China & the American Imperial Economy | Louis-Vincent Gave

In Episode 364 of Hidden Forces, Demetri Kofinas speaks with Gavekal CEO Louis-Vincent Gave about de-dollarization, U.S. re-industrialization, and his case for a Chinese “deflationary boom” and revaluation of the renminbi.
In the first hour of their conversation, Demetri asks Louis-Vincent Gave about the most important trends set to define the investment landscape in the years ahead. Gave argues that the U.S. and Europe are set to undergo a long period of structurally high inflation while China’s economy is set to experience a “deflationary boom” partly driven by rapid advancements in key industries like semiconductor manufacturing and electric vehicles.
In the second hour, Gave explains why he believes that the American imperial model of dollar recycling is unsustainable and why de-dollarization is a prerequisite for the re-industrialization of the United States. They also discuss whether or not America needs an industrial policy to reverse the multi-decade financialization of the U.S. economy that has driven up asset prices relative to their underlying income streams, exacerbating the wealth divide while destabilizing the country’s political system.
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Producer & Host: Demetri Kofinas
Editor & Engineer: Stylianos Nicolaou
Follow Demetri on Twitter at @Kofinas
Episode Recorded on 05/14/2024

[@PhilipWong55]

The US national debt is more than $34 trillion, with 22% of it held by foreign entities. The US also has $40 trillion in unfunded Medicare liabilities and $26 trillion in unfunded Social Security liabilities. The US dollar is the dominant reserve currency, backed by its perceived strength, allowing the US to print unlimited dollars as long as the world maintains trust in it. The US dollar is the backbone of US power, and any actions that undermine confidence in the currency threaten to destabilize its position of dominance. Each unilateral sanction imposed by the US risk damaging the stability and credibility of the US dollar, leading to dire consequences for the nation's power and influence. The US is the only country actively undermining the strength of the US dollar. The freezing of Russia's $300 billion currency reserve by Western governments may lead countries to reconsider investing their funds in US Treasury bonds and finding ways to reduce their use of the US dollar. A significant portion of US dollars is held outside the US, estimated at 60-70% of all US dollars in circulation, due to its status as the dominant reserve currency and wide use in international trade and finance. The one trillion dollar trade deficit of the US is a consequence of being the reserve currency, as a strong dollar makes it difficult for US businesses to export goods and services while simultaneously making it easier for other countries to sell to the US. Countries are expending resources and labor making goods and shipping them to the US in exchange for green pieces of paper. The US is sending back mostly empty containers. The US budget deficit is $1.7 trillion in 2023 which must be paid for by selling more Treasury bonds. The interest on this debt is greater than the military budget. To pay the interest on its debt, the government sells more Treasury bonds, leading to a cycle of increasing debt. The US printing of dollars has been exporting inflation in other countries for decades, but will eventually increase US inflation. Raising interest rates to fight inflation decreases consumer and business spending, increases the trade deficit, and higher interest payments on government debt. Other countries will respond to the US raising of interest rate by raising their interest rate, risking global recession. The Plaza Accord addressed this issue in the past, but it will be challenging to implement such measures now. A well-run country collects taxes to fund essential services and infrastructure. In the US political system, wealthy corporations and individuals can lobby for tax breaks. The shortfall in funding for the US government has reached $34 trillion. Instead of collecting taxes from wealthy corporations and individuals, the government pays interest to them. Banks hold Treasury bonds for their safety, liquidity, regulatory compliance, and potential profitability. When interest rates on Treasury bonds rise sharply, the decrease in existing bond values reduces liquidity and makes it harder for banks to raise cash quickly. This causes depositors to lose confidence, triggering a bank run. In response to the current bank run, the government is issuing Treasury bonds to raise funds to compensate depositors for any lost funds. There are $19 trillion in deposits in US banks. The estimated unrealized loss on US banks' financial assets is $1.94 trillion, while the total size of their equity is $2.1 trillion. SVB had taken a $15 billion loss, while their capital is $16 billion. Around 2,315 of the 4,800 banks are currently sitting on assets worth less than their liabilities. It's a systemic issue. A similar issue is being played out with risker Mortgage-Backed Securities (MBS) valued at $12 trillion. The new Bank Term Funding Program (BTFP) helps prevent discounted bondholders from taking losses when they have to sell them urgently. The BTFP accepts discounted bonds at face value to be used as pledges for loans to inject more money into the economy. Risking more inflation. It's a Ponzi scheme. Ponzi scheme cannot taper. We reached the can and there is no more road.

[@Eric00700]

It’s still the cleaned dirty shirt…

[@roc7880]

not clue if the guy is correct in his analysis, but I never heard a more clear and comprehensive explanation of economics ever. thanks for bringing such speakers, they are much better than the zealots, although the industrial ecosystem was not built in China because of market forces, but because of a wise and persistent industrial policy at the national level. the West thinks in an atomic manner, China understands the role of the network and economic community.

[@thewrightoknow]

Excellent insights about deficit spending that creates NOTHING!

[@kalipotmeng]

The stock prices in the US are quite amazing 😀

[@mechannel7046]

8:20 3 critical pieces: price of energy, price of USD, interest rate 9:00 US shale revolution 11:20 entering a fundamentally inflationary tume 12:40 deficit 15:40 US debt went into things that gave no good returns 17:05 two kinds of empires, land and sea. Empires pull in raw materials, made them into high value goods and push them out to other places 21:20 Before Xi: China made low margin goods. Post Xi: up the value chain. China builds whole eco systems for industries 31:30 US glorifies money, huge income discrepancies, detrimental to industry 36:20 Both Biden and Trump will have similar easy money policy 37:40 Yen hugely undervalued

[@Martin-qm2lg]

Thanx for summary

[@kalipotmeng]

Amazing Gave. Always insightful.

[@markferguson7563]

As is always the case I woke up a tad after 5am, and grabbed the phone to peruse my email/ SMSs. Somehow I encountered this podcast, and seeing it's still dark and cold outside (I'm in Sydney) I thought I'd tune in. Well, how Louie explains things between the 8th to the 16th minute as to what makes the global money-go-round operate is really sensational. So much so, that he spoke in that short time should be played by lecturers to students in economics class, to explain to them the intricacies of the global money-go-round in the simplest terms.

[@CarolinaInman99]

Investors are still in denial about the fundamentals of the economy. They expect rares will soon be cut and believe the topline GDP numbers signal a strong economy. However, they dont. Credit card balences are maxed out, more credit is hard to come by for consumers, a ton of companies are about to beforced into refinancing their debs at far higher interest and the regional bank backstop program is out this month. There's also the fact that inflation ticks higher than expected every single time the markets believe a rate cut is around the corner and a rate cut would cause a surge in inflation. The fed sees this stuff, guys. The only wild card for us investors is to actively engage the market by trading, we always over complicate things when we speculate. It's not about guessing the market's next move; it's about playing it smart and steady during trading...managed to grow a nest egg of around 100k to a decent 732k in the space of a few months... I'm especially grateful to Linda Wilburn, whose deep expertise and traditional trading acumen have been invaluable in this challenging, ever-evolving financial landscape.

[@redeyesband]

Productivity is never accidental; it is always the result of careful planning, dedication, and consistency.

[@simongard-e7e]

A very balanced view from Louis - always a pleasure to listen to his common sense logistical approach to macroeconomics

[@toroblanco800]

[@klausmueller9334]

Great conversation. I liked Louis' comments about moving back the climate catastrophe by many years, now that we have 50% tariffs on Chinese batteries.

[@luning7621]

Agree with most he says except about BRI, which is driven by China' s excess capacities and savings instead of any imperial aspirations. Also he's wrong about Made-in-China 2025. First if you actually read the original, it calls for not "dominance" but in the top rank. The diminishing demographic dividend and aggressive Western tech restrictions have made it imperative for China to move up the value chain.

[@user-vt5ln7qq4j]

Louis is at the end of the day a Frenchman (the white man). That imperialist colonial mindset is genetic. They will never be able to understand China's prosper-thy-neighbour philosophy so that China doesn't have to depend on only the west to trade with. The Chinese believe the world is their hinterland as was the case with ancient China when Admiral Cheng Ho travelled around Asia by ship to trade. China is not rising. China is resuming its former greatness not to war but to trade.

[@richrdroma]

Great guest!

[@shirishpanwalkar]

Thanks for offering us these pearls of wisdom 👍🙏

[@PhilipWong55]

Following the September 11, 2001 attack, the U.S. shifted attention from China to the Middle East, easing China's entry into the World Trade Organization (WTO) in December 2001. As China emerged as the "world's factory," producing inexpensive goods that lowered global inflation, central banks, including the U.S. Federal Reserve, maintained low-interest rates, fostering excessive leveraging in the U.S. and Europe. This, coupled with risky financial practices and the housing market's collapse, led to the 2008 Global Financial Crisis. Despite feeling unsettled by China's economic growth, the United States actively pursued financial support from China, for China to continue purchasing U.S. Treasury bills. In 2011, Obama proposed the "Pivot to Asia" strategy, which shifted the focus of US foreign policy from the Middle East to Asia. This, along with the wargaming of a sea blockade of Chinese commercial ships on a global scale, the formation of the Trans-Pacific Partnership (TPP), which deliberately excluded China, the establishment of a 2500-strong US marine air-ground task force in Darwin, and an increase in the rotation of both US Air Force planes and US Navy vessels through Australian bases, alarmed the Chinese leadership. Unable to remain passive, hide their strength, and bide their time, Xi Jinping was selected as the leader of China in 2013 to make China more secure. These included the establishment of the Asian Infrastructure Investment Bank, the Belt and Road initiative, and the building of artificial islands in the South China Sea. In 2015 the "Made in China 2025" initiative was announced. These policies directly responded to the perceived threat posed by the "Pivot to Asia" strategy. No country is excluded from joining the AIIB or the Belt and Road Initiative. Obama's intentions were clarified when he responded to Xi Jinping's proposal on September 25, 2015, to make the South China Sea (SCS) a non-militarized zone by initiating freedom of navigation operations in the SCS on October 27, 2015.

[@YT-ib7xo]

solid analysis

[@markferguson7563]

Exactly what I've been saying for years (2012).

[@user-vt5ln7qq4j]

Conclusion: President Xi is intelligent, strategic and visionary, just like President Putin. obama is just a crafty small-town used-car salesman who looks at himself in the mirror, egoistically thinks he's smart and erroneously so.

[@hexwrench4433]

When you give away the cow to your competitor you can't cry foul when they sell you the milk.

[@constantinemandylas715]

Thanks, great discussion.

[@alanmrsic893]

Great stuff, thanks again!

[@NoOne-bj2kz]

demetri is the king of cliff notes, one of the best interviewers but can hardly conjure up an original thought in his brain in time to stave off a stammering performance anytime he's in the hot seat. Stick to asking questions, you dont have any answers. Glory to Turkey

[@peterchung7151]

Louis Gave = Amazing 🙏

[@JonathanHerz]

Louis-Vincent Gave is right on most things but he isn’t correct that TSMC was not subsidized by the ROC government. For example ITRI, the state-backed venture arm put up a lot of initial financing.

[@stevecohen1048]

The 34 trillion includes huge corporate subsidies and tax cuts (that generate spending not on productive investment but on their own stock). And tax cuts for the wealthy.

[@billhammett174]

Super smart...

[@smsfelipe]

Policy definitely plays a role with things like Boeing and other major companies, their hands are constantly forced into embracing things like DEI and net zero, which hurt the companies in the long term.

[@renatoapostol8057]

greatest for MORTAL mankind.. LOVE OF CO-EXISTENCE in DIVINE UNITY to ONE NEW GLOBAL BODY*** for lasting PEACE. NO DIVISIVENESS..NO STRIFE..NO ATTRITION, members UNION for peace, protection and prosperity...***RULES OF ALMIGHTY GOD

[@yttean98]

8min into your video you are still at the induction level, I am afraid it takes you far too long to come into the meat/body of the discussion.

[@888YangJi]

👍👍

[@xialiu8608]

中国产品靠性 价 比取得客户信任

[@Strykenine]

Already talking about high structural inflation? I'm in.

[@robertprawendowski2850]

⭐

[@xzyeee]

.. and who told you that God didn't answer? He listened and his answer, sent with blessings, is on its way to you.

[@user-xd4rs6vr4n]

Totally disagree with this guy. Tariffs for tariff's sake are the cure to the cancer. They should not be too high but they should also be permanent, say 20% on everything from everywhere instead of taxing income. The point is a level of self sufficiency for national sovereignty and to prevent labor arbitrage. Also income taxes are oppressive, should not be levied on ordinary workers. Tax consumption, promote production.

[@HKCool-hj4bs]

❤

[@DamienWalter]

Good to know what a China schill sounds like in this sector. Not a single probing question. Your channel just went to zero value.

[@esteban8592]

🤡🤡🤡

[@GregInATX]

The R in idea is silent.

[@smsfelipe]

That said I'd rather ride a Boeing 1000 times than riding a Chinese airplane once.

[@JohnTaylor-ts8wk]

Why so soft of China’s spending? They haven’t done useful infrastructure spending for decades. The past decade saw a large amount of spending to build enormous ghost cities, and they recently switched to building enormous over-capacity in wind, solar, EV’s, and batteries. There’s a reason why China has one of the lowest birth rates in the world and why their people are emigrating in large numbers, and it isn’t because their economy is booming. I’m not defending the US’s spending pattern, I’m just saying that this top-down economic decision making doesn’t work anywhere - in the US or in China.

[@yeechut]

Louis Gave is a macro economist that has spent two decades investing in China, and you are just a random guy who gets your information from bullshit media. Let me put it to you that what you think you know about China is nothing more than bullshit propaganda.

[@luning7621]

You need to go to China to see what "useful" infrastructure China has built over the past 4 decades.

[@keith6371]

As a percentage of population, Chinese immigration is much much much lower than Japan back in the 60s and 70s, S Korea back in the 80s. The problem of China, as Louis said, is deciding to favor industrial sectors over service and financial sectors, the consequence of that is reduced consumer spending and service sector jobs. US is the exact opposite

[@richrdroma]

Great guest!