The Economic “Sweet Spot” Reversal

McAlvany Weekly Commentary

Labor Costs To Spike Worldwide Inflation Higher For Decades Long-Term Interest Rates Higher For Much Longer "The rise of China and demography created a sweet spot that has dictated the path of inflation, interest rates, and inequality over the last three decades. But the future will be nothing like the past, and we are at an inflection point. As a sweet spot turns sour, the multi-decade trends that demography brought about are set for dramatic reversal." —Charles Goodhart, as quoted by David McAlvany Kevin: Welcome to the McAlvany Weekly Commentary. I'm Kevin Orrick, along with David McAlvany. Dave, before we get started on the book that we've been reading, I was over at your house a couple of nights ago. Big party for your son, graduation. Congratulations. I don't know if you and your wife are happy or sad. David: Thank you. It's both. Definitely both. Kevin: And you spent most of the night before cooking a brisket. You looked like you were pretty tired a couple of days ago. David: Up at two, up at four, up at six, up at eight. It needed nursing, it needed care. Kevin: Have you ever cooked in a wok? You know those curved pans? David: Oh yeah. Kevin: Well, when my wife and I first got married, back in 1983, for whatever reason, that was the inexpensive wedding gift. They were about 20 bucks back then, and we got five woks for our wedding. And so after we got back from our honeymoon, she and I were talking and we said, "You know what? Let's keep one of them and let's go return four." And that's what we did. So we had 80 bucks in our pocket as we were leaving Southwest Plaza, a shopping mall in Denver, and we walked past the pet store. And sure enough, we fell in love with a dog that was about 250 bucks. Well, my wife had good credit. Of course, she pulled the credit card out. We bought a dog. We get the dog home. He's so cute. We realized that we had to have a video camera. I mean, back then they were the gigantic VHS— David: Capture the memories. Kevin: Oh, of course. So for a month, all we did was video camera our dog, and we realized, until we have kids, that's a waste. So we took the video camera back, and I remember this was at Sears, and we said, hey, can we return this and swap it into what was then considered the biggest big screen TV. Now, these are the old days. These are the projection TVs where you have the different colors, the red, the blue projecting, and everybody in the room had to sit sort of single file to see the screen because if you got even an inch or two either direction, it faded out. But that was about 2,500 bucks. So by the time we went from the woks, which was 80 bucks, to the dog, which was 250, to the camera, which I think was a couple of grand, to the big screen TV, if you want to call it that, 2,500 bucks—things were even expensive back then. Dave, the phenomenon, since our wedding, 1983, has been a big screen TV. Right now, twice that size would be a quarter of the cost. And there's a reason I'm telling this story because we have lived through, over the last 30 or 40 years, one of the most amazing periods of time where, because of China and other influences, we had low wages, okay? We were able to build things for cheap since the time that my wife and I got married. We also had relatively low inflation because we had a deflationary effect. Things started getting cheaper and cheaper because we didn't have to pay for them to get built. So we were printing money, but we really didn't experience high inflation, and we were in a period of time of falling interest rates. And so wages, inflation and interest rates, it really was the perfect combination of being able to see a large amount of growth worldwide without having to pay for it. David: It's not a surprise to me that all those things were moving down at the same time. I mean from the '80s to the present, consumer electronics are cheaper, interest rates are down, inflation is down,