Who Is Printing the Most Money? | Daniel Lacalle

Most countries are printing a lot of money, and as a result of it, the global supply of money is increasing. How would this impact us in the near future? Our guest today is economist Daniel Lakai, who's been studying this. He's here to tell us which countries are printing the most, and how will this impact the global economy and inflation? We have seen numerous economies in which the aggregate inflation in the past five years has reached 24, 25%, so very significant erosion of the purchase and power of salaries, weakening of consumption patterns. In terms of who are leading in this race of increasing money supply, number one is China. But it's not just persistent inflation. I'm Siamak. Welcome to Market Insider. Daniel, it's great to have you on. Welcome. Thank you very much for inviting me. It's a great pleasure. We want to talk to you about the global economy and the global money supply. Can you tell us what you're seeing right now in the global money supply? Global money supply growth is soaring. We have seen a drastic increase in the last months, and it's rising at the fastest pace since 2021, and that obviously is one of the elements that raises concerns about both markets, but also persistent inflation, because at the same time, the global economy is under quite a severe strain. We see that most developed nations are stagnant and that global economic growth is likely to be, in 2026, lower than initial estimates and moving around the 2.2, 2.3%. What countries are doing it, and what's the rate? When we look at the global money supply, the average rate, annualized rate, is about 13%. And in terms of who are leading in this race of increasing money supply, number one is China, certainly. Its money supply growth is running almost around 9% in the case of the United States, it's about 5.5%. In the case of the Euro area, it's about 3.3% also in the UK. So that is obviously, these last figures that I gave you are in the first three months of the year, and 13% is an annualized. So global money supply in the three-month period has been about almost 3.54%. What we are seeing is that it is actually accelerating. On the one hand, we have big government spending programs, huge levels of indebtedness and deficit spending for most economies. We look at, for example, those G8 economies that remain stagnant. They are also, at the same time, putting more money in the public sector, generating higher levels of deficit, and obviously that leads to higher money supply. In the case of China, we have seen how the economy was slowing down quite significantly in the private sector, and the public sector is accelerating expenditure and also indebtedness in order to at least sustain aggregate demand. So all of those elements tell us that we could see an acceleration of money supply growth in the second part of the first half of the year. And what would be the impact of that? The main impact, obviously, is that the problem of persistent inflation that all of us are suffering may actually remain, even get worse. We have seen numerous economies in which the aggregate inflation in the past five years has reached 24%, 25%, so very significant erosion of the purchase and power of salaries, weakening of consumption patterns from the households, particularly in small and medium enterprises. But it's not just persistent inflation. The other big problem is a fiscal problem, is that as money supply growth is coming predominantly from government spending and deficit spending, that is likely to lead to higher levels of public debt into the end of the year, because governments are trying to offset, slow down in credit demand and investment from the private sector. Is there a difference between US and other countries, the European countries and Asia, like China? Well, obviously, if we look at China, the level of money supply growth is very, very high. It's higher than estimated, and it was basically is running at almost double the GDP growth, no? So that is certainly a challenge, and it can either lead to higher problems of, for example, the real estate sector that continues to be heavily in bubble territory. But if we look at the United States, for example, the United States money supply growth is consistent with a 2.5, 2.6% GDP growth, and that is not a bad thing. However, the problem is in the Euro area, because money supply growth is at 3.3%, but the economy is basically stagnant. We're talking about less than 0.5, 0.6% growth, and that is a big challenge, because if you think about it, money supply can grow because of the private sector. There's more credit demand. We look for more loans in order to invest or to buy a house, et cetera, and that is not a negative, no? The problem is when you have a very big increase in money supply that is coming from government indebtedness, because that means in the future that there will be more taxes and certainly lower productive economic growth. So my big concerns about these figures that we're looking at right now comes predominantly in the UK and in the Euro area, because in the United States at least you have productive economic growth. You have capital goods orders reaching 20-year highs. You have good unemployment levels, et cetera. Those things obviously need to be monitored because the risk of persistent inflation is something that is common to all economies, including Japan. So I would be more concerned about countries in which money supply growth doesn't look very aggressive, but the real GDP growth is so poor and the economy in terms of the productive sector as well is so weak that that can generate a double negative, lower real wages, and at the same time, more difficulties for citizens to purchase a home or get their groceries every day. What about China? You mentioned China has been growing their money supply significantly. Can you tell us more about that? What's going on in China? If we think about the economic model of China, it's a model that has gone from requiring two units of debt for every unit of GDP to requiring almost five units of debt for every unit of GDP. So it's the dependence on very indebted sectors, very indebted levels of economic sectors that in an economy that is not a developed economy is dangerous because the Chinese economy right now has a total debt of about 300% of GDP. Obviously, that includes the public companies, those owned by the state that are heavily indebted. So the problem for the Chinese economy is that it will continue to deliver the expected 4.5%, 5% GDP growth. The problem is the productivity of that GDP growth is that we see that that increase in GDP does not translate to an improvement in the productive sector or an improvement in terms of the affordability of citizens. It continues to rely on very high levels of debt and very low salaries, which makes it very difficult to grow through consumption as so many of the developed economies do and at the same time puts a big strain on the industrial sector because there's an enormous level of overcapacity. So those challenges remain and the government is trying to address them by making it easier for citizens to take credit. But that is not the way in which citizens behave in China. Citizens in China don't use the credit card like Americans or like Europeans. They have much lower wages, they're very prudent and they understand that it's much more difficult to get those kinds of big investments or big expenditures. That is the big challenge. The big challenge is that it's not easy for China to go from an exporting high debt model to a consumption and technology model. You mentioned the European countries are printing more money at the same time the GDP is not growing. Why are they doing that? It's the Keynesian way of thinking. It's the idea that if the private sector is not growing, if consumers are not spending as expected, if investment in the productive sector is not growing, then it has to be somehow offset by much higher levels of government spending. And that obviously doesn't work because if high government spending, high taxes and big public sector were the recipes for economic growth, France would not be in stagnation, it would be a global economic leader. So it's the mistaken view of Keynesianism that assumes that you can maintain or increase aggregate demand through the public sector without understanding that the public sector is only consuming what the private sector is generating today or in the future. Therefore, it basically leads to a higher indebted, lower growth, lower productivity growth model. In the United States, what is happening is the opposite. The administration now is looking to reduce government spending. It has been flat to slightly down in the last 18 months. And at the same time, lead economic growth and credit to the private sector in order to improve everything that has to do with investment, with capital goods orders, with real wages as well, and productivity. You're seeing US being in a different position than Europe and China. And how are you seeing the global world order right now? Is there a change? There's a big change. We have seen how the United States and China are separating more and more. They're becoming different parts of leadership in terms of the new world economic order. China is looking to those economies that are closer to their model of government-led type of economic growth, while the United States is trying to focus more in its position as a global energy leader, technology leader, and financial leader. But it's certain that both China and the United States are separating themselves, although cooperating, but at the same time trying to attract countries that have similar models to each one to their circle of influence. China is trying to do that by maintaining a non-transparent financial system and keeping capital controls and currency controls, currency exchange controls, while the United States is more focused on what we're seeing right now, which is becoming both a global energy exporter and leader and a technology and financial giant. Now, how about the Middle East war? Is that impacting Europe and China and U.S.? Yeah, the impact is quite significant, quite significant. We have to remember that the Strait of Hormuz was basically the way through which 70% of the exports of the movement through the Strait of Hormuz went to China and about 80% to Asia in general. So the most negatively impacted by the shutdown of the Strait of Hormuz are both the Asian economies and the Iranian economy itself, because 25% of its GDP and 65% of its government revenues depended on the Strait of Hormuz. For the United States, it's a smaller impact. It's an inflationary impact in terms of gasoline prices are going up and other prices are going up, but it's a price impact, not a supply impact. In the case of China and other Asian countries, they've had to ration and to limit exports of refined products. They've had to limit everything that had to do with exports in order to maintain the security of supply that they needed. In the case of the United States, it's a price issue, but at the same time, it's become the largest oil and natural gas exporter in the world, the largest jet fuel exporter after the Netherlands, and also a very, very large fertilizer exporter. So it's no wonder that we are seeing that the manufacturing sector in the United States is booming in an environment in which there are big challenges for the global economy. For Europe, it's a huge problem of both security of supply, particularly in jet fuel, but also in fertilizers if we look further into the end of the year. And it's also a problem of prices because the European Union does not have the energy independence that the United States has or the support of Russia that China has. So those elements show that this war can be endured in very different ways by the different economic segments. Those exporting commodity countries are going to find it more easy to go through the problem despite the challenges, obviously, that may come in terms of inflation, et cetera. But the big problem, in my opinion, comes for the European Union that did not prepare itself when the Ukraine war started. It could have taken the huge opportunity of the Ukraine war in order to guarantee security of supply and finds itself now in a very similar negative position as in 2022. So the biggest impacted are Asian and European economies. Now, in terms of what you're seeing out there, is this gonna impact the commodities down the line or the price of hard assets or price of goods? How do you see it? And would it impact U.S. the same way? You mentioned that the U.S., the inflation might not be the same as other areas. For the United States, there is a mitigating factor to inflation, which is the strength of the U.S. dollar. The U.S. dollar is behaving like a cushion to oil prices and other goods that may go up for other economies. For the first time in many, many years, being the United States, the biggest oil exporter and the biggest natural gas exporter, what we see is that when oil prices go up, the dollar also goes up. And that obviously mitigates the negative impact of imports at a higher price. But that doesn't rule out the challenges of inflationary pressures. Gas prices are going up. There is certainly a core PCE impact that although subdued continues to be persistent, all those elements are relevant. So if you add the challenges of the Iran war in terms of security of supply, in terms of global supply chains, and in terms of availability of some key commodities, and at the same time, the fact that governments are increasing government spending, increasing deficit, and therefore global money supply, what that leads is to higher prices of assets. We have seen, for example, to the surprise of so many people, that equities were going up, that stock markets were at all-time highs, that house prices did not come down despite all of the geopolitical concerns. That is basically because of the elevated level of money supply growth. So you have that double combination. One hand, there is a short-term, maybe temporary, but certainly significant impact coming from higher gas prices, higher food prices, et cetera. And at the same time, the impact of what money supply growth is doing to equities and to hard assets, which shows that citizens, instead of looking at the risks of the geopolitical spectrum, they should be looking at the increase in money supply and the behavior of central banks in order to continue to look for investments that defend the purchase and power of their savings. Some people have been arguing that there is a debasement of the dollar. What are your thoughts on that? Well, there is obviously, the U.S. dollar is losing purchase and power. That is absolutely correct. However, it's not a debasement if you look at it from the perspective of global currencies. If you look at it from a level of global currencies, you have the latest figures showing that dollar-denominated asset demand is at all-time highs, that the use of the U.S. dollar is at the highest level seen in decades. And at the same time, its percentage in terms of reserves and in global transactions remains the highest. So there is no such thing as what some people call de-dollarization. There is no substitution from the U.S. dollar to other currencies, let alone the currencies of emerging economies or the BRICS. What we have seen is that global central banks are adding more gold to their reserves in order to balance out their exposures. But that does not mean that there is substitution between the U.S. dollar or any other currency. In fact, what we have seen is that the euro use, the yuan use, et cetera, remain very, very limited and very, very far away from the U.S. dollar. So what is happening globally is that there is a loss of purchasing power of all fiat currencies almost at the same time. We have seen the yen go down. The Japanese government needed to intervene. The U.K. government, the U.K., sorry, not the government, the Bank of Japan needed to intervene. In the U.K., the Bank of England has also tried to control the weakness of the currency. So basically what we're seeing is a reduction in purchasing power of all fiat currencies while gold takes a leading role in terms of percentage or position within the balance sheet of central banks. Now for, U.S. is gonna have a new, we're gonna have a new Fed chair. And he seems to go a direction of not wanting to increase the money supply a lot and just focusing on lowering the interest rates. What are your thoughts on that? Well, if you think about what the Trump administration is aiming for, which is to do what Scott Besant says, which is to bring back the private sector instead of making the economy dependent on the public sector. That makes sense. Lowering interest rates or keeping interest rates at the levels in which they are today is something that supports credit demand from the private sector, that supports investment, et cetera. That is basically what they're trying to achieve. But also from the perspective of the Federal Reserve, what they're basically more focused is on having credit demand from the private sector growing while credit demand from the public sector diminishing. And therefore, money supply growth is less of, let's say, of an objective. They're not going to do a quantitative easing program. They're not going to do a big purchase of government bonds. And what they will be focused on is on the other side of their mandate, which is jobs and particularly private jobs. And how much control do these central banks have on the money supply? Do they have a lot of control over it? There's always a chicken and egg question here of who controls money supply. But ultimately, a central bank cannot print any money that the government hasn't spent prior, no? So when we look at when central banks undertake large quantitative easing programs or they implement big liquidity injections, what they are basically doing is reacting to government spending and deficit spending that has happened before. So what happens first is that the government issues a very significant amount of debt and then the central bank finds itself in no other position but to try to calm and maintain stability in financial markets by trying to control the price at which governments issue their currency, i.e. the interest rates at which the treasuries are issued. So they have less and less control, if that makes any sense. If governments don't take fiscal action in terms of reducing government spending, reducing deficits, then the central bank can do very little afterwards in terms of controlling inflationary pressures and controlling the money supply growth. In a sense, here is what I'm understanding. If the government spends the funds and then they go to the market to borrow them and there's nobody to lend it to them, then the central banks come in and inject more capital and that causes the money supply to grow? Both. The first wave, which is the government increases expenditure, increases deficit, is in itself printing money. That is printing money. And usually what happens is that those bonds are issued in the market and investors globally, pension funds, et cetera, purchase them. When interest rates go way too high or when the demand for those bonds is less clear, et cetera, that's when the central bank comes in and adds further to the money supply, purchasing those bonds. The asset side of the central bank is the new bonds that they acquire, mostly from the banks themselves, from commercial banks, and with the objective of allowing commercial banks to lend more to the private economy. Because think about this. If governments go way too high in terms of debt, they're going to issue that debt and it will be purchased, but it's going to take more and more weight in the asset base of the commercial banks and then because they have so many government bonds, then they don't lend to businesses or to families. They don't have the position. So that's when the central bank has to step in, take some of those bonds out of the balance sheet of the commercial banks and how does it do it? With what money? With newly created money as well, no? So that's basically the process of what we call quantitative easing. It's basically draining the balance sheet of commercial banks from very heavy-weighted treasuries or government bonds. You mentioned China is facing this real estate bubble, but the prices of real estate are down. They're at the level of 20 years ago. What's happening in China? What's happening in China basically was that the economic model for many of the provinces was built on selling land to the real estate companies to build and build and build with the expectation that at some point all those houses, all those big buildings that we see on so many videos would be sold to citizens. However, two things happened. Number one is that they built way too much. The second is that citizens don't have the borrowing capacity that US citizens or European citizens have. Additionally, the amount of building that was made was so huge that they created something that we all have heard of, some of us have even seen, which is those incredible ghost cities in which there are hundreds and hundreds and hundreds of buildings that are completely, completely empty. They had the expectation that people coming from provinces with very high levels of rural activity, et cetera, would go to the cities. But it's impossible to achieve that and at the same time to keep the prices of houses at the level that require those developers in order to pay their debt. So basically the prices are plummeting because there's way too much supply. And at the same time, the ability of citizens to take mortgages is lower because in China the average salary is about five times lower than in the United States. And do you see this collapse continue from what you're seeing? I think it's inevitable. I don't think that even the central bank or the government denies it. I think that they're just trying to manage the process in a way in which it doesn't damage the financial sector and create a big problem like the 2008 subprime crisis. But it's inevitable. You cannot do anything when a country has undertaken that kind of, let's say, artificial growth based on building stuff for the sake of it. Expecting that demand is going to arrive at some point is something that doesn't happen. And we have seen it in so many economies, no? However, the big problem is that if we look at the real estate bubble of Sweden, of Spain, of the United States, of so many other countries, the percentage of GDP that the real estate and construction sector meant at the time was probably 10%, 15%. In the case of China, at the peak, the real estate and construction sector was almost 25% of GDP. So what the government is trying to do is to basically find a way to absorb that enormity of stock of unsold houses in some form, maybe renting, maybe looking for other opportunities, lowering rates, et cetera, and at the same time limiting the amount of houses that come on sale. They have, you have to get a permit in order to sell your home. You cannot just go out like we do every day, no? If we want to sell our home, we just put an advert and we sell it. That's something that you cannot do in China. So they're basically trying to control the burst while technology and exports maintain the level of economic growth. Do you think this could spill to other parts of the world if China has a major collapse in real estate? Not the rest of the world because the financial system in China is very isolated. It's not as interlinked as, for example, the financial system in the Western world. It's very isolated, but it is having a very significant impact already on, for example, the countries that relied on the Belt and Road Initiative. Why? Because the financial sector is absorbing the real estate bubble burst, but it's unable to continue to fuel credit for the Belt and Road Initiatives, for all those development projects in emerging economies. So you are seeing the spillover effects in many emerging economies, particularly in Africa and in Latin America. With what you're seeing, Daniel, do you have any recommendations for people in terms of where to invest or how to protect their savings? Once we understand that this increase in money supply growth is inevitable and that we are going to continue to see the erosion of the purchasing power of currencies, the worst thing that one can do is to rely on a salary and deposit savings. So if you have a salary, you save something, you need to invest it as quickly as possible. Where to invest it? Gold and equities. In equities where you have less of an exposure to the economic cycle. So for example, technology companies, that's why they're doing so well, because people look at the challenges on the global economy of the Iran war and they see that it has very little impact on technology companies, but very large implications for, for example, airlines or for the automotive sector. So you have to basically look for opportunities. In equities and very selective in bonds with lowered levels of duration and adding obviously that the same thing that central banks globally are doing, which is to reduce their exposure to sovereign debt and increase their percentage of gold is what citizens should do as well. Daniel Lakaie, PhD economist. It was great to have you on Market Insider. Thank you so much. Always a pleasure. Tell us what you think about this conversation. Do you think the global economy will get impacted as a result of this money printing and a lot of inflation will come? And also, do you think the US economy can survive and not have as much inflation compared to other countries? Make sure to comment. We read all of them. I'm Siamak, this is Market Insider. We'll see you next time.