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A lot of working-class people don't understand inflation because, you know, the number goes up. So, in other words, if my parents buy a house for $16,000 in 1962 and Zillow says that their house is worth $750,000 today, they feel richer.
I said to my parents, "Your house was $457 of gold." Gold at $35 an ounce in 1962. Today, I could purchase that house on Zillow for 250 ounces of gold. It actually goes down in value from a gold per ounce perspective. And when I told my parents that, they got mad at me. Even though they're not richer, and even though the purchasing power has been woefully skewed since we took ourselves off the gold standard, how do you explain it to somebody that is not us? Or how do you explain to somebody that's the man or woman on the street?
Five years from now, sir, where do you think we are? Fed, US dollar, is it more of the same? Are we going to be able to print two to three trillion another 10 to 15 trillion dollars of deficit spending? Are we able to do that? Add infin item. You you've written about and I've heard you speak about the corrosive effects of inflation and the regressive form of taxation that inflation represents. So, you know, take us out five years. Tell tell me where we are or tell me where you think we could be and what we should be worried about.
Five years and I'm happy to come back on in five years, but I think in five years we will have had some form of debt crisis. And it'll either take the form that in instead of the Fed buying up $7 trillion in debt, they're buying up $25 trillion in debt, which is basically what Japan did. You know, in their situation, we could have a burst of inflation. Uh, we could partially default on some of our debt which uh Trump cabinet has talked about but I think we're going to come under pressure.
Now, Jamie Diamond, I'm sure you know, said we're going to see a crack in the bond market. And I think he's right that at some point there'll be some what we e economists call nonlinearity. You know, some sudden event, but I think what will happen before that is interest rates, long-term interest rates are going to start creeping up. And Trump is president. He's very blunt as you well know. But I think whoever is president's not going to like that. And then we start getting closer to what Jamie Diamond is talking about. But I think it will have happened within five years. I mean in the book I said 5 to seven years. I would have rather you threw me seven years. But I think five years more likely than not that's going to happen and it's not going to be pleasant for us. It's not going to be pleasant for the world.
You know I I want you to react to this s was doing a little research. I'm trying to explain to I grew up, as you know, in a in a blueco collar working-class family and a lot of working-class people don't understand inflation because, you know, the number goes up. So, in other words, if my parents buy a house for $16,000 in 1962 and Zillow says that their house is worth $750,000 today, they feel richer. Uh, but I I I I said to my parents uh over the dinner table, "Your house was 457 ounces of gold." Gold at $35 an ounce in 1962. Today, I could purchase that house on Zillow for 250 ounces of gold. It actually goes down in value from a gold per ounce perspective. And when I told my parents that they got mad at me because again they want to feel the inflation makes even though they're not richer and even though the purchasing power has been woefully skewed since we took ourselves off the go gold gold standard. How do you explain inflation to people that are not economists? Obviously I majored in economics at TUS. I've been in the markets for 36 years. You're one of the seons of uh economic theory. How do you explain it to somebody that is not us or how do you explain to somebody that's the man or woman on the street?
I Okay, not an easy question. I will say on the gold, which is an easy question. When Franklin Roosevelt put it from 20 to 35, people thought that was scandalous, making the dollar worthless. Now, I I I don't know what it is as we speak, but it hit a thousand times that recently. 3,000 3,000 3,000. Yeah. I mean, just incredible. And you could point to a lot of things of how much inflation we've had. So, you know, there prices go up and down. It's hard to control it. Exactly. Where we get concerned is where everything's going up. It happened in the pandemic. It happened in the pandemic. I mean, we saw pretty significant inflation. Not as bad as in the 70s, believe it or not, but it was pretty significant.
I think what people have trouble with is that, you know, you go like the price of paper towels goes up from $10 to $25 and then it stays at depends on where you buy it at like $18 or $20. And the Fed says, "That's great. We solved it." And what are you talking about? It's not $10 anymore. I don't feel like you solved it. So I I I think it it is very upset. Even to me as an economist and I do go grocery shopping. I I just can't get used to it. I know I read the numbers. I know how much inflation went up. I kind of know. And by the way, believe me, my salary at Harvard did not go up that much. Um but yours maybe did. But you know, I I I look at the things when's it going to come down. I I buy a loaf of bread. It had been this exact same loaf. It had been $3.50. 50 and I just went and it's $6 and the Fed says, "Well, inflation has stopped." So, I I think it's definitely very distressing of how much it jumbles around prices, but what it what the Fed's supposed to do is not make you think about it. Like, there little changes here and there. You feel good when your salary goes up a little bit. You don't notice when other things, but it's exactly when we're talking about it that they've got it wrong.
So, so well said. If I if I said to you that gold over the last 25 years, gold has outperformed the S&P 500, the best 500 companies in the United States. What would your reaction be to that? Well, I mean, I follow it. Uh, so I don't follow everything, but I follow that one. And you know, I think that partly reflects that central banks around the world, people around the world don't trust currencies. And that's just sort of common sense. I mean, it's it's absolutely some of the demand for crypto. Also, they don't trust the government. And if you're China, you really don't trust the United States. Look at the sanctions they're putting on everyone. So, you know, there's a lot of reasons gold has gone up, but I I like to say gold is the new gold. Uh, it's, you know, it's it there reasons. It's done very well. It's a uh it's the new reserve currency. I mean, if China could buy more of it, they would. So, it's it's it's been remarkable, but I mean, I wouldn't say it shocked me. I Every time gold goes up and the smug people say only stupid people buy gold. They're nuts. I mean, I actually tell central banks, I tell high netw worth individuals at least, of course, you should hold some gold. I mean, it's a diversification at the very least. I don't know you're going to outperform the S&P 500. Again, you got to pick the dates to make that work, but yeah, it's remarkable.