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The real crisis isn't debt. It's something worse — Transcript

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0:00Recently, at Jackson Hole, like happens
0:02every year, the chairman of the Federal
0:04Reserve, the president of the European
0:06Central Bank, of all the various
0:08large-scale,
0:09substantial G7 central bankers were
0:12there, monetary experts, economists of
0:15note. And you can see from the pages of
0:17the Financial Times, of the New York
0:18Times, even the Wall Street Journal, you
0:20can see that there is a North Atlantic
0:23liberal consensus on monetary and fiscal
0:24policy. What I want to do
0:27I want to take it apart. Now, here I
0:29think that, you know, Wolfgang, you may
0:32agree with
0:33with parts of that consensus which I
0:36shall vociferously challenge. Let me
0:39explain the triptych, the three elements
0:41of that consensus which I want to look
0:43at. First, the notion the United States
0:45may soon be facing a debt crisis. It's
0:47something you've been saying too,
0:49Wolfgang. You You did We did discuss
0:52this last week, but I want to come back
0:53to that. There is no doubt that we need
0:56to interrogate the often-made assumption
0:59that nations like the United Kingdom,
1:01like the United States, nations that
1:03borrow in a currency that they issue
1:05cannot go bankrupt. That is not
1:07strictly speaking true. If, like in the
1:09United Kingdom in the 1970s, there is a
1:12run on the currency due to, let's say, a
1:14large current account surplus, which of
1:16course the United States is the world
1:17champion in, well, sure, things may
1:20spiral out of control as we discussed
1:21last week. Interest rates will be raised
1:23to arrest the falling value of the
1:25dollar, the debt mountain, because the
1:28interest rates are going up, get taller.
1:30This may push interest rates further up.
1:32That may cause a
1:34mighty recession. So, yes, this is a
1:37plausible scenario. But let me explain
1:40why I don't buy it. The United States,
1:42from where I'm standing, remains what I
1:44have called many, many years ago the
1:45global minotaur. Our audience may
1:47remember the Cretan mythical beast which
1:50was nourished, was
1:52fed by subdued foreigners that were
1:55sending tribute to Crete to feed it.
1:57Athenians mainly sending their young
1:59ones to be devoured by the beast. Well,
2:02this is my allegory for the United
2:04States twin deficits that get nourished,
2:06fed by foreign tributes of capital, by
2:09the profits of the rest of the world's
2:11capitalists.
2:12Now, if the rest of the world's
2:14capitalists can do something else with
2:15their dollar profits, yes, a debt crisis
2:19may hit the United States.
2:21Except the rest of the world's
2:22capitalists don't have anything else to
2:23do with their dollars. Europe offers no
2:26safe asset as you know I have been
2:28saying now
2:29well before we created the Econvlass,
2:31and there won't be one. It's not on the
2:34horizon as we discussed many times.
2:36China doesn't want to inherit
2:39the reserve currency status from the
2:41dollar
2:42because they know in Beijing that this
2:44status comes at a price.
2:46At the price of deindustrialization, of
2:49hollowing out its own productive
2:50economy.
2:52So, you know, that's why the Chinese
2:53keep their
2:55about $5 trillion in dollars. The rise
2:58of the United States dollar denominated
3:01cryptocurrencies as we you and I have
3:04discussed before again in this program,
3:06in this podcast. Well, that boosts the
3:09global minotaur further. It feeds it
3:11further.
3:12So, there is no
3:13American debt crisis on the horizon as
3:15far as I'm concerned. Well, that's not
3:16necessarily a good thing because while
3:19there is no debt crisis, all sorts of
3:20other crises are piling up. But now I'm
3:23going to move on to the second part of
3:25my triptych about the transatlantic
3:27North Atlantic
3:28consensus. The notion that the United
3:30States must boost interest rates, that
3:33the Fed must increase interest rates to
3:35contain inflation.
3:37And
3:38moreover, and perhaps more importantly,
3:41to re-establish the Federal Reserve's
3:44credibility vis-a-vis President Donald
3:46Trump who is bullying them to push
3:48interest rates down. Now, underpinning
3:50this view that the Fed must establish
3:52its credibility for fighting inflation
3:54by raising interest rates. Underpinning
3:57this view is the belief that inflation
3:58expectations are inflamed and they're
4:01eating into the foundations of the Fed's
4:03credibility. Well, I've been looking at
4:05some numbers in the last few days and I
4:08have to conclude that this is simply not
4:10so.
4:11If you look at the inflation swaps
4:12market,
4:13well, they show that inflation
4:15expectations, at least market
4:17expectations, are smack on the 2% target
4:20of the Federal Reserve.
4:22And it this happens across the whole of
4:24the forward curve.
4:26So, in short, the money markets seem to
4:28think that the Fed will hit its
4:30inflation target. I'm not saying it
4:32will. What I'm going to say is that the
4:34money markets seem to think so. Of
4:35course, then the question is why are
4:3730-year Treasury yields inflated?
4:40Why are they going up? Well, my view is
4:42that this is happening because of a
4:43combination of two factors, two things.
4:46On the one hand, big tech is borrowing
4:48as if there's no tomorrow, draining the
4:51credit that is available to the rest of
4:53the economy, to the material economy, to
4:55the analog economy, if you want.
4:57And this is what is pushing the real
4:59interest rate component of the actual
5:01interest rate of the United States
5:04upwards.
5:05And then there's a second factor. Money
5:06market pundits anticipate much higher
5:09growth rates reflecting the AI boom.
5:13If I'm right,
5:15I don't have to be right. If I'm right,
5:17if the Fed raises interest rates in
5:19these circumstances, so that, let's say,
5:22Wars proves to the Financial Times and
5:25to the New York Times that he is his own
5:26man and he's not a straw man put there
5:29by Donald Trump to do Donald Trump's
5:31bidding on interest rates. Well, if that
5:34happens and interest rates are raised
5:36now, this will wreck what is left of the
5:38Americans material production sectors.
5:40And if you look at Americans manufacture
5:42American manufacturing, the tariffs
5:45didn't really stop the bleeding there.
5:49They had some effect, but not so much of
5:53a
5:54statistically significant one. Raising
5:56interest rates is going to do to
5:58American manufacturing, what is left of
6:00it,
6:01uh what Paul Volcker's interest rates
6:03did in the early 1980s. Yes, they tamed
6:06inflation, but they effectively wrecked
6:08the production foundation of the
6:11American economy.
6:12Okay.
6:13And now
6:16onto the third part of my triptych.
6:18And Wolfgang, this is
6:20right down your alley, because it's your
6:22favorite dictum. And that is the notion
6:24that Europe's inability to convert
6:26Europe's massive savings into productive
6:28investment
6:29is to large extent due to the lack of a
6:31unitary common capital market, what you
6:34call a capital union.
6:36A capital markets union. Now, a capital
6:39markets union would be good to have. I'm
6:40not against it.
6:42And I have no doubt that the lack of
6:44European capital union, which is due to
6:46the fact that European governments have
6:48still not managed to federate their
6:50money markets,
6:52exactly for the same reasons that they
6:54have not federated their public debt.
6:57Huh?
6:58This lack of a capital union is
7:01symptomatic of Europe's central malaise.
7:05We seem to want the benefits of federal
7:07money without the responsibilities that
7:10go with these benefits. In particular,
7:11our governments, our politicians do not
7:13want to lose control. Control of all
7:16those instruments which they use on
7:19behalf of the national ruling classes.
7:22However,
7:23be that as it may,
7:25even if you had, you, Wolfgang Münchau,
7:28Wolfgang, if you had a magic wand, and
7:31you waved it to create a European
7:32capital union,
7:34I don't think it would help convert
7:36Europe's massive savings into productive
7:38investment. Oh, well, look at the United
7:39Kingdom.
7:40The United Kingdom does have almighty
7:43unified capital market. And yet, it is
7:46just as awful at converting available
7:49liquidity into productive investment.
7:52The same, I would say, about the
7:54American uber super hyper capital
7:56markets, Wall Street. Yes, of course
7:58they are
8:00supremely capable of channeling oceans
8:01of cash to banking and to big tech,
8:04especially big tech these days.
8:06Okay, but Wall Street cannot finance
8:08material production,
8:10the sectors that generate serious jobs
8:11for the many. This is why the United
8:13States cannot finance the manufacturing
8:15of trains,
8:16fast trains, of ships, of batteries, of
8:19decent cars even. Why? Because of what I
8:21call the rent trap. So, what do I mean
8:24by a rent trap? It's simple.
8:26When
8:27growth
8:29within a competitive market system
8:32drives profit rates in the industrial
8:34sectors down due to competition,
8:37a rent-yielding property becomes much
8:40more attractive to investors seeking the
8:42greatest risk-weighted return. Capital
8:44markets, especially if you have a
8:45unified and work well as you want them
8:47to,
8:48then ensure that more wealth chases
8:50rents,
8:51that asset prices rise,
8:54and that wealth moves from industry to
8:56the rentier sector faster. And I include
8:58AI as part of that rentier sector. The
9:01way that AI is practiced in the United
9:03States, which is not channeled into
9:05productive activities, into the material
9:07production of things unlike in China, as
9:09we were saying I was saying last week.
9:11So, the only thing that can help avoid
9:12the rent trap
9:14is collective agency, either in the form
9:16of Franklin Roosevelt's New Deal that
9:19directed investment into job-creating
9:21things society actually needed,
9:23or some war or a military-industrial
9:25complex that gets the state to mobilize
9:28productive capital in destructive, but
9:30also productive ways,
9:32or maybe a large public investment bank
9:36that works as a sponge removing
9:38liquidity from the rent trap and
9:41redirecting that liquidity into material
9:43production. The markets [clears throat]
9:44on their own are not going to do that.
9:46To sum up and to rest my case, no, the
9:49Fed should not increase interest rates
9:51to contain inflation. No, the United
9:53States is not facing a debt crisis. And
9:55no, Europe's woes will not diminish if
9:58we miraculously create a capital union.
10:01Our North Atlantic economies are in a
10:02serious deep crisis,
10:05but not because of American not because
10:07interest rates in the United States are
10:09too low
10:10or because we don't have a capital
10:12markets union.
10:13We have a monetary but we don't have a
10:15capital markets union in Europe. It is
10:17so
10:18deeply in trouble
10:20because our economies are languishing in
10:22an iron clad rent trap.
10:25Just after the end of the Soviet Union,
10:27Fredric Jameson wrote that for many
10:30[music] it had become easier to imagine
10:31the end of the world than to contemplate
10:34the end of capitalism.
10:35>> Well, Yanis and I will be doing exactly
10:37that for the Iconoclast live at the
10:39Unheard Club on the 18th of September.
10:42We'll be stripping away mainstream
10:44delusions to ask is free market
10:46capitalism dead? And if so, what comes
10:49next?
10:49>> Because this is an intimate recording at
10:51the Unheard Club, tickets are extremely
10:52limited, folks.
10:53>> So, don't wait. Go to
10:55unheard.com/iconoclasts
10:59live.
11:02>> Okay, now we we have a disagreement
11:04because I think yes, the Fed should
11:05increase interest rate and I believe
11:07yes, the US has a debt problem and I
11:09believe yes, the EU would be much better
11:11off with a capital markets union. So,
11:13let me let me
11:15you know, put those arguments
11:16specifically. I think you overstate the
11:18degree of consensus about the monetary
11:20financial system, the transatlantic
11:22consensus. We had a strong one around 25
11:25years ago around the creation of the
11:26euro, a very strong consensus to do with
11:29developments in in macroeconomics. The
11:32you know, the conversions of of views
11:34within the macroeconomics community on a
11:36new paradigm for
11:38monetary policy, for how the interaction
11:40of, you know, money, interest rates, and
11:43growth is working. And that informed our
11:45modern economic policy to to a very
11:48significant extent. Monetary and fiscal
11:50policies were separated. The central
11:51purpose of monetary policy was to keep
11:54mostly focused on on inflation, keep
11:56inflation
11:57stable. Central banks adopted inflation
11:59targets. Governments didn't use fiscal
12:01policy for for fine-tuning. It
12:03They were used it for medium-term
12:05targets.
12:06And for and and introduced,
12:08you know, stimulus during the severe
12:10crisis. That was sort of the consensus
12:11that that that everybody back in those
12:14days, even the Germans who were sort of
12:16pretty much out of consensus in the in
12:17the in the era before, kind of accepted.
12:20Today, I think it's much more much more
12:22broad. We're seeing the central banks
12:23are all slipping on their 2% inflation
12:25at zero. We haven't got 2% of inflation
12:27anywhere. I would think that the action
12:28of central banks pretty consistent with
12:30inflation in the region of 3 to 4%. So,
12:32that's already very significantly
12:34different. And central banks have made
12:35it, you know, in their action, not in
12:37their words, but in their action, made
12:39very clear that they're not willing to
12:40pay the price
12:41of pushing inflation below, because that
12:43would have required significantly higher
12:44interest rates for longer. On this
12:45point, I agree with you, it would have
12:47it would have had an effect on the
12:48economy
12:49as it did in the 1980s. I believe that
12:51is the right thing to do in the long
12:53run. It It has a short-term cost. On
12:55this point, we disagree. But that's, you
12:57know, I think this is sort of a fact in
12:58America in particular. You know, people
13:01hate inflation. You know, especially
13:02working-class people hate inflation,
13:03because these days they they get screwed
13:06by this. This used to be different when
13:07when it was middle classes who hated
13:09inflation and the workers loved loved
13:11inflation, because it just gave because
13:13they could compensate their wages
13:14through the roof, you know, trade union
13:16wage claims. That is no longer the case.
13:17So, the lower, especially if you're in
13:19the working the gig economy, I mean,
13:20your
13:21your salary is fixed. If there's
13:22inflation, you can no longer afford to
13:24buy the foods you bought yesterday. So,
13:25you see a very significant shift of
13:27views that on which a lot of classical
13:30economics is based about, you know, the
13:32distributional effects of inflation.
13:33Then, I believe the US is facing a debt
13:35crisis because the Trump administration
13:38but Biden administration previously
13:39before you know, increased the annual
13:41deficit beyond of what the the very
13:44strong American growth rates would
13:46justify. That will, you know, lead to a
13:49gradual increase in in debt servicing
13:51costs. Let's just forget these debt to
13:53GDP levels. These are just metrics
13:55people use, but it's debt servicing
13:57costs. And debt servicing costs in the
13:58United States have exceeded the defense
14:00budget. And pressure will grow on the
14:02central banks to fund fiscal fiscal
14:04deficits and they will do so through
14:06lower interest rates, through
14:08debt purchases, QE. We're going to get
14:10into a situation where the government
14:12takes on more and more debt and
14:14has the central bank fund it funding it.
14:17And people on low incomes will have
14:18ultimately have to pay the bill. The
14:19idea of poorer people working in
14:21factories on which the old model was
14:23built is just no longer true. Poorer
14:24people don't work in factories. People
14:26who work in factories, these are quite
14:27well off. Which brings me to the third
14:29point on capital markets. I don't think
14:31the capital markets union is magic, but
14:33you know, I you know, I've
14:35I've spent a lot of time on the German
14:36economy, what what is what's going wrong
14:38in Germany specifically.
14:40And one of the things I found is a giant
14:42amount of capital misallocation. And
14:45that works through the banking sector.
14:47The banking sector
14:48shifts money to
14:50existing customers essentially.
14:52Essentially the car industry, the
14:53chemical industry, and mechanical
14:54engineering industries.
14:56They have this this relationship
14:57banking. And the capital market would
15:00would end this cartel between and large
15:02industrial companies like Volkswagen and
15:05Mercedes
15:06and the banks and open it to new
15:09entrants. And that's what happens in
15:11Germany. Germany is in many way the kind
15:13of economy that you seem to like because
15:15they are putting money into
15:16manufacturing industries, but they're
15:18putting it in the wrong sectors. The
15:20Chinese were smart. They picked the
15:22right sectors, but the Germans picking,
15:24you know, fuel-driven cars, chemical
15:27processes, and steel making. And that
15:30isn't the sectors that they should have
15:32picked. What we're seeing in Europe is
15:34we have misallocation in Europe. And if
15:36you if you let the banking system make
15:38the decision, you are ending up with a
15:41with a current kind of death trap, that
15:43spiral of low innovation, capital
15:46misallocation, and a surplus in savings
15:48that the ultimate is invested abroad
15:51because that's where the where the
15:52opportunities lie. So, that's why I
15:54think the capital markets union is quite
15:56quite important to actually end this
15:58trap. Now, I agree that it is not
16:00sufficient. I would not claim that this
16:03is a magic bullet. I don't think it can
16:05happen without it. I don't think you you
16:07can fix Europe's problems without a
16:08capital markets union. I would go so far
16:10that I don't think it's even worth
16:11discussing fixing the problem. All this
16:12stuff about the Draghi report. Draghi's
16:15most important statement was 800 billion
16:17in annual investments by the private
16:20sector, 800 billion. Except, the banking
16:22system cannot deliver this. You need a
16:23capital markets union to deliver this.
16:26And yes, in order to deliver the 800
16:28billion investments, you need more than
16:29a capital markets union. You need a
16:30different regulatory environment. You
16:32need to allow people to do what they
16:34want to do. Would that be AI? Yeah, I
16:36think it would would include AI. And I
16:38think it so it should. And yes, I agree
16:40it can be a bubble. I have no idea
16:42whether the AI investment boom is a
16:44bubble or whether it's a sensible
16:45investment into the biggest productivity
16:48enhancing technology in human history.
16:50It would, you know, have enormous effect
16:53on on the lives of some people. And I'm
16:55sure I'm sure there will be lots of
16:56losers in this in this thing. And we
16:58should our policies probably be be
17:00focused on this. I would, however, not
17:02try to prevent this because the question
17:04is either we do we forge this industry
17:07in our on our terms or we let, you know,
17:10your American friends do this all by
17:12themselves. And that's the situation,
17:14unfortunately, that we have right now.
17:16>> Well, I'm very glad we had this
17:18conversation because, you know, it puts
17:20a puts a bee in our bonnets and I think
17:22that our our audience likes it when we
17:24disagree. So, let me codify before we
17:27end for today our disagreements. Three
17:30are the my main disagreements. Firstly,
17:32you said that Paul Volcker's
17:3520-21% interest rates in the early 1980s
17:38were tough medicine and that you agreed
17:40with that. Where I do disagree is what
17:43when you added that there were
17:45short-term costs to Volcker's high
17:47interest rates. I don't think so. I
17:49think that he nuked American industry.
17:52And, you know, if you're worried about
17:54America's debt,
17:56then you you can't be worried about
17:57America's debt and believe that Paul
18:00Volcker's high interest rates were
18:03benign in the long term because they
18:05weren't. By depleting American industry
18:08and effectively, as I said, nuking it,
18:11it created the circumstances under which
18:12Wall Street became the recycler of other
18:15people's money. It was the twin deficits
18:17of the United States that kept America
18:19increasingly hegemonic while its
18:21industrial
18:23foundation was being diminished.
18:25So, the debt that you are worried about
18:28is a direct repercussion of the
18:30vandalism that Paul Volcker enacted in
18:33order to kill off inflation. We have no
18:35disagreement on the question of whether
18:37inflation is a bad thing. Of course,
18:38it's a bad thing. The question is,
18:40do you make a bad thing worse by nuking
18:43the industrial basis or do you find
18:44another way of taming inflation? I think
18:46there are other ways. We can have a
18:48discussion later on. The other the other
18:50two, you know, if let's say that Volcker
18:53does increase interest rates now, well,
18:55he's not going to tame inflation.
18:58Yeah, not necessarily because, you know,
19:01at the moment the United States and
19:02Europe we're facing cost-push inflation.
19:04Well, it's it's energy primarily.
19:07Now,
19:08you know, that's
19:09Donald Trump [clears throat] shouldn't
19:10have started the war in Iran. We should
19:12not have
19:13continued with a war in Ukraine
19:16purchasing LNG imported from New Mexico
19:19and and and from Texas at eight times
19:23the price that we used to get our
19:24natural gas from Russia.
19:26Or we should have had had invested like
19:29the Chinese have done in renewables.
19:31There are other ways of dealing with
19:33interest rates. If you raise them now,
19:35you are simply going to make a bad thing
19:37worse when it comes to the Midwest, the
19:40north of England, you know, the the
19:42heartlands of the Middle Stand in
19:44Germany. Finally, when it comes capital
19:46markets, look at you and I don't
19:48disagree. It would be a good thing to a
19:50good thing to have.
19:51But to think that a capital markets
19:53union would on its own deliver some
19:57salvation from the misallocation of
19:59resources. To some extent, I agree with
20:01you because yes,
20:03in in Germany, in particular in Germany,
20:04but also in France, there is a banking
20:06cartel.
20:08And they are picking losers.
20:10You know, old technologies as you put
20:12it. But what would a capital markets
20:14union do if you said something like
20:17allow people to do what it's people
20:19don't have that much money. It's very
20:21few people have tiny minority have a lot
20:22of money. And they are going to use the
20:25capital markets union in order to invest
20:28in rent yielding assets. And that will
20:32drive us straight into the embrace of
20:35the rent trap. And this is not going to
20:36help. It didn't have the United Kingdom.
20:38It did it doesn't help the Midwest in
20:41the United States. Now, finally, you and
20:44I love AI. I
20:47can't live without. I declare this for
20:50all to to hear and to chastise me if you
20:52want.
20:53But the way that uh Big Tech in the
20:56United States, Silicon Valley is
20:57applying it is catastrophic. It yields
21:01techno-feudalism as I've put it in a
21:02book. Whereas the way the Chinese are
21:04doing it, they're They're it in order to
21:05create stuff, stuff that people need.
21:08So, it's not a question of whether AI is
21:10a great thing or not. It is a great
21:11thing. The question is how do does the
21:14rent trap of the North Atlantic
21:17economies combine with a particular
21:19model of AI, which is not meant to
21:22improve our lives, but it is simply
21:23meant to maximize the cloud rents of
21:26very, very few tech lords. Anyway, we
21:28are going to be coming back to this
21:30again and again, and I believe that you
21:32and I are going to be soon live at the
21:35UnHerd Club. Maybe we can discuss this
21:37as well because
21:38we're going to be talking about folks,
21:40this is for your
21:41information. We're going to be talking
21:43about what comes after capitalism.
21:45So, you know, we can we
21:47I'm sure we will come back to these
21:49questions, Wolfgang.
21:52>> I think the question of what comes after
21:53capitalism is kind of one of the
21:55dominating theme of our of of our entire
21:57podcast. And I will also greatly look
22:00forward to our discussion at the UnHerd
22:02Club. So, folks, this is it for today.
22:04Until next week.
22:06>> And don't forget to rate, like, and
22:08subscribe to The Great Transition.

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