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Why Economists Are Looking at Economics All Wrong · Merryn Talks Money

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  Speaker 1: Bloomberg Audio Studios, Podcasts, Radio News. Welcome to Merrin Talks Money,
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  Speaker 1: the podcast in which people who know the markets explain
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  Speaker 1: the markets. I'm Maren Sumset Web. This week, I'm speaking
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  Speaker 1: with American economist Professor James Galbraith. James as a professoran
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  Speaker 1: government at the University of Texas at Austin. He was
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  Speaker 1: executive director of the Joint Economic Committee of the United
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  Speaker 1: States Congress in the early nineteen eighties and before that
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  Speaker 1: in Economous for the House Banking Committee. He's also written
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  Speaker 1: several books on economics. Most recently is co authored Entropy Economics,
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  Speaker 1: The Living Basis of Value and Production. This is a
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  Speaker 1: book GMOs Jeremy GRANTSLM. Called essential reading on the very
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  Speaker 1: podcast only a matter of months ago, and the book
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  Speaker 1: that we are going to focus on in today's discussion. James,
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  Speaker 1: Welcome to Merrin Talks Money.
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  Speaker 2: Thanks very much. There's a pleasure to be with.
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  Speaker 1: You your kind, and you couldn't be more highly recommended than
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  Speaker 1: by Jeremy who every time he comes on it's one
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  Speaker 1: of our most listen to podcasts. Okay, so you have
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  Speaker 1: written this book which I have gamely battled my way
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  Speaker 1: through because some of them's in the middle are quite academic,
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  Speaker 1: but it's incredibly interesting, useful reinterpretation of the way that
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  Speaker 1: economies should work. Correct me if I get any of
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  Speaker 1: this wrong. But the basic idea is pretty straightforward. It's
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  Speaker 1: that in the main economists look at economies in the
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  Speaker 1: way they work in terms of equilibrium, as though everything
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  Speaker 1: is somehow tending to some kind of stable state at
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  Speaker 1: the end of everything, whereas in fact nothing ever tends
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  Speaker 1: towards stability. It's not how biology works, it's not how
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  Speaker 1: the world works in general, so why should it be
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  Speaker 1: how economies work. So in fact we should relook at
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  Speaker 1: economics through the prism of not tending to an equilibrium.
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  Speaker 2: Well, yes, indeed, and since you're in Glasgow, I can
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  Speaker 2: hardly forbear to mention that, although I have an enormous
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  Speaker 2: admiration for your predecessor there, Adam Smith, taking a certain
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  Speaker 2: amount of departure from his perspective. Really, what we're trying
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  Speaker 2: to do is to bring economics into the main line
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  Speaker 2: of scientific thinking that developed from the nineteenth century onward,
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  Speaker 2: and which really make it consistent with the way life
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  Speaker 2: processes are viewed, the way mechanical systems are viewed to
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  Speaker 2: give an understanding that the economy is essentially an organic
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  Speaker 2: construction that has to be thought of in those terms
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  Speaker 2: and has the same properties as other organic constructions. That's
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  Speaker 2: the broad idea of the book. That's why we call
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  Speaker 2: it entropy economics.
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  Speaker 1: You say, that's why we call it entropy economics, but
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  Speaker 1: and you probably so superior these days, you don't even
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  Speaker 1: realize there's a whole lot of people like that.
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  Speaker 3: Absolutely, no, I do what entropy means.
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  Speaker 2: It means that every life process taps into high quality
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  Speaker 2: resources and uses them, and in order to do any
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  Speaker 2: kind of work, you have to have access to those resources,
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  Speaker 2: and in the course of doing that work, you degrade them.
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  Speaker 2: And that's true of living systems, as true of mechanical systems,
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  Speaker 2: is true of economic systems. What we've realized is that
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  Speaker 2: the textbook view, if you like, the standard supply and
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  Speaker 2: demand view, doesn't take proper account of that fact. It
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  Speaker 2: tends to view resources as a very minor part of
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  Speaker 2: economic activity because they don't figure all that largely in
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  Speaker 2: a construct that we call national income or GDP. But
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  Speaker 2: in fact, without those resources, and without high quality resources,
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  Speaker 2: nothing else is going to happen. Once you see that,
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  Speaker 2: you understand that we've essentially misconstrued a lot of economic problems,
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  Speaker 2: and we're misunderstanding why things are not going according to forecast.
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  Speaker 1: So most models do not take into account the fact
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  Speaker 1: that most natural resources uscas, so they assume a type
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  Speaker 1: of abundance that isn't necessarily there, or at least the
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  Speaker 1: ability if one resource is not abundant, to substitute for
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  Speaker 1: an almost equivalent resource.
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  Speaker 2: Yeah. Well, a small example from the book. One can
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  Speaker 2: look at gold mining towns in northern Canada northern Yukon territory,
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  Speaker 2: and you discover that if you accounted for them in
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  Speaker 2: the standard way, gold mining would not be a very
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  Speaker 2: large piece of their economy because they had lots of
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  Speaker 2: hotels and taverns and saloons and I suppose brothels and
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  Speaker 2: other things. But the fact was that when the mines
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  Speaker 2: ran out, those places were abandoned and deserted, and they're
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  Speaker 2: now ghost towns. You know, that's a small example of
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  Speaker 2: something which happens on a much larger scale. One can
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  Speaker 2: look at what's happening right now in for example, in Germany,
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  Speaker 2: which is suffering from an extremely high cost of resources
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  Speaker 2: as a result of policy decisions that were taken over
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  Speaker 2: the last few decades, especially the last few years, and
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  Speaker 2: the fact the industrial system of Germany is suffering very
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  Speaker 2: seriously from that. In the meantime, if at what's happening
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  Speaker 2: in the United States for the last ten years or so,
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  Speaker 2: with the advent of let's say, fracking of natural gas,
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  Speaker 2: mostly in the Permian basin here in Texas, you see
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  Speaker 2: the foundation of it of much stronger for the time
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  Speaker 2: being any way, much stronger overall economy, and even stronger
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  Speaker 2: manufacturing compared to what it would otherwise be.
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  Speaker 1: So in Germany, these economic modelers looked at what they
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  Speaker 1: were doing with their energy system and said, well, you know,
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  Speaker 1: we won't be using fossil fuels anymore to the extent
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  Speaker 1: that we don't have to, and we will shut down
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  Speaker 1: on nuclear industry, etc. They were misunderstanding the fact that
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  Speaker 1: without access to cheap and abundant energy resources, the rest
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  Speaker 1: of their economy couldn't operate in the way that they
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  Speaker 1: had previously expected.
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  Speaker 2: That's essentially a major piece of it. A second piece.
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  Speaker 2: A second piece of the argument relates to the relationship
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  Speaker 2: between the government and markets. In the conventional view, these
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  Speaker 2: two things are basically opposed. They're antagonistic to each other.
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  Speaker 2: The government interferes with what, in an ideal world would
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  Speaker 2: be a let's say, a perfect market outcome balance. We
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  Speaker 2: call it an equilibrium. But in the reality, all markets,
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  Speaker 2: all sophisticated markets, but essentially all markets require government. Now,
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  Speaker 2: they wouldn't exist without having a regulatory framework. And that's
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  Speaker 2: essentially the same way that our bodies would not survive
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  Speaker 2: if we couldn't regulate temperature and blood pressure. Our machinery
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  Speaker 2: would not work if we didn't keep it cool and
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  Speaker 2: operating within its design limits. And the same is true
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  Speaker 2: for our economies. So if you then think that deregulation
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  Speaker 2: is going to make your economy more efficient, our prediction
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  Speaker 2: would be no general regulation is going to cause breakdowns.
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  Speaker 2: And you see that, of course in real life when
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  Speaker 2: you look at the financial system in the United States.
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  Speaker 2: We deregulated it really beginning in the early nineteen eighties
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  Speaker 2: and extensively at the end of the nineteen nineties and
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  Speaker 2: early two thousands, and then we're right on schedule. In
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  Speaker 2: two thousand and seven, two thousand and eight, it broke
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  Speaker 2: apart and melted down, and we're still to some extent
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  Speaker 2: suffering from the consequences. The economist said, well, well, that
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  Speaker 2: was an unpredictable shock, something nobody could have expected, et cetera,
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  Speaker 2: et cetera. And the answer is no, if you think
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  Speaker 2: about it from a systematic point of view, it was
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  Speaker 2: entirely predictable based upon the policy decisions that were taken,
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  Speaker 2: which were in turn based upon an economic theory. So
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  Speaker 2: in some sense, we're trying to bring our theoretical perspective
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  Speaker 2: in line with way in which basically any business or
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  Speaker 2: any observer of the real world knows that it actually works.
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  Speaker 1: You're hardly the first to say that a lot of
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  Speaker 1: the economic theories and models that we work with are
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  Speaker 1: fairly useless. They're terrible predictors, and if they worked very well,
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  Speaker 1: maybe we wouldn't get ourselves into mess up, to mess up,
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  Speaker 1: to mess So it's no shock to anyone to be
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  Speaker 1: told that everything's wrong. So why is it that we
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  Speaker 1: haven't changed the way that we try to run economies
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  Speaker 1: and the way that we operate on models. When I
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  Speaker 1: did my economics degree at University of Half, an economic
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  Speaker 1: agree is does that many many, many years ago I
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  Speaker 1: was taught the same thing that I think undergraduates are
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  Speaker 1: still taught today.
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  Speaker 2: That's an excellent question, But I think the answer to
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  Speaker 2: it lies in the way politics and economic power intersect.
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  Speaker 2: There are always forces that want to run the system hotter,
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  Speaker 2: that want to make an easier, faster profit out of
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  Speaker 2: in a given situation, and who don't care about the
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  Speaker 2: long term sustainability of an economic system. This is the
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  Speaker 2: way in which in which the way speculative forces operate
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  Speaker 2: on the economy and the way political forces operate on institutions.
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  Speaker 2: So you have attention there.
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  Speaker 1: Let's go back to this idea of resource scarcity and
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  Speaker 1: the use of resources and the running down of resources
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  Speaker 1: inside a system. There's nothing that can actually be done
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  Speaker 1: about that, So how do you change policy to take
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  Speaker 1: account of it.
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  Speaker 2: Well, normally, in order for the condition had changed policy
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  Speaker 2: to occur, historically, there has to have been a major disaster.
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  Speaker 2: There was one in nineteen twenty nine, and it led
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  Speaker 2: to in the United States a four year depression through
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  Speaker 2: to the election of Franklin Roosevelt in nineteen thirty three,
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  Speaker 2: and from that a real extraordinary change in the structure
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  Speaker 2: of the American economy occurred, with the creation of a
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  Speaker 2: vast number of regulatory institutions and the setting of a
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  Speaker 2: policy direction which emphasized the use of new energy resources.
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  Speaker 2: What Roosevelt had going for him was that at that
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  Speaker 2: time it just had the discovery of major oil fields
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  Speaker 2: in Texas, so that you could focus investment on highways,
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  Speaker 2: in air fields and other activities which used that energy resource.
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  Speaker 1: But suddenly discovering new sources of abundant energy is not
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  Speaker 1: a policy, it's a stroke of luck. So I suppose
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  Speaker 1: my question is that lacking a new source of energy,
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  Speaker 1: lacking another type of natural resource that we haven't really
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  Speaker 1: come up.
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  Speaker 3: You see the way energy.
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  Speaker 1: Moves through the ages, from wood to coal, to oil,
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  Speaker 1: gas or whatever.
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  Speaker 3: Whatever.
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  Speaker 1: Being the question, Nuclip, there isn't another option out there. Realistically,
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  Speaker 1: all we can do is attempt to move to renewables,
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  Speaker 1: and that's, as I say, it's a policy choice. But
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  Speaker 1: it's not the same as finding a new source of
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  Speaker 1: dense energy.
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  Speaker 2: Well, there's the modern situation posses additional difficulties. The fact is,
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  Speaker 2: of course we are today using more coal, using more wood,
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  Speaker 2: we're using more oil, we're using more natural gas than
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  Speaker 2: we ever have in the past. So all of those
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  Speaker 2: things continue to be used even as new sources, as
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  Speaker 2: nuclear power came on, as renewables have come on. That's
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  Speaker 2: the first thing. Secondly is that there is obviously a
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  Speaker 2: climate question which has to be considered in this equation,
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  Speaker 2: and that's a relatively new consideration. But the idea that
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  Speaker 2: you can move from high quality resources to low quality
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  Speaker 2: resources to ones that were what we call the return
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  Speaker 2: learnt on energy invested is not very high. It's a
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  Speaker 2: physical fact. It's a problem, and it has to be
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  Speaker 2: taken into account. It's going to limit how much you
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  Speaker 2: can get out of renewables in the long run. So well,
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  Speaker 2: I'm not, certainly we're not saying that renewables are a
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  Speaker 2: bad idea, but what they have to be looked at
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  Speaker 2: realistically in terms of what they can contribute to the
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  Speaker 2: effective functioning of a competitive economy, of a prosperous economy.
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  Speaker 2: These these problems have to be faced seriously.
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  Speaker 1: Okay, So if global economic organizations and big governments at
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  Speaker 1: the moment accepted the premise of your book and accepted
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  Speaker 1: your ideas, what policy choices would they be making now
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  Speaker 1: that are different the ones that they are making?
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  Speaker 3: Do you think?
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  Speaker 2: I'll offer two big, big thoughts here. One is that
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  Speaker 2: our societies have developed an enormous amount. Well, it's basically
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  Speaker 2: one big thought, if you like, with two aspects of it.
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  Speaker 2: The society has developed a lot of fixed overhead. One
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  Speaker 2: piece of this is the financial sector. It's much larger
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  Speaker 2: than it ever used to be. It absorbs much more
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  Speaker 2: in the way of resources, and adding to the size
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  Speaker 2: of the mass of the financial sector, one now has
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  Speaker 2: the enormous energy resources that are being absorbed by mining
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  Speaker 2: for cryptocurrency. In this kind of thing, we need to
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  Speaker 2: think about whether we can cut back and make that
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  Speaker 2: sector much smaller, much more efficient, and make it serve
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  Speaker 2: the productive sector rather than being the master of the
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  Speaker 2: productive sector. Number two is the question of the military.
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  Speaker 2: We have an enormous overburden of military expenditures. This is
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  Speaker 2: particularly true of the United States, which has the largest
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  Speaker 2: the military expenditure in the world. Much of it invested
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  Speaker 2: in technologies which are now plainly obsolete, and this needs
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  Speaker 2: to be reconsidered in a serious way. How to get
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  Speaker 2: rid of the overburden of the nuclear forces that can
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  Speaker 2: never be used. Of a navy whose technologies were essentially
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  Speaker 2: fixed in the nineteen forties and modestly upgraded since then,
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  Speaker 2: but are now outclassed by new developments. We haven't reconsidered
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  Speaker 2: these things, and we're continuing to pour resources into them,
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  Speaker 2: which could be used more effectively to build up a
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  Speaker 2: prosperous and sustainable society. And until you confront the fact
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  Speaker 2: that you're overinvested in certain things and you can't really
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  Speaker 2: move resources efficiently to where you which should have them.
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  Speaker 1: So, if the US is overinvesting in defents in the military,
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  Speaker 1: which is something maybe you couldn't say about the rest
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  Speaker 1: of the world, where is it under investing Where should
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  Speaker 1: resources be diverted to.
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  Speaker 2: You can look around the United States and find plenty
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  Speaker 2: of places where you could make useful new investments. And
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  Speaker 2: if you look at the need for essentially a reurbanization
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  Speaker 2: and again more efficient use of the energy resources that
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  Speaker 2: we have, and you look at the kind of needs
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  Speaker 2: that the population actually has, then you need to support
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  Speaker 2: a population that is healthy, that is growing, that has
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  Speaker 2: useful employment opportunities. Essentially, one needs to rethink what our
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  Speaker 2: national priorities really are. And this is actually going on now.
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  Speaker 2: You can see that the new administration, the Trump administration,
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  Speaker 2: is clearly rejecting of forty or fifty years so past
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  Speaker 2: priorities are past complacency. But the problem is it also
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  Speaker 2: has a very outdated vision of what direction things should go.
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  Speaker 2: They think they can revive the American automobile industry and
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  Speaker 2: make it into the world leader. And you know, I
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  Speaker 2: think that's a not a realistic view when you compare
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  Speaker 2: what is happening, what the capabilities of the American companies
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  Speaker 2: are compared to those that operate in other parts of
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  Speaker 2: the world, most notably in China at the moment. So
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  Speaker 2: there's a certain naive te associated with this, But the
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  Speaker 2: underlying instinct that things should that priorities should change, is
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  Speaker 2: not wrong.
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  Speaker 1: And why is it not realistic to think that America
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  Speaker 1: can rebuild its automobile industry. And one of the things
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  Speaker 1: that I've seen you talking about is the way that
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  Speaker 1: for example, sanctions on Russia closing Russia down to a
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  Speaker 1: degree allowed it to reinvigorate its economy, and tariffon on
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  Speaker 1: China again semiconductor areas, etc. Given it a way to
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  Speaker 1: revitalize or invigorate parts of it economy. Why would that
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  Speaker 1: not work for the US.
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  Speaker 2: That's an interesting question. Let me talk a little bit
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  Speaker 2: about the Russian case. This is a very clear cut
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  Speaker 2: example of the problem of applying the conventional economic theory
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  Speaker 2: to a practical policy question. The idea, which was very
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  Speaker 2: clearly stated by the policy authorities, was that they could
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  Speaker 2: remove crucial building blocks of the Russian economy through sanctions.
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  Speaker 2: They could take away its financing, they could take away
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  Speaker 2: its technology, they could take away these important Western companies
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  Speaker 2: that were managing things. They could encourage bright young people
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  Speaker 2: to leave the country. And all of this, in fact,
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  Speaker 2: to a degree, actually happened. What they didn't understand was
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  Speaker 2: that they were actually creating the conditions under which Russian businesses,
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  Speaker 2: which in Russia's become basically a business economy over the
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  Speaker 2: past twenty five years, in which Russian businesses could grow
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  Speaker 2: and profit and expand. And so there was a major
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  Speaker 2: shock to the Russian economy that was in fact the
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  Speaker 2: effect of the sanctions. But once that shock was registered,
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  Speaker 2: and once it was clear it wasn't going to go away,
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  Speaker 2: the conditions for indigenous economic growth were extremely good. Resource
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  Speaker 2: prices were low, domestic financing was available, capital could be
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  Speaker 2: bought very cheaply from the exiting firms and then converted
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  Speaker 2: to by domestic producers, and all of that happened. And
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  Speaker 2: the Russian economy has grown I think twice as fast
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  Speaker 2: as the European economy, maybe more than that, in the
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  Speaker 2: last several years, and it's now the fourth largest one
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  Speaker 2: in the world, after only China, the United States, and India.
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  Speaker 2: So now we're seeing that the consequences of the sanctions
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  Speaker 2: policy were exactly the reverse of what was clearly predicted.
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  Speaker 2: And the reason was not that the sanctions were ineffective,
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  Speaker 2: but that they actually were a gift to the Russian
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  Speaker 2: Federation in terms of what it wanted to do. I
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  Speaker 2: think that's an exceedingly clear example. Now in terms of
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  Speaker 2: what the United States might do, I think it would
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  Speaker 2: be much harder in the context of the US to
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  Speaker 2: impose the same strict incentive structures that were imposed on Russia,
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  Speaker 2: although to some degree, restructuring the financial sector, restructuring of
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  Speaker 2: the national security sector, the creationists Trump is clearly doing.
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  Speaker 2: Of trade barriers, relatively low energy prices. These are going
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  Speaker 2: to attract European companies, for example, to invest in the
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  Speaker 2: United States. So a little bit of this is going
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  Speaker 2: to go on, but I'm inclined to think that it
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  Speaker 2: will not have the same let's say, mobilizing effect on
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  Speaker 2: the US because, among other things, we simply haven't got
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  Speaker 2: that kind of spirit in what remains of our major
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  Speaker 2: industrial corporations. They're going to be inclined to say, how
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  Speaker 2: can I profit in the short run and raise their prices,
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  Speaker 2: increase their dividends, diversify, acquire other companies the way oligopolists
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  Speaker 2: tend to do. They will be hesitant to expand capacity
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  Speaker 2: and maybe not capable of moving forward technologically to catch
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  Speaker 2: up with these same industries and other parts of the
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  Speaker 2: world which are now well ahead of them. So I'm
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  Speaker 2: inclined to be a bit pessimistic about the capacity of
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  Speaker 2: American capitalism to achieve the same kind of gains. That's
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  Speaker 2: a pity, unfortunately, but that's the way I see it.
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  Speaker 3: Maybe it'll be pleasantly surprised. Can we talk about that
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  Speaker 3: the near.
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  Speaker 1: Future and where you see the US economy over the
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  Speaker 1: next couple of years. There is a new consensus building
• 18:49
  Speaker 1: everyone at the end of last year having said that
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  Speaker 1: the US would not fall into recession. Now as being
• 18:54
  Speaker 1: economists after economists after economists raise their expectations of the
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  Speaker 1: US being in recession in the relatively short term.
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  Speaker 3: What do you see there?
• 19:05
  Speaker 2: Well, I'm a habitual pessimist, and I think the element
• 19:11
  Speaker 2: of uncertainty at the moment is very high, which tends
• 19:14
  Speaker 2: to work against major long term investments.
• 19:17
  Speaker 3: Here.
• 19:17
  Speaker 2: The problem is that, first of all, this administration it's
• 19:21
  Speaker 2: basically likely to be a one term administration. It could
• 19:24
  Speaker 2: lose control of the Congress in less than two years.
• 19:28
  Speaker 2: The tariffs have been imposed, but or are being imposed.
• 19:32
  Speaker 2: The question is how long will they last. I'm inclined
• 19:35
  Speaker 2: to think that there will be a lot of weight
• 19:38
  Speaker 2: and see amongst the major sources of business investment to
• 19:43
  Speaker 2: see whether the climate that the administration is trying to
• 19:46
  Speaker 2: create will in fact be a lasting one. The President
• 19:50
  Speaker 2: has declared tariffs and then taken them off and clearly
• 19:54
  Speaker 2: using them for short term political purposes. So if I
• 19:57
  Speaker 2: were considering investing a large amount of mone a new
• 20:00
  Speaker 2: productive capacity, I wouldn't be entirely committed to it at
• 20:05
  Speaker 2: this stage. I don't see that kind of rapid transformation
• 20:09
  Speaker 2: that some people are hoping for. Will there be a
• 20:11
  Speaker 2: recession in the short run, I think it's entirely possible.
• 20:15
  Speaker 2: What thing that goes against that is that the household sector,
• 20:18
  Speaker 2: which is the largest part of the American economy is
• 20:20
  Speaker 2: pretty stable, and it tends to continue to do what
• 20:24
  Speaker 2: it does to consume to take out debt when necessary
• 20:28
  Speaker 2: until it can no longer do so. So things can
• 20:31
  Speaker 2: go on for quite a while before this expansion comes
• 20:34
  Speaker 2: to a final end. But we're clearly in what shall
• 20:38
  Speaker 2: we say, I'm certain and even unchartered waters at the moment.
• 20:43
  Speaker 1: Yes, with all that in mind, obviously, one of the
• 20:46
  Speaker 1: things this administration is attempting to do is just cut
• 20:49
  Speaker 1: the size of the state via the Department of Government Expenditure, etc.
• 20:53
  Speaker 3: But with the possibility of.
• 20:55
  Speaker 1: Recession ahead, are you concerned about the US debt marketcerned
• 21:00
  Speaker 1: about the extent of public debt in the US?
• 21:04
  Speaker 3: That can that go on indefinitely?
• 21:07
  Speaker 2: Well, first of all, I don't see that the administration
• 21:10
  Speaker 2: is succeeding so far in reducing public expenditure. They're making
• 21:15
  Speaker 2: all kinds of gestures in that direction and doing a
• 21:18
  Speaker 2: fair amount of damage to existing institutions, regulatory agencies, regulatory
• 21:23
  Speaker 2: structures which will degrade economic performance in the long run.
• 21:27
  Speaker 2: So they're running against their declared objectives with all of that.
• 21:30
  Speaker 2: But that said, so far as I have seen, public
• 21:34
  Speaker 2: expenditure continues to grow. It continues to grow because much
• 21:37
  Speaker 2: of it's on automatic pilot anyway, so that will sustain
• 21:41
  Speaker 2: economic activity. Am I worried about the fact that the
• 21:44
  Speaker 2: Treasury issues debt or pays interest on reserves in order
• 21:48
  Speaker 2: to placate the investment community by giving them bonds that
• 21:51
  Speaker 2: pay interest or other assets that pay interest. No, I'm
• 21:54
  Speaker 2: not worried about that so long as the broader community
• 21:58
  Speaker 2: wants to buy those bonds, which so far there's absolutely
• 22:01
  Speaker 2: no sign that is losing its interest in doing so.
• 22:04
  Speaker 2: And there's no reason why would the United States pays
• 22:07
  Speaker 2: a bill with a check that creates a dollar balance,
• 22:11
  Speaker 2: and the person receives it, if they don't have an
• 22:13
  Speaker 2: immediate use, they like to convert that into an interest
• 22:16
  Speaker 2: bearing asset, so the Treasury issues a bond. This is
• 22:19
  Speaker 2: not itself a problem of sustainability. If things really started
• 22:25
  Speaker 2: going against the dollar, that would show up in a
• 22:28
  Speaker 2: decline in the dollar exchange rate, but we're not seeing
• 22:30
  Speaker 2: that either. In fact, we're seeing that with uncertainty, the
• 22:34
  Speaker 2: dollar tends to rise because other currencies, the euro in
• 22:38
  Speaker 2: particular and I guess the British pound, you know, they're
• 22:41
  Speaker 2: not considered to be a safe so people tend to
• 22:43
  Speaker 2: flee to the treasury bond market because it's large and
• 22:46
  Speaker 2: it's liquid. So again, one can look at the level
• 22:50
  Speaker 2: of interest rates, the long term interest rates, and you
• 22:53
  Speaker 2: just don't see the kind of warning sign that there's
• 22:55
  Speaker 2: going to be a significant decline in the dollar anytime soon.
• 23:00
  Speaker 1: We talked earlier about the US misallocating expandit share and
• 23:04
  Speaker 1: spending two months on military et cetera. When you look
• 23:07
  Speaker 1: at the extent to which the debt interest burden is rising,
• 23:10
  Speaker 1: and obviously this is the case in all high public
• 23:12
  Speaker 1: debt countries that UKNQ did, the percentage of public spending
• 23:17
  Speaker 1: that is going towards debt interest rises and rises and
• 23:21
  Speaker 1: begins to crowd out public services.
• 23:24
  Speaker 2: It doesn't crowd out public expender just adds to it.
• 23:27
  Speaker 2: And what it does is provides income or provides increments
• 23:30
  Speaker 2: to the wealth of the wealthy. So it's a it's regressive.
• 23:34
  Speaker 2: It distributes, redistributes the balance of purchasing power toward people
• 23:40
  Speaker 2: who have capital assets, who hold treasury bonds on away
• 23:44
  Speaker 2: from people who are living hand to mouth on their
• 23:46
  Speaker 2: wages and their salaries. And that is that that's a problem.
• 23:49
  Speaker 2: That is why I don't favor a policy of high
• 23:52
  Speaker 2: interest rates, and I think the Federal Reserve List what
• 23:55
  Speaker 2: has been doing in the last four years is essentially pointless,
• 23:58
  Speaker 2: except that in so far it affected that kind of redistribution.
• 24:03
  Speaker 2: But let's say, does it draw real resources that the
• 24:06
  Speaker 2: government would use for other purposes. No, it doesn't do that,
• 24:10
  Speaker 2: because when the government has other purposes, it simply legislates
• 24:14
  Speaker 2: that they should be achieved and the process moves from there.
• 24:18
  Speaker 3: Are you worried about inflation.
• 24:20
  Speaker 2: Yes, of course I always worry about inflation. The question
• 24:23
  Speaker 2: is what is the cause and what are the policies
• 24:26
  Speaker 2: that are appropriate to maintain reasonable stability in the price level. Well,
• 24:31
  Speaker 2: first of all, what was driving inflation in the early
• 24:33
  Speaker 2: part of this decade twenty one and twenty two was
• 24:37
  Speaker 2: first and foremost the rise in oil prices from the
• 24:40
  Speaker 2: very low base in the middle of the pandemic. That's
• 24:43
  Speaker 2: what drove up gasoline prices and other heating oil and
• 24:46
  Speaker 2: so forth, and fed through into food prices. So dealing
• 24:50
  Speaker 2: with that that was actually done by the Biden Whitehouse
• 24:54
  Speaker 2: when it started selling oil from the Strategic Reserve. That
• 24:57
  Speaker 2: was the anti inflation policy. What the Federal is irve
• 25:00
  Speaker 2: started doing in March of twenty twenty two was basically
• 25:04
  Speaker 2: Eyewash started raising interest rates, the price changes started coming down.
• 25:09
  Speaker 2: In June, three months later, they'd only raised the interest
• 25:12
  Speaker 2: rate by less than a percentage point seventy five business points. Actually,
• 25:16
  Speaker 2: they were basically saying, oh, we're waiving our magic wand
• 25:20
  Speaker 2: we're the ones who were controlling inflation. Didn't have anything
• 25:23
  Speaker 2: to do with it, and they still don't. And now
• 25:25
  Speaker 2: they're caught in a little bit of a dilemma because
• 25:27
  Speaker 2: they thought the inflation had gone away, but of course
• 25:30
  Speaker 2: it hasn't. And the administration, assuming the tariffs go into
• 25:34
  Speaker 2: effect and start feeding through into prices, they're going to
• 25:37
  Speaker 2: see that in the price indices. And then questions was
• 25:40
  Speaker 2: their policy of failure? Was the policy that they've been
• 25:43
  Speaker 2: pursuing for the last three years just a failure And
• 25:46
  Speaker 2: the answer to that is it was neither a success
• 25:48
  Speaker 2: nor a failure. It was just not relevant to the
• 25:51
  Speaker 2: change in the price level. So when you have a
• 25:53
  Speaker 2: price level problem, you need to deal with it with
• 25:56
  Speaker 2: its actual sources, which in our situation, energy prices, the
• 26:01
  Speaker 2: supply chain disruptions, and then some strange things that go
• 26:04
  Speaker 2: on in the housing sector, which I think I won't
• 26:07
  Speaker 2: trouble you with. But thank you are largely statistical.
• 26:12
  Speaker 1: Okay, I've had you for a while now, so I
• 26:14
  Speaker 1: want to move on to the end of your book.
• 26:17
  Speaker 1: Let's go back to the book, and I'm sorry to
• 26:19
  Speaker 1: have to tell listeners.
• 26:21
  Speaker 3: That the last chapter is not hugely optimistic.
• 26:23
  Speaker 1: You described yourself at the beginning as a fairly relentless pessimist,
• 26:27
  Speaker 1: and towards the end you say that human society has
• 26:30
  Speaker 1: become complex, rigid, and fragile, and whether this human society
• 26:35
  Speaker 1: can withstand even relatively small changes in the operating conditions
• 26:39
  Speaker 1: laid down by previous human societies under the earlier conditions
• 26:44
  Speaker 1: is an open question. So your vision of the future
• 26:48
  Speaker 1: of humanity in a warming and greening world isn't particularly
• 26:55
  Speaker 1: happy one, is it. There's a transition period for us
• 26:58
  Speaker 1: that isn't great.
• 27:00
  Speaker 2: No, it's not a terribly happy outlook, because we just
• 27:04
  Speaker 2: apply the same principles to the economics of the household
• 27:08
  Speaker 2: and what we observe. And this is something by the way,
• 27:12
  Speaker 2: that I learned from my students who are perfectly candid
• 27:16
  Speaker 2: about this, is that, first of all, modern households have
• 27:20
  Speaker 2: very large fixed expenses, They have mortgages, they have car payments,
• 27:24
  Speaker 2: they have utility bills, and if they have children, they
• 27:27
  Speaker 2: have a major tuition payments and all of that. And
• 27:31
  Speaker 2: so when they're placed under austerity programs, which they have
• 27:35
  Speaker 2: been in most of the wealthy countries for the last
• 27:39
  Speaker 2: twenty years at least, what do they do. They figure
• 27:42
  Speaker 2: they've got to economize somewhere. And the way they economize,
• 27:46
  Speaker 2: one of the most important ways, is to have fewer children.
• 27:49
  Speaker 2: And so you see and practically every in fact, in
• 27:52
  Speaker 2: every upper income society in the world, under these circumstances,
• 27:56
  Speaker 2: the fertility rates fall, and ultimately population begins to fall.
• 28:01
  Speaker 2: It won't happen in the short run at the global level,
• 28:04
  Speaker 2: because there's still countries in some countries which have large
• 28:08
  Speaker 2: populations of young people, a few countries that have high
• 28:12
  Speaker 2: fertility rates, but it will happen eventually if this continues,
• 28:16
  Speaker 2: and as populations get older, the stresses on young families
• 28:20
  Speaker 2: become even greater, and so you ultimately look at a
• 28:24
  Speaker 2: let's say, a downward spiral. It's very much like the
• 28:29
  Speaker 2: famous statistic r that we all became familiar with in
• 28:33
  Speaker 2: the COVID epidemic when it falls below one, then you're
• 28:37
  Speaker 2: on the happy path toward the end of an epidemic. Well,
• 28:42
  Speaker 2: if you apply that to demography and have the same principle,
• 28:45
  Speaker 2: you're on the unhappy path toward the decline of the
• 28:49
  Speaker 2: species as a whole. So that's something to think about
• 28:52
  Speaker 2: over the long run. But it follows from applying the
• 28:54
  Speaker 2: same principles of entropy economics to this problem and understanding
• 28:59
  Speaker 2: that the households are reacting rationally to the pressures that
• 29:03
  Speaker 2: they've been placed under by austerity minded economists who are
• 29:08
  Speaker 2: trying to implement their traditional theories.
• 29:12
  Speaker 1: And the other thing that may bring us to a
• 29:14
  Speaker 1: smaller population that you mentioned again was the end of
• 29:16
  Speaker 1: the book, is the fragility of our food production food security.
• 29:20
  Speaker 1: You talk about how as high quality fossil fuel resources
• 29:23
  Speaker 1: are depleted, the industrial basis of food production will decline.
• 29:26
  Speaker 1: And again, if you weren't going to have a fewer
• 29:29
  Speaker 1: babies now, you certainly have fewer babies once you see
• 29:31
  Speaker 1: that food is no longer available in the same way
• 29:33
  Speaker 1: that it was previously.
• 29:35
  Speaker 2: Yeah, I think that's right essentially.
• 29:36
  Speaker 3: Yes, Okay, that's not a happy future. Is there any
• 29:40
  Speaker 3: way that we can head this off?
• 29:43
  Speaker 2: Well, The first thing you have to do is recognize
• 29:46
  Speaker 2: realistically the situation that we're in. Always the first thing
• 29:49
  Speaker 2: to do was to change your thinking. You can change
• 29:52
  Speaker 2: your thinking and confront a problem rather than in this
• 29:55
  Speaker 2: constant state of denial about it, then at least you
• 29:58
  Speaker 2: have a fighting chance. If you can't do that, then
• 30:02
  Speaker 2: you are constantly going down and doubling down on the
• 30:05
  Speaker 2: same path. Sanctions didn't work, Let's have more sanctions. Austerity
• 30:09
  Speaker 2: doesn't work, Let's have more austerity. Balance in the budget. Well,
• 30:13
  Speaker 2: we never quite got there. Maybe if we cut taxes
• 30:15
  Speaker 2: and spending even more, we'll get there. Get rid of
• 30:17
  Speaker 2: government altogether. And you're basically putting everything into a spiral
• 30:22
  Speaker 2: of decline. And our argument is that is not the
• 30:27
  Speaker 2: way any successful system develops. So successful systems develop on
• 30:34
  Speaker 2: the basis of realistic plans. And every business knows this.
• 30:38
  Speaker 2: This is not news to business people.
• 30:41
  Speaker 1: So we should start with less magical thinking from governments.
• 30:44
  Speaker 1: But James, in an environment like this, what is an
• 30:47
  Speaker 1: investor to do?
• 30:50
  Speaker 2: I first of all deny any competence to give investment advice.
• 30:55
  Speaker 3: But none of us have any I will tell.
• 30:57
  Speaker 2: You that in nineteen eighty seven day the stock market
• 31:01
  Speaker 2: fell by thirty percent. I called my father, who of
• 31:04
  Speaker 2: course is the author of a great book on the
• 31:07
  Speaker 2: on the called the Great Crash in nineteen twenty nine,
• 31:10
  Speaker 2: which has been in print continuously since nineteen fifty five.
• 31:14
  Speaker 2: And it was hard to get through. But around nine o'clock,
• 31:18
  Speaker 2: I mean he'd finished dealing with all the reporters that
• 31:21
  Speaker 2: the stock market had fallen thirty percent. Said. I heard
• 31:25
  Speaker 2: his voice. He said, James, is that you sides? There
• 31:28
  Speaker 2: was a pause. He said, not to worry. I've been
• 31:30
  Speaker 2: in cash for three weeks. And then there was another pause,
• 31:35
  Speaker 2: and I thought things were the mood was about to change,
• 31:39
  Speaker 2: which was not wrong. And then he said, but I'm
• 31:42
  Speaker 2: sorry to say that. The same cannot be said of
• 31:45
  Speaker 2: your mother. She finds it very difficult to sell the
• 31:48
  Speaker 2: General Electric that her family bought from Edison for a dollar.
• 31:53
  Speaker 2: So any event, you can read my investment advice into
• 31:58
  Speaker 2: that anecdote. Don't be like my mother, be like my father.
• 32:03
  Speaker 2: But that is to say, if you don't, if you're
• 32:05
  Speaker 2: not holding the capital gains for too long, too much
• 32:09
  Speaker 2: of the tax burden, in which case you're like my
• 32:12
  Speaker 2: mother and you're.
• 32:13
  Speaker 3: Stuck and you're stuck. Interesting. Thank you.
• 32:16
  Speaker 1: One final question before I let you go and say,
• 32:19
  Speaker 1: I know I have run over, and I apologize earlier.
• 32:22
  Speaker 1: I sense a little note of disparagement in your voice
• 32:28
  Speaker 1: when you said about the amount of energy used in
• 32:32
  Speaker 1: crypto mining, and feeling that you're not a fan.
• 32:36
  Speaker 2: You're right, I'm definitely not a fan. I see this
• 32:39
  Speaker 2: as a device for undermining the legitimate control that government
• 32:45
  Speaker 2: should exercise over their own monetary systems, and I think
• 32:49
  Speaker 2: that's partly the purpose is to provide a completely insulated,
• 32:54
  Speaker 2: opaque way to make transactions in defiance of legitimate public
• 33:00
  Speaker 2: purpose control of first of all, taxation, control of capital
• 33:04
  Speaker 2: flows in the countries that have capital controls. I think
• 33:07
  Speaker 2: there's nothing but trouble to be expected from that in
• 33:10
  Speaker 2: the long run.
• 33:11
  Speaker 1: James, thank you so much for joining us today. Hugely
• 33:13
  Speaker 1: appreciate it.
• 33:14
  Speaker 2: Oh that's great. I joined it enormously. Thank you very
• 33:17
  Speaker 2: very much.
• 33:24
  Speaker 3: Thanks for listening to this week's Marin Talks Money.
• 33:26
  Speaker 1: If you like us, show, rate, review, and subscribe wherever
• 33:28
  Speaker 1: you listen to your podcasts. We're off next week for
• 33:31
  Speaker 1: the Easter break, but we'll be back in two weeks.
• 33:33
  Speaker 3: Check out any episodes you have missed.
• 33:34
  Speaker 1: In the meantime, I strongly recommend my conversation with author
• 33:38
  Speaker 1: and economist David Williams about his book Money, The Story
• 33:41
  Speaker 1: of Humanity and how the evolution of currency is central
• 33:44
  Speaker 1: to the rise and fall of civilizations. Don't forget to
• 33:48
  Speaker 1: keep sending questions or comments to Merror Money at Bloomberg
• 33:51
  Speaker 1: dot net. You can also follow me and John on
• 33:53
  Speaker 1: Twitter or x. I'm Maren s w and John is
• 33:56
  Speaker 1: John Underscore Stepic.
• 33:58
  Speaker 3: This episode was hosted by Me Mary in Somerset Web.
• 34:01
  Speaker 1: It was produced by Somersadi and Moses and sound designed
• 34:04
  Speaker 1: by Blake Maples and special thanks of course to James Galbraith.