr. Jekielek:
You’re describing a situation where the system is being heavily manipulated, and not just by one side. Many people are taking advantage of it, and this legislation was meant to prevent a specific type of manipulation. Its effect is that it allows a normal market to function. We have a proven ability to have a highly successful space industry. We have already launched Starlink satellites and enhanced global connectivity. Many have forgotten what Americans are capable of. But we have already demonstrated our potential, and we should continue to do so.
Mr. Tucker:
It’s interesting how you can target one industry and ensure its success by eliminating manipulation in the system. That’s what you’re describing. A similar situation occurred in the United States with the steel industry in the 1880s. We imposed high tariffs to protect the U.S. steel industry from European countries, mainly Germany. Back then, it was a brand new industry, and the U.S. wanted to establish itself.
Now, I’m a free trader and not a fan of tariffs, but it did work. We were able to build a massive steel industry. However, in 1913, an interesting shift happened. The federal government decided to finance itself through income taxes instead of tariffs. Personally, I believe that income tax is a more detrimental way for governments to raise money. Furthermore, if I recall correctly, it was initially intended as a temporary measure.
Many people remind me of that. They often point out that it was a constitutional amendment. But the most important thing about the 1913 income tax is that it was initially only for the wealthy. Of course, that’s what they always say. Nowadays, nobody believes that anymore. However, there’s increasing talk about getting rid of income tax and replacing it with tariff revenue.
Between the two, I would prefer the latter. It’s a fantastic idea that I would support. It’s fascinating to discuss these possibilities, as they bring up many points that we’ve discussed today. It might be shocking to hear about the fakeness of economic data and the unfairness or instability of our so-called free trade regime. Personally, I don’t believe it functions like free trade.
However, don’t just take my word for it. Take a look for yourself and try to understand what is truly happening. I believe you will reach the same conclusions as I have, but if not, that’s okay. I welcome anyone to write to me and correct any points made in this interview.
Mr. Jekielek:
Jeffrey Tucker, such a pleasure to have you on the show.
Mr. Tucker:
It’s great to be here, Jan. Thank you.
This interview has been edited for clarity and brevity.
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