With Randy Charles Epping, Manager of IFS Project Management, Author of The New World Economy: A Beginner’s Guide
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Steve had an in-depth conversation about the global economy, with Randy Charles Epping, the author of The New World Economy: A Beginner’s Guide. Randy has more than 20 years of experience in the international financial industry, and his book offers keen insights in clear, easy to understand terms (including a glossary) to help people understand the different forces that drive the world’s economy now.
The Global Economy
Steve prefaced his discussion with Randy by saying, “We’re in a period of time where the global economic landscape is shifting and shifting at an increasing rate. It’s important that we understand the building blocks of this new world economy. I mean, just look at the stunning effects on the financial markets of the hitherto unknown coronavirus that’s spreading around the world. The world economy is so much more interconnected now than it was in the 20th century. It’s like that old saying, ‘China sneezes and the U.S. catches a cold’”.
In the chapter entitled, “Butterflies over Beijing”, Randy references the butterfly example of the chaos theory: the idea that a butterfly flying over the Amazon River, flapping its wings, can cause a thunderstorm over Central Park because of all the little connections that ensue, meaning that any little thing that happens anywhere can end up having a huge effect on things everywhere.
Randy offered a real-life current example of that idea: “If you look at the actual source of the coronavirus, it was bats in Wuhan province flying over open-roofed livestock markets, and those bats flapping their wings over the market were dropping little bits of this virus onto animals being sold in the market, and that’s how the coronavirus was initially passed on to humans.”
A Book To Help You Understand Things
Randy explained the idea he had in mind in writing his book, The New World Economy. “The idea of the book is not to say that there’s nothing we can do about these global forces shaping the world’s economy, but to say, ‘Let’s try to understand as much as we can.’ And it’s important for us to understand because the major governments all around the world—not just the US—are using our economic illiteracy to basically force things down our throats, telling us, ‘Oh, we have to do this because it’s good for the economy’. The problem is that most people think that the politicians are listening to the economists and that the economists understand what’s going on, and so we can all just sit back and not think about it like we don’t really need to know. But we do need to know. It’s in our best interest to understand at least the basics.”
He further explained, “And so the idea of my book is just basically to give people simple, everyday examples to help them understand things such as Bitcoins and trade wars and the blockchain. Our tendency is to think that we can’t really understand these things, that we just have to trust the experts. But, in fact, we can understand them, and it’s to our advantage to do so.”
So, how about the opinions of the experts? Steve noted that Jamie Dimon, head of JPMorgan Chase, and Warren Buffett as well, say that cryptocurrencies such as Bitcoin are essentially just a pyramid scheme, a scam, that they don’t have any real intrinsic value. To that, Randy replied, “That’s funny because the same words have often been used to describe regular currencies. I mean, when the United States went off the gold standard in the 1970s, it basically said these little pieces of paper, Federal Reserve notes, now have value, but they’re really only worth what people think they’re worth. So how is that different from a cryptocurrency?”
Steve mentioned one possibly key difference. “When you’re talking about a currency that’s backed by a country like the United States, it’s really backed by the economic capacity of the United States. Sure, there’s still a level of trust that has to be underlying the value of the currency, but the country itself has economic productivity. But there’s no such economic backing of cryptocurrencies. The only thing that I see supporting them is basic supply and demand pressures.”
Randy agreed with that thought, saying, “Yes, the scarcity of any commodity is what’s going to give it value. So, yeah, you’re right. And the United States does have a currency that everybody wants to have, but that’s led to some problems as well. I mention in the book that the United States’ role as the banker to the world or the role of the US dollar as the world’s major reserve currency has given the United States enormous economic leverage. But at the same time, it’s made the value of the US dollar artificially stronger than it would normally be otherwise.” He also noted that while people think of the US dollar as being backed by the US government, the one thing that’s really backed by the government is US Treasury Bonds.
Comparing GDPs
Randy’s book contains some interesting comparisons of the world’s major economies based on GDP (Gross Domestic Product) numbers. The basics: The U.S. GDP, as of late 2019/early 2020, is about $20 trillion. Second-place China’s GDP is about $14 trillion. However, when you look at purchasing power parity, things change rather significantly. Purchasing power parity compares the cost in different countries, calculated in a constant currency, of various basic items that consumers buy. For example, if you take the cost of a Big Mac in Switzerland converted to US dollars, you see that Big Mac costs nearly twice as much in Switzerland as it does in the US.
The purchasing power parity of China’s GDP is about $25 trillion, leapfrogging it well ahead of the US GDP of $20 trillion. That’s quite a difference. So, factoring in purchasing power, China appears as the number one economy in the world and by a significant margin.
But there’s another twist on GDP to consider as well, and that is per capita GDP, which is a country’s GDP number per person, calculated by dividing the GDP figure by the country’s total population. This is a more refined measure of GDP since it shows the amount of economic activity generated per person in the country. The per capita GDP figures show a much larger disparity, with the US coming out back on top. US GDP per capita is $62,000, while China’s GDP per capita is only around $10,000.
Steve summed things up by saying “So, in terms of who’s winning the economic race between the US and China, the US is winning based on pure GDP, losing based on purchasing power parity, and winning in a big way based on per capita GDP.”
Randy then revealed that while the US may be beating China soundly on per capita GDP, it’s not, in fact, #1. That spot belongs to Switzerland whose per capita GDP is around $82,000.
Looking At Switzerland
According to Randy’s research, “Switzerland is just a perfect example of a country that is incredibly well-managed, has no debt, and has a solid healthcare system.” We might be able to learn some things from Switzerland or other countries that would help our own economy in dealing with issues such as health care and income inequality. For example, Switzerland has an excellent health care system. Health care, or insurance, in Switzerland is through private plans, so it’s not the kind of “one payer” system currently being advocated by many Democrats in Congress. However, everyone is required to have health insurance. But if someone can’t pay their insurer for their health plan, then the government will step in and help them with the payments.
However, Steve insightfully pointed out that what works in countries like Switzerland might not be feasible in the US. He said, “It’s one thing to talk about the economies of countries where you have very homogeneous and relatively small populations. But in the United States, we are a mosaic of so many different cultures, so many different nationalities and ethnicities, that I think it’s very, very difficult to try to paint the US with the same brush.”
Different Economic Models
Steve and Randy concluded their conversation with a look at the different economic models that exist in different countries. Rather than just using broad terms such as Capitalism vs. Socialism, Randy’s book delves more deeply into the nature of different economies. In the US, the economy is primarily driven by large corporations and conglomerates on one hand and by small entrepreneurial companies on the other. In China’s economy, the primary drivers are entrepreneurial firms, combined with an overall economy guided and controlled by the government.
Randy found in the course of researching his book that the Chinese economic system is being looked at by more and more people, especially young people, as a viable way to run a country. Whether or not it is a viable and beneficial economic system is an open question, but there’s no denying the increasingly positive views of such a system.
Randy explained further: “And this ties into the idea of income inequality as well, the idea of looking for an economic system not just focused on making a lot of money, but also on finding the best ways to distribute the money. It’s just incredible that this sort of unbridled, billionaire class that’s only about half a percent of the population owns something like 40% of the world’s wealth.” The level of income inequality is going down in several countries around the world. Even in the United States, you have billionaires like Warren Buffett saying, “We cannot continue with this system where more and more of the wealth is being transferred into the hands of a very small minority.
Steve’s concluding remarks expressed his fundamental faith in the American capitalist economic system. He pointed out the horrific failures of socialist economies in Venezuela and Bolivia. Noting the recent chaos surrounding the handling of the coronavirus in China, Steve pointed out that “Yes, it’s tougher in the United States, there are many more avenues of dislocation and discord and so on, but the organism being so diverse has, I think, a greater chance of survival than one where you have a singular government trying to guide or create a planned economy.”
You can get much more information and economic insights from reading Randy’s book, The New World Economy: A Beginner’s Guide.
Disclosure: The opinions expressed are those of the interviewee and not necessarily of the radio show. Interviewee is not a representative of the radio show. Investing involves risk and investors should carefully consider their own investment objectives and never rely on any single chart, graph or marketing piece to make decisions. Content provided is intended for informational purposes only, is not a recommendation to buy or sell any securities, and should not be considered tax, legal, investment advice. Please contact your tax, legal, financial professional with questions about your specific needs and circumstances. The information contained herein was obtained from sources believed to be reliable, however their accuracy and completeness cannot be guaranteed. All data are driven from publicly available information and has not been independently verified by the radio show.
Steve Pomeranz: This is not a beginner’s book on the ABCs of investing, nor is it a book which promises you will become a millionaire in three easy steps. The book I’m going to discuss today is a book about understanding the changing financial world in which we live, so you can navigate it as an informed person. It’s a book that demystifies the financial world. We’re going to talk about cryptocurrencies, what they are, about AI, about Brexit, about border walls, just to name a few.
My guest is author Randy Charles Epping. He’s based in Zurich, Switzerland, and the book is The New World Economy: A Beginner’s Guide. Welcome to the show, Randy.
Randy Charles Epping: Thanks, Steve. Great being here.
Steve Pomeranz: So we’re in a period of time where the global economic landscape is shifting, and it’s shifting at an increasing rate. It’s more important than ever that we understand the building blocks of this new world economy. I mean, just look at the stunning market effects of the hitherto unknown virus that’s spreading around the world.
Why don’t we start there, Randy? Eerily, your first chapter is titled “Butterflies Over Beijing: What Is the New Fusion Economy?” So Butterflies Over Beijing refers to what?
Randy Charles Epping: Well, it is eerie because the butterflies, of course, is a reference to the butterfly theory of chaos theory, which is that a butterfly over the Amazon flapping its wings can cause a thunderstorm over Central Park because of all the little connections that will exist between any one action and things that can happen in a completely different environment.
So when I chose the title, “Butterflies Over Beijing,” I was just trying to be a little bit silly and provocative, but as it turns out, if you look at the actual source of the coronavirus, which we could, I think, now call a pandemic, it was bats over Wuhan province flying over open-roofed livestock markets, and those bats flapping their wings over the market were dropping little bits of this virus onto animals like ducks and pigs that would actually transform it and then pass it onto humans. So the coronavirus, as we’ve now seen, has just exploded and completely changed the whole economic landscape of the world. I mean, today’s news announced that the $1.7 trillion travel industry is going to be in tatters over the next few weeks or months.
Steve Pomeranz: Yeah. Now, this isn’t the first time that a crisis in one country has spread to other countries. I mean, there is a contagion aspect that has been going on for a long time. I’m thinking of 2008 as an example.
Randy Charles Epping: Sure. I also use the example in the book of what happens in small countries. I mean, 2008 was a big event in the US, that started in the US, but if you look at little things like Argentina’s debt crisis or the way that Russia is trying to change the oil prices or even just take a thousand different little things happening in one part of the world, and the idea of the book is to not say there’s nothing we can do about it. The idea of the book is to say, “Let’s try to understand as much as we can.” Because the way people have looked at economics and understanding the world economy in the past has basically been to say, “Oh, it’s good to know so I can make some money in the markets.”
But as it turns out, if you start looking at the way populous governments all around the world, and not just in the US, but all around the world, are using our economic illiteracy to basically force things down our throats, tell us that, “Oh, we have to do this because it’s good for the economy. We have to put up walls because we have to protect jobs at home.” If you really look at the facts, economically, the countries that open their borders to trade and investment are the ones who actually end up being richer.
So the problem is that most people, however, think that politicians are listening to the economists, and that the economists really understand what’s going on, and that we can just sit back and we don’t really need to know. But the idea of the book is to say, basically, we do need to know, and it’s in our interest to understand at least the basics. And so the idea of the book was just basically to say let’s give simple everyday examples explaining Bitcoins and trade wars and blockchain and all these things that we tend to not really think we can understand. But the idea of the book is we can understand them.
Steve Pomeranz: Gee, well, there’s a lot of topics to cover. Let’s start with Bitcoin then. Let’s start with cryptocurrencies. There is a lot of talk from bankers. I’m thinking of Jamie Dimon as one, from heading the biggest bank probably in the world, Warren Buffett is another. They said that this cryptocurrency is a scam and it’s a pyramid scheme and something that’s not going to be ubiquitous in our lives. And yet, here it is, still again, and it’s starting to be used more and more. So explain these cryptocurrencies to us.
Randy Charles Epping: Hey, you know, it’s funny the words you’ve just used have often been used in the past to describe normal currencies. I mean, the fact that back in the early 1970s, the United States went off of the gold standard and basically said, “This piece of paper that people are going to use to do business and to receive their salaries and invest their earnings, those pieces of paper are basically just worth what everyone else thinks they’re worth.” So how is that really different from a cryptocurrency.
Anything in the market has its own value. I use the example of people going to a farmer’s market, and if everybody decides one day they want to buy apples, the person or the persons selling the apples are going to start raising the prices. And if no one wants to buy avocados, the prices are going to go down. Currencies are basically a commodity like anything else. So to say that just because one is made out of paper and the other is what is basically based on little digital zeros and ones, what’s the difference? If you look back in time, people used to use shells, people used to use stones to buy and sell things.
Steve Pomeranz: Well, let me make the counterpoint here. I see the difference here. When you’re talking about a currency that’s backed by, let’s say a country like the United States, you’re really backed by the economic capacity of the United States. Sure, there’s a level of trust that has to be underlying the value of the currency, but the country itself has economic productivity, and there is backing. With cryptocurrencies, really, the way I see it, there is no economic backing. The only thing that’s actually strengthening it or keeps it strong is the lack of supply. ”
Randy Charles Epping: Yeah. Scarcity of any commodity is what’s going to give it value. So, yeah, you’re right. The United States does have a currency that everybody wants to have and actually, that has led to some problems as well. I mention in the book, even in the chapter on “Butterflies Over Beijing,” that the United States’ role as the banker to the world, or that the role of the US dollar as the major reserve currency, has given the United States enormous economic leverage. But at the same time, it’s made the value of the US dollar stronger than it normally would be. So for the United States to be obsessed about having a trade deficit with any given country, in the long run, is not a good idea because if you start destroying the world economy, the value of the US dollar will go down. So it’s like everything, things have their own value, things have their own reasons for existing.
One thing to remember though is that people think of the dollar as being backed by the United States government. In fact, the United States Treasury only just issues pieces of paper or they do it electronically as well. The main backing of the US government is for US Treasury bonds. And Treasury bonds is a whole different story because you have the promise of the United States government that they will pay these bonds back. The United States is in an incredibly strong position in that if people want to buy US bonds, they know that the US will always be able to pay them back. Why? Because all the US would have to do is start printing up more US dollars to pay those bonds. But think of countries like Argentina or Brazil who have issued bonds in their own currency, nobody wants that currency. So the United States is in an incredibly strong position. But as I mentioned, that brings good with bad, like everything else in the fusion economy.
Steve Pomeranz: Well, we’re talking really about the GDPs of these economies and the strength and the power of these economies. There was a chapter that I enjoyed very much about how countries stack up against each other in this new global economy. I want to talk about that. Let’s talk about GDP, the gross domestic product which is a measure of all the output from each of these countries. However, you have to look at some other GDP type statistics to kind of get a sense of things.
Let me start you off. So the GDP of the United States, the gross domestic product, is just about $20 trillion, correct?
Randy Charles Epping: Mm-hmm (affirmative). Yeah.
Steve Pomeranz: The GDP of China, which is second in the world, is 14 trillion. These are US dollars. So they’re being measured in dollars.
Randy Charles Epping: Right. Which is a key point.
Steve Pomeranz: Yeah, it’s a key point. Right. So when you look at the numbers in the local currency, they’re skewed way different. But when you’re using the dollar, you can kind of measure apples to apples. Now, if we look at something called purchasing power parity, and I want you to take a moment to explain that, things look a little bit differently. What is that?
Randy Charles Epping: Absolutely. Yeah. The idea of purchasing power parity is, like everything in the book, I try to bring it down to a very basic, simple day-to-day level. If you’re going down to your local McDonald’s and you want to buy a Big Mac, that’s what, I don’t know how much it is in the States, but in Switzerland, if you translate the local currency Swiss Franc price back into dollars, it’s almost double what it would cost in the US.
So basically, you can apply that across the whole economy. And if it’s true that everything in Switzerland costs basically double what it does in the US, or in the other case, in China, for example, if it costs basically half of what it costs in the US, then purchasing power parity is basically just that. It’s saying let’s look not just at the local currency price and then translate it into dollars because if the gross domestic product is basically a survey of all the goods and services that are sold in an economy, and you’re using a deflated price, it gives you a skewed view of what the economy really is.
So purchasing power parity basically says let’s imagine if everything in China costs what it did in the US, and let’s imagine what everything in Switzerland cost what it did in the US, haircuts to a box of cereal, and then you take that value and apply it to the GDP, you will see that China if they had US-style prices and you added up everything in their economy, it would be way bigger than the United States.
Steve Pomeranz: Well, let me give you the number. China, the purchasing power parity of the GDP in China is 25 trillion versus the US at 20 trillion.
Randy Charles Epping: Exactly.
Steve Pomeranz: So now China moves into position number one in terms of, I guess, basically the cost of living relative to the United States and the cost of the production of all these goods and services.
Randy Charles Epping: Exactly. It’s just a summary to give us an idea, to tell us who’s winning, who’s losing-
Steve Pomeranz: That’s right.
Randy Charles Epping: … who’s big, who’s small.
Steve Pomeranz: That’s what I want to know. That’s what I’m trying to find out.
Randy Charles Epping: Right.
Steve Pomeranz: All right, now there’s a third measure here. Looking at the GDP on a per capita basis, looking at per person, based on the amount of people in a country, the GDP divided by the number of people.
Randy Charles Epping: Sure.
Steve Pomeranz: So per capita, the US is now $62,000 per person, whereas China is under $10,000 per person. So in terms of who’s winning the race, the US is winning the race on pure GDP, losing the race on purchasing power parity, but also significantly winning the race on a per capita basis.
Randy Charles Epping: Yeah, it’s interesting that you’ve put all of that together. I didn’t even attempt to do that in the book, and you succeeded. Congratulations.
Steve Pomeranz: Thank you. Thank you.
Randy Charles Epping: One last little tweak to that survey that you just made is I purposely left off smaller countries, like Switzerland, which is if you took its GDP and then divided it by the number of people, it’s like a third higher than the United States.
Steve Pomeranz: Okay. Per capita.
Randy Charles Epping: So this idea of the US being number one, sure, it’s number one in aggregate terms, but you have several countries around the world, Norway, and it’s usually small countries … But Switzerland is just a perfect example of a country that is incredibly well-managed, has no debt, and has a healthcare system. And I don’t know if you’re ready to get to that part, but one of the last chapters of the book, I tried to do a survey in the same vein to just basically say what works and what doesn’t.
Americans are just not listening to the good news of countries around the world, like Switzerland, where you have private healthcare, everybody has their own private plan, but everybody has to have it. And if you can’t afford it, which is a rare occurrence in Switzerland, the government will step in and help you pay your own private insurer. So there are tons of examples of ways things can work around the world, that maybe would be useful if … Especially in this year of the presidential campaign. Income inequality is another huge issue that I don’t think people are really … Everyone’s talking about it, but no one’s really looking at ways around the world that work to reduce income inequality.
Steve Pomeranz: I think it’s one thing to talk about the economies and the societies in countries where you have homogeneous populations, relatively small populations, that kind of act somewhat the same or think the same. In the United States, we are a mosaic of so many different cultures, so many different nationalities and ethnicities, that I think it’s very, very difficult to try to paint the US with the same brush.
Randy Charles Epping: Absolutely.
Steve Pomeranz: However, in one of your chapters, I did want to discuss this and I think it’s a perfect segue, you discuss what are the other choices to capitalism. I mean, we, in the United States, believe in capitalism as religion, I’m a firm capitalist myself, and have strong feelings about socialism and communism and so on. But it’s not always just black and white.
So let me start the conversation off and discuss the different kinds of economic foundations that countries around the world use. In the United States, you wrote that we are a country of large companies and very small entrepreneurial type companies that really drive our economy. Would you think that’s an accurate statement?
Randy Charles Epping: Yes, definitely.
Steve Pomeranz: Okay, so the US, again, is economically driven by large companies and entrepreneurial small companies. In China, the economies are driven by entrepreneurial companies and a government guided economy. Can you explain that a little bit for us?
Randy Charles Epping: Yeah. In fact, it’s interesting you bring that up, Steve, because as we speak, and this has nothing to do with the coronavirus sweeping around the world, but the Chinese economic system is being looked at by more and more countries, especially young people, as a viable way to run a country. The idea that the government should have a laissez-faire, step back, and let business take care of itself. If you ask any young person, including in the United States, I mean look how many young people are voting for Bernie Sanders … In France, for example, they just did a survey and they said, “What do you think of capitalism, is it good or bad?” Something like 70% of young people said it’s bad and they want a different system.
So people are looking at countries like China and saying, “How can we try to …” And this ties into the idea of income inequality as well is that the idea of an economic system is not just to make a lot of money or find the best way to make money, but also to find the best ways to distribute the money. And the idea of this sort of unbridled, billionaire class that has currently something like 40% of the world’s wealth is in the hands of the top half a percent of the people, it’s just incredible. So China is an example of a system where the government kind of shelters the economy and can make decisions that a government of a capitalist country like the United States would never imagine doing.
Steve Pomeranz: Well, there is a lot of room for discussion there, but let’s move on from China.
Randy Charles Epping: Sure.
Steve Pomeranz: In Russia, you have the oligarchy, which is very concentrated numbers of rich individuals who run the economy of the country. So that’s Russia. I don’t think anybody’s really interested in that so much.
Randy Charles Epping: No.
Steve Pomeranz: In Poland, you wrote in your book, that it’s kind of developed into a crony capitalism, which means it’s who you know and who gets the contracts and so on. In Israel, it’s somewhat based on the kibbutzim, which is kind of a socialist framework. Explain how Israel looks these days with regards to that.
Randy Charles Epping: Well, Israel is, as everyone I think knows, is one of the most successful small economies in the world. And so, yeah, to look at how they are managing their economy and finding ways to distribute the wealth that is created, it’s working. If you look at countries like Sweden and Denmark, it works there too. The amount of income inequality is going down in several countries around the world. So if it’s true that …in the United States, you have people like Warren Buffett and big billionaires saying, “We cannot continue with this system where more and more of the wealth is being transferred into the hands of the small, small minority,” we’re going to have to find some way to change that. And obviously, taxes is one, but there are many other ways of doing it. The fact of just healthcare is a way that brings into this or that ties into this story. So yeah, the chapter on alternatives to capitalism was basically an attempt to respond to this question that’s being asked by especially a lot of young people, but obviously, older people too, is there a better way of doing things?
Steve Pomeranz: Well, I think the idea of the book is to learn about these different ideas. So at least, when you’re navigating through the world, you have some context now in order to get an informed opinion.
Randy Charles Epping: Absolutely.
Steve Pomeranz: Finishing up with this chapter, we want to talk about Venezuela and Bolivia, which really follows the Marxist-Leninist form of socialism. We can see how those systems have failed. The one point, opinion, that I want to express here is that when you talk about a guided economy, let’s get back to China for a moment, you also are talking about an economy that is much more fragile than the economy in a place like the United States. Yes, it’s tougher in the United States, there’s many more avenues of dislocation and discord and so on, but the organism being so diverse has, I think, a greater chance of survival than one where you have a singular government trying to guide or create a planned economy.
So, I think this fragility of the system, which we’ve kind of seen in China, a little bit of with the coronavirus, may be a problem in the future.
Randy Charles Epping: Sure.
Steve Pomeranz: I want to reintroduce the book so people can get this book. The book is called The New World Economy: A Beginner’s Guide. The author is Randy Charles Epping. He’s based in Zurich, Switzerland. And again, it’s The New World Economy: A Beginner’s Guide.
Randy, thank you so much for joining me.
Randy Charles Epping: Thank you, Steve.
Steve Pomeranz: As you know, my mission is always to educate you and to remind you week after week, segment after segment, that we’d love to get your questions because we do. These are very complicated times, which makes for complicated topics, and I’m always here to try to answer them for you.
If you have any questions about your portfolio, your kids, your kids’ kids, your retirement or 401(k), or how to better take care of your family, anything financial on your mind, we’re here with a lot of experience and I would love to help you in any way I can. The way to do this is simple. Just go to stevepomeranz.com, go to the contact section and let me know how we can help. Stevepomeranz.com is the website. That’s stevepomeranz.com.
