Transcription
China, if they want to really play hardball, could shut the western world down in a matter of about six to nine months. In my view, China really holds all the cards in this because they control the critical material space.
This is why Argentina keeps defaulting on its debt. So, so this would all this would all stop if you dollarized. There would be no capital flight because of people who were afraid and didn't want to be in the in the peso because everything would be in the dollar.
It's another big down day in the markets. Uh, stock markets are down. The S&P's down about 1.1%. Uh, NASDAQ's down almost 2% intraday. Uh, Bitcoin's down also also 2.8%. Uh, the dollar's flat and Treasury yields are down. Gold is also flat. We'll talk about all these assets today and much more with our guest today, uh, Steve Hanky, a professor of applied economics on John's Hopkins University. Uh, Professor Hanky is an expert in monetary policy. He served previously, uh, with the Reagan administration as an, uh, at the Council of Economic Advisors and importantly, this summer, he's met with Trump officials to discuss dollarizing several countries around the world. We'll talk about what that means, um, and why the banks tapped into the Fed's standing repo facility last week. Great, packed, action-packed show today. Professor Hanky, welcome back.
>> Thank you, David. Great to be with you as usual.
>> Lot of, um, a lot of market activity. Now, I'm going to pull up a, uh, S&P 500 heat map here. You'll see that, um, the tech sector has been leading the charge downward for a few days. In a, now it's Thursday, November 6th, as we speak, but a few days ago, uh, or earlier in the week, rather, uh, Nvidia and, uh, AMD, um, both down, uh, second or third day in a row. Now, uh, we also had Palantir, uh, a couple days ago, disappointing earnings. Um, that was down. Oracle, same story. Uh, interestingly though, and I'm reading the news from CNBC, several companies actually beat earnings today. Call, uh, Qualcomm, for example, uh, posted better than expected quarterly results, still down 4%. AMD, uh, declined 7%. So, it doesn't, you know, it's like it doesn't really matter anymore right now if, uh, companies are posting good earnings. They're just everything is falling down. And I'd like to get your take.
>> Well, my take is, uh, something we've talked about before, and my bubble detector has us in bubble territory. Uh, Warren Buffett's bubble detector has us in bubble territory. Uh, Robert Shiller, uh, Nobel laureate from Yale, his his bubble detector metric has us in bubble territory. So, so, so all these indicators are are showing us that all these bubble indicators, these variations on and ways to measure bubbles, have us in bubble territory. And now more and more people are talking about bubbles. And when they look at these tech stocks, it, it isn't the earnings today or the last quarter that that counts. It's what people expect the earnings to be in the future. And they, as they look at the prices, they're they're going like, my, the these earnings are going to have to be on another planet to justify the prices that we're paying for these stocks right now. And I think that's what's going on. People are just having second thoughts about what, what do the prices imply the earnings are going to have to be to justify the kind of prices that are out there right now. And, and a lot of people are saying, I, I just don't think they're going to be able to get to another planet on these earnings. So, I, I think that's what's going on more, more than anything else.
>> Okay.
>> And, and, and the big problem with bubbles, David, is the fact that we, we can measure them. They're, they're pretty solid metrics for measuring them. But the problem is to, in, to be able to detect what whether the bubble's going to pop, when it's going to pop, or, or if, or if the air will just gradually come out of the thing over time and valuations will reach more reasonable levels and you'll exit the bubble. So, so, so we, we just don't know.
>> I want to get to your bubble detector just a minute. That's a very, um, interesting, uh, discussion there. Uh, I want to get your methodology. This is a chart I'm pulling up on my screen here. If you can, you know, I'll zoom in a little bit. This is a chart, uh, courtesy of another, uh, guest that's on the show, uh, from Oxbow Advisors. And here we have what's called Circular AI Deals. And what, what's been happening is, you're probably aware, professor, is that these tech companies have been investing in each other, um, not just taking stakes in each other, although that's sometimes happening, but also just, uh, buying equipment or investing in, uh, IP. For example, Oracle spending tens of billions of dollars on Nvidia chips. So, it's, I mean, they're, they're, they're partners and they're comp, they're their, they're competitors, but also they're a customer. AMD, the biggest competitor to Nvidia, uh, has just been, um, uh, has just been given some stake, I believe, OpenAI to deploy 6 gigawatts AMD GPUs. AMD gives OpenAI option to buy up to 160 million shares. At the same time, Nvidia is investing $100 billion into OpenAI. So, it's like Nvidia has invested into OpenAI, uh, and that, and OpenAI is buying chips from AMD, which is a direct competitor to Nvidia. And by the way, they're, they're run by the same family. So, um, on paper, they're competitors. Anyway, the point I'm making here is that there's this circular deal flow going on right now. And it seems that if one company is, is, is really going down for whatever reason, it has the potential to drag down the entire sector because they're all interrelated now. And that could drag down the entire market, which actually could maybe have some effects, um, on the Fed's decision if this continues. Well, we'll see. What do you, what do you think about this?
>> I think you're on to something. That's what I think.
>> Yeah. What, what, what you're, what you're suggesting is that there, there's a possibility to be enter a doom loop kind of phase. If, if, as you say, if one or two of these things starts going down, it has knock-on effects all, all around the sector. And the sector is the thing that's been holding, been pushing the bull market.
>> Okay. Well, how do you define a bubble? I think we've talked about this one more time, but I'd like to apply this to other assets as well. You said that, you know, they, you have definite metrics you can use to identify a bubble. Can you just please walk us through one more time what these metrics are?
>> Well, my, my, my metric, Dr. X's bubble detector, is ba, basically your, your, your income flow, the current income that you have, and, and how expensive it is to use that income that you have to, to buy yield. And, and it's very expensive to buy yield in stocks right now relative to bonds. And when that happens, that, that drives you into this bubble zone in the, in the equity market. It, it costs you, per dollar of income that you have, it costs you a lot more to buy yield in the stock market than it used to. And it, that's an absolute measure. And, and relative to bonds, it's m, it's much more, uh, attractive to buy yield in bonds right now than it is in stocks.
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>> Can you apply the same logic to something like gold, which does not yield cash flows? People have been saying gold is in a bubble for quite some time, quote unquote. I know you're positive on gold long-term. We've talked about that several times. Uh, but with gold consolidating around $4,000, does it look like a bubble to you?
>> No, it doesn't. It looks like it looks like it's consolidating. And I think the, the best way to, to look at this, there, there, there are various ways to look at it, but gold has pulled back and, and, and it's hovering around $4,000 an ounce. So, if you look at the option market, uh, David, for options with a strike price of $4,000 an ounce expiring on November 24th, the call options, we have 8,736 contracts out there right now today, and the puts, 4,84,389. So, the, the calls outnumber the puts by about a 2:1 margin. And, and that suggests that the consolidation around $4,000, it's, it's going up, not, not going down. It'll, it'll hold at $4,000 and probably go up. The, the options market is betting, uh, that it's going up from $4,000. So, that's, that's, that's the way I'd look at it objectively. In other words, what I think does, what I think doesn't really matter. The question is, well, what's the market think?
>> Yeah.
>> And then, and the market is telling us objectively that the, that the calls with a strike price of $4,000 expiring on November 24th are, are, are about twice, twice as great as, as the puts. The guy, the guys who are betting it's going down from $4,000 are in the minority. The ones betting that it's going up from $4,000 are in the majority. So, uh, that's, that's, that's the way I, I look at it objectively. That's what I think.
>> What, what about anything else in the commodity space like oil or cattle futures or anything of that sort? Uh, can, can we can we use the same logic here? If, uh, if the long positions are short of, are greater than the short positions, then it's, it's still got momentum. Um, basically, how do you look at a market that doesn't yield any cash flow and determine whether or not it's overbought or tremendously oversold at any given point?
>> Well, gold is the one we're looking at right now, and we've already gone through the methodology for that. The, the other markets, you, you can use the same thing. You, you can get, first of all, you've got to get a strike price and then, and then what's the betting? Is the betting that the calls out outweigh by a large margin the puts? And if they do, there's a pretty good chance that that the market is telling us, the market is telling us that they anticipate the market participants that the market will go up from wherever that strike price is, if, in fact, the calls greatly outweigh the puts. And they, and they do in the gold market right now at $4,000. And $4,000 is the, is the strike price that I've chosen simply because if you look at what's happened after the pullback, that it pulled back to about $4,000, it's been hovering around $4,000 now for a week or so, and that's where we're at.
>> Let's talk about, uh, the economy now. Uh, lots to discuss today. We, we've got the Fed. We've got the end of QT. We've got banks borrowing. We've got, uh, uh, tariffs disputes. Uh, I, where would you like to start? Let's start with the banks. Actually, that's top of mind. Do you know why, uh, banks tapped into the Fed's standing repo facility by the order of $50 billion last Friday? Let me pull up an article to show, uh, show you. But, um, we have here the most, uh, used on record in a single week, I believe, according to some reports. Uh, yeah, the Fed announced, um, it will end quantitative tightening on December 1st. That's a separate issue. But yeah, let's talk about why, uh, the Fed's, uh, standing repo facility lent a record $50.35 billion on October 31st, uh, amid month-end pressures, it seems.
>> Yeah. Yeah. Where, I'm curious where, where you, who's reporting that?
>> Oh, it's all over, uh, it's all over here. It's, let me just, all over the news here. We, this is, this is from this particular story is, uh, is, uh, Reuters. Fed standing repo facility lent a total $50.35 billion on Friday to eligible financial firms in two separate availabilities. The highest ever usage since the tool was put in place in 2021.
>> Okay. Anyway, the Fed, interestingly, this, this did occur on October 31st. There's no question that the standing repo facility was, was used heavily. Uh, uh, and, and by the way, it's a, it's a pattern that happens pretty regularly. At the end of a month or end of a quarter, that's when you get the surge in the use of the standing repo facility. And, and, uh, and, and it did happen. Uh, the, the Fed, the, what I saw, uh, from the Fed, just looking at the Fed, they said it was $29.44 billion, and that was the largest, that was the largest since 2020. But this is, this is quibbling. What, what's, what's the point? It was, it was a big use of the repo facility, uh, as I say, it is a normal pattern, end of month or end of quarter. Uh, I, I think, but, by, by the way, my conclusion, it, we're talking about this, it was written up and everything, but it, it's kind of a tempest in a teacup, kind of, nothing happened. It, it, the re, the repo occurred and then, and, and then was unwound, obviously, the next day. Uh, the only thing that from a market point of view that that's interesting is that why was it used? Well, the repo rate, the interest rate was going up, up, up, and so that the, the Fed, uh, injected the cash, the liquidity, and, and the repo rate came down. And what's this do? Well, this supports risk assets like Bitcoin. That's, that's the only effect. Effect. You, you didn't get a crash in the, or as large a crash in the Bitcoin market as would have been the case if that repo facility hadn't been used. So, so that's kind of the knock, the knock-on effect of it. It, it, it has some ripple effects in the market, mainly for highly speculative assets, but, as I say, tempest in a teacup, nothing, nothing, it, it hasn't changed the trajectory of the, of money supply growth or anything like that. It was just an overnight liquidity, uh, action.
>> It also says at the same time, financial firms parked considerable amount of cash on Fed books with the reverse repo facility seeing inflows of $51.88 billion. How does this not impact the money supply? As you said, if banks are borrowing from the Fed and vice versa, it doesn't change M2 whatsoever.
>> Oh.
>> Okay. But if, okay, but, but why, just, just help us out here. This happens on a regular basis, you said. But why, why do banks need to do this in the first place? Can't they just lend from each other?
>> Yeah, this, this is an overnight kind of activity, not, not a, not something that's, you know, at, at the end of, end of the, you know, two weeks or three weeks. You're not going to see anything. In fact, at the end of 24 hours or 48 hours, you're not going to see anything. You'll see it in 24 hours. This is an overnight kind of thing. But, but it's not, it's not affecting the, the month-on-month or the three-month or six-month annualized rate of growth in the money supply or the year-over-year rate, which would be, you know, some, something that I would be looking at. We, we talk about the year-over-year rate. You know, Hanky's golden growth rate for the M2 money supply is about 6%, a little over 6%. It's growing a little less than 5%, and, uh, and it's not, not changing very much. Uh, it, it might, it might, by the way, you mentioned stopping quantitative tightening. We'll have to see what effect that has eventually in December when they do it on the money supply, and, and that will affect directly the course of growth in the money supply. And let's, let's hope they don't overdo it and, and get into an acceleration of the money supply, getting it up too high. What, what if it goes up to seven or 8%? Well, that, that's going to mean that inflation starts getting baked in the cake. And there's another, as, there's another aspect that we have to be concerned about. They, they're stopping quantitative tightening. That means they're going to ease up monetary policy, and it will ease up the rate of growth in the money supply will accelerate. There's another thing that, and that is the, uh, supplemental liquidity ratios that on, on banks, that's a bank regulation, the capital, uh, regulations on banks will, will be eased up in a, d, in a, in a deregulatory move. Now, that, that also will give the banks more capacity to increase lending and, uh, maybe go too far. We, we don't know yet. So, we have, we, we have two things in the, in the wind, David, that are important to be watching. The, the effect after December, when they stop quantitative tightening, how that's going to affect the growth rate and the money supply. It's an easing move. And there's another easing move, and that's the bank regulation. So, there, so, there are two, uh, monetary policy easing policies that are, that are in the pipeline now, and we'll have to see how that works because that might change our view about where we think inflation is going. If, if, if the acceleration gets a money supply up above Hanky's golden growth rate of 6%, then we have to be concerned about inflation not going away, maybe, maybe even getting worse. But that, that, that will depend on how, how the quantitative tightening, dropping, dropping that, and how the bank deregulation, how those are factored into the growth rate and the money supply. But my guess is, we, we know one thing, it's easing, and, and the rate of growth will, will accelerate. How much? We don't know.
>> Okay. So, I have here on the screen the bank balance sheet here. It's declined from 9 trillion, roughly $9 trillion at its peak to about $6.6 trillion. This is a quote from the Dallas Fed President Lorie Logan. The decision to end asset runoff was one that I supported. Money market conditions indicate that the Fed's balance sheet is now much closer to a normal size following the expansion in response to economic and financial stresses during the pandemic. So, this is a normal size, like you said. Uh, we'll see what they do. Um, if, let's say the Fed does not engage QE and they continue to maintain the size of the balance sheet without adding to its, uh, to its, uh, case, which is what, which was the case between 2014 and 2018, it was flat. Uh, what, what does that mean for the money supply? In other words, uh, do, do we need QE for the money supply to expand, or just naturally, the end of QT will mean higher growth rate in M2? How does the math work there?
>> The end, the, the end, end of QT will accelerate.
>> Okay.
>> Accelerate because, and, uh, the, the thing that, in that statement you read by, uh, the Dallas Fed, uh, chairman.
>> Yeah. Uh, it, it, she, she didn't take the next key step, and that's the step you're taking, and that is, how is all this going to? She said, oh, this is normal, but that's the balance sheet. What about the money supply? She didn't take the thing as far as she should, and that is to indicate, okay, if, if we're going to stop QT at the Fed and, and, and allow the balance sheet to run at whatever, whatever the current rate is, at a stable rate. What effect is that going to have on the money supply? It's, it's all about the money supply, and, and, and, and my guess is it, it will, it will mean, what? It will mean that the, the, the Fed is not, is, is contributing more, not less, to the growth rate in the money supply. So, it's a, it's an easing move, and, and acceleration of growth rate in the money supply.
>> I'm going to put these two charts side by side so we can do a little comparison here. Here we have the growth of the M2. I've put them, I, I put this chart in a percentage change from a year ago basis here. And as you know, it's been, the latest, the latest, uh, number from September shows that it was growing at 4.49% annually. And this was during QT. And so, we're looking forward to you, professor, to maybe do a calculation, maybe for the next show or into December, as to how this number may change in the coming months, once QT ends. Because keep in mind, this, the pace of growth of the M2 has been accelerating ever since 2023 in conjunction with a decline in the asset base of the Fed. Now, I think, I think I don't know if we have to do some calculus here, but I think that slope has been gradually declining, right? Uh, the, the rate of change has been declining, which may suggest why the M2 has been going, the rate of change of the M2 has been going up. And now we can really see the pace of M2 go up even more if this starts to stay flat. I, I don't know, we're very close to your golden growth rate of 6%, is all I'm saying.
>> Yeah. Yeah. But that, that's, that's right. So, so that's, that's what, what we should be f, we're focusing on the right thing. We're asking the right questions. And as you say, let, let me do a little sharp pencil work and see, see what, what the possible scenarios are. You, you, this, the kind of a scenario analysis when you're, you look at stopping of QT and, and then do a little sharp pencil work and say, you know, what, what, what is that going to do to the Fed's contribution to the growth rate in M2? Because remember, remember, we're talking now about, about not about the elephant in the room, 80% of M2 has nothing to do with the Fed's balance sheet. It's a com, what the commercial banks, banks are contributing.
>> Yes.
>> Most of the, most of M2 is produced by commercial banks, about 80% of it.
>> So, so it's, the, the Fed itself and the size of its balance sheet is, is not irrelevant, but, but it's not the monster that the commercial banking system is. Now, if the commercial banking system is the elephant in the room, and, and you're imposing a, a loosening of the capital controls that they will have more capacity, and, and that's another sharp pencil exercise that you have to do. Well, if they have more capacity, what, what are the, what are the commercial bank, what, what are the changes in bank regulations that, that are in the pipeline right now going to do to the contribution of commercial banks to the growth rate in the money supply? That, that's another question. So, so now we have two things moving around, and, and then in the background, you've got a tremendous amount of pressure by President Trump to, to loosen monetary policy. Now, he's focused on really the wrong thing, and that's the federal funds rate, and all of his advisors are going on and on about the Fed funds rate. But the, the key thing, it is quantitative tightening and bank deregulation, because those things directly affect the growth rate and the money supply.
>> Okay, let's move on, professor, and talk about some other, um, countries around the world. Now, Argentina, um, a place you're very familiar with, having worked with Latin American countries several times over your career. Some is going through some sort of currency crisis yet again. And the peso has been weakening, uh, this year, uh, going into, uh, despite a rally following midterm elections, the Argentine currency has weakened again and remains near the 1500 pesos per dollar, lower than set by the government. I'll let you explain further why and what's going on over there. But importantly, you met with White House officials, uh, this year, over the summer. I, I believe you told me offline, uh, to discuss how the administration could promote dollarization around the world. Um, let's just start by talking about your meetings. So, this is an article from Financial Times. Staff from government departments, including the Treasury and the White House, met Steve Hanky, professor at Johns Hopkins, that's you, and a leading expert on dollarization over the summer to discuss how the administration could promote the policy of dollarization. Tell us how these meetings came about. You know, why they invited you to have these discussions. Uh, presumably you were, yeah.
>> I, I, I think the background is, uh, to, to keep it a kind of 30,000-foot, uh, the, the White House is, uh, has, has concerns about the, the so-called de-dollarization movement, and that that comes from China and the BRICS, Russia, you know, the, the global south, and that is to, to get away from the dollar, de-dollarize, supposedly, and, and, uh, in, in that context, uh, I'm, you know, I know a little bit about dollarization because I, I think I'm the only economist in the world who actually has part designed and implemented two dollarizations. One, one happened to be in Montenegro in 1999, when we replaced the hyperinflating, uh, Serbian dinar with a German mark. I was a state counselor, a member of the government in, in Montenegro at the time. Then, uh, the next year, we, we had Ecuador, where I was advisor to the finance minister, and, and we got rid of the sucre and replaced it with the US dollar. So, that's, that's dollarization. That's, that's getting rid of a local currency and replacing it with the US dollar. So, so that would be that would be pro-dollarization, not, not de-dollarization. That would be kind of anti-de-dollarization. So, so they're interested in that because I, I, I actually have, I think now written, um, well, counting currency board books, I think the number, I think I've written 24 books on this topic. And, and more importantly, the books are one thing, but I've actually done it. Now, I've also done four currency boards, and, and currency boards, the, the local currency is retained, and it trades at a fixed exchange rate with an anchor currency. And if the anchor currency is the US dollar, that means the local currency being produced by the currency board is really just a clone of the US dollar. It has to be, the local currency has to be backed 100% with US dollar reserves. So, so the effect is somewhat similar to full dollarization in the sense that it obviously increases the demand for dollar-denominated assets because you've got to back the local currency 100% with US treasuries, basically. So, so that, that was the, the kind of motivation. In other words, you've had, for example, the, the de-dollarization movement. The, the big part of that is China. Because if you look at, at China since 2022, and you just look at FX transactions and the, and the share of the market, uh, the, the RMB has picked up a little, not, not much, but a little. They, in 2022, accounted for 7.2% of the total world FX transactions, and now 8.5%. The US, by the way, and this is, this is one thing that most people don't realize, the US's share has actually gone up, like, like China's. It's gone up from 88.4% in 2022 to 89.2% in 2025. So, a lot of the de-dollarization talk is, is, is just that, it's, kind of hot air, but it's talk. And China, it, when you look at the Chinese, they, they have made inroads, there's no question about it. Actually, the one that's fallen is the euro, as a percent of total FX transactions, 30.6%, 6% in 2022, and now 28.9%. But at any rate, that, that's the background on how, how do you, how you develop a strategy for a pro-dollar, not a, not an anti-dollar, not a de-dollarization, but a pro-dollar. And, and you would do it by encouraging full dollarization, where you get rid of these local currencies, like some place like Argentina. President Milei was elected by, in, by embracing the idea that he would get rid of the peso, get rid of the central bank in Argentina, and replace the peso with the US dollar. Well, he hasn't done that. But, but what if the US had a strategy, if we're encouraging and blessing this kind of thing? Trump, who's, who's very close to Milei, by the way. What if, what if Trump came out and said, the strategy of the United States is to stop all this de-dollarization talk and, and bless and encourage dollarization, because not only it would be good for the United States and the US dollar, but it would be very good for the countries that adopted the US dollar, because they, they, they would get rid of currency crises, balance of payments crises, banking crises, all these things that plague Argentina. And, and the fact that Argentina, the, has the peso and, and a peso problem, and people don't like to be in the peso. Uh, if you look at the debt they've accumulated since 1995, $177 billion worth of, dollars worth of debt has been accumulated in Argentina. And I've calculated about 76% of that debt comes in the front door and goes out the back door via capital flight. So, very little of it stays in Argentina. Now, that creates a big problem because, let, let's go through just the arithmetic of, of this. Let's say you borrow $100, and the interest rate you have to pay is 8%, which is more or less the interest rate that Argentina pays on its foreign debt. That means you, you have to invest $100, and it has to generate eight, so that they, the debt can be serviced. But what if 75%, let's say, of the debt that you accumulate escapes and, and goes out the back door and, and via capital flight? That means that you only got 25% of the $25 out of the hundred that you borrowed that you can invest. Now, what's the rate of return that you have to get to, to generate eight to service the debt? Well, you have to, you have to have not, not an 8% rate of return, a 32% rate of return on your investment. So, this is, this is why Argentina keeps defaulting on its debt. It can't service its debt because most of the money that comes in the front door ends up going out the back door and is never invested in Argentina. So, so this would all, this would all stop if you dollarized. There, there would be no capital flight because of people who were afraid and didn't want to be in the, in the peso because everything would be in the dollar. You'd be borrowing in dollars, but everything internally, all the investments would be in dollars. All the books would be kept in dollars. The legal tender would be dollars. The, the peso wouldn't, wouldn't be around. It would, it would be in a museum someplace.
>> Some economists have argued that you, well, not you, but emerging market economies should not be borrowing in dollars to begin with. I think, uh, I think the term they've used is "original sin" of emerging markets.
>> Well, that, that, that's true, but why do they do this? Because, because they can't, they can't borrow in their local currencies because the only way they can do it is if you would issue debt in the Argentine peso, you'd have to pay an arm and a leg in terms of interest cost to, to service that, to issue it. It would, so, the attraction of the dollar. Why does everybody borrow in dollars? Because the interest rates much lower than, yeah, you would have to pay if you issued domestic currency denominated debt. You, you get rid of the original sin by getting rid of the problem is the local currency that's junk.
>> Can you really, can you really describe Argentina's economy as going through a currency crisis still? The, the inflation rate, although still high by western standards, has fallen since Milei took office more than a year ago, I believe. Yeah. Um, can you just explain, uh, well, you just evaluate the progress so far?
>> So, I, I evaluate the progress is, is there, there has been progress. They've, they've, you know, the fiscal austerity has taken a hold. They've deregulated a lot of the economy, and, and, and those have been good things. But the Achilles' heel, always in Argentina, and it's someplace I know, by the way, because I advised President Menem from 1989 to 1999. I was president of a, of a fund in Argentina, Toronto Trust Argentina, and Buenos Aires, that, that was the best performing fund, emerging market fund in the world in 1995. So, I know the territory, and the Achilles' heel is always the same, the peso. So, it, it's a peso. You, you still, you still have all this capital flight going on. And as you said, the, the managed exchange rate, which is a standard IMF kind of operation that they're doing. These things always fall apart in the end. And, and they fall apart because people are afraid of being in the local currency. And, and the only way they'll stay in the local currency is if you have a very high interest rate to keep them in. But if you have a very high interest rate, that, that buries the economy.
>> But they couldn't manage the currency like in, in a float through open market, uh, open market, um, operations?
>> Well, that, that's right. You, with, with full dollarization or a currency board, hard peg, you, you have no monetary policy. You have no monetary policy. There's no discretion. But in these, in developing countries, having monetary policy and, f, trying to fine-tune the economy with open market operations and all kinds of monetary policies, that's what gets them into trouble. Why, why do you think the economy is so volatile in, in Buenos Aires, in Argentina? It's because they have a central bank that engages in discretionary monetary policy. If they've dollarized, they would not be able to engage in discretionary monetary policy. If they had a currency board, a real currency board, they, they would not be able to engage in it. By the way, in April of 1991, they, they did put in a system that many people thought was a hard peg. It wasn't. It was a convertibility system that, that lasted until 2001. But early in 1991, right after they introduced it, I said the thing would eventually blow up because convertibility, although it looked a little bit like a hard peg and a currency board, it allowed for discretionary monetary policy. From 1995 until the time the convertibility system blew up in Argentina, the net domestic assets were six times more volatile on the central bank's balance sheet than they were on the balance sheet of the central bank in Chile, which had a, which had a managed float. And, and the, the net domestic asset shouldn't have even been on the balance sheet of, if you had a currency board or, or if you had a currency board and you had domestic assets on the balance sheet, they would be frozen. It, it's the movement of those net domestic assets that is a measure of discretionary monetary policy and open market policies.
>> The article that I cited earlier from FT said that the administration, the Trump administration is concerned about China that is supposedly trying to convince other countries around the world to de-dollarize and use less of the dollar in cross-border transactions. So, how would you, as an economist, convince a country in the emerging markets that's maybe not going through the same kind of problems as Argentina? Maybe the country is not seeing hyperinflation, but convince them to continue using the dollar in cross-payment transactions. Certainly, maybe the administration has asked you about this, maybe, maybe not.
>> Well, yeah, I, I've, I've evaluated, uh, you know, all, all the currencies in the world and run them through various filters and come out with a list of 50 countries that would be prime candidates for dollarization. They, they would be a lot better. They would have a much better monetary regime, you, by using the dollar and getting rid of their local currency.
>> Can you give us one example of a country on your list that is not currently in hyperinflation?
>> Well, there, none of the countries on the list are in hyperinflation. There, there's no country in the world that's on hyperinflation. The highest inflation in the world right now is in Venezuela, which is, you know, it's roughly about 550% per year. But to, to be in hyperinflation, you have to be about 12,000% per year.
>> Okay? So,
>> There have only been 71 hyperinflations in world history. And I, I've calculated all of them. The Hanky-Cruz hyperinflation table, world hyperinflation table, contains all of those things.
>> I should, I should, uh, specify for the audience who may not be familiar. You're, the, the definition here that we're discussing is 50% inflation month over month, and those countries are not satisfying that condition. So, let me just rephrase this. Are there any countries on your list of 50 countries that would be prime candidates for dollarization that are not currently in very high inflation? Let's say, just normal economies that would benefit from dollarization. Let's put it that way.
>> Uh, well, you know, there, there, there are about 50 of them, but on, on the list, on the list, let me just give you some.
>> Yeah, please.
>> Pakistan would be, is on the list.
>> Okay.
>> Argentina is on the list. Lebanon is on the list. Ghana is on the list. Zambia is on the list. Zimbabwe is on the list. Turkey, big time on the list. All, all of, all of those countries suffer from flawed discretionary monetary policy. That, that, that, that's a negative. Having a central bank and a local currency for the countries that I just listed is, is a negative. And, and, and, and if, if they dollarized, there'd be a huge confidence boom. You, you wouldn't have balance of payments crises, wouldn't have currency crises, you'd have higher rates of growth, lower fiscal deficits, lower, lower government debt to GDP ratios. All of those things improve.
>> What, what is your outlook? Uh, let's end, uh, this particular segment here. What is your outlook on the dollar then? There seems to have been, um, a loss in trust of the dollar in the first half of the year, especially following, uh, the liberation day announcement of tariffs. As you can see, in April, the DXY fell from over 103.1 all the way down to just 100, and it's been just trading range-bound ever since then. Hasn't really moved up or down in a considerable fashion. Um, any, any, any policies regarding trade or even monetary policies that could move the dollar in either direction next year that you're looking forward to?
>> Well, this, the dollarization, if, if there was a defined, well-defined dollarization strategy, like the one I'm talking about, and a, a pro, a pro-dollar thing, the, the dollar would probably stay about where it is. If, if not, I, I, I think the fair value, given the current regime, the, the way everything is set up, I think the current range is about fair value, about 120 to 140 against the euro. And, you know, it's, it's been about 115, 16, 17, 18. It's, it's gotten a little weaker. It's getting closer to the, to the weak end of my fair value zone, 120 to 140. So, okay.
>> Would, would, would I be surprised if, if it got into the zone? No.
>> But,
>> so, a little bit weaker from here.
>> Yeah, perhaps. Perhaps a little bit weaker. But, but as I say, if, if there was a well-defined pro-dollar strategy, we, we, we could stay on this, you know, definitely on the, on the strong end. Very strong end.
Speaking of trade, let's finish off on this piece of news. The Supreme Court appears to be skeptical of Trump's tariff policies. Conservative, conservative and liberal justices sharply questioned Solicitor General D. John Sauer on the Trump administration's methods for enacting the tariffs, which critics say infringes on the power of Congress to tax. Lower federal courts ruled that the Trump lacked, that Trump lacked the legal authority to, he cited under the International Emergency Economic Powers Act to impose a so-called reciprocal tariffs on imports from many US trading partners and fentanyl tariffs on products from Canada, China, and Mexico. Uh, no ruling has been made so far. I think it's just people voicing concerns. Um, I, I, I, I don't know if how this is going to progress. What do you think? Do you think the Supreme Court, even if, even if the Supreme Court were to rule that this is illegal? Could Congress still go ahead with it? Could Trump still go ahead with the tariffs?
>> Well, fir, first of all, the International Emergency Economic Powers Act of 1977, it, it's actually been imposed, used 69 times by presidents. And, and, and the average length of the imposition of each one of these 69 things, if you average them all up, it's like 10 years. So, they aren't like temporary. They last quite a while. And actually, out of the 69, 39 are still in place today. So, the problem with these emergency acts is is that they're, number one, they, they don't require Congress's approval or oversight. So, the president just does it, and, and, and they tend to stay for a long time, and they tend to ratchet up government spending and government activity. So, there's a ratchet effect. If you use an emergency power and, and go in unilaterally with the president doing something, it, it tends to ratchet up the size of government and government spending, and the, and the so-called temporary emergency never goes away. That they act, they, 57% of all these emergency power acts that have been instituted or used by the president, 69 of them, they're still around. So, I, I'm completely against using these in, in, in general, just as a matter of principle. I'm, I'm against them. I think that, I think the Supreme Court will come down against, and, and the reason for that is twofold. One, tariffs aren't mentioned in the International Emergency Economic Powers Act. That'll be what the lawyers in a flea pick about and go into. The tariffs aren't mentioned. My, my thing is more economic, and that is, these trade deficits aren't an emergency caused by some foreigners. That if you look at the language of the act, it said, here's the language I'm quoting, to deal with any unusual and extraordinary threat which has its source in whole or substantial part outside of the United States. Well, we've had trade deficits every year since 1975. They've never created any problem, but they haven't been created by foreigners. They're created because Americans spend more than they produce. So, so if you look at, if you understand the economics of a trade deficit, it doesn't fit the emergency powers thing because the emergency powers thing, it actually specifies that it has to be an outside country doing something that's threatening the United States. Well, the reason we have trade deficits is because Americans make them. They spend more than they produce. It has nothing to do with foreigners doing some nefarious act of some sort. So, I, I, I, I know they won't be judging the thing with economics and common sense. And the common sense is, we've had a trade deficit every year since 1975. It's never caused any problem at all. So, that's the common sense thing. The economics thing is, no foreigners created the trade deficit. Americans created it by spending more than they produce. And then the third thing is this legalistic thing that they're into at the Supreme Court, and that is that tariffs aren't mentioned in the act, and, and there, and therefore, I, I, I think they'll probably come down on, on the right side of things, but maybe for the wrong reason. But where does that leave us? That leaves us, if the Supreme Court throws this Trump tariffs out, he'll use other laws to, to reimpose them. Or alternatively, you, you could actually go to Congress and have Congress do something, which I don't think he'll do. I don't, I don't think he'll do that. He'll, he'll simply use a ver hodgepodge of other legislation to reimpose these, these tariffs. But it, it will be an utter mess. I, it, it's not, it's a mess right now. And if the Supreme Court throws the thing out, which I think they should, by the way, it'll even become messier.
>> If Trump isn't going to go to Congress, you said why? Because he doesn't expect wide support for these tariffs.
>> Well, yeah. Yes. But he, he, he doesn't, he doesn't like to go to Congress for anything. He, he likes to call the shots himself.
>> Yeah, I get it. Okay, then. Um, it seems like we've seen some sort of détente between China and the US for now. As you're aware, two weeks ago, Xi and President Trump met in South Korea to smooth things out. And so perhaps this is the beginning of the end of escalations. I don't know if you've discussed plans or with the Trump administration where maybe I don't know how much you're able to discuss with the media. Um, but what, what do you see up ahead?
>> Well, I, I think what, what we're seeing is that Trump's backing off, basically, because his, his modus operandi is this. This is how you deal with Trump. He, Trump, Trump's the kind of guy he says, "You, you do something nice to me, and if you don't, I'm going to do something bad against you." That, that's the, that, that's the, the modus operandi. Now, with China, that, that creates a little bit of a problem because China really holds all the cards in this, because they control the critical material space that we talk about, rare earths. There, there are other things too, and, and, and, and I think President Trump has been advised and realizes that China, if they want to really play hardball, could shut the western world down in a matter of about six to nine months, in my view. So, so that's why, that's why I think the truce is, is, is in place, and, and it probably will stay in place because Trump, because to, to use Trump's terminology, Xi holds all the cards, not, not Trump.
>> I, uh, encourage people to check out our last conversations with Professor Hanky. I'll link one of them down below where we discuss this topic in a bit more detail. Um, and, uh, Professor Hanky is a regular in the program. So, please send him or myself an email if you have any questions for the next program, or if you just like to comment down below. Uh, any questions you may have, we'll collect them. We used to do this, uh, where we take viewers' questions. Um, I think we should resume that practice. People have submitted very good questions in the past and, uh, give us ideas for what we should talk about next. So, please do send us an email. I'll put, uh, Professor Hanky's email down below as well as mine. Either works. Uh, Professor Hanky, that was a great talk. Where can we follow you? Um, I mentioned your email. Where else?
>> Oh, okay. The email you'll put up. Uh, you can also follow me on X, and that's @Steve_Hanky. And I'm running, you know, 8, 800, almost 812,000 followers. So, there's, there's a lot of action on X.
>> Do you get stopped in the streets sometimes?
>> No.
>> No. Okay. Well, we got to work on that. Please, uh, bump up those numbers for Professor Hanky and, uh, say hi to him on the streets because he's so famous. And, uh, thank you very much, Professor. We'll speak to you again soon.
>> Okay, David. Thank you.