Moneybeat: Raising rates

MARY REICHARD, HOST: Next up on The World and Everything in It: the Monday Moneybeat.

NICK EICHER, HOST: Time now for our weekly conversation on business, markets, and the economy with financial analyst and adviser David Bahnsen.

He’s head of the wealth management firm The Bahnsen Group and he’s here now.

David, good morning!

DAVID BAHNSEN, GUEST: Good morning, Nick. Good to be with you.

EICHER: Yeah, I think that his comments were in line with what I was expecting. I don't believe that as the Fed begins this pivot to slightly less restrictive monetary policy, slowing the rate of interest rate increases, eventually pausing and within a year, I believe that they'll be cutting rates. And so when you look at this kind of trajectory of easier monetary policy, I still believe and expect the Fed will have to talk a more hawkish game and whatnot. Because I don't think that you can undo the message very easily that has already been really the focus of monetary policy, which is inflation is high, and the Feds here to cure it. And I have long tried to make the argument—it was what I devoted last week's Dividend Cafe to—that the Fed was not the primary cause of the inflation, and therefore it can't be the primary solution. And so as we start getting more recessionary consequences from tighter monetary policy, I think the Fed is going to have to put on a full court press of explaining the other side of policy. And so in the meantime, they're talking the way I would expect. I think, Nick, it's also important to recognize that last week, you not only saw the Fed increase 50 basis points, but then you saw Europe's Central Bank do the same. You saw the Bank of England do the same. The Bank of Mexico do the same. There was a real global coordination around raising rates more, doing it less than these banks had been doing it, and I also noticed that Christina Lagarde, the head of the European Central Bank, kind of the Jerome Powell equivalent in Europe, that she was talking about how we're going to have to have rates higher for longer. And she's one of the most dovish central bankers in history. And so there's definitely a unified message right now coming from global central banks.

EICHER: I have to ask, at the risk of asking you to be repetitive, but you said the Fed was not the cause of the price inflation and so can’t be the solution to price inflation. Can you flesh that out, if the Fed didn’t do it, what did?

BAHNSEN: Yeah, so the fundamental thesis as to why the Fed needs to tighten rates to bring down inflation is that aggregate demand got so hot because of such easy monetary policy, so if the Fed broke it, the Fed has to fix it. But of course, the problem is that out of the COVID moment, the absolutely overwhelming evidence is that the inflation was caused by the total cessation of production, that we stopped producing goods and services. And we slowed the supply side of the economy so dramatically, that when reopening did take place, and people were mostly resuming a normal level of consumption, they were getting back up to the place that they wanted to be before the lockdowns and shutdowns and so forth. However, the supply side of the economy was not ready for that. And so you ended up with normal—not excess—demand and yet sub-normal, inadequate supply. And from semiconductors coming into the country, energy production, access to laborers, ports, trucking, transportation, containers, all elements of supply, you had costs go higher. America was producing way less and so we were importing way more, but every aspect of our imports had gone up in price. And those things were the primary but not exclusive cause of inflation. And the one caveat I would give is I do believe the Fed was a key player in driving up housing prices to totally unsustainable inflationary levels, but the broad level of price increases and goods and so forth, I don't think the Fed was remotely the primary cause and therefore turning to the Fed to try to create a recession or try to get a whole lot of people out of work and bring wages down, the idea that that will be the remedy to this inflation, I think, is really, really misbegotten.

EICHER: OK, David, listener question time.

MARK BATLUCK: Hi, David and Nick, thanks so much, David, for the Monday money beat and all of your insight into financial matters. This is Mark Batluck. And I'm sending this message from Minneapolis, Minnesota. My question has to do with the investment of the Chinese government, in American enterprises and real estate and things like this. Some people and at times, I'll read news reports about the the sheer amount of Chinese investment in the US and, and these reports or people will talk about this as sort of a scary thing. Even the amount of U.S. debt that they own, is something that they could recall at any moment or, you know, and therefore exert tremendous pressure or control over us in our financial policies. I don't really understand the whole the whole dynamic and, and yet, from what little I do know, it does seem that these these reports are this sort of message is not altogether is not the full picture. So could you speak to that for us? Thanks.

BAHNSEN: Oh, I really love this question. It's one of the areas where I think there's the most amount of misinformation and it's important to kind of clarify. In the broader sense, we're talking about U.S. government debt. And China right now owns a tiny bit less than $1 trillion of U.S. debt. It has been a little bit over a trillion. It's right now down to $910 billion. Japan is the largest to just under $1.1 trillion. And so total foreign ownership of U.S. debt is about $7.2 trillion. And as most people know, we have roughly $31 trillion of debt. So it's less than 30% and China's stake in that represents less than 3%. But when someone says, Well, they could just call that debt anytime. That's where someone has gone from sharing a number that sounds interesting. China owns a trillion dollars of our debt to a totally untrue and illogical statement. How can they just call the debt? The debt has a maturity date. If you and I go out and buy a bond, then the government owes us our money back at the maturity date of the bond. When the United States government issues debt, there are insurance companies, U.S. banks, investors like you and me, and yes, sovereign countries like Japan and China. There are dozens of foreign countries that own our debt, that are all given terms to the debt. And it's a coupon meaning an interest rate, and it's a maturity date. So you tell me who has more leverage here—the person who has borrowed the money or the person who owes the money. They can't call the debt, they're owed the debt at a certain maturity date. And yet, in theory, this country that for 250 years has never defaulted on its debt, but if there were ever one of these severe situations of geopolitical strife, our country has the ability to not repay the debt. And by the way, the debt is generated in U.S. dollars. The debt is denominated in our currency, so we have the ability to strengthen or weaken our currency from fiscal and monetary activity that represents the currency we're paying back the debt in. This has been the great complaint that China publicly states about us, that while they fund our deficits and that they export to us more than than we are exporting to them, that all of this is being done on our terms because it's done in our currency. Now, I vehemently disagree that that is a justifiable complaint. Because all actors are acting, of course, in their own interest. The United States has wanted China to fund its deficits. And if the United States doesn't want China to fund its deficits, the United States doesn't have to run deficits. Now, it's our choice to be a nation of low savings and to spend at a governmental level above its means. But China, of course, wants to do such because it means they're getting more customers of their exported goods and then with that excess dollar, the excess currency that's generated, they have to have a place to park it and U.S. Treasuries had been a pretty safe place to park it. So I know I'm getting in the weeds a little on some of this, but my answer has always been and these are activities that have benefited both parties, here to now. And I fundamentally believe that we have it in our power if we do not want foreign countries to be buying our debt, and that is that we don't have to issue so much debt.

EICHER: Thanks to Mark Batluck for the question and for raising the subject of China and its holdings.

You may have a question, too. If so, I hope you’ll share it with us and you may hear yourself on a future episode.

Email is feedback@worldandeverything.com. You can type it out and I’ll read it or you can read it into your voice memo app as Mark did today and send along the file. Again, feedback@worldandeverything.com.

David Bahnsen is founder, managing partner, and chief investment officer of The Bahnsen Group—his personal website is Bahnsen.com. David, thank you. As I look at the calendar, it’s telling me we do not speak again until the Monday morning after Christmas. It’s moving so fast! So Merry Christmas to you and the Bahnsen family. Enjoy!

BAHNSEN: Merry Christmas to you and yours, Nick, and Merry Christmas to all the listeners.

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