The Most DANGEROUS Mix I’ve Seen: Debt, Dollar & U.S. China Rivalry | Richard Haass
Summary
Geopolitical Influence: The podcast highlights the impact of geopolitical tensions, particularly the U.S.-China rivalry and the ongoing Russia-Ukraine conflict, on global markets and economic stability.
U.S. Economic Policy: Discussion centers on the uncertain role of the U.S. in global economics, with emphasis on tariffs, interest rates, and the Federal Reserve's monetary policy as significant market influencers.
Tariff Implications: Tariffs are debated as a tool for economic leverage, with skepticism about their effectiveness and concerns about their inflationary impact and geopolitical consequences.
U.S. Debt Concerns: The U.S. debt situation is described as a major domestic issue, with potential implications for global confidence in the dollar and economic performance.
Dollar Dominance: The podcast discusses the gradual decline of the dollar's dominance as a global reserve currency, influenced by new technologies and geopolitical dynamics.
China-U.S. Relations: The complex economic and geopolitical relationship between the U.S. and China is examined, with potential for future trade agreements and the strategic importance of managing tensions.
Market Outlook: Despite high market valuations, the discussion suggests more downside risk than upside potential, with geopolitical events having limited immediate impact on markets.
Technological Optimism: Emerging technologies, particularly AI, are seen as potential drivers of future economic growth, possibly mitigating some of the challenges posed by current economic policies.
Transcript
What is weighing on markets right now? Is it the Fed? We're all waiting for Jerome Powell take the microphone here in Jackson Hole this afternoon. Is it geopolitics? Is it the affair between Russia and the Ukraine? We'll have to find out. I've invited a phenomenal guest today to the show. His name is Dr. Richard House. He's a distinguished diplomat and also President Emeris of the Council on Foreign Relations. So, nobody better to discuss what is weighing on markets and and the gold price and other factors as well. And of course you can probably guess it will have a heavy focus on the geopolitical side today. I'm really curious his take on potential China's involvement in the Ukraine as a security guaranter. What does that mean? Does it have any impact? Does he have any significance? We'll we'll get to the bottom of it in a few short seconds. But before I switch over, hit that like and subscribe button. It helps us out tremendously. It's a free way to support our channel and it means a lot to us. So thanks so much for doing that. Now Dr. Hus Richard, it is a great pleasure to have you on the program. Thank you so much for joining us. Good to be with you all. >> Yeah, really looking forward to this. Um, as as I mentioned to you before hitting the record button, I think we need to let set the, you know, set the groundwork a little bit or do some groundwork and really define the current world order and where do you think things are headed and then we can go a little more granular and talk about little crises here and there, but what is your current world order from your perspective, Richard? Well, since this is a financial podcast, if they were a share of stock called World Order LLC, uh it would have suffered something of a correction over recent uh years. Any number of reasons. One is the war in Europe that's now in this phase what well into three and a half years a Middle East where while parts of it have been perhaps sorted out still some immediate questions like Gaza and the West Bank and long-term questions between Israel and Iran that are very much an open question. China's rise and what it plans to do with its power particularly given its uh interest in in Taiwan. Probably the biggest question for world order is the United States. what sort of a role it plans to play going forward. It's played a central role for 80 years, built a close network of alliances, supported international institutions. A lot of that can't be assumed. And then is that if as if that weren't enough, you've got everything from the emergence of new technologies and the like, what it's going to mean, and so forth. So for those in the business or financial world, I simply think that the assumptions they could make in the past that things would pretty much be the same tomorrow as they are today. Uh that things would be more stable than not. I don't think people should be as comfortable making those assumptions going forward as they have been in the past. >> Yeah, definitely like the level of comfort or our comfort levels have been shaken up quite severely here. Uh markets seem to be nervous as well. Um what what do you think is having the biggest impact right now? I I started leading with the geopolitical side, but what do you factor is the biggest impact of right now? >> I actually don't think the geopolitics have the biggest impact though again it's always a context for for markets and geopolitics have a history shows have a way of intruding particularly when things get particularly bad. No, I think again it's the United States its uncertain role. I think the tariff uh policy quote unquote has had an enormous impact, projections of lower growth in the United States and the rest of the world. The uncertainty and so forth. I think that's probably a bigger factor than than anything else. And you mentioned before Jay Powell, obviously uncertainty about American interest rate policy and the relationship going forward between, among other things, uh inflation in the United States, tariffs, and again interest rates. How do you think monetary and fiscal policies in the US are being dictated by geopolitics? Meaning, what is sort of the end goal? Where does the US see itself in five, 10 years or 20 years down the road? >> Well, for the most part, I don't see uh this, you know, those policies being dictated by geopolitics in a funny sort of way. The people who do macroeconomic policy and the like tend to do macroeconomic policy and the like. The people who do geopolitics tend to do geopolitics. It's almost like a university and they each have their departments. They're they're somewhat siloed and unless things get really extraordinary in one of those silos, I think people end up uh working more within the confines of the world they're familiar with. So, so a Jay Powell or the Fed is going to be looking at traditional economic indicators and nothing going on right now and the geopolitics even, you know, we can talk about it. Even if there were to be something positive in in Ukraine, I don't see that as fundamentally affecting what the Fed would do. >> Yeah, it's interesting. You're talking inflation, employment are the two main mandates for the Fed. Of course, u tariffs seem to be having an impact slowly seeping into the CPI data here as well. What what is your take on on the impact of tariffs here and how should the Fed sort of factor that in given also that China is looking at deflationary pressures here? >> Sure. Look, I think tariffs are already showing themselves up in the production numbers, the PPI. I think there's a greater lag in the CPI, but it's going to show up. And my guess is the entire emphasis on on on the tariffs is one of the factors that has led the Fed to go more slowly than among other people Donald Trump would like to see. that they're they're nervous about lowering rates decidedly or decisively in particular because of a sense that there is a lag effect from tariffs. They will boost inflationary pressures in in the United States. So I think that I think that's simply part of the the trade-off and again my enthusiasm for our tariff policy shall we say is limited uh to say the least. But but it's simply you know President Trump believes in them and I think now they become structural. We're debating how high tariffs will be for how long, not whether they will be. >> Yeah, it's the tariff debate is an interesting one. We've had guests on that say, "Yeah, tariffs are fantastic. It's a great tool to to put some leverage onto our trading partners um to to even the playing field a bit more." It sounds like you're against that narrative and you think it's just counterproductive. Am I am I correct in that? Yeah, I believe tariffs can be a useful instrument, but only in very select circumstances where you have evidence that uh a trading actor is subsidizing or dumping or is blocking your exports to its country. In those narrow specific situations, I think tariffs can be can be justified as if as a tactical response, if you will. But tariffs as an acrosstheboard strategic policy, I think, are not just inflationary, they're a very expensive way to to do business. uh in terms of protecting domestic industries and the right and the rest. I think they're actually bad for American competitors. So, no, I I have very little enthusiasm. That doesn't even get into the geopolitical consequences of tariffs. The fact that they're so often used against our friends and allies is geopolitically, I think, truly counterproductive. >> Yeah, you just used the word competitive. And I was going to ask you as a follow-up like how competitive is the US on a global scale right now? Is it is it competitive? Well, we are competitive mainly though because of what we done in the past. We we still reap the benefits of of past policies. I wonder, you know, I worry and and that's it's a little bit unfair. We're also competitive, you know, given we still have enormous talent whether it's in Silicon Valley and biotech, what have you, but we're hurting our universities. We are reducing dramatically funding for for basic research. Our immigration policy is discouraging some of the most talented people in the world from from coming here or or staying here. So what I worry about is that we're eating our seed corn. That American competitiveness 5 10 15 20 years hence is diminished because of policies that I believe are remarkably shortsighted being conducted now. >> Yeah. You've you've been arguing that the biggest enemy or the US is fighting comes from within. It's a domestic enemy. can be like you've been referencing the US debt situation as an example, but now policies like immigration policies are a struggle as well. Where do you see things trending? Like do do you see there's a there's a change? Like is this just a momentary like blip on the radar screen or is this a longer term trend? >> Well, you mentioned debt. I don't see that as a momentary blip. Uh I haven't checked my debt clock this morning, but we're in the we're in the zip code of 37 trillion uh as a percentage of GDP. What are we about 125 give or take? Uh I see no reason to believe that's going to improve. The politics simply aren't there. The only question we could have a conversation about or debate is how fast it will go up and go up in either absolute terms or in relative to to to GDP. I think it's unfortunate because, you know, as rates stay relatively high, debts, we now spend more in this country on servicing our debt than we do on our military and certain other parts of what we spend in the budget on entitlements, on social security, Medicare, Medicaid, and so forth are very, very hard to decrease, particularly as Americans uh get older. So, I think we're facing a future where discretionary spending gets gets squeezed. So even without a bond crisis, a bond market crisis, I think our debt is uh puts a real ceiling on our economic uh performance over over time. And then there is the the potential obviously for a crisis and all that would mean. But again, I just don't see the the politics uh of either, you know, coming get building a consensus to decrease discretionary spending, to increase taxes. And one of the really nutty things that we've done, I believe, is our reduction in the capacity of the Internal Revenue Service, our our our tax collector. And so our ability to collect revenues now is is diminished because we've so reduced the funding and staffing of our internal revenue service. >> From you staying on the debt topic here for a second, like um it's undermining credibility on a global scale. Uh the world is looking at the US $ 37 trillion which is is an insane number. Uh debt to GDP ratio closer to 130 now as well. What what does that mean for the currency the confidence in the bond market? You were talking about that or touching on that as well. Can you elaborate on that? >> It's it's it's a question I'm wrestling with as well, but I think your first points spot on uh which is it raises questions about our financial stewardship. United States has this outsized role in the world. The dollar is the reserve currency. What happens here with interest rate policy ripples through the entire global uh economy. What we do or don't do in our trade policy again has an outsized influence because we're still what a quarter or so of of the global economy and and GDP. So I think our debt situation and our politics more generally diminish confidence in the United States. The fact that we go through this drill regularly about whether we increase our debt ceiling again puts the entire world on notice that American politics may not be uh what's the word responsible or or uh serious. And I think you have to look at two scenarios. I've been thinking a lot about this one is the one you alluded to. You one day uh there's a a a crisis in the bond market. we have to raise rates here not in order to cool an economy but in order to attract funding or so forth that raises questions of default. There's also concerns about whether there might be an effort at some point to inflate our way uh out of this and so forth. And then there's even without a bond market crisis just uh this this reality that the United States has what I would call a kind of slow motion crisis with a 37 and trillion and rising uh debt and all that means for the uh again for our reputation and for our economic performance. So I I think it's a real overhang but again uh I wish I wish I could say otherwise but I don't see the political impetus to do anything about it. The really interesting question is would it take a crisis to do something and might that bring people across party lines together to do some of the the work on on taxes and spending that right now is impossible? >> Do do you think the White House or politicians in in Washington understand that the US dollar is under attack? Meaning that potential other competitors like the Chinese one or so are are on the rise. They're discussing now stable coins backed by by the remimi. Um, do you do you do they factor that in at all? Is that a notice of concern there? >> A couple of reactions. One, is there are those in Washington who who like the idea of the dollar being somewhat weaker in terms of improving our our trade position. So I think you know I haven't checked the numbers recently but the dollar's position has gone down what north of 10% over the last seven eight months since President Trump entered office and there are those who'd say that's fine that a strong dollar has has been an impediment to the US uh trade position we are in you're right correctly at a time two things are going on one is the new technologies stable coins you mentioned and other things uh digital currencies are proliferating and because the United states has not just raised questions about its financial stewardship but the what some have described as the weaponization of the dollar because of financial sanctions. I think there is a kind of secular drift away very very slow from a dollar centric uh world. You know at the moment we're still dominant. You mentioned the Chinese currency. The Chinese uh are still not converting. They're not open. So I think you know to use the old expression in the land of the blind. The oneeyed man is king. And the dollar for all of its imperfections is still the oneeyed man. It still dominates. But as I said, I think there is a secular trend diluting dollar domination. And to go back to what Xgard Dust Stang once said, the dollar's role does confer on us exorbitant and privilege. And I don't think people here are sufficiently sensitive about the consequences of the dollar losing its uh its prominence. >> What what is the pace of that where you just mentioned the dollar losing its prominence? Like >> a good question. I don't have an answer to that. At a minimum, it's gradual. The real question is whether crises or developments happen that accelerate it. And that's possible. I I don't have a a crystal ball, but I think you'd have to say again the secular trend is reduced centrality for DA, but very very gradual in part because there's no good competitor that's come out. The real question is whether there's crises that accelerate this and that I don't think either one of us can rule in or or or out. I wouldn't be shocked though if it were to happen, but it doesn't happen until it happens. >> No, that's that's very true. Like little by little by little and then all at once, right? >> As Mr. Hemingway said said about going bankrupt. Yes, sir. >> Exactly. Um, you know, if you boil it all down, I had Michael Avery on the show the other day and he said, if you boil it all down, it's US versus China. Um, if you really look at the meta, whatever it is, um, whether it's the tariffs, whether it's geopolitics to a degree, it it really boils down to US versus China. Would you agree with that statement and would you >> simplified? Look, the United States are the two most significant countries of this era of history. But look, we haven't talked about it. We don't have to. We've, you know, Russia is obviously a major force in Europe and selectively in some other parts of the world. In the Middle East, countries like Iran have played a large role. Israel, obviously, Saudi Arabia. So, if you go around the world, but yes, China is the one country that is a global competitor of the United States. It's uh built up its conventional military forces and continues to. It's the world's fastest growing nuclear arsenal. China has a large economic footprint in the world through it its trade and its development policies, Belt and Road, what what have you. It represents in many ways something of a political ideological alternative to the United States. And all this is without mentioning the possibility of geopolitical friction between the United States and and and China. And look what's so interesting at the China US relationship is unlike the US Soviet relationship during the four decades of the cold war Soviet Union was really a political military challenger to the United States. China is also the economic challenger. It's the world's second largest economy. It's everywhere. It's making massive state investments in select sectors of the economy. All of which I think to one degree or another will will pay off pay off. So yeah, >> China and the United States occupy a a special, shall we say, position in the world. And the question is to what extent and how do they manage their relationship uh going forward and how is it hopefully it avoids spilling over into confrontation? How do they manage a very competitive uh economic uh relationship against this backdrop of geopolitical competition? You know, a lot of big questions. >> Lots of big question. Exactly. How close are we to a military conflict with China at all? Like it doesn't feel like we're in the middle of a cold war just yet. A lot of sable rattling more on the economic side, tariff embargos, meaning extremely high tariffs that are similar to an embargo. Um what does it look like? I don't much like the phrase cold war with the United States and China because again China is so present economically unlike the Soviet Union and you know the USChinese trade relationship is enormous and you words like decoupling ought to be jettisoned because there's no decoupling that's going on or going to be going on and even recently areas of export controls uh here are are being uh somewhat uh reduced. So again, I think the the reality and the likelihood is China and the United States will maintain a large economic relationship as they compete ideologically and geopolitically. But no, I do not believe we're on the precipice of any type of military confrontation between the United States and China. China still wants to build up its military. Uh China's purging, as I can best see, a lot of its senior military. That will slow them down. I think they want to learn the lessons of the Ukraine war and incorporate them into their uh military. China also, if you think about it, they want to see what they can get diplomatically from the United States. You haven't had a meeting between Presidents Trump and Xihinping. My guess is China is curious as to two things. One is what is the United States ultimately going to do visa? How committed is the United States to supporting Ukraine, to opposing the idea that territory can be acquired by force? And then translating that, what is the United States prepared to do to back Taiwan? What is the United States prepared to do visv China geopolit politically? So, I think it's way premature for people to think that China is going to act militarily against the United States. I think they're they're trying to answer a lot of questions before they'd even begin to go down to think about going down that path. Yeah. What is the US stance on Taiwan right now? It feels like it's uh there what we call there's a bit of horse trade involved. It feels like if you leave Russia alone, maybe we'll give you Taiwan. I've been hearing various rumors about that. Um if you stay out of Iran, maybe you can have Taiwan. Like I'm just throwing like phrases out there and rumors have picked up, you know, over the recent months. What is the stance on Taiwan? Is the US coming to to the defense here? Well, look, for since the United States established a relationship with Taiwan 40, 50 years ago, the policy has been one described as strategic ambiguity. Taiwan could not be certain we would go to their defense. China couldn't be certain that we would not. That's still the uh official policy. I think there's probably a little bit more ambiguity given the nature of the Trump administration, its willingness to go to bat for allies is structurally a little bit more uncertain than it was. But I think that reality is still there that China can't assume what it is we would do or wouldn't do. And the real question is whether at some point they decide to test that. And that's pos possible. I don't see it as imminent, but I'm not going to sit here and say they're not going to do it at some point. >> What are the odds of the US and China actually reaching a tariff agreement? Uh constantly we're seeing extensions here, but nobody's really inching closer to a deal. Um what are your expectations here and what do you think the implications could be from a deal? I would think ultimately there's a pretty good chance that you the fact that the president has kicked things down the road, President Trump, the fact that he's been as open as he's been to a deal on Tik Tok, the fact that he's uh allowed uh Nvidia to export advanced uh chips. This suggests to me that he wants a deal with China. My own guess is, I can't prove this, is that the United States and China to some extent got to a place in their economic relationship more by events than by design. The United States introduced tariffs and then China, you know, reciprocated in ways that other countries didn't. So, there was an escalation at the outset and now they're beginning the long slow process of unraveling that of climbing uh down. But I I fully expect there will ultimately be a trade deal. And to me the real question I don't have the answer to it is whether it is a trade deal or part of a larger US China deal in which other elements enter as well and that's possible. >> What what could be those other elements? Like I mentioned in my intro that China has been asked to be potential security guaranter in the Ukraine. Would you throw that into the mix as well? >> No. Uh first of all I don't see anything to guarantee in Ukraine. I am, shall we say, profoundly skeptical of the prospects for having any uh agreement to to guarantee and I don't necessarily see China being involved in it because China's not, shall we say, been a neutral party here. It has been been helping Russia in all sorts of uh ways. So, no, I don't see China playing uh a role there and as I said, I'm not sure there's going to be anything to much to, you know, to to to work on uh together. Now, it's interesting like I've just picked up in a a headline here as well. The US has been sparring China uh from sanctions in in regard to importing Russian oil. Now, we're getting really granular on the econ economic side here, but it's been uh chasing down India like we've been putting heavy sanctions on India. Um where's the discrepancy coming from? Does the US see China as a stronger partner or not partner but stronger what do you call him? Uh opponent like for lack of a better term here. because I think there's different reasons but your observations unfortunately or fortunately whatever however you look at it it's correct in terms of China I think the United States is very wary of confronting China with tariffs because China then has the option of cutting off rare rare earth exports the United States is too dependent on China for supply chain issues right now so that there's that and also as we were just discussing I think President Trump is optimistic or hopeful maybe is a better that he and China Xiinping can strike a deal. So I don't think the United States is looking to add more complications to its economic relationship with with China. The fact that we are tariffing India as much as we have I find truly unfortunate. It's not that India isn't protectionist. It is. It's not that India isn't buying oil from Russia. It is. uh but to be so confrontational with India threatens what's been what several decades of careful knitting together of a US Indian strategic relationship in part to give China more to to think about on its other uh its other flank India is also a growing uh economy in the world it's I think it's a question of when not if it becomes the world's third largest uh uh economy in the world been a lot of speculation about why the United States is taking this position a lot of talk about connections between the US and Pakistan. Uh but you again I just think it's unfortunate. U but I think coming back to your question uh we're clearly stuck in a confrontational approach to India and my guess is we want to shield China from that. Again, President Trump wants to meet with Xiinping and see what it is the two of them can produce. >> Yeah, it's interesting. I've been calling India a bit of a Trojan horse within the bricks cuz up until recently until the tariffs have been put on India they were a close ally of the US as well within the bricks. I think India is trying to play both sides China and the US. >> India I would take issue I mean India's I would never call India an ally. India has always kept it strategic independence but it was strategically affiliating itself more with the United States than it has in the past. But India always keeps its options open. It did during the cold war. it doesn't in this year. Again, what's striking though is how much how the relationship has taken a turn for the worst. That is uh not something that a lot of people see coming. And again, I think it's uh unfortunate, but if you're China, you'd say that's one of the positive things to use an old Soviet notion, the correlation of forces. I expect China likes it when the US India relationship uh suffers. China likes it when the war in Ukraine goes on. China likes it when the United States and Taiwan have have issues. All these things are are pretty good forh for China. >> It definitely plays into their hand strengthening the role within the bricks becoming the capital C in there. Um which is really interesting. Um Richard, like maybe the last couple minutes, let's touch on markets again. Let's come back to implications on markets. S&P 500 near record highs again, 6,400 points. Rate cut expectations high. um although they're shrinking uh on a daily basis here only 73% now expect to cut in September. Um but what do you make of the markets right now and how should we try to understand them? >> Look I tend to agree with those that you look by any historical measure markets are pretty high. It's been a favorable rally. A lot of good things are priced in uh including rate uh cuts. My own guess is there will be something in that direction but less than perhaps some in the administration want less than the markets uh expect but all things being equal and you look at the market in the short run you'd have to say there's more downside than upside but but again you know I wouldn't take my my take on it um you know more seriously than people who are more expert than I am I don't see at the moment any geopolitics that will particularly affect the market as I said I think that I I don't see anything imminent in Asia. Middle East is churning. I'm skeptical of what's going to happen between Russia and Ukraine, but I don't think that that's particularly priced into the markets one way or the other. So, I think what the markets are reacting to are general economic performance, tariffs, inflation, Fed behavior, and that's a that's a pretty familiar conversation. >> I know you've been following new technologies quite a bit and the impacts on on our society and what what we're looking at here. Um c can you give us some pointers like what are you excited about and how will it shape the world moving forward? >> Yeah, there is a lot going on in in new technology. I was had an interesting conversation the other day. Uh you know AI is you can be talking about what you had for breakfast and sooner or later AI comes into the conversation. It's hard to escape these days. The uh and we were talking about the debt and there's always been a school of thought of people who said don't worry about the debt that much. American economy will grow out of it. Well, all things being equal, we we won't. But what struck me the other day was what you might call the AI bulls. And they were saying that AI is going to be such a a strong source of economic growth that that could actually change the calculation. And the idea of having sustained four or five% growth is no longer uh inconceivable because of AI. So that to me was just one of those interesting uh things that was had entered the the the conversation but clearly you know AI things going on in biotech uh in science every day. Look uh I'm a I'm a technology optimist. Think of the last great crisis we had which was uh COVID the pandemic. Well, we got through it in remarkable shape with two thanks to two technologies. One was obviously mRNA vaccines which were effective and safe and dramatically shortened the lead time you would need for a vaccine. The other technology which doesn't get the credit it deserves is the is a version of what we're using here which is Zoom that essentially people could communicate. They could wouldn't have to go into the office. they wouldn't have to have be in physical proximity with all the risk that had for disease transmission, but they could still have professional and personal uh lives and we simply wouldn't have gotten through the pandemic again without mRNAs and without without Zoom. So, I'm a I'm something of a technology uh optimist in in terms of what you know how we're going to weather some of the inevitable storms going forward. >> Yeah. Allow me one last question here, maybe 30 seconds or less, but do you see ourselves increased productivity as much to grow out of the debt situation or at least decrease the gap again? >> Quite possibly. Uh, you know, I wouldn't count on it, but it doesn't mean I wouldn't get serious about thinking about how to deal with the debt, but yeah, that that could be the wild card there that productivity and growth at least could ease the the debt challenge and give us a lot more space and time and cushion. That's the optimistic side. >> Absolutely fantastic, Richard. It was a great pleasure having you on the program. Like where can we send our audience to follow more of your work and we need to have you back by the way. >> Love to be back. Uh thanks for asking. Look, I put out a a newsletter every week on Substack called Home and Away in which I discuss domestic developments in the United States. That's the home site away. I discuss American foreign policy and international uh developments. You can't beat the price at the moment. It's free. So if people want to subscribe to to Home and Away, uh that would be great. >> Fantastic. Yeah, we'll definitely link to it down below. And uh Richard, it was great to have you on. Have a wonderful weekend. We'll definitely need to catch up later this year and see what the latest developments are. What is the Fed doing? What is happening on geopolitical side have a wonderful weekend. Thank you so much. And uh everybody else, thank you so much for tuning in to sore financially. I tremendously enjoyed the conversation here with Dr. Richard Hos. If you did as well, go follow his uh his Substack Home and Away, but also leave a like, leave a comment down below, and if you haven't done so, hit the subscribe button. It's a free way to support us and we tremendously appreciate it. Thank you so much for tuning in. Take care out there. [Music]
The Most DANGEROUS Mix I’ve Seen: Debt, Dollar & U.S. China Rivalry | Richard Haass
Summary
Transcript
What is weighing on markets right now? Is it the Fed? We're all waiting for Jerome Powell take the microphone here in Jackson Hole this afternoon. Is it geopolitics? Is it the affair between Russia and the Ukraine? We'll have to find out. I've invited a phenomenal guest today to the show. His name is Dr. Richard House. He's a distinguished diplomat and also President Emeris of the Council on Foreign Relations. So, nobody better to discuss what is weighing on markets and and the gold price and other factors as well. And of course you can probably guess it will have a heavy focus on the geopolitical side today. I'm really curious his take on potential China's involvement in the Ukraine as a security guaranter. What does that mean? Does it have any impact? Does he have any significance? We'll we'll get to the bottom of it in a few short seconds. But before I switch over, hit that like and subscribe button. It helps us out tremendously. It's a free way to support our channel and it means a lot to us. So thanks so much for doing that. Now Dr. Hus Richard, it is a great pleasure to have you on the program. Thank you so much for joining us. Good to be with you all. >> Yeah, really looking forward to this. Um, as as I mentioned to you before hitting the record button, I think we need to let set the, you know, set the groundwork a little bit or do some groundwork and really define the current world order and where do you think things are headed and then we can go a little more granular and talk about little crises here and there, but what is your current world order from your perspective, Richard? Well, since this is a financial podcast, if they were a share of stock called World Order LLC, uh it would have suffered something of a correction over recent uh years. Any number of reasons. One is the war in Europe that's now in this phase what well into three and a half years a Middle East where while parts of it have been perhaps sorted out still some immediate questions like Gaza and the West Bank and long-term questions between Israel and Iran that are very much an open question. China's rise and what it plans to do with its power particularly given its uh interest in in Taiwan. Probably the biggest question for world order is the United States. what sort of a role it plans to play going forward. It's played a central role for 80 years, built a close network of alliances, supported international institutions. A lot of that can't be assumed. And then is that if as if that weren't enough, you've got everything from the emergence of new technologies and the like, what it's going to mean, and so forth. So for those in the business or financial world, I simply think that the assumptions they could make in the past that things would pretty much be the same tomorrow as they are today. Uh that things would be more stable than not. I don't think people should be as comfortable making those assumptions going forward as they have been in the past. >> Yeah, definitely like the level of comfort or our comfort levels have been shaken up quite severely here. Uh markets seem to be nervous as well. Um what what do you think is having the biggest impact right now? I I started leading with the geopolitical side, but what do you factor is the biggest impact of right now? >> I actually don't think the geopolitics have the biggest impact though again it's always a context for for markets and geopolitics have a history shows have a way of intruding particularly when things get particularly bad. No, I think again it's the United States its uncertain role. I think the tariff uh policy quote unquote has had an enormous impact, projections of lower growth in the United States and the rest of the world. The uncertainty and so forth. I think that's probably a bigger factor than than anything else. And you mentioned before Jay Powell, obviously uncertainty about American interest rate policy and the relationship going forward between, among other things, uh inflation in the United States, tariffs, and again interest rates. How do you think monetary and fiscal policies in the US are being dictated by geopolitics? Meaning, what is sort of the end goal? Where does the US see itself in five, 10 years or 20 years down the road? >> Well, for the most part, I don't see uh this, you know, those policies being dictated by geopolitics in a funny sort of way. The people who do macroeconomic policy and the like tend to do macroeconomic policy and the like. The people who do geopolitics tend to do geopolitics. It's almost like a university and they each have their departments. They're they're somewhat siloed and unless things get really extraordinary in one of those silos, I think people end up uh working more within the confines of the world they're familiar with. So, so a Jay Powell or the Fed is going to be looking at traditional economic indicators and nothing going on right now and the geopolitics even, you know, we can talk about it. Even if there were to be something positive in in Ukraine, I don't see that as fundamentally affecting what the Fed would do. >> Yeah, it's interesting. You're talking inflation, employment are the two main mandates for the Fed. Of course, u tariffs seem to be having an impact slowly seeping into the CPI data here as well. What what is your take on on the impact of tariffs here and how should the Fed sort of factor that in given also that China is looking at deflationary pressures here? >> Sure. Look, I think tariffs are already showing themselves up in the production numbers, the PPI. I think there's a greater lag in the CPI, but it's going to show up. And my guess is the entire emphasis on on on the tariffs is one of the factors that has led the Fed to go more slowly than among other people Donald Trump would like to see. that they're they're nervous about lowering rates decidedly or decisively in particular because of a sense that there is a lag effect from tariffs. They will boost inflationary pressures in in the United States. So I think that I think that's simply part of the the trade-off and again my enthusiasm for our tariff policy shall we say is limited uh to say the least. But but it's simply you know President Trump believes in them and I think now they become structural. We're debating how high tariffs will be for how long, not whether they will be. >> Yeah, it's the tariff debate is an interesting one. We've had guests on that say, "Yeah, tariffs are fantastic. It's a great tool to to put some leverage onto our trading partners um to to even the playing field a bit more." It sounds like you're against that narrative and you think it's just counterproductive. Am I am I correct in that? Yeah, I believe tariffs can be a useful instrument, but only in very select circumstances where you have evidence that uh a trading actor is subsidizing or dumping or is blocking your exports to its country. In those narrow specific situations, I think tariffs can be can be justified as if as a tactical response, if you will. But tariffs as an acrosstheboard strategic policy, I think, are not just inflationary, they're a very expensive way to to do business. uh in terms of protecting domestic industries and the right and the rest. I think they're actually bad for American competitors. So, no, I I have very little enthusiasm. That doesn't even get into the geopolitical consequences of tariffs. The fact that they're so often used against our friends and allies is geopolitically, I think, truly counterproductive. >> Yeah, you just used the word competitive. And I was going to ask you as a follow-up like how competitive is the US on a global scale right now? Is it is it competitive? Well, we are competitive mainly though because of what we done in the past. We we still reap the benefits of of past policies. I wonder, you know, I worry and and that's it's a little bit unfair. We're also competitive, you know, given we still have enormous talent whether it's in Silicon Valley and biotech, what have you, but we're hurting our universities. We are reducing dramatically funding for for basic research. Our immigration policy is discouraging some of the most talented people in the world from from coming here or or staying here. So what I worry about is that we're eating our seed corn. That American competitiveness 5 10 15 20 years hence is diminished because of policies that I believe are remarkably shortsighted being conducted now. >> Yeah. You've you've been arguing that the biggest enemy or the US is fighting comes from within. It's a domestic enemy. can be like you've been referencing the US debt situation as an example, but now policies like immigration policies are a struggle as well. Where do you see things trending? Like do do you see there's a there's a change? Like is this just a momentary like blip on the radar screen or is this a longer term trend? >> Well, you mentioned debt. I don't see that as a momentary blip. Uh I haven't checked my debt clock this morning, but we're in the we're in the zip code of 37 trillion uh as a percentage of GDP. What are we about 125 give or take? Uh I see no reason to believe that's going to improve. The politics simply aren't there. The only question we could have a conversation about or debate is how fast it will go up and go up in either absolute terms or in relative to to to GDP. I think it's unfortunate because, you know, as rates stay relatively high, debts, we now spend more in this country on servicing our debt than we do on our military and certain other parts of what we spend in the budget on entitlements, on social security, Medicare, Medicaid, and so forth are very, very hard to decrease, particularly as Americans uh get older. So, I think we're facing a future where discretionary spending gets gets squeezed. So even without a bond crisis, a bond market crisis, I think our debt is uh puts a real ceiling on our economic uh performance over over time. And then there is the the potential obviously for a crisis and all that would mean. But again, I just don't see the the politics uh of either, you know, coming get building a consensus to decrease discretionary spending, to increase taxes. And one of the really nutty things that we've done, I believe, is our reduction in the capacity of the Internal Revenue Service, our our our tax collector. And so our ability to collect revenues now is is diminished because we've so reduced the funding and staffing of our internal revenue service. >> From you staying on the debt topic here for a second, like um it's undermining credibility on a global scale. Uh the world is looking at the US $ 37 trillion which is is an insane number. Uh debt to GDP ratio closer to 130 now as well. What what does that mean for the currency the confidence in the bond market? You were talking about that or touching on that as well. Can you elaborate on that? >> It's it's it's a question I'm wrestling with as well, but I think your first points spot on uh which is it raises questions about our financial stewardship. United States has this outsized role in the world. The dollar is the reserve currency. What happens here with interest rate policy ripples through the entire global uh economy. What we do or don't do in our trade policy again has an outsized influence because we're still what a quarter or so of of the global economy and and GDP. So I think our debt situation and our politics more generally diminish confidence in the United States. The fact that we go through this drill regularly about whether we increase our debt ceiling again puts the entire world on notice that American politics may not be uh what's the word responsible or or uh serious. And I think you have to look at two scenarios. I've been thinking a lot about this one is the one you alluded to. You one day uh there's a a a crisis in the bond market. we have to raise rates here not in order to cool an economy but in order to attract funding or so forth that raises questions of default. There's also concerns about whether there might be an effort at some point to inflate our way uh out of this and so forth. And then there's even without a bond market crisis just uh this this reality that the United States has what I would call a kind of slow motion crisis with a 37 and trillion and rising uh debt and all that means for the uh again for our reputation and for our economic performance. So I I think it's a real overhang but again uh I wish I wish I could say otherwise but I don't see the political impetus to do anything about it. The really interesting question is would it take a crisis to do something and might that bring people across party lines together to do some of the the work on on taxes and spending that right now is impossible? >> Do do you think the White House or politicians in in Washington understand that the US dollar is under attack? Meaning that potential other competitors like the Chinese one or so are are on the rise. They're discussing now stable coins backed by by the remimi. Um, do you do you do they factor that in at all? Is that a notice of concern there? >> A couple of reactions. One, is there are those in Washington who who like the idea of the dollar being somewhat weaker in terms of improving our our trade position. So I think you know I haven't checked the numbers recently but the dollar's position has gone down what north of 10% over the last seven eight months since President Trump entered office and there are those who'd say that's fine that a strong dollar has has been an impediment to the US uh trade position we are in you're right correctly at a time two things are going on one is the new technologies stable coins you mentioned and other things uh digital currencies are proliferating and because the United states has not just raised questions about its financial stewardship but the what some have described as the weaponization of the dollar because of financial sanctions. I think there is a kind of secular drift away very very slow from a dollar centric uh world. You know at the moment we're still dominant. You mentioned the Chinese currency. The Chinese uh are still not converting. They're not open. So I think you know to use the old expression in the land of the blind. The oneeyed man is king. And the dollar for all of its imperfections is still the oneeyed man. It still dominates. But as I said, I think there is a secular trend diluting dollar domination. And to go back to what Xgard Dust Stang once said, the dollar's role does confer on us exorbitant and privilege. And I don't think people here are sufficiently sensitive about the consequences of the dollar losing its uh its prominence. >> What what is the pace of that where you just mentioned the dollar losing its prominence? Like >> a good question. I don't have an answer to that. At a minimum, it's gradual. The real question is whether crises or developments happen that accelerate it. And that's possible. I I don't have a a crystal ball, but I think you'd have to say again the secular trend is reduced centrality for DA, but very very gradual in part because there's no good competitor that's come out. The real question is whether there's crises that accelerate this and that I don't think either one of us can rule in or or or out. I wouldn't be shocked though if it were to happen, but it doesn't happen until it happens. >> No, that's that's very true. Like little by little by little and then all at once, right? >> As Mr. Hemingway said said about going bankrupt. Yes, sir. >> Exactly. Um, you know, if you boil it all down, I had Michael Avery on the show the other day and he said, if you boil it all down, it's US versus China. Um, if you really look at the meta, whatever it is, um, whether it's the tariffs, whether it's geopolitics to a degree, it it really boils down to US versus China. Would you agree with that statement and would you >> simplified? Look, the United States are the two most significant countries of this era of history. But look, we haven't talked about it. We don't have to. We've, you know, Russia is obviously a major force in Europe and selectively in some other parts of the world. In the Middle East, countries like Iran have played a large role. Israel, obviously, Saudi Arabia. So, if you go around the world, but yes, China is the one country that is a global competitor of the United States. It's uh built up its conventional military forces and continues to. It's the world's fastest growing nuclear arsenal. China has a large economic footprint in the world through it its trade and its development policies, Belt and Road, what what have you. It represents in many ways something of a political ideological alternative to the United States. And all this is without mentioning the possibility of geopolitical friction between the United States and and and China. And look what's so interesting at the China US relationship is unlike the US Soviet relationship during the four decades of the cold war Soviet Union was really a political military challenger to the United States. China is also the economic challenger. It's the world's second largest economy. It's everywhere. It's making massive state investments in select sectors of the economy. All of which I think to one degree or another will will pay off pay off. So yeah, >> China and the United States occupy a a special, shall we say, position in the world. And the question is to what extent and how do they manage their relationship uh going forward and how is it hopefully it avoids spilling over into confrontation? How do they manage a very competitive uh economic uh relationship against this backdrop of geopolitical competition? You know, a lot of big questions. >> Lots of big question. Exactly. How close are we to a military conflict with China at all? Like it doesn't feel like we're in the middle of a cold war just yet. A lot of sable rattling more on the economic side, tariff embargos, meaning extremely high tariffs that are similar to an embargo. Um what does it look like? I don't much like the phrase cold war with the United States and China because again China is so present economically unlike the Soviet Union and you know the USChinese trade relationship is enormous and you words like decoupling ought to be jettisoned because there's no decoupling that's going on or going to be going on and even recently areas of export controls uh here are are being uh somewhat uh reduced. So again, I think the the reality and the likelihood is China and the United States will maintain a large economic relationship as they compete ideologically and geopolitically. But no, I do not believe we're on the precipice of any type of military confrontation between the United States and China. China still wants to build up its military. Uh China's purging, as I can best see, a lot of its senior military. That will slow them down. I think they want to learn the lessons of the Ukraine war and incorporate them into their uh military. China also, if you think about it, they want to see what they can get diplomatically from the United States. You haven't had a meeting between Presidents Trump and Xihinping. My guess is China is curious as to two things. One is what is the United States ultimately going to do visa? How committed is the United States to supporting Ukraine, to opposing the idea that territory can be acquired by force? And then translating that, what is the United States prepared to do to back Taiwan? What is the United States prepared to do visv China geopolit politically? So, I think it's way premature for people to think that China is going to act militarily against the United States. I think they're they're trying to answer a lot of questions before they'd even begin to go down to think about going down that path. Yeah. What is the US stance on Taiwan right now? It feels like it's uh there what we call there's a bit of horse trade involved. It feels like if you leave Russia alone, maybe we'll give you Taiwan. I've been hearing various rumors about that. Um if you stay out of Iran, maybe you can have Taiwan. Like I'm just throwing like phrases out there and rumors have picked up, you know, over the recent months. What is the stance on Taiwan? Is the US coming to to the defense here? Well, look, for since the United States established a relationship with Taiwan 40, 50 years ago, the policy has been one described as strategic ambiguity. Taiwan could not be certain we would go to their defense. China couldn't be certain that we would not. That's still the uh official policy. I think there's probably a little bit more ambiguity given the nature of the Trump administration, its willingness to go to bat for allies is structurally a little bit more uncertain than it was. But I think that reality is still there that China can't assume what it is we would do or wouldn't do. And the real question is whether at some point they decide to test that. And that's pos possible. I don't see it as imminent, but I'm not going to sit here and say they're not going to do it at some point. >> What are the odds of the US and China actually reaching a tariff agreement? Uh constantly we're seeing extensions here, but nobody's really inching closer to a deal. Um what are your expectations here and what do you think the implications could be from a deal? I would think ultimately there's a pretty good chance that you the fact that the president has kicked things down the road, President Trump, the fact that he's been as open as he's been to a deal on Tik Tok, the fact that he's uh allowed uh Nvidia to export advanced uh chips. This suggests to me that he wants a deal with China. My own guess is, I can't prove this, is that the United States and China to some extent got to a place in their economic relationship more by events than by design. The United States introduced tariffs and then China, you know, reciprocated in ways that other countries didn't. So, there was an escalation at the outset and now they're beginning the long slow process of unraveling that of climbing uh down. But I I fully expect there will ultimately be a trade deal. And to me the real question I don't have the answer to it is whether it is a trade deal or part of a larger US China deal in which other elements enter as well and that's possible. >> What what could be those other elements? Like I mentioned in my intro that China has been asked to be potential security guaranter in the Ukraine. Would you throw that into the mix as well? >> No. Uh first of all I don't see anything to guarantee in Ukraine. I am, shall we say, profoundly skeptical of the prospects for having any uh agreement to to guarantee and I don't necessarily see China being involved in it because China's not, shall we say, been a neutral party here. It has been been helping Russia in all sorts of uh ways. So, no, I don't see China playing uh a role there and as I said, I'm not sure there's going to be anything to much to, you know, to to to work on uh together. Now, it's interesting like I've just picked up in a a headline here as well. The US has been sparring China uh from sanctions in in regard to importing Russian oil. Now, we're getting really granular on the econ economic side here, but it's been uh chasing down India like we've been putting heavy sanctions on India. Um where's the discrepancy coming from? Does the US see China as a stronger partner or not partner but stronger what do you call him? Uh opponent like for lack of a better term here. because I think there's different reasons but your observations unfortunately or fortunately whatever however you look at it it's correct in terms of China I think the United States is very wary of confronting China with tariffs because China then has the option of cutting off rare rare earth exports the United States is too dependent on China for supply chain issues right now so that there's that and also as we were just discussing I think President Trump is optimistic or hopeful maybe is a better that he and China Xiinping can strike a deal. So I don't think the United States is looking to add more complications to its economic relationship with with China. The fact that we are tariffing India as much as we have I find truly unfortunate. It's not that India isn't protectionist. It is. It's not that India isn't buying oil from Russia. It is. uh but to be so confrontational with India threatens what's been what several decades of careful knitting together of a US Indian strategic relationship in part to give China more to to think about on its other uh its other flank India is also a growing uh economy in the world it's I think it's a question of when not if it becomes the world's third largest uh uh economy in the world been a lot of speculation about why the United States is taking this position a lot of talk about connections between the US and Pakistan. Uh but you again I just think it's unfortunate. U but I think coming back to your question uh we're clearly stuck in a confrontational approach to India and my guess is we want to shield China from that. Again, President Trump wants to meet with Xiinping and see what it is the two of them can produce. >> Yeah, it's interesting. I've been calling India a bit of a Trojan horse within the bricks cuz up until recently until the tariffs have been put on India they were a close ally of the US as well within the bricks. I think India is trying to play both sides China and the US. >> India I would take issue I mean India's I would never call India an ally. India has always kept it strategic independence but it was strategically affiliating itself more with the United States than it has in the past. But India always keeps its options open. It did during the cold war. it doesn't in this year. Again, what's striking though is how much how the relationship has taken a turn for the worst. That is uh not something that a lot of people see coming. And again, I think it's uh unfortunate, but if you're China, you'd say that's one of the positive things to use an old Soviet notion, the correlation of forces. I expect China likes it when the US India relationship uh suffers. China likes it when the war in Ukraine goes on. China likes it when the United States and Taiwan have have issues. All these things are are pretty good forh for China. >> It definitely plays into their hand strengthening the role within the bricks becoming the capital C in there. Um which is really interesting. Um Richard, like maybe the last couple minutes, let's touch on markets again. Let's come back to implications on markets. S&P 500 near record highs again, 6,400 points. Rate cut expectations high. um although they're shrinking uh on a daily basis here only 73% now expect to cut in September. Um but what do you make of the markets right now and how should we try to understand them? >> Look I tend to agree with those that you look by any historical measure markets are pretty high. It's been a favorable rally. A lot of good things are priced in uh including rate uh cuts. My own guess is there will be something in that direction but less than perhaps some in the administration want less than the markets uh expect but all things being equal and you look at the market in the short run you'd have to say there's more downside than upside but but again you know I wouldn't take my my take on it um you know more seriously than people who are more expert than I am I don't see at the moment any geopolitics that will particularly affect the market as I said I think that I I don't see anything imminent in Asia. Middle East is churning. I'm skeptical of what's going to happen between Russia and Ukraine, but I don't think that that's particularly priced into the markets one way or the other. So, I think what the markets are reacting to are general economic performance, tariffs, inflation, Fed behavior, and that's a that's a pretty familiar conversation. >> I know you've been following new technologies quite a bit and the impacts on on our society and what what we're looking at here. Um c can you give us some pointers like what are you excited about and how will it shape the world moving forward? >> Yeah, there is a lot going on in in new technology. I was had an interesting conversation the other day. Uh you know AI is you can be talking about what you had for breakfast and sooner or later AI comes into the conversation. It's hard to escape these days. The uh and we were talking about the debt and there's always been a school of thought of people who said don't worry about the debt that much. American economy will grow out of it. Well, all things being equal, we we won't. But what struck me the other day was what you might call the AI bulls. And they were saying that AI is going to be such a a strong source of economic growth that that could actually change the calculation. And the idea of having sustained four or five% growth is no longer uh inconceivable because of AI. So that to me was just one of those interesting uh things that was had entered the the the conversation but clearly you know AI things going on in biotech uh in science every day. Look uh I'm a I'm a technology optimist. Think of the last great crisis we had which was uh COVID the pandemic. Well, we got through it in remarkable shape with two thanks to two technologies. One was obviously mRNA vaccines which were effective and safe and dramatically shortened the lead time you would need for a vaccine. The other technology which doesn't get the credit it deserves is the is a version of what we're using here which is Zoom that essentially people could communicate. They could wouldn't have to go into the office. they wouldn't have to have be in physical proximity with all the risk that had for disease transmission, but they could still have professional and personal uh lives and we simply wouldn't have gotten through the pandemic again without mRNAs and without without Zoom. So, I'm a I'm something of a technology uh optimist in in terms of what you know how we're going to weather some of the inevitable storms going forward. >> Yeah. Allow me one last question here, maybe 30 seconds or less, but do you see ourselves increased productivity as much to grow out of the debt situation or at least decrease the gap again? >> Quite possibly. Uh, you know, I wouldn't count on it, but it doesn't mean I wouldn't get serious about thinking about how to deal with the debt, but yeah, that that could be the wild card there that productivity and growth at least could ease the the debt challenge and give us a lot more space and time and cushion. That's the optimistic side. >> Absolutely fantastic, Richard. It was a great pleasure having you on the program. Like where can we send our audience to follow more of your work and we need to have you back by the way. >> Love to be back. Uh thanks for asking. Look, I put out a a newsletter every week on Substack called Home and Away in which I discuss domestic developments in the United States. That's the home site away. I discuss American foreign policy and international uh developments. You can't beat the price at the moment. It's free. So if people want to subscribe to to Home and Away, uh that would be great. >> Fantastic. Yeah, we'll definitely link to it down below. And uh Richard, it was great to have you on. Have a wonderful weekend. We'll definitely need to catch up later this year and see what the latest developments are. What is the Fed doing? What is happening on geopolitical side have a wonderful weekend. Thank you so much. And uh everybody else, thank you so much for tuning in to sore financially. I tremendously enjoyed the conversation here with Dr. Richard Hos. If you did as well, go follow his uh his Substack Home and Away, but also leave a like, leave a comment down below, and if you haven't done so, hit the subscribe button. It's a free way to support us and we tremendously appreciate it. Thank you so much for tuning in. Take care out there. [Music]