Taps Coogan – November 1st, 2022

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Sam Zell, legendary real-estate mogul and Chairman of Equity Group Investments, recently spoke with Bloomberg about his outlook for the economy and his “great concern” about the reserve currency status of the US Dollar.

Sam Zell on the economic outlook:

“My sense is that we are headed for a recession. If you think about the fact that in the last four years we’ve added $7 to $8 trillion to out debt… Until just recently Congress appropriated money in billions. The word trillions didn’t exist… People got crazy and …infected the world with way too much liquidity and the Fed was asleep at the switch… We’ve created a huge burden and I don’t know how the United States is going to deal (with it) going forward…”

On fiscal spending constraints:

“I don’t see how we can avoid (fiscal constraints). We’re dealing with a crisis in the fiat currency world. Ever since Bretton Woods, the whole idea was (to) create stability in the foreign currency markets and to a great extent we’ve done that. And then Covid came and we lost all of our discipline and the net-effect of (that) is we’ve created staggering new obligations that are going to have to be paid for in the future. Part of it is being paid for with really significant inflation…”

On the Fed:

“I am old enough that I was here when interest rates were 21.5% and Volker said ‘We’ve got to do this until we kill it…’ I’m not impressed (by the Fed). Despite the fact that a lot of people think the Fed has been very aggressive, I think the Fed has been not so aggressive. If it had been my call, beyond being asleep at the switch, once they woke up, I would have been increasing (rates) at 1% or more. One thing that I think nobody understood is that when debt goes from 0% to 2%, not a lot happens. When it goes from 2% to 0%, not a lot happens. The first 200 basis points of an increase over zero has relatively little impact on the overall economy. It’s when interest rates start to go from 4% to 5%, etc… that you really start to see an impact.”

“We’ve never really have a significant recession without a liquidity crisis and the Fed has been buying $80 billion a month and now the Fed is going to stop buying $80 billion a month. Maybe not the first month, but in a couple of months that starts to change the game. It’s a liquidity crisis that ultimately forces a change in behavior.”

On the US Dollar:

“When I look at what’s going on out there, I am very worried about the reserve currency and the privilege that it gives the United States… If we lose control of the reserve currency status, you’re talking about a significant hit to our standard of living. To some extent, 10% inflation is a first step towards deteriorating our standard of living, but it’s really the ability to issue debt, the ability to generate demand for our (debt) because we are the reserve currency that gives us an enormous advantage… I think the dollar is in great jeopardy and that’s what I’ve been worried about more than anything else. We need discipline and it starts in Washington DC where there has been very little…”

We couldn’t agree more that fiscal discipline, however unlikely it may be, is the single most important step that could be taken to moderate inflation and give the Fed more room to tighten policy by reducing treasury supply.