China, debt, gold: What’s happening under the surface
In this episode, Joseph Solis-Mullen joins us for a sweeping conversation on China’s economy, America’s debt spiral, and the growing global appeal of gold.
From ghost cities and financial repression to reserve currencies and demographic decline, Joseph cuts through the headlines to explain what’s really happening beneath the surface of both the Chinese and U.S. systems.
We explore why China may not want to replace the dollar, how government debt quietly reshapes everyday life, and why both governments and citizens are increasingly turning to gold as a trusted store of value in an era of mounting uncertainty.
Watch the episode now.
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Transcript
Joseph Solis-Mullen
The Chinese government is buying tons of gold, right? Because they’re trying to diversify away from dollar holdings. That turned out not to be safe. Turned out property rights were not a real thing if you were playing inside Washington’s financial system. And gold just does not operate that way. Gold is immediately fungible. Gold is highly liquid. So it’s smart to have all that gold, whether you’re a government or a common citizen.
And again, in China, if you’re sitting there and you’re like, okay, if you’re looking to put your money in a savings account in China, you will be lucky to get 1%. Real estate, you know, that’s a horror show. So that’s what’s going on there. So you don’t want to be involved in real estate, right? And then the stock market— a lot of people got burned in the Chinese stock market, including a lot of the Chinese people themselves. So if you’re a Chinese citizen sitting there, the only obvious thing to do, especially if you can’t get your money out of the country, is put in gold.
Monetary Metals
Welcome back to the Gold Exchange Podcast. My name is Ben Natelstein. Today I am joined by Joseph Mullen. He’s spent his career studying political economy, monetary systems, and of course, the incentives that shape both. He’s a professor of politics, history, and economics, and he’s the author of The Fake China Threat and The National Debt and You. Today, he joins us to talk about all things China and of course, the national debt. Joseph, welcome to the show.
Joseph Solis-Mullen
Thanks so much for having me, Ben. It’s a pleasure.
China is buying gold while investors look for a way out
Monetary Metals
Joseph, I want to start on a question that I think a lot of people want to know, which is How big is China, either in terms of its economy, in terms of its financial situation compared to the US, or in terms of its military strength? How big, how powerful is China really?
Joseph Solis-Mullen
Well, as you said, it really depends on how you look at it. In terms of its economy, in terms of its nominal GDP output, it’s the second largest economy in the world. If you adjust it for purchasing power parity, it’s, it’s the largest. If you look at its population, it’s the second most populous. If you look at its military strength on paper.
It’s depending on how you look at it in terms of tonnage or number of ships, you know, it’s the largest navy, third largest nuclear arsenal. Certainly it’s formidable. And I always tell people, because I’ve been talking about this for years now, my view of China as not being a threat is maybe a little bit different depending on how you characterize what a threat is. In Washington, and Bob Woodward had some really great quotes from some insiders in one of his books where they hit the nail right on the head. Where they said, look, China’s growth and power threatens U.S. global hegemony.
And so yes, if you believe that it is absolutely vital to yours and my well-being here in the United States that Washington be able to do whatever it wants whenever it wants all over the world, including right up on the shores of China, then okay, sure, China’s growth and power is a quote-unquote threat.
But to me, China does not look like even a regional hegemon, let alone a global hegemon. And the fact that Washington can’t do whatever it wants in China’s immediate environs bothers me not at all. So I’m sure we’ll have more occasion to talk about these things, but as we go into more specific questions, I, I’ll just say, look, China is not a paper tiger, but nor is it a Goliath.
It is just a big-sized state with a very rapidly aging population, has some very critical roles in the global economy that gives it a lot of leverage. That leverage was given to it, we should remember, by Washington as part of its engagement strategy. So, but you know, in terms of its primary role in things like refining rare earth minerals, in terms of its role as the biggest trading partner of most states all over the globe, so it’s highly plugged into globalization, it’s highly globalization dependent.
And so I’m sure we’ll have occasion to talk more about these things as we, as we move along, especially with regards to its, its fiscal and monetary policies.
Monetary Metals
So on one hand, we hear all the time, oh, China is a paper tiger, they’re more in debt than the United States, They’re having a real estate crisis with this Evergrande situation that’s even bigger than 2008. Everything about them from paper cities to these ghost towns that they create, it’s all paper wealth. China is a paper tiger.
And then on the other hand, we hear no, China is actually even stronger than they appear on paper. They’re simply biding their time. They’re waiting for the US to simply burn out, fizzle out, and then take over as either the world’s reserve currency, the world’s dominant economy. They’re simply just waiting out the US. So which is it? Is it that China’s a paper tiger, everything’s a complete sham, or they’re so strong they’re just waiting for the US to fizzle out?
Joseph Solis-Mullen
I love that that’s how you put it, because I really do feel like that’s why I wrote the book, especially at the time, because I started working on the book in 2019. It must have been right around 2019 that I started the book because it grew out of several articles that I wrote, and it was because rhetoric around China was becoming a little bit unhinged.
This is when all those books about like, When China Invades, you know, all these books that were coming out one after another, especially like popular ones aimed at the American people. I saved a whole bunch of like Wall Street Journals and Washington Post from that time period. And every single day on the front page, it was something about China. It made it sound very ominous, whatever it was. And so, yeah, I wrote the book to find the middle ground, to say, no, China is actually not a world-conquering Goliath, nor is there any reason to think that they would want that.
Why China may not want to replace the dollar
Joseph Solis-Mullen
And there are a whole bunch of reasons that I document in the book why they would not want to be in the United States’s position. We can even talk about things related to monetary policy with regard to that, because people talk about, oh, China’s going to want to be the world reserve currency.
Actually, no. If you take a look at their economic model, that would absolutely sink the ship right away, cause mass unemployment, destabilize the regime. And, you know, public choice theory, people, public choice theory. These people are politicians. They exist to have jobs. They do not want to do anything that will challenge their position of power.
And on the other hand, China does have a lot of very real weaknesses, especially demographically. It’s also a highly state-directed economy. It should not be surprising at all that there are tons of debt problems, malinvestment problems, cronyism, corruption. There should be no surprise that there’s all of these things. And yes, of course China does have a lot of debt. They have about $13 trillion that we can see. It’s one of the things that’s very difficult with studying China is the data.
I will say this has gotten a lot better in the last 10, 15 years. The data is still, it’s very opaque. And especially if you’re looking at financial reporting, they do not have the same financial reporting standards that we do here in the United States, which is one of the reasons that the Chinese stock market just does not see the same amount of investment.
That the American stock market does because there’s just much, much weaker corporate controls.
Monetary Metals
Well, I do want to ask you specifically about the debt question in China. Obviously, one argument could be, well, because everything is so opaque, it’s so unclear, it makes it seem as if China might be doing better than the US in terms of the debt situation. They only have $13 trillion, the US has $39 trillion and counting. And so is it really that China’s opaque and they’re winning in the debt situation simply because we just don’t know how bad the situation is.
While the US is so transparent with their debt, they’re so upfront with, hey, we are really having a debt problem or a debt situation here, that by comparison we actually seem worse because we’re so transparent. And part of that transparency is what keeps US debt afloat compared to the Chinese debt, where most people say, eh, do I really want to hold Chinese bonds? So is the debt situation comparable in China? Is it better? Is it worse than the US?
Joseph Solis-Mullen
Better or worse? I would just say it’s different. I would just say that it’s a different situation because of how a lot of their debt is structured and who holds the debt. As you said, no one’s running to the Chinese debt market to hold those bonds, you know, to fill that part of their portfolio. You know, their economy is smaller in nominal terms, and so obviously the debt does, you know, weigh on it more. There’s also a lot of private sector debt, and that’s where it gets really difficult.
Then there’s also a lot of local government debt. and there’s state banks and local government financing vehicles and property developers who have unclear ties to all of these things. I mean, high end, I’ve seen estimates that there’s another $6 trillion buried in there somewhere that we just can’t see. Low end, I’ve seen like $1.4, $1.5 trillion.
So I think it’s probably fair to say there’s something like $3 trillion sloshing around in there, shifting around on some uncertain balance sheets, hiding out somewhere. Obviously, one of the things that puts China in a little bit of a better situation is, is that their welfare system, their entitlement system, is not nearly as comprehensive or generous as our own.
And so when I look at the US fiscal trajectory, that’s really troubling because, you know, the Cold War ends and there’s all these budget fights in the ’90s about, you know, like, got to get a balanced budget, got to get a balanced budget, because they knew that when the baby boomer generation started to retire and stuff and the population demographic shifted and you had fewer workers supporting more retirees, you were going to start running deficits.
And instead they decided to blow up the Middle East and, you know, run $2 trillion annual deficits instead. So like we’re in, we’re in a horrible situation. I don’t think China has anything even comparable to what we’re dealing with right now, which is just a total inability to rein in spending. And I look ahead at all of the entitlements that have been promised. All of these unfunded liabilities. And we’re, we’re looking at like easily $100 trillion over the next 50 years, easily.
I mean, I’ve seen people project $180 trillion, and of course a lot of that depends on the inflation rate and all of that different— all those different things. And, you know, think about how much money Washington is on the hook for, and it’s scary when you look at just how unable they are to stop spending money.
I don’t know whose situation I would prefer. China’s, where it’s not clear what the problem is, or how bad the problem is, or the US situation where it’s like we know what the problem is and it’s a horrible problem and we can’t seem to stop doing it, especially as we look forward to like higher interest rates. I mean, the interest, uh, on the debt now is already the single biggest line item now, and it’s only going to grow. And Washington is obviously going to shift that onto us with some heavy financial repression at some point.
Financial repression, capital controls, and trapped money
Monetary Metals
So can you explain what financial repression is? Because obviously there is a level of financial repression that’s happening in China with their central planning, their central economy, and of course the way they run their banking system. But in the US as well, US consumers and US investors also face financial repression. So what is financial repression?
Joseph Solis-Mullen
Well, we used to have some of this stuff here in the United States, like interest caps on savings accounts, yield curve control. You can put up capital controls to keep them from, from taking money out of the country. Obviously that’s a huge thing in China. Things like running inflation a lot higher because you’re, you’re trapped in there, right?
They’re holding down the interest rates that you can get, and those interest rates underlie everything in the economy. And at the same time, they’re not letting you take the money out of the country with capital controls. And then at the same time, they’re inflating away the value of the money. And this is something in the 1970s— I don’t know if I want to get distracted into the whole savings and loans thing and why that all happened, but It was basically that there was a lot of regulation that was keeping interest rates low at a time when they should have been higher.
And money started leaving the country looking for like euro bonds and Latin American debt and all, all other things because they were trying not to lose their shirt with 10% annual inflation in the United States.
So again, these are things that happen in China and they used to be in the United States. And one thing that I’m really concerned about is that they could come back very easily because even though it seems unthinkable that the government would, could do something like that, that they could gin up the popular support for something like that, I think we’ve seen over the last 7 to 10 years that actually people will just line up to support their guy.
Whatever Biden or Obama or whoever the next person is says is what we’re going to do, they’re going to get behind him and support him. Even if it’s something that they campaigned that they weren’t going to do. Same thing with Trump. Trump campaigns that he’s not going to do this one thing, and now he starts doing that thing, and everyone who voted for him and supported him is saying, well, of course we should be doing that thing, are you crazy? And it’s like, you know, the FISA thing. The FISA thing, just recently Donald Trump said, oh well, you know, I’m willing to give up some of my freedom to renew FISA. And it’s like, what?
And all the Republicans now are like, well, of course we should be renewing FISA. It’s like No. What? And so that’s my big fear is that, you know, it seems like no way it’s impossible. Capital controls, interest rate caps, that can’t happen. It very much could. I have zero confidence that it won’t.
Monetary Metals
Explain what is going on with capital controls inside China. Some people might know that China has a currency that they use domestically and then a currency that they use internationally. What does it mean for citizens inside China when you say they have capital controls?
Joseph Solis-Mullen
So currency inside and outside China, this is a great one and it plays in very much to why wouldn’t China want to be the world reserve currency and stuff. It’s because they have a highly managed currency. So it’s the renminbi. It’s called the renminbi. A unit of it is a yuan, but most people just say yuan.
So I’m just going to say the yuan, just so you know. I’m just saying yuan if you’re listening. It is actually the renminbi, but the yuan. Okay. So inside the yuan, the CNY, this is highly managed, capitally controlled. And very closely influenced by the People’s Bank of the United States. Right. And so the People’s Bank of the United States does operate very similarly to the United States’ own central bank, the Fed, but it has a lot more direct control.
The Fed is more operating on this kind of like signaling, right? Like it’s signaling the market what it wants it to do. And it has certain policy levers that it can pull to try and nudge people in that direction. And you and your listeners have no doubt heard that old expression, don’t fight the Fed. If the Fed is trying to lean in a direction, sure, you can lean the other way, but it might not go so well for you.
Also, that’s your backstop too. If you get out over your skis and you need a bailout, you better not have irritated the wrong people. I and a number of other people believe that that’s why Lehman was allowed to fail, that it wasn’t that it was an investment bank, though the Fed opened the door to investment banks through a little workaround like a week later. It was because they all hated him.
They all hated the guy in charge, you know. The People’s Bank is highly administrative. I mean, it’s using lending guidance, state bank channels, exchange rate management, capital controls. It’s highly, highly involved. And so it’s, it’s similar but, but very different. And of course, that plays through too onto its external yuan, the one that’s traded offshore in Hong Kong. This is the CNH. This one is traded in international markets, and it is allowed to move within a certain band. I mean, and it’s indirectly shaped by Beijing’s policy choices at home. And so there is still that level of control that Beijing would be loath to give up.
Why Chinese investors are buying U.S. real estate
Monetary Metals
I want to ask about— we hear all the time, well, there’s these people, they’re coming from China, they’re buying real estate inside the United States. What’s going on here? Is that a play to get outside of the currency controls of China? Are these expats saying, hey, I want to leave China and join the United States? Is there something more sinister happening? Give us the story on what’s happening when Chinese people are coming into other countries, whether it’s United States or around the world, and buying real estate. We hear this story all the time.
Joseph Solis-Mullen
Yeah, it’s, it’s one of the most common scare stories, right? And they’ll, they’ll put up that they own like hundreds of thousands of acres of US land or something like that. But the United States is enormous. It’s mind-boggling how large the United States is. China, Chinese companies, Chinese nationals, all put together, they still constitute a little over 1% of all the foreign-held land in the United States. So I want to repeat, that’s not— they hold around 1% of the land in the United States.
They hold about 1% of the total amount of land held by foreigners in the United States. And there are all sorts of reasons that you might want to— like the Saudis, for example, they don’t have much agricultural land in Saudi Arabia, but they do have like a booming population and they have animal agriculture and stuff. And so they grow like— so they buy some land in the United States to grow alfalfa or something like that. Right. China, same thing.
But with China, I think you hit the nail on the head there. A lot of it is them trying to get their money out of China. And frankly, U.S. real estate is, is a great investment because, you know, the Fed is not going to stop printing money, and that money is going to hit assets first, whether it be stocks or real estate or whatever the case may be.
So yeah, absolutely. A great thing to own.
Monetary Metals
And I want to ask, how does this play into gold specifically within China? There’s been an argument, well, the reason gold prices have been rising, especially in China, is because the people inside China, the ones who are not fortunate enough to be able to buy real estate abroad, are basically saying, well, I don’t want to put my money in a bank because of financial repression. I definitely don’t want to put my money into Chinese real estate.
That’s a horror show. I don’t want to put my money into the Chinese stock market because that’s failed to really grow wealth over time. And I don’t really know what to put my money in that isn’t going to be controlled by some level of, you know, centralized economy. Maybe I’ll just buy some gold. Is that what’s happening inside the Chinese economy and why in many ways Chinese citizens are going gaga for gold?
Joseph Solis-Mullen
I think you nailed it, Ben. So first, there’s the government aspect of it, right? The Chinese government is buying tons of gold. Right, because they’re trying to diversify away from, from dollar holdings to some degree. They do still have a lot of dollar holdings. The nice thing is gold is immediately fungible, right? Gold is highly liquid, right?
So it’s a great thing to have your money in. It’s, it’s going to be a solidly recession-proof, great thing to own whether you’re a government or a common citizen. And again, in China, if you’re sitting there and you’re like, okay, if you’re looking to put your money in a savings account in China you will be lucky to get 1%. You will be very lucky to get 1%.
Real estate, you know, that’s a horror show. I mean, they didn’t, they didn’t have like a Lehman moment, right? Everyone’s like, Evergrande, it’s the Lehman moment. It’s all going to explode and implode now. No, it was never going to be that way because the Chinese government was not going to let it be that. It’s not going to be the bubble popping, as I’ve argued in many articles.
It’s going to be like more like Japan. It’s going to be a long, slow deflation that is going to weigh on the economy for decades. So that’s what’s going on there. So you don’t want to be involved in real estate, right? And then the stock market, a lot of people got burned in the Chinese stock market, including a lot of the Chinese people themselves back— what was that, 2015 when that bubble burst?
But yeah, there was like a crazy run-up and then it turned out there was all sorts of corporate malfeasance. You can’t trust the reporting, you can’t trust the regulators. So if you’re a Chinese citizen sitting there, The only obvious thing to do that you can do, especially if you can’t get your money out of the country, is put it in gold.
Is China becoming the next Japan?
Monetary Metals
I want to ask you now about the similarities between Japan and China. In years, years, years, and even decades past, everything’s made in Japan. It’s this cheap garbage. Japan’s going to take over because they can just make really cheap products. And soon Japan is the financial center of the world. And then over time, of course, that story didn’t play out. Japan has a very high debt-to-GDP ratio. They have terrible demographics.
And of course, their economy is not stronger than the United States in any way, shape, or form. Is the same story happening right now with China? People are afraid of cheap Chinese products. They’re worried that the Chinese economy will overtake the US economy. But really, over time, that story won’t play out and we’ll see demographic issues and economic issues plague China.
Joseph Solis-Mullen
Well, I hate making predictions about the future because sometimes they turn out to be wrong, but I’ll go ahead and give it a shot here. No one holds it against me. So I have compared and other people too have compared the China story to the Japan story, and especially for younger listeners, this might sound shocking, but if you had gone back to the 1980s and gone to a bookstore, you wouldn’t have found books about the China threat.
You would have literally found books talking about the Japan threat, about how Japan was going to take over the world. And there was a really good one. The guy who started Stratfor, he wrote a book about how Japan’s economy is going to overtake the US and they’re going to rearm and, you know, all this, all this funny stuff. But anyway, in terms of Japan’s economy, yes. Okay. So Japan’s economic model was very simple, right?
We’re talking about use a lot of state-directed control to boost exports and manufacturing. Keep your currency weak, boost your exports, funnel credit into that, repress spending inside the country. Force it all out, right? Okay. I was thinking about this actually today because I knew I was going to be talking to you about this, and I figured this might come up.
Japan, then as now, is, is basically a US vassal, right? Like, they’re highly dependent on the United States. And Reagan pressured them to make change. We call these the Plaza Accords, right, in the mid-1980s. And this is when they had to start shifting some of that toward the domestic economy, and it wound up going into real estate, and it became this huge debt-fueled real estate bubble that burst and then, you know, there was a lot of government intervention after that, you know, repressing interest rates and all of that stuff and trying to bring interest rates artificially low to restart economic growth.
And this led to the lost decades now. And so the question is, are we seeing that same thing with China? Okay. It definitely makes sense as far as, you know, you have the big state-directed export boom, all of that stuff. And then you have the debt-fueled real estate bubble that burst. What’s missing though there is there’s really no ability for the United States to force Chinese revaluation of their currency upward. Japan, the Reagan administration basically was able to force them to revalue higher. They had done the same thing to the West Germans, I think a decade before that.
And this obviously was a huge hit to the Japanese economy that needed to go somewhere, and it went into real estate. And the US does not have the same level of influence or leverage against China. And so, you know, China’s currency is, is obviously undervalued. At the same time though, you, you did still have that same debt-fueled property boom.
I think that was more just a combination of things like bad incentives. For example, the central government in China does not fund the welfare programs and stuff like that. That’s all local government stuff. And the only way the local government can really raise money is by selling land to developers who want to build housing. And so then the developers need a way to market that, right?
And so, and the government has an incentive to help them market that as an attractive investment because that keeps real estate prices high. That’s where the government gets its money from. And so I think you and your listeners can kind of see what the issue is there. And then, yes, the real estate bubble bursts. You know, economic growth slows. China’s growth is still, you know, high by U.S. standards.
But in terms of like still developing economy standards, it’s nothing to write home about anymore. The days of double-digit Chinese growth are gone. You know, it’ll grow at a brisk, you know, 5 to 6% clip. So Japan losing out on manufacturing, will that happen to China?
It’s already happening to some extent, right? Because the more people buy from you, the higher the wages get in that country, the less advantages there is to manufacturing in that country. Things move to other countries. So you’ve— that happened to Japan. It’s happened to some extent with China. One thing that I love doing is when I go to Walmart, I just pick random things up and start looking and seeing where they were made.
And when I was a kid back in the ’80s and ’90s, it was like there was a lot of stuff from like Taiwan and Japan and then it shifted to like some stuff from Mexico. And then for a while it was like everything was made in China, you know, in the 2000s. And then over the past like 10 years, you’ve started seeing a lot of stuff coming from India, Vietnam, Indonesia, Malaysia.
So that’s, that’s very interesting, an interesting shift. One thing that I wonder about is because China has been able to make that jump into high-end production, they’ve made that jump into high-end production, and now we’re seeing a lot of that replaced by automation.
It’s hard to know what’s going to happen to their global share of manufacturing and exporting because they have a very curious demographic situation where they’re not going to have a lot of workers. But we have an interesting situation right now where even like a lot of white-collar work can be done by AI. And, you know, whole factories in China now are all just robots. It’s just all robots.
So it’s hard to say whether or not they’ll lose their share in global manufacturing. I think it’ll probably just evolve into like more high-end things as it already is, like solar panels, microchips. Obviously they also have a very strategic advantage in a lot of industries that they just kind of dominate. No one was refining these precious metals, these rare earth metals. And so China started doing it. Now they, they do like 60 to 70% of the whole global supply. Some of it’s like 100%, like gallium, like that’s like 100% China.
And they also engage in some very aggressive tactics in terms of protecting that. Like, for example, if the price of something is high right now and you start a new mining operation or you start a new refining operation, the Chinese government and their firms, they’ll just dump onto the market to drive the price down, to run you out of business, and then they’ll buy up the resources.
That’s why the Trump administration right now is talking about putting together that like mineral consortium where there’d be like guaranteed price floors and stuff because they want basically like their own cartel to fight against China. But it’s hard to get people to go into that area because for years it’s been a kill zone. It’s like, why doesn’t anybody start a search engine? Right? Because Google will crush you immediately. It’s wasted money.
Belt and Road: global domination or domestic survival?
Monetary Metals
So let, let me ask you now about kind of two conflicting theories. One is that China wants to dominate the globe either economically or as a military powerhouse. They are doing this Belt and Road Initiative. They’re, you know, making all these connections and putting all these countries in debt. They’re trying to become a world reserve currency, a world economy, and of course a military power across the globe.
That is contrasted with, no, China really wants to focus on their domestic economy. They want to just be a regional power, not a global power. And of course, all of these tactics like the Belt and Road Initiative, they don’t actually really work. They don’t actually bring global hegemony to the Chinese. So which is it? Is it that China actually does have, you know, global ambitions, or are they focused on their domestic economy but do need to have some level of Hey, you know, we’re interested in posturing around the globe.
Joseph Solis-Mullen
Well, I think the two things are interconnected. Foreign policy always has a domestic component. Let’s go one at a time. So first, the Belt and Road Initiative, right? And this is something that I talk about in the book and I’ve written other articles about it.
My view of the Belt and Road Initiative is pretty simple. Yes, on the one hand, it does give you a certain amount of leverage over a small country that you loaned money to, and that if they don’t pay it back, you can take over their port on a 100-year lease. Okay, on the one hand, but that assumes that they decide to honor that contract, right? They just walk away.
The IMF and American institutions, they’ll step in. It’s not like China is going to go like land troops and take over Djibouti or something like that. It’s a bad example. There’s a U.S. military base there. Well, whatever country, pick your country. It is about giving them influence. It is about giving them some leverage. But really what it looks like to me when you take it apart and you look at where the money goes and where the supplies for these projects are coming from, here’s what it looks like to me.
China needs places to send its exports, right? Especially in the developing world. Well, the developing world doesn’t have a whole lot of money. China needs a place to send all the currency that it’s creating, so it lends the currency to the countries, and then the countries turn around and take that currency and send it back to China to buy things from China in a circle.
And to me, it just looks like a way to keep the domestic economy humming. And like, yes, does it spread, you know, Chinese influence? Like, yeah, but I think that’s probably just a secondary effect. And a lot of these loans are performing very poorly. And now just recently they’ve been talking about like, can we get some help bailing some of these places out?
And it’s like, wow, who could have possibly foreseen this coming, right? It’s almost like we haven’t had an East Asia crisis or a Latin American debt crisis or a Mexico crisis, right? Like, the more things change, the more they stay the same. That’s the Belt and Road Initiative there. It was a huge propaganda coup for the CCP because it really made them look like a global leader in economic development.
This was very big for the CCP’s image globally and domestically as well. I don’t think it can be overstated just how much legitimacy the CCP has simply because of its economic management. And we, you and I, probably look at it and say, well, yeah, but there’s all these problems. And, you know, well, look, when Mao finally did us all a favor and died, the average Chinese person was as poor as poor could get. Right.
And after 20 years of the right-wingers in China, the right-wing communists anyway, the right-wingers doing like marketizing reforms and stuff before they entered the WTO. I mean, GDP per capita in China was still like $900. Look at what it is today, right? It’s almost $10,000 last I looked. I haven’t looked in a couple years, but just imagine if in the last 30 years your income had grown by a magnitude of 2.
How would you feel about your government, right? Be big cheerleaders, right? Wouldn’t even care who was in charge. I think that’s one of the big flaws with, with the development theory approach that guided so much of US policy of engagement towards China. Which was this very rigid sort of dialectical belief in how history plays out, which is, you know, well, first you have agrarian society, then you urbanize, and then you industrialize, and this creates a prosperous middle class, and as they become more prosperous, they demand political rights, and then they, you know, become a liberal capitalist democracy, and that’s the end of history.
Yeah, it’s pretty plain to see that that is not a universal law of history or something, and that there’s no reason to think that the Chinese people are upset with the fact that their government has made them incredibly prosperous.
And I just look at some of the high-tech stuff that’s coming out of China now because I feel like a lot of people, when they hear that like China’s manufacturing stuff, they think of like shirts and socks and like crappy electronics. It’s like, no, we’re talking highly advanced softwares, batteries. Jim Farley, the CEO of Ford, he got in a little hot water when it was revealed that he drives a Chinese electric vehicle and he didn’t want to give it up because it was so nice.
China’s military power and the real oil strategy
Joseph Solis-Mullen
I just look at some of the stuff over there and it’s like, man, you can have an amazing car for like $10,000. You know, those will never be allowed in the United States, right? Ford and GM will work hard to keep those out of the market. But there’s always going to be those intersections between what China is doing internationally and what it’s doing domestically, because foreign policy wins boost the credibility of every regime domestically.
Tactically. But in terms of its power projection capabilities, they’re very meager. They have a green water navy. They don’t have a blue water navy. They have like, I think, one decent aircraft carrier. Now, one of them is crap. They basically just use it for practice. The second one, like, would have been good like 25 years ago. And the third one is like a reasonable aircraft carrier.
They just launched it not that long ago. That one’s pretty reasonable, but they don’t have the kind of power projection capabilities the United States has. And there was just an analysis it was a language analysis of policy papers and think tanks in China, looking to see, like, do they talk like American think tankers and policy people about, like, global domination and all these different things? They don’t. They talk about being safe from external invaders like the United States.
Their entire strategy is based on area denial. They want to be able to keep the United States away from it. And in terms of the little string of bases that they’re setting up in the Indian Ocean, on the way to the Persian Gulf, it’s because they want that oil.
They need that oil. The United States does not need that oil. The United States is completely energy independent. And there’s been arguments for years that the reason to stay in the Persian Gulf is in case we ever have a fight with China, we can shut off their oil supplies and try and destroy their economy.
And so China, what would you do, right? What does game theory tell you you should do if someone is out loud saying, you know, in the event of a conflict with our new frenemy China, we should just shut off the oil? Well, it would behoove you to diversify your supplies and maybe try and put some assets closer to there. So I don’t think anything about China’s posture, its force structure, or its history tells you they’re going to go marauding around the globe trying to invade people. And I think the example of the United States over the last 25 years should have shown them that this is total folly.
Monetary Metals
Total folly. All right, Joseph, I want to get into a rapid-fire round with you. So I’ll ask you all these questions about debt, China, and you can answer as quick or as long as he wants. I want to ask you about, is China having a real estate crisis today? Is it going to be a kind of slow-moving, slow-burning crisis? Are the ghost cities in China real?
Joseph Solis-Mullen
Ghost cities are real. Yes, they’re having a crisis. It’s going to be a slow, drawn-out deflation of the bubble, not a Lehman moment. I would never invest in property in China.
Monetary Metals
Okay, next couple for you. What are interest rates like in China? And what is the inflation rate like in China compared to the US?
Joseph Solis-Mullen
They’re battling deflation right now. Interest rates, you could probably get right now about 0.4% on a deposit. So yeah.
Monetary Metals
Okay, next one’s for you. How is the Chinese central bank, the People’s Bank of China, different than the Fed, for better or for worse?
Joseph Solis-Mullen
Well, again, it’s not a market-based kind of nudge you in the direction I want you to go. It’s more about mandates. It’s an administrative center. It does lending guidance, it channels investment, it has capital controls. All those banks have members of the CCP on their boards. So like it’s very different, probably for the worse, I would say.
Monetary Metals
What is the main tax burden like in China?
Joseph Solis-Mullen
Well, that’s a tricky one there because it’s not like the high visible income tax where we’re like, hey, I pay that percentage of my income and that’s my big tax burden. It’s much more about VAT, payroll. Social insurance stuff. And then the hidden taxation is really huge because remember, China is still pretty poor. Like if you move out of the coastal areas, it’s still super poor. And so a lot of it is financial repression as well.
Monetary Metals
I want to ask you about China issuing a gold currency. Obviously, lots of people in the gold world have hyped up this idea. Oh, trust me, there’s a gold-backed yuan coming any day now. It’s going to dethrone the dollar. And yes, maybe the yuan as a paper currency isn’t so good, but trust me, the Chinese, they’re buying gold so they can issue some sort of yuan gold-backed currency. Is this an idea that’s real or completely hype?
Joseph Solis-Mullen
I think to some degree it’s hype simply because China has given no indication that it is going to do this. I mean, I know people say like, yeah, they’re probably just cooking it up downstairs and they’re going to spring it on Washington one day and like they are. Acquiring large amounts of gold, but I think that’s more about just protecting themselves and diversifying away. Like, look what happened to Russia and all of the holdings that it had in the global financial system.
That turned out not to be safe. Turned out property rights were not a real thing if you were playing inside Washington’s financial system, and gold just does not operate that way. So it’s smart to have all that gold. In terms of why they wouldn’t want a, a gold yuan, I mean, it, it requires the discipline that convertibility requires, and they, they don’t want that. And again, the CCP is concerned with its position of power in a prosperous China, and I don’t think a gold yuan helps that. If anything, I think it probably hurts it by making China’s currency too strong. It would hurt its export-based model of, of development.
I guess it could shift to a consumption model eventually. Again, it’s hard to know what the future will bring there, but they’re getting very old though. Old people tend to spend less. I mean, it’s certainly possible. China has tons of demand for gold, both in the government and in the private population. I just don’t know that the whole gold yuan idea makes a lot of sense.
Why a gold-backed yuan probably isn’t coming
Monetary Metals
Great answer. Exactly what we were looking for. Now I want to ask you about US questions and the US debt. So obviously for decades we’ve heard, oh, US debt is going to be a big problem. There’s going to be some debt explosion. Trust me, 2008 was just the beginning.
Any time a bank has an issue, oh, bank failures are right around the corner. And yet basically over time, things have gone pretty steadily. Yes, there has been some levels of, of debt crises or inflation or stock market falls, but overall the US economy has continued to trot along. So what do you say, Joseph Solis-Mullen, to people who think, well, the debt problem just isn’t really a problem?
Joseph Solis-Mullen
I tell them that in 1995, $80,000 bought you a beautiful home, two cars, put the kids in private school. Mom doesn’t have to work. You’re going on vacations every year. Today, 30 years later, you need about $290,000 to have that same life. And that is a function of just generating more and more money to cover the enormous amounts of deficits that Washington generates every year.
So just because they haven’t had to tighten the screws in a way where you’re like, oh my God, now taxes are 80% of my income, or, you know, I can’t move my money out— that’s all politically untenable. What is tenable is just to keep kicking the can down the road and inflating away the value of the money. This is something that’s going to have to continue.
There’s no way that Washington is going to cut the spending that they need to, raise the taxes that they need to. It’s just not going to happen. It’s been highly destructive. And look at what it’s done to things. Like, so 2008, right? 2008, the big crash, and everyone’s like, oh, but look, there wasn’t hyperinflation and stuff. And it’s like, really?
Why U.S. debt is already hurting everyday Americans
Joseph Solis-Mullen
Take a look at the asset market and tell me that you don’t see an insane amount of inflation. They’re just looking at CPI and they’re saying, oh, you know, the government cheerleaders, the, the court, the court, uh, intellectuals, they’re saying, look, CPI didn’t go out of control. I mean, we were fighting deflation. What are you kooks talking about?
And it’s like you can take a graph of M2 and a graph of housing prices and just stack them right on top of each other.
Same thing with the Nasdaq and the S&P. And it’s not surprising at all with the Cantillon effect and all that stuff. And that interest rate suppression that the Federal Reserve engaged in is what caused people to shove all this money into these highly speculative tech companies and all this other stuff and to put tons of money into real estate.
And that’s why no one can afford a house now. And so it’s like, okay, we haven’t had a quote unquote government debt crisis. And so supposedly that means that the debt isn’t a problem. It is a huge problem. It is destroying social mobility. It’s destroying the ability of young people to own homes, for people to have proper nuclear families with like a dinner time and a parent at home with the kids.
Like it’s destroying all of that stuff. And it’s unfortunately only going to get worse. Especially because a lot of people who’ve been crowing that that’s, oh, hahaha, this doesn’t even matter. Yeah, that’s because interest rates were basically zero. Now interest rates aren’t zero.
And look what’s happening to the interest expense. It’s already over $1 trillion a year. By 2030, we’ll be looking at, you know, $1.5, $1.7 trillion. I mean, who knows what this is going to hit? I mean, eventually it’s going to be the entire tax take and you’re going to have to fund the rest of it by printing money. And it’s just a continual spiral. And I worry because, like you said, people have gotten used to it.
Remember when we hit $10 trillion and it was like a huge national story and people were talking about it at the local diner and it was like, what are we going to do? We’re going to go bankrupt. Now we hit $40 trillion. Everyone’s like, this seems fine. We hit $10 trillion, we hit $20 trillion, we hit $30 trillion. $40 trillion seems fine. And then you have that new school of like the most radical post-Keynesians, you know, the MMT people who are really muddying the waters by saying, guys, it doesn’t even matter.
It’s just a bookkeeping entry. It’s like, what’s wrong with you people? Where did you get your PhDs from?
Monetary Metals
I want to ask you about a country that oftentimes people in this MMT camp or in this, hey, the government debt doesn’t matter so much camp, and that’d be Japan, who we’ve talked about today. We’ve discussed, well, Japan’s had this lost decade. They have this demographics problem. But Japan has an even worse debt-to-GDP ratio than the US does. And obviously people continue to work in Japan.
They continue to have an economy. It might not be stronger than the US, it might not be stronger than some other economies, but they continue on. So what is the debt-to-GDP issue? Is there a certain number we should be worried about, or is there something else we should be focusing on?
Joseph Solis-Mullen
I don’t think the debt-to-GDP number is, is a good one to look at because I, I did like an actual empirical study. It’s been a few years now, but I basically took 20 emerging market economies, 20 developed economies charted their debt-to-GDP ratios and their inflation ratios and a whole— so just populated this huge Excel spreadsheet, ran a bunch of regression analyzes, and there’s just— there’s not a solid connection between like, okay, you cross that 100% level, like, uh, what was that book that they tried to make like a really strong statement about?
Like, no, when you hit— I think it was like 80% or something. It just— it doesn’t seem like that’s a good indicator. There’s no strong statistical evidence that says this number is the bad number because there’s, there’s too many moving parts. There’s too many different factors to consider. And Japan is a good example. I mean, Japan’s been dead in the water for a long time, right? In terms of being an economic power player. Luckily, this happened at a point where they were already at an advanced stage of industrial development and they didn’t wind up like Zimbabwe or someplace like that.
And people who say, look, Japan is fine. It’s like you’re saying they’re fine, but you’re not thinking about how much better off they could be. You’re saying, oh, it’s fine to be like Japan because, look, Japan’s fine. It’s like, compared to what? Where could Japan be now had they not pursued those policies? Again, it’s hard to prove a counterfactual, but to me, to just point to a state and say, hey, they’re doing fine, we’ll be fine too, it’s like, should we really follow that path when it seems like they’ve been stagnant for a long time? What is Japan an industry leader in? Right?
What do they lead in anything on? Nothing. They were at one time, they were at the cutting edge of things. Don’t we want to be at the cutting edge of everything? And isn’t the government’s irresponsible fiscal policy pushing us closer and closer to a place where that’s just not going to be possible anymore? I think so.
Can the U.S. or China fix their moral hazard problem?
Monetary Metals
I want to ask you now about moral hazard. We’ve brought it up in the China case, in the U.S. case. Of course, there’s this idea of a Fed put. They’ll never let the stock market go down. They’ll never let real estate go down. And then there’s also this idea of moral hazard in China, which is, hey, our entire economy right now is based on high real estate prices.
So if all of a sudden we just let real estate crash or a stock market crash, the people who have been really excited, like Joseph’s been saying, wow, look, you know, my income’s doubled, or, you know, I have a brand new city that’s being built, a skyscraper right next to my house that used to be a mud hut— well, if that stops, or worse, actually turns around, the people in China will revolt. They won’t be happy with their leaders. They won’t be happy with our economy.
So there’s moral hazard in both the U.S. and in China. Who do you think is more likely to be able to fix this moral hazard problem? Is it the U.S. with our democracy, or is it China where they can say, hey, listen, we’re just clamping down, we’re fixing this issue today?
Joseph Solis-Mullen
40 years ago, I would have said the United States without question. The growth of the state, its purview, its power within the U.S. economy is incredible. And it’s especially concerning because so many of the people in positions of power believe that we should be aping what China is doing in order to outdo China.
It’s like, is that what allowed the United States to outrun the Soviet Union in the Cold War? Is that— is that what happened? We copied the Soviets and, oh, okay, that’s what happened. No. It’s not the way things are going right now. I don’t like the US fiscal trajectory. I just don’t like a lot of the things that are going on there, especially with, with, you know, the bureaucracy and stuff that is just so entrenched.
And we had a populist president come in and try to root some of it out, and Trump was just soundly defeated and is now very much in their pocket. And so it doesn’t look like there’s going to be any major steering away of of policy there. It kind of reminds me of something that I heard years ago, which was, in the United States, you can change the party in power, but you can’t change any of the policies.
Whereas in China, you can’t change the party in power, but you can change the policies. And just the other day, someone was saying on CNN, it was a Biden guy, it was someone from the Biden administration saying, yeah, we were getting ready to bomb Iran too.
So, you know, just kind of fell on Trump’s watch. We were going to do it in our second term too. And it’s like, okay, that’s a good example of what we’re talking about there, because how many Democrats would have supported that, right? Like, basically zero. But the problem in China though is, oh gosh, there’s a lot of corruption and patronage because, you know, Xi Jinping is not some all-powerful space wizard who controls everything.
Like, he has a very complicated set of clientelistic relationships that he has to manage. And, you know, there’s a lot of people who got very rich from this stuff. You know, not just the ordinary people who started to have a decent standard of living. We’re talking about people who made many millions, hundreds of millions. You know, these party officials, like, they’re pocketing a lot of that stuff. A lot of those anti-corruption probes that happen in China, that’s them taking out rivals.
That’s not like an actual anti-corruption They’re not like passionate about rooting out corruption or something. It’s just that’s how you take out a rival there. And a lot of the corruption is how the system works.
And the government just recently had said they were going to try and basically try and— well, number one, as I’d said previously, they are just trying to gradually deflate this thing and hope they can kind of grow their way out of it and that there will be just a long-term gradual adjustment. They’re trying with a new program to subsidize people living in some of these like ghost cities because a lot of them were built in like not very attractive areas, right?
Because like I said, if you’re on the East Coast of China, it’s already like booming, very nice. You don’t, you don’t need some kind of like subsidized weird property development. There’s just, there’s a ton of demand there. So a lot of it’s like kind of out in the sticks, not really where you want to be. And so the government is, is kind of trying to subsidize people moving in there. They want to keep housing prices up, as you said, because so many people’s wealth is tied into that.
Just like in the United States, right? The middle class, that’s where all their wealth is, is in their, their house. So, you know, it’s, it’s going to be a long road. I don’t know that either state is in a great position to fix things just because of the, the internal dynamics there. It’s, it’s very, very hard when you’re a long way down a path to turn, right?
There’s so many different forces moving in the same direction that we might just be on a path dependent course that even if smart people are saying, no, look, there’s an iceberg ahead and everyone can kind of see that there’s an iceberg ahead and we’re all talking about like, hey, there’s an iceberg ahead, the ship just doesn’t seem to stop going straight at the iceberg. So yeah, I wish I had a better answer for you, but I don’t think either state is particularly well equipped to deal with these challenges.
The biggest myths about China and U.S. debt
Monetary Metals
All right. Last rapid-fire question for you. What’s one widely accepted belief about China that you think is wrong and one widely accepted belief about the US debt situation that’s wrong that you want to correct today?
Joseph Solis-Mullen
With regard to China, I would say the idea that they want to replace the United States as the global provider of security and a global currency that everyone uses. No, they want to have their way in their backyard in places like the South China and East China Seas. Much as the United States wants to have its way in the Gulf of Mexico and in its immediate environs.
And again, being the global reserve currency just does not work with China’s development and economic model. It just doesn’t make sense. In 20 years, maybe it will. I don’t, I don’t have a crystal ball, but right now that’s, it’s just not, it hasn’t been true and it isn’t true. With regards to the US debt situation, it is not manageable. It is not a benign thing where it’s like, eh, it’s just a number, eh, 10 trillion. They said 10 trillion would be bad.
No, it’s— it is bad. It’s been bad. We would all be so much better off, so much wealthier, and so much more prosperous if the government had not been doing this, spending all of this money, inflating away the value of the currency.
It is a problem, and it’s only going to get worse. And so there’s just this kind of general apathy that scares me more than anything, which is like, it’s fine.
Monetary Metals
It’s not.
Joseph Solis-Mullen
And it’s going to get a lot less fine as we go along, uh, merrily on our way. And they’re going to get it from us. That’s the only place the government can get value from. The government produces nothing. And so when it comes time to pay their bills, they’re going to get it from us somehow, some way.
Monetary Metals
Joseph, my last question for you: what’s a question I should be asking all future guests of the Gold Exchange podcast?
Joseph Solis-Mullen
Gosh, you got me. I don’t know. Maybe what is their favorite historical example of a hard money standard and why is that their favorite standard?
Monetary Metals
All right, I’ll turn it around on you. What’s your favorite example before we go?
Joseph Solis-Mullen
Probably the florin, although you could also go the ducat. I’m Italian, and so I am partial to the Italian city-state examples, but I just love how these very small trading republics were able to place such an outsized influence in trade simply because they were diligent in maintaining the value of their money. It was something you could trust.
Monetary Metals
Fascinating. Joseph, if people want to read your books and learn more about your work, where should they go?
Joseph Solis-Mullen
I am a fellow at the Libertarian Institute. You can find all of my articles and links to my books there. And I’m also an associate scholar at the Mises Institute. I write biweekly there. I write a weekly Thursday column on the Libertarian Institute.
Monetary Metals
And, uh, yeah, Joseph Solis-Mullen, thank you so much for joining us on the podcast. We’ll have to have you on again soon.
Joseph Solis-Mullen
Thanks, Ben. It was a real pleasure.