Latest / Merryn Talks Money / What the New Cold War Means for the Global Economy with Niall Ferguson

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What the New Cold War Means for the Global Economy with Niall Ferguson · Merryn Talks Money

0:00
Speaker 1: John, you've been writing about interest rates again. You can
0:02
Speaker 1: be writing about interest rates forever. Do you remember all
0:05
Speaker 1: those wonderful years when interest rates just below and stayed low.
0:07
Speaker 1: We didn't have to worry about it all the time. Yeah,
0:09
Speaker 1: it was great. I mean I still wrote about them
0:11
Speaker 1: all the team, which my long soften readers will remember.
0:14
Speaker 1: But you know it was. It just didn't change very much.
0:17
Speaker 1: Must have been so good. I apologize John's readers. I
0:20
Speaker 1: apologize to you on his behalf that he can't find
0:22
Speaker 1: anything to write about except for interest rates aren't moving.
0:24
Speaker 1: On the plus side, you don't have to be bored
0:32
Speaker 1: by him anymore because interest rates they are changing right now.
0:37
Speaker 1: You're writing your Money Desert newsletter this week about Powell's
0:41
Speaker 1: comments and how that changed the way everyone was feeling.
0:43
Speaker 1: We were all frightfully optimistic and nothing can go wrong
0:45
Speaker 1: ish about things in the first bit of the year,
0:47
Speaker 1: weren't we. Now we're back into oh my god, everything
0:49
Speaker 1: can go wrong. Yeah, it's just the I suppose that
0:53
Speaker 1: Marcus have just been etching for an excuse to believe
0:57
Speaker 1: that the fad is fainally going to stop reason interest rates,
1:00
Speaker 1: and they kind of thought that they'd had one towards
1:02
Speaker 1: the end of last year, and then what appened is
1:04
Speaker 1: that the employment data in the US came in extremely strong. Well, yeah,
1:10
Speaker 1: I mean those figures are always interesting, and I need
1:13
Speaker 1: to take out the research on this, but I am sure.
1:15
Speaker 1: I remember reading during past financial crises that the data
1:20
Speaker 1: on the non farm pay rolls is actually not great
1:24
Speaker 1: at turning points. I mean, it's quite random at best
1:27
Speaker 1: of times. Anyway, it's interesting how much attention the market
1:30
Speaker 1: pays to this on the day, and then quite often
1:32
Speaker 1: that will get revised by several hundred thousand later in
1:36
Speaker 1: the year and nobody oll care. But long story short,
1:40
Speaker 1: it was a lot better unexpected, and at that point
1:43
Speaker 1: everyone started thinking, oh my god, the labor markets running
1:46
Speaker 1: so hot that the FED can't possibly ignore this. And
1:49
Speaker 1: then earlier this week, Jerome Powell was up in front
1:53
Speaker 1: of US politicians and he basically said, yes, we're gonna
1:56
Speaker 1: have to raise interest rates for higher and we'll have
1:58
Speaker 1: to keep them here for longer than any your law
2:00
Speaker 1: currently think. And suddenly everyone's kind of thinking, oh, wow,
2:03
Speaker 1: it's going to be going up to six percent, maybe
2:06
Speaker 1: eight percent sort of federal funds, right, And of course
2:09
Speaker 1: that's got an Awkin effect everywhere else in the world
2:11
Speaker 1: as well. So we're into good news is bad news
2:14
Speaker 1: whereas it used to be. I don't know if you remember,
2:16
Speaker 1: of course you do. Bad news used to be good news,
2:18
Speaker 1: and good news used to be good news, and now
2:19
Speaker 1: good news is bad news. So here we are, right
2:23
Speaker 1: do you think do you think that this is all
2:26
Speaker 1: about how I'll wanting to be a little bit more
2:28
Speaker 1: Volca than he's capable of being. I mean, if you're
2:30
Speaker 1: a central banker now in the first proper inflationary period
2:33
Speaker 1: you've had for a while, you have to sit there
2:35
Speaker 1: and think to yourself, am I going to be Arthur
2:37
Speaker 1: Burns known to be an incompetent although in that with
2:41
Speaker 1: my main guest and in the podcast we do talk
2:43
Speaker 1: about this and poor mister Burns was not really incompetent.
2:46
Speaker 1: But Arthur Burns who everyone thinks of as being incredibly incompetent,
2:49
Speaker 1: and Volca, who everyone thinks is being the most competent
2:52
Speaker 1: investment bank central bankers since the beginning of time for
2:56
Speaker 1: slamming up interest rates again and again again under the
2:58
Speaker 1: process creating it pretty appalling resertion. So we think of Powell,
3:03
Speaker 1: he's sitting there and thinking, am I going to be
3:05
Speaker 1: Burns who had inflation running at an average of six
3:08
Speaker 1: and a half seven percent all the way through his tenure?
3:11
Speaker 1: Very bad? And he gave this this lecture which I
3:14
Speaker 1: was reading in the middle of last year. I was
3:16
Speaker 1: reading this lecture he gave in nineteen seventy nine in Belgrade.
3:19
Speaker 1: He called it the anguish of central banking, you know,
3:22
Speaker 1: because while he had he had this power in theory
3:26
Speaker 1: to get rid of inflation, to deal with money supply,
3:28
Speaker 1: to show up interest rates and make it end. But
3:31
Speaker 1: he couldn't do it because politics, you know, he said
3:34
Speaker 1: at the time, he said he was caught up in
3:35
Speaker 1: the philosophic and political currents that were transforming American life
3:39
Speaker 1: and culture, and as a result, he just couldn't do it.
3:42
Speaker 1: I am I This is a classic not my faultism,
3:44
Speaker 1: of course, but you can see how he got himself
3:46
Speaker 1: caught up in this. And Volker came in and said,
3:49
Speaker 1: you know, I'm not going to think about these philosophical
3:52
Speaker 1: and political currents. We don't have the luxury of that anymore.
3:54
Speaker 1: I'm just shoving up rates. I mean, I can you
3:58
Speaker 1: aastually think the bonds even that that is overthinking it.
4:02
Speaker 1: I mean, I think that does these whole debates between
4:06
Speaker 1: historians about the individuals matter more or the geopolitical currents
4:11
Speaker 1: matter more, and all that sort of stuff, and I
4:13
Speaker 1: think the central banking is one of those areas where
4:15
Speaker 1: the individual matters almost not a jot. Basically, central bankers
4:19
Speaker 1: always follow the path of least resistance, wherever that is
4:23
Speaker 1: at a given time, and for Jerome Powell right now,
4:28
Speaker 1: the path of least resistance is for higher interest rates
4:33
Speaker 1: to make it look as if he's tackling inflation, or
4:35
Speaker 1: at least to talk tough on it, because there is
4:40
Speaker 1: so far no obvious impact on the economy or on
4:44
Speaker 1: unemployment rates. Now the problem is that obviously unemployment is
4:47
Speaker 1: a lagging indicator. But for now, Powell's only kind of
4:54
Speaker 1: rational choice is to stay hawkish on rates. Maybe, I mean,
5:00
Speaker 1: maybe he won't, maybe they won't raise them as much
5:02
Speaker 1: as they're saying, but it certainly needs to talk a
5:04
Speaker 1: good game, because, apart from anything else, if markets get
5:08
Speaker 1: the sense that he's not going to raise rates, then
5:10
Speaker 1: of course they bounce again, and kind of technically speaking,
5:13
Speaker 1: that relaxes financial conditions. So it's like it's a sort
5:18
Speaker 1: of you're actually lowering rates by not talking about pushing
5:22
Speaker 1: them up. So I think at the moment, I think
5:24
Speaker 1: that's that's basically how you have to look at these
5:25
Speaker 1: things up until you know the end of the pandemic.
5:30
Speaker 1: The path of least resistance for central banks was always
5:33
Speaker 1: to cut interest rates if it looked as if, you know,
5:37
Speaker 1: markets were falling, because at that point the risk was
5:40
Speaker 1: that markets would fall, some sort of destabilization would happen,
5:44
Speaker 1: and then we'd be plunged into deflation. But now the
5:48
Speaker 1: opposite is true, and because there's no political pain really
5:51
Speaker 1: coming from people losing her job yet they kind of
5:54
Speaker 1: the obvious path is to stay hockey sewn rates. The
5:58
Speaker 1: tricky bit will be whenever people do start losing their
6:01
Speaker 1: jobs and Joe Biden start staying, oh wait a minute,
6:04
Speaker 1: it was coming off for an election here, can't even
6:06
Speaker 1: have unemployment going up. So I think, yeah, I just
6:10
Speaker 1: think these central banks auld basically where the heart at
6:13
Speaker 1: the time they are in Vulcan was the same. That
6:15
Speaker 1: was the point in which inflation was too painful in
6:18
Speaker 1: not do anything about. I mean, I know that he
6:21
Speaker 1: had his effigy bond on the steps of the capital
6:24
Speaker 1: or something like that. But but that was going to
6:26
Speaker 1: happen either way. You know, something it had to be tackled,
6:29
Speaker 1: and that was the rational choice for Vulcan at the time.
6:31
Speaker 1: But he was also lucky. I mean he was lucky.
6:34
Speaker 1: I think people argue about this a lot, but when
6:36
Speaker 1: when you look at the environment around Chemny, they had
6:39
Speaker 1: this kind of backup from from domestic and global politics
6:42
Speaker 1: that poor Arthur Burns were what was going to call him,
6:44
Speaker 1: poor Arthur Burns, but like used to call terisume poor terisame. Anyway,
6:48
Speaker 1: poor Arthur Burns. They had the sort of support that
6:51
Speaker 1: he had. This Volca had the support that Burns couldn't
6:53
Speaker 1: possibly be had because he had Ronald Reagan's supply side revolution,
6:58
Speaker 1: I mean, you know, slashing of regulation. That was the
7:01
Speaker 1: breaking of the Air Traffic Controllers Union of looking this
7:04
Speaker 1: up in nineteen eighty one, they fired in early twelve
7:07
Speaker 1: thousand air traffic controllers and one go just like that,
7:09
Speaker 1: which was kind of a watershed in the battle and
7:12
Speaker 1: the wage price spiral. So that ended. There was this
7:15
Speaker 1: productivity boom. You had an oil price crash at the
7:17
Speaker 1: beginning of a computer age, etcetera. You know, Volka, he
7:20
Speaker 1: might have served up interest rates. But there is a possibility,
7:23
Speaker 1: and a not negligible possibility, that if Volca had done
7:26
Speaker 1: absolutely nothing, inflation would still have come down to three
7:30
Speaker 1: point five percent by the end of his tenure. You know,
7:34
Speaker 1: he did after poor Arthur Burns in his Anguish of
7:36
Speaker 1: Central Banking speech. Volca gave a talk a couple of
7:39
Speaker 1: years later after it his massive success, called the Triumph
7:42
Speaker 1: of Central Banking, which he would think, which would have
7:45
Speaker 1: been extremely rude. Exactly, he put a question mark at
7:48
Speaker 1: the end of his title. So obviously that was very
7:50
Speaker 1: very gracious of them, because he knew he was lucky. Yeah,
7:54
Speaker 1: it's a calculus thing, isn't it, Because it's not a
7:58
Speaker 1: boat what the individual central anchor does. It's about the
8:01
Speaker 1: background that they're operating against. And you know, we've talked
8:04
Speaker 1: about this before the whole I mean, I think on
8:07
Speaker 1: the edges they could do things differently, Like I think
8:11
Speaker 1: that certainly since the nineties, and you know, the great moderation,
8:16
Speaker 1: we could have avoided an awful lot of the kind
8:18
Speaker 1: of serious bubbles and busts that we had if central
8:22
Speaker 1: banks had been less in love with themselves and be
8:26
Speaker 1: less kind of in thrall with this or sort not
8:29
Speaker 1: even entrall, just using the two percent inflation target as
8:31
Speaker 1: an excuse to keep rates lowered, and they arguably should
8:34
Speaker 1: have been for that whole period of time, and we
8:36
Speaker 1: ignored the fact that China was exporting deflation across the world.
8:40
Speaker 1: We ignored the fact that, you know, labor courts were
8:43
Speaker 1: going down because the whole Eastern Europe had been opened
8:46
Speaker 1: up for you know, highly skilled, very very very cheap
8:50
Speaker 1: workforce being added to the global economy. John, I'm going
8:52
Speaker 1: to stop you there, a girl, stop you there, because
8:54
Speaker 1: you're beginning to encroach on the things that I brilliant
8:57
Speaker 1: guessed in the men porncas And I don't want to
9:00
Speaker 1: anyone to think that you know more than Neil focuson
9:02
Speaker 1: about anything that would not be right. Okay, So I
9:09
Speaker 1: have to stop you so we can go on. But
9:10
Speaker 1: before I do, I want to ask you one question. Match.
9:13
Speaker 1: I don't want you to answer. I want you I
9:17
Speaker 1: want you to think about because it's a question that
9:19
Speaker 1: I was going to ask Neil, and we got caught
9:22
Speaker 1: up and all sorts of other things, and I forgot
9:23
Speaker 1: to ask him. And it's this question is right now?
9:26
Speaker 1: What is the most important place in the world. And
9:30
Speaker 1: I was thinking about this because of last week's podcast, which,
9:33
Speaker 1: by the way round if you haven't listened to yet,
9:34
Speaker 1: please go and listen to it, because Pepper was incredibly
9:37
Speaker 1: interesting and I came away from my conversation with her thinking, Hm,
9:41
Speaker 1: possibly the most important place in the world right now
9:44
Speaker 1: is the northern Norwegian island of Falbard. When you start
9:47
Speaker 1: looking at up it really is the most fascinating place.
9:50
Speaker 1: Beyond important. I'm going to write about it at some point,
9:53
Speaker 1: but not everyone would agree. I'm sure that that's the
9:56
Speaker 1: most important place in the world. So I'm now going
9:58
Speaker 1: to ask all of our podcast guess what they think
10:01
Speaker 1: is the most important place in the world, the place
10:03
Speaker 1: that we should be watching that we're not watching geographically
10:07
Speaker 1: And we talk about that kind of thing quite a
10:08
Speaker 1: lot with Neil, but not specifically. So I'm going to
10:11
Speaker 1: leave you with that, and I'm going to ask you again,
10:15
Speaker 1: and I'm going to ask all our podcast guests going forward. Okay, yeah,
10:19
Speaker 1: I can't get a Hallmark listeners. You have homework as well.
10:25
Speaker 1: Send me emails. Tell me what is the most important
10:28
Speaker 1: geographical place in the world right now that people are
10:32
Speaker 1: not looking at and they really really should be. Thank you, John. Thanks.
10:43
Speaker 1: Welcome to Mary and Talks Money, the podcast in which
10:46
Speaker 1: people who know the markets explain the markets. I'm Mary
10:48
Speaker 1: in Sunset Web. This week our guest is Neil Ferguson.
10:51
Speaker 1: Neil's got a long list of job titles including Millback
10:55
Speaker 1: Family Senior Fellow at the Hoover Institution, Stanford University, and
10:59
Speaker 1: a Senior got the Fellow of the Belfast Center for
11:02
Speaker 1: Science and International Affairs at Harvard. Here is also the
11:05
Speaker 1: author of sixteen books. How about that I've done two
11:08
Speaker 1: was absolutely exhausting. I don't know how he does it. Neil,
11:11
Speaker 1: thank you so much for joining us today. We really
11:13
Speaker 1: appreciate it. My pleasure. Now we're going to dive right
11:17
Speaker 1: in World War three? How likely is it? What do
11:22
Speaker 1: you think out there? Are we into a new Cold War?
11:24
Speaker 1: Are we into an invisible war? Is the Ukraine just
11:27
Speaker 1: the beginning of a much bigger Hot war? How do
11:30
Speaker 1: you see this whole situation at the moment. Well, we're
11:34
Speaker 1: already in Cold War two, and that's been the case
11:37
Speaker 1: for four or five years. As at the beginning of
11:41
Speaker 1: the first Cold War, people in the West have been
11:44
Speaker 1: rather slow on the uptake. If you go back to
11:46
Speaker 1: the late nineteen forties, a lot of Americans and also
11:51
Speaker 1: Brits didn't believe George Orwell and Winston Churchill when they
11:55
Speaker 1: started talking about a cold war and arn curtain. For
12:00
Speaker 1: many people, the penny didn't drop until a hot war
12:02
Speaker 1: broke out in Korea in nineteen fifty and rather in
12:06
Speaker 1: the same way, people who disbelieved me in twenty eighteen
12:10
Speaker 1: when I said Cold War two has already begun now
12:13
Speaker 1: seem more ready to listen with a hot war raging
12:18
Speaker 1: in Ukraine. And that leads on to your core question,
12:23
Speaker 1: what's the possibility or probability that a hot war on
12:27
Speaker 1: a global scale could emerge from this second Cold War.
12:32
Speaker 1: I think the point that Orwell made when he coined
12:35
Speaker 1: the phrase cold war is that there is an implicit danger,
12:42
Speaker 1: and a serious one of World War three. And we
12:46
Speaker 1: saw in the First Cold War all the way through
12:50
Speaker 1: right down to the nineteen eighties periods of alarm, most
12:56
Speaker 1: obviously the Cuban Missile crisis, but not only the Cuban
13:00
Speaker 1: missile crisis, when people feared with good reason that a
13:04
Speaker 1: global conflict was going to occur. And with nuclear weapons,
13:08
Speaker 1: and I think something similar will be true today now.
13:11
Speaker 1: World wars are a kind of very distinctive genre of
13:16
Speaker 1: historical event. If you look at World War One and
13:20
Speaker 1: World War Two, there were really multiple wars that just
13:22
Speaker 1: happened roughly at the same time, and we then called
13:25
Speaker 1: them world wars. I think you could imagine a world
13:29
Speaker 1: in which the war in Ukraine drags on, and then
13:32
Speaker 1: you get another war in Iran between Iran and Israel,
13:37
Speaker 1: Iran and Saudi Arabia or some combination, and then you
13:42
Speaker 1: get a third war over Taiwan in the Far East,
13:46
Speaker 1: and that would start looking very like World War Three,
13:50
Speaker 1: even if no nuclear weapons were used, because there would
13:55
Speaker 1: be this threat of nuclear war as there was in
13:59
Speaker 1: the First Cold War. That's why I think the atmosphere,
14:03
Speaker 1: the environment for investors is radically different now from the
14:09
Speaker 1: period after nineteen ninety or nineteen ninety one. We went
14:13
Speaker 1: through this extraordinary period after the end of the First
14:16
Speaker 1: Cold War, which we can now see as an interwar period,
14:19
Speaker 1: and that interwar period created very low inflation, buoyant asset markets,
14:26
Speaker 1: globalization boomed, and that's for many people being the period
14:31
Speaker 1: of their careers, so they're not ready for this altogether
14:34
Speaker 1: different atmosphere which it's much more similar, I think, to
14:39
Speaker 1: the period of the first Cold War. Yeah, so let's
14:43
Speaker 1: just step back a little bit and make a little
14:45
Speaker 1: bit more of the background and explain why it is
14:47
Speaker 1: at the end of the end of the Cold War
14:49
Speaker 1: created this extraordinary and incredibly unusual environment for investors and
14:53
Speaker 1: for markets. It was the opening up of global label markets,
14:57
Speaker 1: the opening up of global manufacturing markets that gave that's
15:00
Speaker 1: the very low inflation that led to the very low
15:02
Speaker 1: interest rates. They gave us the stunning environment that younger
15:05
Speaker 1: people now see as the normal environment. One important point
15:09
Speaker 1: mariners that the interwar period was characterized by quite low
15:14
Speaker 1: levels of global conflict by any measure. There was a
15:18
Speaker 1: lot less war in the nineteen nineties and two thousands
15:23
Speaker 1: in terms of say battlefield casualties or just expenditure on
15:29
Speaker 1: conflict then there had been during the Cold War. And
15:32
Speaker 1: that was because during the Cold War, almost any local
15:36
Speaker 1: conflict would be boosted by superpower involvement. Usually we called
15:45
Speaker 1: these proxy wars, because the United States and the Soviet
15:48
Speaker 1: Union didn't ever want to go ahead to head that
15:50
Speaker 1: they were happy to fight by proxy, supplying combatants in
15:55
Speaker 1: say Korea or in Vietnam with weaponry. So the nine
16:00
Speaker 1: nineties and the period really right up until i'll say
16:04
Speaker 1: twenty eighteen were a period of much lower levels of conflict.
16:08
Speaker 1: Even although we remember the wars in Iraq and Afghanistan,
16:12
Speaker 1: they were really small conflicts which didn't involve that many
16:16
Speaker 1: people and were economically not that significant. And I think
16:21
Speaker 1: that's part of the reason for the low inflation. Throughout history,
16:25
Speaker 1: and I'll be talking as an historian. Throughout inflation has
16:31
Speaker 1: very often been associated with conflict, because conflicts very destructive,
16:35
Speaker 1: but it's also conducive to monetary and fiscal expansions. So
16:41
Speaker 1: we had a real break from that after nineteen ninety one.
16:45
Speaker 1: The other thing that happened was that the barriers to
16:49
Speaker 1: trade that had existed at the height of the Cold
16:53
Speaker 1: War were reduced. Even before the end of the Cold War,
16:58
Speaker 1: in the period of detent Soviets wanted to do trade
17:02
Speaker 1: with the West, and they did it, not least in
17:04
Speaker 1: the form of energy exports. More importantly, beginning in the
17:08
Speaker 1: mid seventies, China was brought in from the Cold and
17:12
Speaker 1: Chinese growth became the heart of globalization. It was the
17:18
Speaker 1: sudden advent of China's population and China's savings on world
17:25
Speaker 1: markets that led to what more sulc and I called
17:30
Speaker 1: Chimerica back in two thousand and seven. Chai America was
17:33
Speaker 1: this extraordinary symbiotic relationship between the United States and China
17:38
Speaker 1: where US corporations benefited from the great shop to global
17:45
Speaker 1: wages caused by China's entry into the world market and
17:50
Speaker 1: also benefited from the Great surgeon savings that came from Asia,
17:55
Speaker 1: so costs of labor and costs of capital went way down.
18:00
Speaker 1: That was the age of Chamerica. We talk about globalization,
18:03
Speaker 1: that at its heart was this relationship between the US
18:06
Speaker 1: and China. Those were the good times, and they were
18:10
Speaker 1: good times, especially for Western investors. And why do you
18:15
Speaker 1: make twenty eighteen the turning point? Well, the trade war
18:21
Speaker 1: that Donald Trump launched against China got going the year
18:27
Speaker 1: before a Trump had signaled in his election campaign that
18:32
Speaker 1: part of what differentiated him from the established politicians of
18:37
Speaker 1: both parties was that he was prepared to go after China.
18:40
Speaker 1: He didn't really do that until the tariffs of twenty seventeen,
18:44
Speaker 1: but up until the end of twenty seventeen, it was
18:46
Speaker 1: still essentially a trade war, and that was what Trump intended.
18:49
Speaker 1: But in the course of twenty eighteen, it morphed into
18:52
Speaker 1: something much war more. It became a tech war, and
18:56
Speaker 1: then it took on an ideological character. You could see
18:59
Speaker 1: that Mike Pencer's October twenty eighteen speech for the Hudson
19:03
Speaker 1: Institute the United States government, and I think this was
19:08
Speaker 1: bipartisan from an early stage because Democrats agreed suddenly woke
19:12
Speaker 1: up to this Chinese threat, and I think Trump woke
19:17
Speaker 1: Americans up, but he didn't really expect his trade water
19:21
Speaker 1: morph so quickly into a cold war. From a Chinese
19:24
Speaker 1: vantage point, of course, it had been going on for
19:26
Speaker 1: years because Sejon Ping, from the moment that he came
19:29
Speaker 1: to power in China, intended a change of strategy and
19:35
Speaker 1: at the very least to achieve parity with the United States,
19:39
Speaker 1: if not to displace it as the number one super
19:43
Speaker 1: par So I think, you know, when I talked to
19:46
Speaker 1: my Chinese counterparts in academia, I did a lot of
19:50
Speaker 1: that as a visiting professor at Singhua. I would be told,
19:54
Speaker 1: you know what, your sense kind of obvious to us,
19:57
Speaker 1: I mean to them, it was it was almost self evident.
20:02
Speaker 1: That there would be something like a cold war, but
20:04
Speaker 1: it was news when I started talking about it in
20:07
Speaker 1: the United States. I can remember Eric Schmidt's incredulity when
20:11
Speaker 1: I made this argument at a dinner in San Francisco
20:15
Speaker 1: in twenty eighteen. A lot of people initially said, well, well,
20:18
Speaker 1: that's a very bad thing to say, and I said
20:21
Speaker 1: to them, not at all, because a cold war is
20:24
Speaker 1: much better than the alternative. If the alternative is a
20:28
Speaker 1: hot war. What's no longer a viable alternative is Chimerica
20:32
Speaker 1: because Chia America is basically dead or dying, so cold
20:36
Speaker 1: war would be a good outcome. We need to recognize
20:38
Speaker 1: that cold war is preferable to hot war, and in
20:41
Speaker 1: conditions of superpower rivalry, as Graham Allison Harvard has argued,
20:47
Speaker 1: very often, it does produce hot war, so got cold
20:50
Speaker 1: war would actually be a good outcome. Cold war is
20:52
Speaker 1: also good because it wakens Americans and American policymakers up.
20:58
Speaker 1: Having effective the Chinese Communist Party operatives roaming around the
21:03
Speaker 1: universities and tech companies of California doesn't make enough a
21:07
Speaker 1: lot of sense. Given the strategic importance of things like
21:10
Speaker 1: artificial intelligence or quantum computing, so making people realize that
21:14
Speaker 1: the other side is a totalitarian regime with aspirations to
21:20
Speaker 1: world domination slightly focuses the mind, and it also produces
21:25
Speaker 1: a much more concerted effort to make the United States
21:29
Speaker 1: retain its technological lead. Because cold wars are won by
21:32
Speaker 1: technological leads. They're they're not one in battle. And so
21:37
Speaker 1: I make no apology for having argued for a cold
21:40
Speaker 1: war we needed one. I totally understand that, and I
21:46
Speaker 1: rather agree with you, But we have this cold war.
21:50
Speaker 1: And cold wars have huge implications for economies in similar
21:54
Speaker 1: ways to hot wars. I mean, their hot words very
21:56
Speaker 1: obviously expensive. You know, you need a lot of coal,
21:59
Speaker 1: you need a lot of energy, web engine, need to
22:02
Speaker 1: see a lot of intense manufacturing, etcetera. But cold war
22:05
Speaker 1: is also very expensive fiscally and changes monetary policy because
22:10
Speaker 1: you still need you know, you need to have your
22:12
Speaker 1: weaponry and your defense ready to the cold word on
22:14
Speaker 1: into a hot war. You also you lose a lot
22:16
Speaker 1: of the benefits of global trade, and you lose a
22:18
Speaker 1: lot of the benefits of manufacturing in the cheapest place
22:22
Speaker 1: in the world, etcetera, etcetera. So it still has huge
22:25
Speaker 1: implications for inflation, hence for interest rate policy, hence for everything. Yes,
22:31
Speaker 1: it's not an accident that Cold War One produced a
22:35
Speaker 1: great inflation in the nineteen seventies. That inflation can be
22:40
Speaker 1: traced back to the mid to late sixties, and it
22:44
Speaker 1: had its origins in fiscal and monetary policy. So of
22:49
Speaker 1: course Cold War is going to be more inflationary than
22:52
Speaker 1: chi America was, because chi America was an adherently deflationary regime,
22:56
Speaker 1: and let's all forget it got to deflation to the
22:58
Speaker 1: point that that was a big worry after two thousand
23:02
Speaker 1: that we were actually going to end up being Japan
23:05
Speaker 1: with a real problem of falling prices. So you get
23:10
Speaker 1: rid of that problem with not only the costs of
23:15
Speaker 1: trade wars, but the much greater costs of reduced globalization,
23:21
Speaker 1: supply chains that rely less on China, domestic investment in
23:26
Speaker 1: expensive things like semiconductor manufacturer. It all adds up, and
23:30
Speaker 1: of course you have to spend much more money on defense,
23:32
Speaker 1: because what's been revealed by the hot war in Ukraine
23:36
Speaker 1: is that the military industrial complex that was once so
23:39
Speaker 1: powerful in the United States has atrophied to an extraordinary extent.
23:43
Speaker 1: We actually would run out of certain precision missiles within
23:47
Speaker 1: about a week of a hot war with China over Taiwan.
23:51
Speaker 1: And so the realization and this is something that we
23:56
Speaker 1: should thank President Putin for that we actually have. I've
24:00
Speaker 1: not got the wherewithal to sustain a really large scale
24:04
Speaker 1: conflict with the number one rival China is causing a
24:09
Speaker 1: big reassessment of the manufacturing capacity and particularly the capacity
24:18
Speaker 1: of the United States to produce weaponry and ammunition. And
24:24
Speaker 1: Europe has an even greater problem because European defense budgets
24:29
Speaker 1: dwindled and European defense capability at dwindled. And I include
24:34
Speaker 1: in this the uk to the point that the US
24:39
Speaker 1: has had to do most of the arming of Ukraine,
24:42
Speaker 1: and the Europeans have provided some financial support, but much
24:48
Speaker 1: much less military support. So this is all bracing and
24:51
Speaker 1: makes one realize that the era of globalization was just
24:57
Speaker 1: an interwar period and not something that had any inherent
25:01
Speaker 1: the durability any more than the inter war period of
25:04
Speaker 1: the nineteen twenties and nineteen thirties, and that this is
25:07
Speaker 1: all extremely expensive and most government finances in the developed
25:10
Speaker 1: world already in a pretty digital state. That's right, And
25:14
Speaker 1: I've been talking about the structural problems of American public
25:17
Speaker 1: finance for twenty years, going back to a book called
25:21
Speaker 1: Colossus that I wrote in two thousand and three, It's
25:25
Speaker 1: been possible for economists and policymakers to ignore that for
25:31
Speaker 1: a long time because interest rates trended down both in
25:36
Speaker 1: nominal and real terms. This was the secular stagnation that
25:39
Speaker 1: Larry Summers talked about. But I think that's over. And
25:42
Speaker 1: the critical issue here is that once you've got a
25:45
Speaker 1: really large stock of debt in excess of one hundred
25:47
Speaker 1: percent of GDP and forecast to rise, and the interest
25:52
Speaker 1: you're paying on that debt is rising, with the risk
25:57
Speaker 1: that you end up with positive real rates, We're not there, yeah,
26:00
Speaker 1: but then it starts being expensive to have a really
26:03
Speaker 1: large stock of debt and a and a rising defense budget.
26:10
Speaker 1: That the key metric that I've often used is to
26:15
Speaker 1: say that when a great power is spending more on
26:17
Speaker 1: interest payments than on defense, it probably has a problem.
26:22
Speaker 1: And the way the US is going, if you look
26:24
Speaker 1: at the recent Congressional Budget Office estimates that point will
26:27
Speaker 1: be reached at some point this decade, that the US
26:31
Speaker 1: will be spending more on interest on the federal debt
26:33
Speaker 1: on defense so, yeah, I mean, I think we need
26:36
Speaker 1: to realize that the US entered Cold War One in
26:41
Speaker 1: a stronger position, not only in a fiscally stronger position,
26:47
Speaker 1: but I think in an economically stronger position. Because, of
26:50
Speaker 1: course the early years have called War one, the fifties
26:53
Speaker 1: and sixties or tremendous and sustained economic growth in the
26:57
Speaker 1: United States, it's a little hard to believe that we'll
27:00
Speaker 1: be so well positioned this time around. Yeah, So, is
27:04
Speaker 1: there any fix for the American public finances? Sure? There
27:10
Speaker 1: are fixes that Again I've been writing about for years.
27:13
Speaker 1: The US tax system is a mess. There is no
27:16
Speaker 1: value added tax, which is quite standard and other developed economies.
27:22
Speaker 1: The income tax regime is full of holes. You could
27:27
Speaker 1: rationalize the American tax system and make it far more
27:30
Speaker 1: efficient and eliminate abuses, if you could only get it
27:35
Speaker 1: through Congress. The problem is not a fiscal technical problem.
27:39
Speaker 1: The problem is a political problem that it's really hard
27:43
Speaker 1: to get at the votes for the kind of reforms
27:47
Speaker 1: to entitlement programs that you would clearly have to do.
27:50
Speaker 1: Those are the things that are really the big drivers
27:52
Speaker 1: of the deficits. So the last candidates to run on
28:00
Speaker 1: fiscal reform were Romney and Paul Ryan, and you may
28:03
Speaker 1: remember that that didn't prove to be a great hit
28:07
Speaker 1: with voters. So cold War at some point is going
28:11
Speaker 1: to force a reckoning, and if past experiences any guide,
28:15
Speaker 1: the United States will have to get into a proper
28:18
Speaker 1: mess before it does. As Churchill famously said, the right thing,
28:23
Speaker 1: after all the alternatives have been exhausted. Let's talk then
28:28
Speaker 1: a little bit about the inflation that all this is
28:30
Speaker 1: going to drive. I mean, there are there are predictions
28:34
Speaker 1: out there now, people seemingly believing that inflation could come
28:38
Speaker 1: back to two percent by the end of the year.
28:39
Speaker 1: And you know that's that And I think you and
28:41
Speaker 1: I would both agree that that's incredibly unlikely, regardless of
28:44
Speaker 1: what central banks do. And there's also the question of
28:47
Speaker 1: the extent to which continually tightening monetary policy can help
28:51
Speaker 1: a supply problem. So what happens here? What do the
28:55
Speaker 1: big central banks in a particular, the fair in the
28:58
Speaker 1: worst do to deal with a problem that their solution
29:02
Speaker 1: hasn't got much to do with. Well, we have some
29:05
Speaker 1: good history to draw on here, which is really the
29:07
Speaker 1: history of the nineteen seventies. That problems that have arisen
29:12
Speaker 1: since the beginning of twenty twenty one have a certain
29:16
Speaker 1: amount in common with the problems of the late sixties.
29:19
Speaker 1: It was a combination of fiscal and monetary over at
29:22
Speaker 1: shoot as we came out of the pandemic that caused
29:26
Speaker 1: what to me was a quite predictable inflation mistake. Expectations
29:32
Speaker 1: certainly moved. Ordinary people spotted the inflation and their expectations jumped. Accordingly,
29:39
Speaker 1: the Fed has to make sure that expectations don't become
29:44
Speaker 1: embedded at a much higher rate than two percent, and
29:48
Speaker 1: so it has to keep going down this course. It's
29:51
Speaker 1: embarked on that, and clearly it's going to have to
29:55
Speaker 1: go higher and for longer than people were hoping at
29:59
Speaker 1: the beginning of the year, because there's a lot of
30:00
Speaker 1: Goldilocks type people out there who just want the salt
30:03
Speaker 1: to magically go away, some of them are fed economists,
30:07
Speaker 1: and inflation to come back down towards two percent. I've
30:11
Speaker 1: said all along that that scenario of soft landing you
30:15
Speaker 1: get back down to close to two percent without even
30:18
Speaker 1: a painful recession, requires nothing else to happen. Everything else
30:22
Speaker 1: in the world has to be just fine. In twenty
30:25
Speaker 1: twenty three for that to be plausible, But what we
30:28
Speaker 1: know from the nineteen seventies is that that's not the
30:30
Speaker 1: way the world works. One damn thing leads to another.
30:33
Speaker 1: A war in Ukraine had lots of inflationary impact last year,
30:41
Speaker 1: and who's to say what's next If there were any
30:44
Speaker 1: escalation in an already fraught situation in the Middle East,
30:49
Speaker 1: that would obviously be inflationary. So watch Iran, and watch
30:53
Speaker 1: what the new government in Israel is going to do,
30:56
Speaker 1: Watch the Iran Saudi relationship, and those are the places
30:59
Speaker 1: where the FED has no control. The FED can't influence
31:03
Speaker 1: what happens in the Middle East anymore than it can
31:05
Speaker 1: influence what happens over Taiwan next year when there'll be
31:08
Speaker 1: an election in Taiwan, and lots of reasons why the
31:11
Speaker 1: Chinese might want to escalate, and plenty of people in
31:14
Speaker 1: Congress who would be ready to escalate right back. So
31:17
Speaker 1: I think that the lesson that the seventies is that
31:20
Speaker 1: you can set out on a disinflationary course as the
31:23
Speaker 1: FED chair, but be caught out by events. Arthur Burns
31:28
Speaker 1: was not a blithering incompetence. He just wasn't lucky every time.
31:34
Speaker 1: They kind of done the recession and got inflation down,
31:38
Speaker 1: something would happen, the most obvious example being the October
31:41
Speaker 1: nineteen seventy three Arab attack on Israel to blow up
31:47
Speaker 1: the strategy. In the nineteen seventies saw three distinct peaks
31:51
Speaker 1: and inflation. I don't think there's anything that the FED
31:53
Speaker 1: has done to day that really differentiates it from the
31:56
Speaker 1: Arthur Burns Fed. I mean, I know Jpal wants us
31:59
Speaker 1: to believe he's pulled Vulcar, but I knew Paul Vulcar,
32:04
Speaker 1: and he's no Paul Vulcar. And we haven't come anywhere
32:07
Speaker 1: close to the pain that Paul Vulcan had to inflict
32:10
Speaker 1: on the US economy to bring inflation expectations down. But
32:14
Speaker 1: Neil wasn't a Volca lucky. I mean he obviously he did.
32:17
Speaker 1: He raised into his ray significantly. He looked brutal, but
32:20
Speaker 1: the environment changed around him too. I don't think it
32:23
Speaker 1: felt very lucky to be FED chairman. During the very
32:27
Speaker 1: painful recession of the early eighties. Tom Sargeant wrote the
32:32
Speaker 1: definitive paper about this at the time, the Ends of
32:35
Speaker 1: Four Big Inflations, and Sargeant's point was, if you if
32:38
Speaker 1: you have an inflation problem like that you can't solve
32:40
Speaker 1: it just by monetary means. There needs to be a
32:43
Speaker 1: fiscal reset. There needs to be a regime change in
32:46
Speaker 1: policy right across the board. And that's what happened because
32:53
Speaker 1: Reagan was president, and that meant a regime change, not
32:58
Speaker 1: just in terms of fiscal policy, in terms of regulation.
33:01
Speaker 1: And the nineteen eighties economy of the United States came
33:05
Speaker 1: out of that recession having broken the inflation expectations cycle,
33:09
Speaker 1: ready for a period of sustained growth. That's not luck,
33:14
Speaker 1: that was design. But Paul Vulker couldn't control all that.
33:19
Speaker 1: And in the same way Jpal can't control the other
33:23
Speaker 1: moving parts. He can't get Congress to be responsible about
33:27
Speaker 1: fiscal policy. He doesn't really have any say over trade policy,
33:32
Speaker 1: which remember is not only as protectionist as Donald Trump's
33:36
Speaker 1: trade policy, but in some ways is more protectionist, because
33:39
Speaker 1: the industrial policy of the Inflation Reduction Act, in fact,
33:43
Speaker 1: is more protectionist than anything Trump did with his tariffs.
33:46
Speaker 1: So I think the situation the FED is in, as
33:50
Speaker 1: in the nineteen seventies, is circumscribed by Vivas that the
33:56
Speaker 1: FED chair can't control. Yeah, okay, we assume ongoing inflation.
34:01
Speaker 1: Can we assume what five or a volatile around five percent. Well,
34:09
Speaker 1: the lesson that some is is that one can expect
34:11
Speaker 1: volatility and inflation if even Paul Krugman, who's not noted
34:16
Speaker 1: for his modesty, admits to being completely baffled by the
34:22
Speaker 1: data on inflation, which is another way of saying he
34:26
Speaker 1: was wrong, by the way, but being Krugman, he can't
34:28
Speaker 1: quite bring himself to say that. But then who am
34:33
Speaker 1: I to offer predictions? I think the key thing to
34:38
Speaker 1: remember is we can't really know because of all the
34:42
Speaker 1: exogenous variables, particularly the geopolitical variables. If there were a
34:47
Speaker 1: sudden surge of conflict in the Middle East, then obviously
34:51
Speaker 1: inflation would go back up, just as inflation picked up
34:57
Speaker 1: in the wake of the Russian invasion of Ukraine. A
35:00
Speaker 1: lot of what goes on in economics is kind of
35:03
Speaker 1: almost theological. Will They'll sit around with their model, tweaking
35:09
Speaker 1: the variables, forgetting that the exogenous shocks of the things
35:14
Speaker 1: historically that drive inflation, wars are not part of the
35:17
Speaker 1: economics models. And yet wars are the big drivers of
35:21
Speaker 1: inflation historically. Yeah, almost none of the important things are
35:24
Speaker 1: in the models. I was telling a representative bank of
35:27
Speaker 1: England the other day that they should put alien sightings
35:30
Speaker 1: in their models, because when alien sightings go up in
35:33
Speaker 1: the US and also in the UK, it's normally an
35:36
Speaker 1: advance of an unexpected election result or a period of
35:39
Speaker 1: unrash because it suggests that populations are hugely unsettled. And
35:43
Speaker 1: he seemed to think I was the mad one. Well,
35:45
Speaker 1: I'm still reeling from the fact that we actually had
35:48
Speaker 1: unidentified flying objects over the United States and the wake
35:52
Speaker 1: of the Chinese balloon. I thought that would be a
35:55
Speaker 1: huge story, that you actually had the US government acknowledging
35:58
Speaker 1: that it was shooting down UFO, And to my amazement,
36:02
Speaker 1: everybody just shrugged and returned to their mental health problems
36:06
Speaker 1: or whatever they are most preoccupied by. Yeah, well, I
36:09
Speaker 1: we see. Honest, at this point, nothing is extraordinary, is it.
36:12
Speaker 1: You know? I keep reminding myself that it's not as
36:16
Speaker 1: crazy a time as we perceive it to be, because
36:21
Speaker 1: in reality, if we'd been around in nineteen seventy three,
36:25
Speaker 1: it would have felt a lot crazier. Actually, I mean,
36:27
Speaker 1: there's a sense in which we exaggerate how volatile, uncertain
36:35
Speaker 1: crazy our period is. It's just a kind of vanity. Actually,
36:38
Speaker 1: it's not that special. I mean, imagine if you and
36:41
Speaker 1: I were having this conversation in nineteen twenty three. I mean,
36:47
Speaker 1: there was a year, the year of Henry Kissinger's birth,
36:50
Speaker 1: the year of the German hyperinflation, when of all countries,
36:53
Speaker 1: Germany suffered a complete collapse of its currency, Year of
36:56
Speaker 1: Hitler's beer hole Pusch. I mean three at this point
37:00
Speaker 1: is not even a close. I'll give you all of that.
37:03
Speaker 1: But I do think the almost the entire world logging
37:06
Speaker 1: all of their populations up in their houses for a
37:09
Speaker 1: fairly lengthy amount of time was a fairly extraordinary event.
37:14
Speaker 1: And we'll have long term the implications are all around us. Yes,
37:18
Speaker 1: it was. I did a book called Doom, pointing out
37:21
Speaker 1: that there never had been anything quite like mass house
37:24
Speaker 1: arrest because in previous pandemics you just didn't have that option.
37:29
Speaker 1: Wasn't even discussed in nineteen eighteen or in nineteen fifty seven.
37:33
Speaker 1: So yeah, that was a truly exceptional and one can
37:36
Speaker 1: say unprecedented event. And the consequences in a whole range
37:40
Speaker 1: of domains, including mental health, which I was writing about
37:42
Speaker 1: the other day, are still I think, far from fully
37:46
Speaker 1: grasped by policymakers. Yeah, I suspect it's an option we're
37:50
Speaker 1: going to hope that we are going to rather wish
37:52
Speaker 1: that we hadn't had it. Can't move on to the
37:55
Speaker 1: miseries of the UK another another country that has inflation troubles. Again,
38:02
Speaker 1: things don't look like they're going that well here on
38:05
Speaker 1: the face of things, or that we can be far
38:06
Speaker 1: too pessimistic and authorizing about this. In fact, things aren't
38:10
Speaker 1: really as bad as they look. But in your view,
38:12
Speaker 1: is the UK doomed to become a smaller and smaller
38:16
Speaker 1: part of the global economy indefinitely? And I don't think
38:20
Speaker 1: it is, by the way, but you may. And if so,
38:22
Speaker 1: why Doomed is a word that I use very carefully,
38:28
Speaker 1: because part of the points of the book Doom was
38:30
Speaker 1: to make fun of our propensity for demongering, our tendency
38:34
Speaker 1: to exaggerate the imminence of the end of the world.
38:37
Speaker 1: The UK's problems are I think more serious than the
38:43
Speaker 1: problems of most other peer countries, because on top of
38:50
Speaker 1: the impacts of COVID, which the UK government talk took
38:54
Speaker 1: pretty seriously and managed pretty badly, and on top of
38:59
Speaker 1: the war and train which the UK has become more
39:03
Speaker 1: involved in than average in terms of its support. You've
39:08
Speaker 1: had Brexit now. I was an opponent of Brexit in
39:11
Speaker 1: twenty sixteen, not because I have any sentimental attachment to
39:15
Speaker 1: Brussels or the European Union, but because I didn't believe
39:18
Speaker 1: the economic arguments that Daniel Hannon and others made. Indeed,
39:23
Speaker 1: I regarded them as preposterous. And sure enough are the
39:28
Speaker 1: promises of a brave new world of Singapore on the Thames,
39:32
Speaker 1: or a free trade in Britain with free trade agreements
39:35
Speaker 1: with the United States. All of this has turned out
39:37
Speaker 1: to be just as much nonsense as I said early days, Neil,
39:41
Speaker 1: early days, early days. Well, actually you know we're now
39:47
Speaker 1: what getting up towards the seventh anniversary, and if a
39:53
Speaker 1: week is a long time in politics, seven years a
39:57
Speaker 1: pretty decent time in the realm of of economic policy
40:02
Speaker 1: and diplomacy. And it was never plausible that leaving the
40:08
Speaker 1: Single Market would not be costly. But I think there's
40:12
Speaker 1: a bigger problem, Marin, which allows me to get away
40:16
Speaker 1: from the really tedious debates over Breggsits at the heart
40:22
Speaker 1: of the Brexit project, at least in the Dominic Cummings version,
40:26
Speaker 1: was the belief that you needed a revolution in the
40:28
Speaker 1: British state, and that that was really the point. Brexit
40:33
Speaker 1: was a means to that end that hasn't happened and
40:38
Speaker 1: it isn't going to happen, and its failure I think
40:43
Speaker 1: revealed something structural about Britain. You can have a clever
40:49
Speaker 1: maverick like Dom Cummings, but if the prime minister's Boris Johnson,
40:57
Speaker 1: there's never going to be a serious revolution in government
41:01
Speaker 1: because that's just not the kind of person who becomes
41:04
Speaker 1: prime minister in Britain. I think the British problem is
41:13
Speaker 1: that in reality, what Brexit did was to take us
41:17
Speaker 1: back to nineteen seventy two, to the year before we
41:20
Speaker 1: joined the EC, and Britain's now going to re enact
41:23
Speaker 1: the nineteen seventies with an amazing fidelity to detail. It's
41:27
Speaker 1: going to be like the only BBC costume drama re
41:31
Speaker 1: enactment of the nineteen seventies, and other countries will not
41:34
Speaker 1: do it so faithfully. Everyone will agree that the Britains
41:38
Speaker 1: should get the Bafter for best nineteen seventies reenactment. We'll
41:42
Speaker 1: have we have a weak conservative government, We'll soon have
41:45
Speaker 1: a week labor government. We'll have strikes will have higher
41:49
Speaker 1: inflation than our peer countries. My only hope is that
41:55
Speaker 1: the sitcoms and the music will improve, because the nineteen
41:58
Speaker 1: seventies had all of that economic malaise, but they were
42:04
Speaker 1: quite fun. I'm not too optimistic about that, but I
42:09
Speaker 1: live in hope. But we are sort of. I mean,
42:13
Speaker 1: this is something that worried me about bregsit all along.
42:15
Speaker 1: If it was a mistake to join Europe. If that's
42:18
Speaker 1: the basic thesis, then don't be surprised if if leaving
42:23
Speaker 1: takes you right back to where you were, and then
42:25
Speaker 1: you remember why we joined in the first place. The
42:27
Speaker 1: reason Britain joined in the first place was that its
42:30
Speaker 1: own institutions of government could not deliver a stable growth
42:34
Speaker 1: and they could not deliver low inflation. That was why
42:37
Speaker 1: it happened. So surprise, Okay, So all we can hope
42:41
Speaker 1: for is better music. Yeah, I'm hoping that Slade will reform.
42:46
Speaker 1: I was listening to Slade recently. Slave was such a
42:48
Speaker 1: great band. We only ever hear their Christmas song to
42:53
Speaker 1: the point of nausea. But if you go back to
42:55
Speaker 1: Goodbye to Jane Mamma, we were all crazy. Now. I
42:58
Speaker 1: was playing some Slade some living all the time. We
43:00
Speaker 1: were in England last week, zooming around the place looking
43:03
Speaker 1: at schools. Schools are still something Britain has that really
43:09
Speaker 1: are world beating, And I said, you know, you need
43:12
Speaker 1: to listen. You need to listen to Slade. So I'm
43:15
Speaker 1: hoping that there will be there will be at least
43:18
Speaker 1: some kind of cultural return to the nineteen seventies. You know,
43:21
Speaker 1: the nineteen seventies were fun for young people. I know,
43:24
Speaker 1: because I was young then. I'm being young today just
43:27
Speaker 1: seems rubbish by comparison. And so yeah, my consolation to
43:33
Speaker 1: everybody that I tell this story too is never mind,
43:36
Speaker 1: maybe being young can be fun again. Well, we'll try
43:40
Speaker 1: and play a little Slade at the end of the
43:41
Speaker 1: podcast and see how that goes. I don't entirely agree
43:45
Speaker 1: with you, but we haven't got time for me to
43:46
Speaker 1: tell you why right, I'll write it up in a collar.
43:50
Speaker 1: But before we end, look, I wanted to ask you
43:52
Speaker 1: about what on earth the ordinary person is supposed to
43:56
Speaker 1: do financially in response to this, you know, really fairly
44:00
Speaker 1: miserable story that you've told us. Thank you very much. Now,
44:03
Speaker 1: I know that you used to be quite keen on bitcoin,
44:05
Speaker 1: didn't you. And on the general cryptocurrency thing, do you
44:08
Speaker 1: still believe or do you think that holding a bitcoin
44:13
Speaker 1: the only vaguely plausible cryptocurrency is a hedge against chaos
44:17
Speaker 1: and inflation doesn't have a value of own or as
44:21
Speaker 1: that ship rather sailed. I think that was true in
44:26
Speaker 1: twenty twenty twenty twenty one, but I became utterly disgusted
44:33
Speaker 1: by the advent of Sam bankmun Freed. I was writing
44:37
Speaker 1: about his I said not so much wild West as
44:40
Speaker 1: whacko West pronouncements in May of last year, and then
44:44
Speaker 1: I actually came across him at a conference at the
44:46
Speaker 1: height of his fame in of all places, Aspen, and
44:51
Speaker 1: his performance at that conference so disgusted me that I
44:55
Speaker 1: realized the adoption phase of crypto was over and we'd
44:59
Speaker 1: enter the scam and speculation phase and exited not long
45:05
Speaker 1: after that. I wish I had exited sooner. It was
45:08
Speaker 1: pretty obvious that monetary tightening would be bad for an
45:10
Speaker 1: increasingly speculative market, because what had happened in the course
45:15
Speaker 1: of the pandemic was that we'd gone from the adoption
45:17
Speaker 1: phase to the speculation phase, and lots of leveraged players
45:20
Speaker 1: were driving up the prices. So you know. The one
45:23
Speaker 1: lesson of financial history, it's even in the a sense
45:25
Speaker 1: of money, is once the monetary conditions tighten, the speculative
45:29
Speaker 1: players will be blown up one by one. That's what happened.
45:33
Speaker 1: And yeah, I only wish i'd time my exit a
45:37
Speaker 1: bit better. Peter Teal got out before I did, but
45:41
Speaker 1: that's why he's a billionaire and I'm not. You were
45:45
Speaker 1: relatively close. So how do we protect ourselves? Have you
45:48
Speaker 1: got any thoughts from your great sweep of history is
45:51
Speaker 1: to how a man on the street and look at
45:53
Speaker 1: this particular environment and find a way to protect they're
45:58
Speaker 1: purchasing power long term. Well, it's a very difficult time.
46:02
Speaker 1: If the nineteen seventies or any guide, you can lose
46:05
Speaker 1: on both stocks and bonds, and so your standard sixty
46:08
Speaker 1: forty allocation won't help you. The other lesson of the
46:13
Speaker 1: nineteen seventies is that real estate housing outperformed in the US,
46:17
Speaker 1: and I think also in the UK it did, but
46:21
Speaker 1: it started very cho I was going to say, that
46:24
Speaker 1: problem is that doesn't quite work today because you're you're
46:28
Speaker 1: in a very different world and the markets already pretty
46:32
Speaker 1: inflated after a long period of very low rates, so
46:35
Speaker 1: it's unlikely that that story will play out. Having said that,
46:38
Speaker 1: I did position myself quite aggressively in favor of real estate,
46:44
Speaker 1: but I have a very a desynocratic trade called the
46:46
Speaker 1: historic real estate trade. I'm thinking about historic real estate.
46:49
Speaker 1: It's really hard to make a sixteenth century house in
46:53
Speaker 1: twenty twenty three. They don't make them anymore, and so
46:57
Speaker 1: I've kind of I've gone about acquiring historic real estate.
47:02
Speaker 1: It'll probably turn out to be a bad investment because
47:06
Speaker 1: really they belong on the liability side of the balance sheet,
47:09
Speaker 1: not the assets side. But they're quite fun to live in.
47:12
Speaker 1: I don't know. I've got a kind of it's a
47:14
Speaker 1: sign of old age when you're kind of more attracted
47:17
Speaker 1: by historic houses than by girls. But I've kind of
47:21
Speaker 1: reached that stage and I thought I might as well
47:23
Speaker 1: just go with it. There's a chance it will work out,
47:26
Speaker 1: and even if it doesn't, it'll still be quite nice
47:28
Speaker 1: to sit by my my ancient fireplace. I was going
47:34
Speaker 1: to try shove you towards gold at the end there,
47:36
Speaker 1: But bad story, because I mean a part of anything else.
47:42
Speaker 1: If you do sanctions like the sanctions we did to Russia,
47:46
Speaker 1: that basically reveals that if you get on the wrong
47:49
Speaker 1: side of the US, holding dollars is a disaster. And
47:52
Speaker 1: so I think the Russians and the Chinese is going
47:54
Speaker 1: to happen quietly accumulated as much gold as they can.
47:57
Speaker 1: So that's probably pretty bullish for gold. I think, you know,
47:59
Speaker 1: you'd have to prefer gold to bitcoin in this state
48:03
Speaker 1: of the world. But my advice was always don't have
48:07
Speaker 1: too big a part of your portfolio in those those
48:10
Speaker 1: particular instruments, whether it's bitcoin or gold. I mean that
48:14
Speaker 1: that's not really how you should manage your portfolio. Well,
48:18
Speaker 1: you know what you really should do at the beginning
48:19
Speaker 1: of an inflationary period, hold of assets that are cheap.
48:22
Speaker 1: At the beginning of the inflation period. I think about
48:25
Speaker 1: your property in the nineteen seventies, and do you know, Neil,
48:27
Speaker 1: what's cheap right now journalists? Depends which ones. UK equities.
48:33
Speaker 1: That's true, UK equities are cheap and I think underprised.
48:39
Speaker 1: But on the other hand, you've got a labor government coming.
48:45
Speaker 1: UK equities were terrible trade in the seventies. If we're
48:47
Speaker 1: re enacting the seventies, that's unlikely to work. Yeah, you know,
48:51
Speaker 1: I think what else was not a bad trade in
48:53
Speaker 1: the nineteen seventies eighty It was cash because the interest
48:55
Speaker 1: rates were almost always neutral to real there were very
48:59
Speaker 1: few occasions when you didn't at least break even on
49:02
Speaker 1: inflation with your cash deposits. Yeah, I mean, Bill's short
49:06
Speaker 1: term instruments paying a decent yield are probably the best
49:09
Speaker 1: best at the moment. It is plain vanilla, it's liquid,
49:13
Speaker 1: and I mean, I think, look, put it this way,
49:16
Speaker 1: in the light of what we've said, there are some
49:19
Speaker 1: significant risks to the downside for equity markets, maybe because
49:23
Speaker 1: the FED has to be even tougher than has so
49:26
Speaker 1: far been advertised. Maybe because things blow up in either
49:32
Speaker 1: Iran or over Taiwan. And that's the kind of thing
49:35
Speaker 1: that makes you really not want to be long anything
49:38
Speaker 1: terribly much. So yeah, sort take the interest where people
49:41
Speaker 1: are paying it and and yeah, listen to Slade. It
49:47
Speaker 1: cheered me up a lot. I have to say, Okay, well,
49:50
Speaker 1: I'll remember that so gold very old houses cash, and
49:55
Speaker 1: if you can get your hands on an old slate tape,
49:59
Speaker 1: that's cheap, as you know. And I'm probably about to
50:03
Speaker 1: go up massively and value the second this podcast is released.
50:07
Speaker 1: So now we have inside information right straight down the
50:09
Speaker 1: second hand records shop. Well, thank you so much for
50:12
Speaker 1: joining today, Thanks for listening to this week's Marion Talks Money.
50:23
Speaker 1: We'll be back next week in the meantime. If you
50:26
Speaker 1: like our show, rate review and subscribe wherever you listen
50:29
Speaker 1: to podcasts. This episode was hosted by me Marion Sumset Web.
50:32
Speaker 1: It was produced by Samasadi. Additional editing by Blake Maple's
50:36
Speaker 1: special thanks of course to Neil Ferguson anti John Steppec
50:40
Speaker 1: And this is my weeklyer reminder. You must if you
50:42
Speaker 1: have not already, you must sign up to John's daily
50:45
Speaker 1: newsletter Money Distilled the links in the show notes and
50:48
Speaker 1: you will not regret it. And one more special announcement.
50:52
Speaker 1: I will be doing a live taping of the podcast
50:54
Speaker 1: at the Bloomberg invest event on the twenty second of March.
50:57
Speaker 1: It's called Strategies for Wealth Creation. I guess there's going
51:00
Speaker 1: to be someone I think an awful lot of you
51:02
Speaker 1: know and an awful lot of you invest with, So
51:04
Speaker 1: please do come. If you're in London, you can join
51:07
Speaker 1: in person. Everyone else join online. There is a link
51:09
Speaker 1: in the show notes to register