The Fed and The Flu | David Kotok on How Pandemics Transform Economies and Markets
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The ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough. Thank you. Just close the f***ing door.

I am speaking with David Kotak, co-founder and strategic advisor at Cumberland Advisors. We are going to be speaking all about his new book, The Fed and the Flu, Parsing Pandemic Economic Shocks. David, your book is a follow-up addition to a paper from the Federal Reserve branch that

focusing on 19 pandemics over many hundreds of years of history and the relationship between pandemics and global public health crises and economics, a very understudied connection that's very crucial. David, what were the findings of that paper? Why did that paper blow your mind? And then what additional things did you find when you were writing this book to find that crucial link between global health and economics?

Thank you very much, Jack. The first thing was the paper examined 800 years of history and used the Bank of England database, which was a marvelous assemblage of interest rates and economic data from Europe over 800 years, say since the Dark Ages. A wonderful database.

At the same time, the paper used information from the Federal Reserve for its hundred years of history and examined 19. They defined what was a pandemic, and COVID was one of them. And this was early in COVID when this work was being done, very, very early. So I read the paper,

I was locked up in my apartment wiping cardboard boxes for dinner outside the front door. And what did I see? These researchers have really captured something. And what they captured is what happens to the neutral interest rate, the interest rate at which

There is no impact, whether on inflation or economic growth. The R star is the modern version. And they used the framework from the originator of the concept, Wicksell, a Swedish economist from over a century ago. And what did they find? After the pandemic shock,

In the medium term, and that's a definition that could be three or four years or 20, the neutral interest rate goes down. Now, why does it go down was not the focus of the paper, but it was some additional result after we did the work of the book. What happens in a pandemic? People die, but capital doesn't die. So poor people,

have heirs, but they don't inherit very much. Rich people have heirs, and they inherit a lot. So the rich get richer. The divide between rich and poor widens, and the savings rate is concentrated more in the rich, and it goes up because of the shock. What else happens in a pandemic? The least productive enterprise falls by the wayside.

Example, in history, the farmer had 10 fields. Now, he only needs nine to supply the food because there are fewer people. What field does he not plow? The least productive. He allows to lie fallow, and the nine meet the needs instead of the 10. Now, let's take what I just described and

and put it in economic terms. Wealth per capita goes up, savings more concentrated. Division, Tom Piketty's division between rich and poor, widens the gene coefficient, changes, to use a technical term, productivity per capita goes up.

the least productive enterprise fails. Everybody we talk to knows of a business that failed because of COVID. Everybody. Ask an audience, raise your hand if one business, one entrepreneurial enterprise of any type that doesn't exist because of COVID. And every hand will go up. So you say, gee, if wealth per capita goes up,

with a concentration of savings that is more intense and a wider division between rich and poor, which is, by the way, what's been happening for five years. And if productivity per capita goes up, the neutral interest rate goes down. It must go down. Now, what happens when the neutral interest rate goes down?

It fuels the innovation. In the old days, the innovation was in the means of war. You learned how to go from bow and arrow to launch a spear 18 feet long. Or you designed a catapult to throw a big massive fire at the city-state wall because you wanted to knock the wall down. Innovation in war. Every pandemic has had components.

of innovation or war. It happened in the Peloponnesian War after the plague in Athens 2,500 years ago. What do we have today? Drones. The drone technology is accelerating so fast worldwide, and the counter defense worldwide, and the worry about security elements worldwide that the United States is now saying, what are we going to do if a Mexican cartel throws a million

Bees at a stadium 40 miles across the border in the middle of a football game. How do we protect the stadium? Think about massive innovation in security apparatus happening. It's happening because it has to happen. So neutral interest rate goes down, creates something else. Wealth effect, very positive. Why was the stock market on a tear before the tariffs? For good reason.

And why were interest rates low? And why did inflation subside? Jay Powell was right when he said it's transitory. People wrapped the word around his neck, but he was right because he knew the history of a neutral interest rate that would roll over and decline.

David, I got to say, the word transitory can mean a lot of different things to many people. You could say, and you probably did say in 2021, inflation is transitory. And here's what I mean. What I mean is that the causes of it are mostly supply chain based and that they will not have long self-reinforcing effects. And therefore, I expect inflation

longer term will go down and that the stable rate of inflation is not 7%. It's probably going to go back down to 3% or 2%. You probably did say that. And I would say you were right. But when Jay Powell said transitory, and when many Federal Reserve economists and other economists, economists associated with the then White House said transitory, what they meant was that inflation is going down. And they said that in 2021, and inflation went up. So they were wrong. You were right, but they were wrong. Just call the balls and strikes.

Yeah. Right or wrong is a question of timing. As John Maynard Keynes said, in the long run, we're all dead. This is true. This is true. There have been no exceptions to that one. But if we think about a transition from a shock, the big shocks take longer.

and their trajectory is not clear at any given moment in time. I am a defender of the Federal Reserve. I think the Federal Reserve prevented a Great Depression. I think it was creative. It had to be. It exercised monetary policy to avoid a repeat of a shock that would trigger a depression. It was already a serious shock, and it worked. Now,

Counterfactual over what would have been. Who knows? The Fed was criticized after the fact for waiting too long to start to tighten policy. Okay, after the fact, it's very easy to criticize timing. And we know that. Put yourself in the position of sitting at an FOMC meeting in the middle of COVID. You've already seen the first shock.

You've already seen the evolution of it. You now know more about the virus. You now know more about deaths. You see the trajectory and you're in a debated and FOMC meeting. And one of your colleagues says, it's time for us to move away from this low rate and start to take it back up. And somebody else says, wait a minute, Jack.

20,000 people just died from the Delta variant. How do we know a mutation isn't going to kill 50,000? Why are you in such a hurry? Can you wait eight weeks and let's see what the next mutation does? Are you going to say, no, I won't wait eight weeks to another meeting? I want to come off the interest rate low today.

Or are you going to say, you know what? It's not so bad. If we have to tighten it when the time comes, we'll be able to do it. That's a debate.

There's no right or wrong to that debate. When you're making decisions in real time, you don't have a full deck of cards ever. So I'm not a critic of the Fed. In retrospect, they could have moved sooner to tighten. At the time, if I were sitting at the table and I had a face eight weeks or vote today and I'm dealing with a deadly virus, I would wait.

Reasonable people, I believe, did wait and would wait. That's my opinion. And it's so easy to criticize people in the past when all of the variables are known. So yeah, I'm looking at, I just pulled up the chart of GDP, nominal GDP and nominal spending, personal consumption expenditures. And even they were, they collapsed in spring 2020.

They surged after that coming from a very low level. And by the summer and fall of 2021, they were above trend, meaning that if you just draw a line through where they would have been if there was no COVID, they were above that. So you could say that that might have been a sign, but you're right. There was so much uncertainty with COVID and these are central bankers. These are not public health experts. David, what was it that caused

the collapse in consumption and in growth in that horrible March through May 2020 period. So the Q1 and Q2 2020, I guess, is it just that we don't really have a ton of economic data on in-depth inflation and consumption markets?

month to month, going back to the plague of Athens, and that this is normal? Does this actually normally happen? Is it that because societies are so organized now, we had a government mandated lockdown that exacerbated the already safety seeking behavior of people just not spending money and not

doing normal economic activities because they were afraid. What was the cause of that sharp decline? And do you think that most pandemics are going to have that thing? Or do you think that lockdowns are something specific to that period that are not really going to be in play going forward? Our book examined this question from COVID backwards. In every case, there was fear,

In every case, there were reactions in governance of one type or another that were dramatic. In every case, there was disinformation and there was scapegoating because of the pandemic. Blaming somebody else for dying and sick people is something that has happened in all of recorded history of the human being. And in every case...

The timing of trying to have a policy change was off because in the moment, no one knew. So we had super spreader events throughout history. We had deaths throughout history. In the Spanish flu in 1918,

In the city of Philadelphia, on one day, 800 people died. 12,000 people died in Philadelphia in the Spanish flu breakout that are recorded in history. At one point, the flu people went to work in the morning.

healthy and young, and were dead on the street in the afternoon for the cytokine storm. Their bodies triggered fighting the bug. In Philadelphia, they held a mass parade, and they got everybody sick. And you don't have to go back to 1918. In the 1957 flu pandemic,

The Boy Scout Jamboree was at Valley Forge, Pennsylvania. I was a Boy Scout at that time. I was working in a Boy Scout camp. I had a job as a counselor, and I was one of the ones who couldn't go to the Jamboree. We had 30,000 Boy Scouts in Valley Forge, Pennsylvania in 1957. In the middle of a pandemic, what did they do? They got sick. They all went home. The whole country got sick a few months later. So...

Behavior is a strange thing in the human animal. In this pandemic, we had super spreader after super spreader. What were all the motorcycles in Sturgis? What were they doing? They were spreading a virus. What kind of disinformation? Crazy treatments. In Florida, we had somebody selling an injectable bleach. Go figure that out. Because the human being is this very, very strange animal. And we're not complete animals.

We're learning slowly. And when it comes to an epidemic, a pandemic, or a plague, they don't happen every week. So they are a test of those who study history. And those who forget their history, as George Santayana wrote so poignantly in his poetry, are condemned to repeat it.

Study history. Churchill said it. I believe in it. There's a lot to be learned. This book takes history, epidemics, pandemics, and plagues from the time when you blamed Apollo for 20,000 people dead. It wasn't Apollo's fault. And then you prayed to Apollo, and you got relief, and you built a monument to him, a statue, and then he forgave everybody, and the plague stopped.

That happened. Now, whether Apollo did it or not, I don't know, Jack. I wasn't there at the time. Neither was I. David, what do you make of the different government responses to...

COVID. From China, basically starting up its factories very quickly, so they produce things very quickly. But in terms of consumer behavior, it was basically like a prison for these locked people in their compounds. And then Sweden was way more open. And I think some scientists were critical of Sweden, but Sweden actually had some more positive outcomes than other countries that did do lockdowns. The US was in the middle, I think. And then Brazil also, I know you write about the Brazil in the world. So

any of those countries or none of them or different countries in the world, but how do you evaluate the various government responses to COVID? - One metric is to look at deaths per capita. Now that's a hard number. You know how many people there are, how many were dead, how many are COVID deaths or attributable to COVID because they're an excess death because of the demographic trajectory.

That's a metric. Is it the best one? I don't know. We looked at that. Look at the behavior of two places, Taiwan and the United States. The deaths per capita in Taiwan, right next door to China, so much lower than America. What did Taiwan do?

First, they were on alert for the disease. Number one, the minute on December 30th that there was that speck of evidence released by China about the virus, Taiwan closed their airports to Chinese flights. On December 31st, negotiation. Why were the Chinese all of a sudden in a hurry to have that trade negotiation? Because they knew what was going on.

If you followed the news flow from Wuhan, you knew something big was happening. Did you know it would be that big? No, but you knew something big. I was a speaker in Fort Lauderdale at the Global ETF Conference at the end of January. Now, we already had news out of China.

I went, and that was at the Westin Hotel, 2,300 people from around the world. I stayed at another hotel down the street because I didn't want to stay in a place with 2,000 people.

And I wore a mask around the conference. And Matt Hogan, Matt Hogan said, anybody in the ETF business or now crypto business knows the name. Matt Hogan and I did an interview on stage and I handed him a mask. I said, put this on. There wasn't a person in the audience had a mask on. And he says, why? I said, because we're going to be wearing these things in a few weeks. And I

I think if you think ahead, you're wearing them now. And the two of us put masks on and did an interview on. People were taking our pictures and saying, what's all this? And a few people came up to me and said, maybe I should be doing that. I said, if this thing is a bug the way we think it is, you will be. That was January, end of January. We had the first cases in Florida six weeks later.

And by the end of the year, we had thousands of people dead. That was a lesson. Why did 2,300 people not know history, not pay attention to the warning? I don't know. I did. I left the conference early and came home.

David, it's tough to know what's true, what you should believe in, what you... Even now, that's true. And David, I remember reading an article, it was not from The Atlantic, from some other mainstream publication that you would definitely trust, saying that...

you've got to focus hand sanitizer. Basically, it was not focusing on masks, it was about hand sanitizer. And they weren't being dishonest, they just didn't know that it was transferred. I actually think in other pandemics, often they don't know how it's transferred and things are revealed later. So David, in terms of deaths per a million people, which countries did the best and which did the worst? And also, how do you rank them? Because for example, a country like Nigeria or even a much less developed country in Africa, that's not very...

it's not probably going to spread as much in a very rural environment. And also probably they're not picking it, they're not measuring it as much. Also like China's deaths per million people is extremely low. And if those numbers are accurate, that's congratulation. They achieved those remarkable results admittedly at the expense of the freedom of their people, but those are very good results. But also do we believe those figures? I don't know. So how do you grade them? So I look only really at the developed country figures.

numbers, the G7, maybe to the G20, because I don't think we really know a lot elsewhere. We could look at Russia today, and you would look at their statistics, and they didn't have a COVID problem. Do you believe that? I don't. So I look at the United States, and deaths per capita were the worst. I look at life expectancy in the United States, because we have those numbers.

And we had two years of absolute decline in life expectancy. And if you look at the G7 countries today, the United States has the lowest life expectancy of all of them. Now you say to yourself, okay, where, if we look at all 50 states, where do we find life expectancy highest? Where do we find it lowest?

Where do we find it compared to vaccination rates and public health rates? And we have a correlation. Unvaccinated people get sicker. More of them get sick, whether it's measles or something else. Where public health is poorly applied at a state level and low funded, people don't live as long. You want the greatest life expectancy, live in Hawaii. They respect this.

You want to have low life expectancy. There are states where the difference is 10 years between Hawaii and a state. I don't want to disparage any state, but anybody can go look at that number and say, gee, if I live in this place, my lifespan could be 10 years longer than if I live in this place. And those are raw numbers. They're there for anybody to see. So

How did we do? I would grade America with about a C. We didn't do well. We rolled out vaccine in a hurry. Then we had a disinformation campaign. Then we had the battles. And vaccines aren't perfect. Some people die when you get a vaccine.

It's sad, but it's true. There is no 100% vaccine. But what do we know? If it's an effective vaccine with a high probability, it is less likely that you will be terminally ill. I've had COVID. I had COVID vaccines. I get boosters. I'm an old man. I have an immune system disease. I have to take care of myself. I look around where I live.

The people who are sensitive to health do the same thing I'm doing. The vast majority have said COVID is over. It's not a risk. I don't have to deal with it anymore. 46,000 people died of COVID in 2024, check. 46,000 in America in year five of a pandemic. And between 9 and 17 million

have long COVID disability characteristics today. You and I know some of them. So that's where we are. So David, there is a total conflict between like economic outcomes and enjoying your life outcomes and life outcomes. Because we can do China. If the goal is to purely minimize death, we'll do the Chinese model anytime there's a pandemic, no freedom. And our deaths, at least the reported deaths will be extremely low.

per capita. And if you want to minimize the risk of not being run over car, like you can never leave your house. So I was David, I think in America, people willingly take risks in COVID. And would you agree with me that in America, a lot of people are like fine taking COVID risk, and they actually claim to not want to shut down and also like to not be unvaccinated. And there is a I'm not saying it's good or bad. But I'm saying there's a demand there to be unvaccinated

in 2020 and 2021 and just have no lockdowns and that there's an incredible backlash, David, against the measures of the Institute of Health, Anthony Fauci. And you would acknowledge that maybe. What are your thoughts on it? There's no question there's a backlash. There are people who think he should get a Nobel Prize, Fauci, and there are people who think he should be in prison. Maybe both. I don't know. But

I'm a libertarian at heart. I think a person takes responsibility. And if they don't, they're taking a risk they don't have to take. We have a child dead from measles in Texas. There's no doubt about that. That child was unvaccinated against measles. Now, measles vaccine and measles has been around a long time.

So this is not a new pathogen. If you reach a vaccination level against measles high enough, you suppress the spread and you create this herd immunity. We'll call it whatever you want. If you let the vaccination rate go below, you encourage the spread. What happened? We stopped vaccinating kids against measles. The numbers went down. Along came the measles.

We have polio cases in the United States. Polio. I'm old enough to remember Salk and the vaccine and the Eisenhower administration and the first prevention of polio. I can remember it. You weren't born then. I remember the pushback until the Sabin vaccine, the sugar pill, came along so you could get an oral polio vaccine.

I got one. We still have people who had polio. We have one in the United States Senate. His name is McConnell. Why is he so supportive of the public health, conservative Republican, the Republican leader in the Senate? He's had polio. He learned the hard way or he was a victim. So behavior, I'm a libertarian. I believe in truth and people make personal decisions.

And if you don't want to practice preventive medicine, you don't have to. You may get away with it. For me, preventive medicine has been something that I've respected since I was a lieutenant in the United States Army in the 1960s. And by coincidence, in the book, by the way, this history, I put it in the book. Why am I interested in this subject? Because in the 60s, I was assigned to a preventive medicine unit. That was my first assignment in the U.S. Army.

And before that, I didn't know a thing about it. And here's all these officers outranking me and their ologists, epidemiologists, you name them, entomologists. And their responsibility was for an entire theater in war. I remember a meeting, a two-star general sat at that meeting and said, you guys are more important than the artillery and the infantry. And we looked at him and he said, disease has killed more soldiers than bullets in the history of war.

And he's right. So do we respect? Don't we? Do we practice preventive medicine? Don't we? Do we wash our hands? Don't we? Do we brush our teeth? Don't we? And we pay a price if we don't. That's the way the world works. If you don't want to, it's your choice. If I want to protect myself and I know that you don't want to protect yourself and I associate with you,

That's my choice. I'm not for imposing my will on someone else. And I don't want someone to impose their will on me. But that's the greatness of America, to try to defend that.

I'm completely with you. I don't want to impose my will on other people. I also believe in preventative medicine. David, final question I'll ask before we get to hardcore economics is, I never get a chance to ask this to any of my guests, being a finance show, but the origin of COVID. You've done so much research into this book. I'm sure you've rushed up into the topic and may have looked into it. When it happened, we were told it was a

bat, at first a pangolin, but then a bat into a wet market. And a lot of diseases, they spread from animals to humans. And again, I never talk about non-financial economic issues because I don't know anything about any topics that aren't economics or finance, but here we have an opportunity. And people said, oh, it's a lab leak. And then many outlets and authorities said that was a conspiracy theory, meaning it was not true.

I think as time has gone on, that theory has gained a little bit more traction. And then first you've got the FBI saying with weak confidence, we think this could have happened. And the CIA, with weak confidence, this could have happened. And then you learned that there were some European intelligence agencies that in April 2020 thought that this was a lab leak. Because again, I know nothing. I and the audience are in your capable hands, David. What happened? What do you think? How are you weighing the probabilities of

a lab leak versus natural causes, bat or some other animal to humans? I thought about this for years. What do we know? There was gain of function research going on, not just in Wuhan. It was happening in the United States. It was happening in other centers of bio-warfare research. They weren't the only ones. Who was there a leak? Who

We don't know. Next, I have been to the markets like the market in Wuhan in different countries in the world. They are fertile for a zoonotic jump of disease, meaning from animal to human. That's a fertile breeding place for a pathogen, whether it's in China or in Africa. It's a fertile breeding place. So the answer is,

Both things are possible. And the answer is we may never, ever know exactly. I would ask a different question. What difference does it make once it's out? Do you spend your energy trying to sort out four year ago history? Or do you say, do we have in place the preventive defenses against

The next pathogen, we have a bird flu pandemic, epidemic in the world and in the United States today. You and I know that today. We know this virus. We know this pathogen can jump from a cow to a person and kill the person. We know that.

So we know it's respiratory, upper respiratory transmissible, and it's zoonotic. What we don't know is, will there be a mutation tomorrow?

So that it can jump from you to me directly and not need an animal as an intermediary. And it'll be upper respiratory or it'll be of aversion. David, I got something to say. I think it does. So I see your point that what does it matter? Let's focus on solving the issue regardless of who is at fault. If it's a bat or if it's a lab leak that could have been funded with American money and stuff, which I think was. I get that. I understand your point.

But wouldn't you say that if you,

A COVID was caused by a lab leak of an experiment of taking a natural pathogen and then by 10 or 100 times making it more transmissible. Isn't the lesson there like to all scientists, stop the experiments. You've cost $50 trillion of money and tens of millions of lives. And obviously the lives are way more important than the money. Let's stop the experiments and let's be way more safe and conservative with our research. But Jack, you answered the question by asking it.

Because the answer to the question is the same today, whether the actual event was a lab leak or not. Because the answer is yes. If we continue to do this work, we invite sometime in the future a new version of COVID. But the second question is, how do you stop doing this work when we are in a global pandemic?

environment? How do you stop doing it over there? What are the tools? How do you monitor? The same question about using a nuclear weapon. So these are profound geopolitical questions. I would stray from this question and ask you a question. We are witnessing economic shocks

Tariff wars, isolationism rather than globalism, protectionism rather than integration, does that exacerbate the risk of another Wuhan or reduce it?

My first answer that comes to mind in my lizard brain is it might reduce it because if there's less traffic, if everyone hates America so much that they don't come here, then there could be a reduced risk of a thing. But you, I'm sure, has a greater argument in mind. So what's your answer? I think the more you're able to have open exchanges of information and economic interchanges,

the better you are because you facilitate the good things. And the bad actors will always be there. The whole yin and yang tug-of-war in human history is between the bad actor, which never disappears, and the tools for the good actors to exchange because that's the debate. That's the tug-of-war.

So I favor globalism and integration and I reduce protectionism and improve quality of life because I believe they build better defenses against bad actors. But that's an old man with an opinion who just finished a book. I appreciate you sharing it. David, turning to the economics part.

Just how so many examples in the book, particularly at the end when an analyst really goes through these charts, just how drastically shaped COVID is in our economy. I'll give just one example. You tell us all the many others that stand out to you. But how...

in COVID, it impacted supply more than demand originally. So even though demand collapsed in March and April and May of 2020, supply went down by more. So inventory, even in, we basically were in a mini Great, actually a greater Great Depression, but it lasted for two months in March and April of 2020. And everyone was panicking over demand and credit crisis. And there's just, you're not going to have an economy anymore. But actually, even then,

inventories had already gone down. So the seeds for inflation and disruption, excess demand relative to supply had already been planted. That's one example to stand out to me. So please comment on that, share your thoughts. But there are countless other examples throughout the book that I'm sure you want to share. You had a supply shock and for a limited amount of time, a demand shock. That's a massive shock. Both ends working against you.

That's a depression. And like you said, we had the experience of a collapse in an economy of time, but we had it. And then came the recovery. Time compressed. And the book describes that and the charts depict it. So I take away a different view after this experience, Jack. Every pandemic, epidemic, plague in history,

was a different pathogen. And they function, they happen. There's no way to say today it won't happen again. And those of us who believe in preparation for the future and the shocks of the future say, are we prepared? Now, there was a president by the name of Bush

who grasped the idea of preparing for an epidemic shock. He said, we got to do this. And there was a central bank, the Federal Reserve, that said, oh, SARS 2003. This could be serious. We need to put in place certain tools if we have to use them. And the Fed did, by the way. They didn't have to use them.

And the SARS experience and fear triggered an acceleration of mRNA research in vaccine preparation. It was at the University of Pennsylvania. Two researchers, very skilled, and they didn't have to use them. But that activity, for those who want to think about preventive activity, was occurring. And it is occurring now, today.

in 2025 for those who focus on it. And 99% of the country goes about its business and doesn't think about it. That's the nature of the human society. And that's the way we are. So my answer, I think, is the takeaway from the book, I should say. The takeaway for me, after all the research and all the reading and the examination of

plagues from the Roman Empire to today is we're a strange species, this human being, and we are quite different. And our behaviors maybe are more modern in their versions, but we're still the same species. And we still do things that we did in the past, and we don't study enough to learn from them.

And maybe it'll always be that way. I don't know. I don't know how much longer I'm going to be around to watch. Oh, I hope you are. Thank you. What are some lessons of the next time there's a pathogen? What's the David Kotak playbook? Oh, first of all, how do you make an observation? Because anybody can wring their hands and say another pathogen is coming. Of course it is. May not get here for 50 years. Maybe here next week.

The first thing I look for is a cluster of disease. So if I see an outbreak with one sick person or another isolated sick person, that tells me there's a disease, but it doesn't tell me it's a super spreading, highly transmissible disease. If I see a cluster of sick people or a cluster, a village somewhere in the world,

where several people die, a cluster. The cluster is the warning for high transmissibility among human beings and between human beings. You see the same thing with bird flu. When you see wild birds transmit and an entire flock in a poultry farm is dead. That's a cluster, but it's in the animal kingdom.

Whether it's cattle or birds doesn't make a difference. Concept's the same. So for the people defense, for me, the metric is a cluster. If I see one cluster, I need to take action, defensive action, and I have to believe it and hope I don't need to do it. That's the preparation. In 2003, with the Global Interdependence Center,

I was program chair at the time. We did a conference at the Lauder Center in the University of Pennsylvania on SARS. And fortunately, we didn't get an outbreak that was a super spreading pathogen. It was the pathogen was there. It dissipated. It decided it had enough. We did the same thing with bird flu with the Philadelphia College of Physicians. We had a worldwide conference. We had how do you prepare? I remember Intel.

was one of our presentations in the Intel master plan of what we're inventorying and what we're doing and how we're preparing if there's a disease outbreak was a presentation coming from Intel. It was very credible, by the way, and very thorough. They thought it through. I remember coming back here. I have a little company called Cumberland Advisors, and we got a couple dozen people.

And I come back and I buy cases of masks, N95 masks, and the types of things you would do to defend yourself. Those masks sat, moved to Florida when the company moved from New Jersey to Florida, and sat in closets. When COVID broke out and there were no masks, we donated N95 masks.

masks to the local hospital when there were no supplies to help protect the nurses and healthcare professionals. And those inventory of those masks originated from the preparation conference. Wow. In 2003. Yeah. That's wild. So David, on an individual and a small scale basis, you recommend people holding on to masks. Do you recommend the government to do the same? Because is it part of the issue that

America had relied on other countries to make things, to make drugs, to not treat, to handle COVID. And basically, when supply chains shut down, we couldn't get enough stuff. I'd also like to introduce a concept that we are one of the very few advanced countries to...

not have a government healthcare system or have a government involvement in an active way. We have Medicare and Medicaid, obviously. But is that also to blame why the death count was so high? Because in terms of technology, we have some of the best disease doctors in the world. And yet our results are so bad in terms of deaths per million people, even when you compare them to countries that took a much more libertarian approach, such as Sweden.

Is our health care system really messed up is my question. I think our health care system is so fragmented. Look at the story of Charity Dean, the California story. Public health officer has extraordinary powers, implements them as chaos in California. That's a worthwhile story to read.

We are a fragmented public health, and we are now going through a massive change in public health where the federal government is essentially going out of the business and saying, we're going to give this to 50 different states. Oh, my opinion? We're going in the wrong direction. And what we know is the disease doesn't know where the border is between Georgia and Florida. It doesn't pay any attention.

So that's where we are functionally. I don't like to use the word should. You know that, Jack. I don't like to tell somebody else what to do. But I would say we are warned. And whether we heed warnings or not is up to each of us. And to the extent we can do it collectively using government or a 501c3 health-oriented philanthropic enterprise,

To the extent we can do that, we're better off because our collective power and strength is better than individuals. But that's the nature of our system. David, what are the economic consequences of COVID that we are still living with right now? Okay. Great question. There's still a few deaths, but that's declining.

We have the longer-term disability issue of long COVID, and that is serious, and it affects our workforce. It affects our quality of life. We know the cohort of people is somewhere between 9 and 17 million. That's the range. We have data. We are still learning.

how this disease manifests itself. Because we know it's not respiratory. You get it through a respiratory function, but it's circulatory, which means it appears everywhere. So it has a neurological component.

And we see it. That's new evidence. We didn't have that four years ago, but we do now. We know it's got a cardiological component. So the fact is we're learning about the disease. And I believe in another four or five or 10 years, we'll know a lot more about it. And we'll know more about viral treatments. And so for me, the health effect is to accelerate the learning.

Because that's the way you protect yourself from the next one. My concern is that in the current environment, when it comes to public health, funding public health, budgeting, doing the practice of public health, we're going backwards. I'm opposed to someone like Robert Kennedy Jr.,

in the role he is placed in. And I'm not alone. This is not a Democrat-Republican thing. One of his biggest detractors is a physician, a Republican senator, who understands and has been very critical. Says, what are we doing? That's not a Democrat attacking the administration. That's a Republican in the United States Senate who has skills in health care. So where it plays out, we'll find out.

David, earlier you referenced a consequence of most of the pandemics. Actually, all the pandemics is lower, longer-term neutral interest rate. That is the level of interest rates that's just stable, that is neither too low, that causes inflation and overheating, or too high and causes a recession and deflation. But so...

Did that also occur with COVID? Because, okay, interest rates collapsed to their lowest rate ever, basically, for 2020 and a lot of 2021, but then they started inching up. And by 2022 and 2023, you had a huge surge in bond yields and interest rates. And now many economists and the Federal Reserve actually estimate that the longer-term neutral rates is actually higher than it was in 2019. So is COVID an exception or is it not and why?

Pandemics, epidemics, and plagues are exceptions to the normal business cyclical enterprises. That is established in the book. The data is there to support it. And that is a conclusion. Not only is it a conclusion, but there's an estimate as to how much and how long. Depends on how severe the epidemic was in terms of death. Because remember, pandemics kill people, not capital.

So, if you look at history and you say, gee, what if we wiped out a third of the population? Which happened, hasn't happened recently, but it did happen. What happened to interest rates? If you wipe out a third of the population and you don't destroy any of the capital, you don't need to produce the new capital for 100 years, you would expect the neutral interest rate to be lower. And it was.

Now, this time around, it was lower. It went through the beginning trajectory, and it did have the outcomes we would expect. And we saw the... I ask myself today, is the disruption from the tariff, isolationist, protectionist change...

And what is coming, which is a tax policy deficit financing change that's still in front of us today, it's coming fast, though. Does that reverse the trajectory of the neutral rate decline? And I don't know the answer. I think it's something that in the financial markets, in the economic sphere, is something we have to be

paying very close attention to now. And do you think the reason that interest rates went up in 2022 is because of the large amounts of money printing and fiscal stimulus, monetary but fiscal as well, that probably I'm guessing that

there wasn't as much fiscal stimulus during the Black Death, the huge plagues of the 13, 14, 14 hundreds in Europe. And that therefore you had a huge collapse then, but then we printed our way out of it and gave people money. And that's why demand was so high and interest rates had inflation high and interest rates went up. Well, we have good monetary history for all the pandemics. I've looked at them all. In ancient Rome,

Three pandemics decimated the population each time. Each one of the three Roman plagues is discussed in the book. What did the emperor do? Debase the currency, triggered inflation. Essentially, that was the approach taken. Cheapen the currency.

and they did. What did Greece do after the Peloponnesian War and the plague in Athens? Restored the value of the drachma, went back to a hard money policy. There was no inflation after the Peloponnesian War in Greece for about a hundred years. Think about what I just said. The currency, the drachma, was credible

They restored it after they had debased it. But after the war and after the war was over and after Sparta and the tyrants were gone, they restored democracy and they restored the value and trust in the currency, a silver coin. And they said, it's going to weigh the same no matter when, where, we're not going to put some cheaper metal in it. And the Greek drachma after the Peloponnesian War, Jack,

was accepted throughout the Mediterranean for several hundred years. If you really want a history of a world reserve currency, look at the drachma after the Peloponnesian War. It was the world reserve currency for centuries. Amazing. The Romans, in the beginning, maintained that policy until they had a pandemic. Once they had a plague,

and it hit them. The emperor liked to put his picture on the coin and cheapen the monetary value and determined by law you have to use this coin, otherwise I'll cut off your head. And that's what happened. So we have lots of monetary history throughout. It's all in the book and discussed. The use of the deficit spending, the fiscal response

was hard to do in antiquity. So that's new. I believe we blunted COVID because we combined both the monetary response with the fiscal response. Double barrel, bam. We'll throw the book at this. And you can be critical of the Trump administration or not. The fact is we rolled out a vaccine rapidly.

And it was on Trump's watch. And I give him credit. You give the general the credit for winning the battle, whether he fought it or not. And you give the general the criticism for losing the battle, whether he lost it or not. Yeah, I also give Trump credit. That's my answer. The fiscal response wasn't either available or used. Spanish flu, certainly not.

1957, Asian flu? Certainly not. 68, Hong Kong flu. We're in the middle of fighting a war in Asia. There was a huge fiscal operation anyway. We were dealing with an inflation that was accelerating. We had a central bank that had to deal with a war. There was a lot going on in the late 60s. And that was the last time until COVID that we had to deal with the question.

57 is instructive. It's not examined very much in history. We were surprised, by the way, to find that. We examined it. Federal Reserve ignored the Asian flu. William McChesney Martin was the chairman of the Fed. He was a hard money banker. Our job is to keep the banks sound and keep inflation down. Here's the 57 flu. It's a pandemic. Worldwide,

Martin and the Fed don't even mention it in the minutes. They worry about the health of Eisenhower and say the stock market and the slowdown and sentiment is eroding. Maybe they're worried about the health of the president because he had a heart attack. Hello? You got people sick and dying around the country. No wonder you have a business slowdown and a stock market going down.

So 57 is an instruction of too narrow a response. You learn from 57. The Fed learned, by the way. They've looked at all this. The Fed started to do serious research about this as an economic shock in the 1990s. The papers, some of them are in the book. So the central banks around the world have caught on to the fact that a disease,

can be a severe economic shock, and you need tools, and governments need tools to deal with it. That's relatively new in human history, to have both the fiscal and the monetary applied to confront disease.

A lot of the tools were just invented from whole cloth. David, a lot to think about. The book is The Fed and the Flu, Passing Pandemic, Economic Shops. People have got to buy this book. It is a fascinating read. So much interesting information. You talked about 1957. No one really talks about that. Definitely in economics. The Federal Reserve at the time didn't even talk about it. So people got to check that out. David, my final question for you. We're doing a little smoke and mirrors with our audience. We had one conversation on Friday, April 4th.

The first part of which will be released as a shortly after April 4th, talking about tariffs with the market going down close to 10% in two days. Pretty crazy stuff. I want to ask my final question about trade because for the second part of conversation is much more evergreen. You said for my entire life, I'm not old enough for Smoot-Hawley. Everyone knows you're not that old, but going back even further,

the golden age of tariffs in the 1870s through the mid 1900s, and particularly one of Donald Trump's idols, President McKinley, who did the McKinley tariff and then several tariffs later when he was president. What were the consequences of that? And also, do we have any historical parallel of going from tariffs of basically 2% to tariffs of 30% in a few days? Because

Everyone thinks, oh, McKinley was Mr. Tariff, but he basically raised tariffs from, I'm making numbers up, 35% to 38%. It was not that big. Tariffs really started for real. The American tariff policy started during the Civil War, and then after the Civil War, that became America's policy. So that was really the change. And I don't know what the stock market did in 1866. I'm struggling for analogs. David, so not just your entire life, but going back to your study of history, I know you're a very man focused on history.

Any lessons or analogies you can draw to the current moment with regards to trade and their economic impacts? I don't recall in history a tariff shock the size of Liberation Day shock. The Trump tariff shock, as announced, has no precedent in history. We went from way down here,

to higher than Smoot-Hawley in a straight line, literally in days. So that's a unique shock in history. Now, we have to see how it plays out. Is it sustainable? Will it be muted? Will there be negotiations? That remains to be seen. Tariffs have been around for centuries.

They were the means of raising revenue to support a government before income taxes. Income taxes and taxation, which allowed a more sustainable, predictable revenue, supported the victors. In the US Civil War, they relied on tariffs for revenue. The Union

He said, wait a minute, to win the war, we have to finance it. To finance the war, we need a better source of income. So the substitution of a tariff mechanism for some other form of taxation is to go from a more predictable revenue stream to a less predictable revenue stream.

And that is a danger in financing governments of any type anywhere. We'll see where this one goes. History. After the Peloponnesian War in Athens, you had a port. Athens won. They were the dominant naval power. They had to finance themselves. What did the Greeks do? They imposed a 2% tariff in the port of Athens on everything coming in and on everything going out.

2% in, 2% out. Why did they do that? First of all, 2% is a small number, but its impact for the revenue stream for the budget of Greece was large. Number two, they were the winner in the war, so they were the only game in town. You couldn't go to the port next door. And so the 2% tariff was sustainable by Greece.

as a revenue stream, and it restored the treasury. And they, as I said earlier, they had confidence in the currency and they kept the value of the currency. So you could say, gee, if we'd have had a 2% tariff worldwide, what would we have done? We would have essentially imposed the sales tax of 2% on tradable goods.

And whoever was imposing the tax would collect it. Whoever was paying it would pay it. No one who paid it would like it, but the governments would be able to do that. That's different than a hike from 20%. So- - I mean, you just have 2% tariffs now. - Yeah. Do we care at 2%? No. And if two went to three, academics would write papers.

But the fact is, around our daily life, do we care? The answer would be no. But this was not 2% to 3%. This was not even the 10% that was expected, which would have been huge. Instead, clunk, we got a monster dropped on our head. That's different. There's no precedent for it.

Truly unprecedented. Yeah. And tariffs on China will, if they, what was announced on Liberation Day, go into effect, be 54%. Incredible number. Yeah, really. David, thank you so much. Again, people can find you on Twitter at David Kotak, G-I-C. There is a newsletter I'm now writing called the Kotak Report.

And anybody who wants to read it is welcome. And if they don't like it, they're welcome to take themselves off the list. I don't get offended. I don't want to annoy anybody. But it's a newsletter that I am now writing independently. So I have a little more freedom to offend people or instigate debate.

That's really good. We'll link that in the description. David, thanks again. Thank you everyone for watching. People can find us on Apple Podcasts, Spotify, and YouTube. Please remember to like and subscribe. Thanks again. Until next time. Thank you. Just close this door.