Speaker 1: Bloomberg Audio Studios, Podcasts, Radio News.
Speaker 2: Welcome to Merin Talks Money. The podcast so much people
Speaker 2: who know the markets explain the markets. I'm Meren Sum's
Speaker 2: that web. This week, I'm speaking with Felix Martin. He's
Speaker 2: an economist, he's a fund manager, he's an author. He
Speaker 2: was educated in the UK, in Italy, and in the US,
Speaker 2: where he was a Fulbright scholar. He's got degrees in classics,
Speaker 2: in international relations and in economics. He has worked at
Speaker 2: the World Bank, and he has worked in several different
Speaker 2: fund management companies. Crucially, he's also an author of a
Speaker 2: book called Money, The Unauthorized Biography, and that's in part
Speaker 2: what we're going to talk about today. It was published
Speaker 2: more than ten years ago, but I'm afraid it is
Speaker 2: more relevant than ever today. We talk about that, we
Speaker 2: talk about modern monetary systems, ancient monetary systems. We don't
Speaker 2: have time to go into everything I would have liked to,
Speaker 2: so where I really would urge you to get the
Speaker 2: book and when you get it, read the story of
Speaker 2: the Money of Yapp and definitely read about the Bank
Speaker 2: of England and Tally Stones. We are going to talk
Speaker 2: about a variety of other things, Felix, welcome to Merin
Speaker 2: talks Money.
Speaker 3: Well, thank you very much for having me, Marin, it's
Speaker 3: a pleasure.
Speaker 2: Well you'll find out, won't you. Maybe it will be,
Speaker 2: maybe it won't be. Now, you are not the first
Speaker 2: person to write a book called money, although everyone has
Speaker 2: a different subheading, but yours I got to say it.
Speaker 2: It's particularly good, and I do recommend it to everybody listening.
Speaker 2: Go up by this book. You think it's just about money,
Speaker 2: but that's because you don't really understand what money is.
Speaker 2: It's really a very granular history of pretty much everything
Speaker 2: you've ever thought of. So I think what I want
Speaker 2: to do, Felix, is start by asking you what exactly
Speaker 2: it is that money is, and what is the big
Speaker 2: mistake that people make when they think about the nature
Speaker 2: of money? Going through your book through the way that
Speaker 2: you think, there are two things to think about money,
Speaker 2: what money actually is and who should control money, manage money,
Speaker 2: manipulate money, and for whose benefit? Right, So there's two
Speaker 2: parts to the story of money, but you can't talk
Speaker 2: about the second unless you've really got a good grip
Speaker 2: of the first.
Speaker 3: Absolutely right, you did an excellent summary, Marion. What can
Speaker 3: I say and thank you very much, indeed for those
Speaker 3: very generous words. I also, of course urge everyone to
Speaker 3: go out and get a copy and they'll have a
Speaker 3: more comprehensive version. And I'll give here the basic story
Speaker 3: which I try to tell in the book, which I
Speaker 3: think is very important, is that what I call a
Speaker 3: conventional view of money and its history, this is the
Speaker 3: one that you can find in every sort of children's book,
Speaker 3: and it's the one that's sort of ingrained in people's minds,
Speaker 3: is wrong. That conventional story is that in the beginning
Speaker 3: there wasn't any money, and people just started with each other.
Speaker 3: You know, I had fish and you had corn, and
Speaker 3: in order to exchange with one another, you had to
Speaker 3: want my fish and I had to want your corn,
Speaker 3: and in fact we had more than the same time
Speaker 3: as well, what economists call a double coincidence of wants,
Speaker 3: and otherwise no trade could take place. And that's all
Speaker 3: terribly inefficient. And therefore, at some point in the distant past,
Speaker 3: probably a different times, in different places, somebody come up
Speaker 3: with a bright idea, which is, why don't we choose
Speaker 3: one particular sort of commodity to serve as a so
Speaker 3: called medium of exchange, that is to say, something which
Speaker 3: people don't want for its own sake, but just so
Speaker 3: that it can be used to settle and liquidate exchange.
Speaker 3: And that basically was the invention of money. And typically
Speaker 3: it was precious metals that were chosen for this use
Speaker 3: because they've got lots of nice properties when they last
Speaker 3: for a long time, and so and so forth. That
Speaker 3: was the invention of coinage. And then people had an
Speaker 3: even better idea, which is why didn't we start lending
Speaker 3: and borrowing this money commodity? And that was the invention
Speaker 3: of credit. And then even later in that there were
Speaker 3: institutions that were built up which specialized in organizing credit,
Speaker 3: and those were banks. That was the invention of banking.
Speaker 3: That's the kind of conventional history that you find throughout
Speaker 3: literal money, and it's the way that a lot of
Speaker 3: people think about it, but it basically has it all
Speaker 3: completely the wrong way round. In reality, money is a
Speaker 3: system of ideas. It is the institution of credits and debts.
Speaker 3: It is the various technologies which have been developed and
Speaker 3: deployed for recording credits and debts and for transferring credits
Speaker 3: and debts from one person or one company to another.
Speaker 3: It's therefore basically a set of ideas and institutions. I
Speaker 3: don't mean that in a sort of wooly sense. There
Speaker 3: are very specific ideas which are extremely important in the
Speaker 3: development of money and which really constitute what it is
Speaker 3: to live in a monetary society. The most important one
Speaker 3: of these is the monetary standard, the standard unit economic value.
Speaker 3: Monetary value is the key concept in money. It hasn't
Speaker 3: always existed in human history. It is an idea, a
Speaker 3: concept of value, which was invented at a certain point
Speaker 3: in time and has been developed. Most concepts of value
Speaker 3: don't have standard units. So esthetic value or religious value,
Speaker 3: all kinds of different measures of value that we talk about,
Speaker 3: but they don't have standard units. You can't enumerate the
Speaker 3: esthetic value or the religious value of something. But the
Speaker 3: monetary value, the economic value of things, what distinguishes it
Speaker 3: has a standard unit. Just like physical concepts like length
Speaker 3: and weight and so on, they have standard units kilogram,
Speaker 3: a meter and so on, and this is what The
Speaker 3: standard unit in money is, something like a dollar or
Speaker 3: a pound or a euro. And that's incredibly important and
Speaker 3: the key questions around which all of monetary history revolve,
Speaker 3: and you alluded to this at the beginning, are what
Speaker 3: is that monetary unit, what does it actually mean in
Speaker 3: real terms, what do you get for it? And who
Speaker 3: gets to decide today? The answers to those questions for
Speaker 3: something like the pound sterling are that we define a
Speaker 3: pound sterling according to the rate of change of prices
Speaker 3: for a particular basket of goods and services. So we
Speaker 3: don't have, say a gold standard, which is where you
Speaker 3: define what a pound is by reference to one particular commodity,
Speaker 3: gold and a particular weight of it. We do it
Speaker 3: with the whole basket of goods and services, the so
Speaker 3: called CPI basket, and we do it with the rate
Speaker 3: of change of prices. So we say we want prices
Speaker 3: to go up at two percent a year. In other words,
Speaker 3: we want the pound sterling, this abstract monetary unit, to
Speaker 3: depreciate in real terms by two percent a year. So
Speaker 3: that's the answer to the first question, what is the
Speaker 3: monetary standard today for the pound sterling? And then the
Speaker 3: answer to the second question, who gets to decide that
Speaker 3: in our current version of the monetary system, Well, that's
Speaker 3: actually the Chancellor of the Excheque. He actually, I was
Speaker 3: sure she sets what that standard is, but of course
Speaker 3: it's it's implemented and operationalized by the Bank of England,
Speaker 3: which sits under democratic control.
Speaker 2: Okay, let me just take you back a little bit,
Speaker 2: because one of the things that I found fascinating little
Speaker 2: side points in the book was when you asked how
Speaker 2: it could be that this mistake about what money is
Speaker 2: I is in is actually a system not a token,
Speaker 2: How this mistake could have been made for so long
Speaker 2: by so many historians. And the answer to that, you say,
Speaker 2: is because it is the coins that survive, not the
Speaker 2: evidence of the system.
Speaker 3: Yes, I think there are several answers to that crucial question,
Speaker 3: and one of them is exactly that. When you're doing
Speaker 3: monetary history, when you dig into the past and try
Speaker 3: and work out how things were back then, of course
Speaker 3: what survives is physical evidence. In the case of money,
Speaker 3: that means coins, for example. But we actually know that
Speaker 3: in many past societies a great deal of monetary credit
Speaker 3: and debt and financial balances and transactions were not of
Speaker 3: course represented by coinage, and transactions weren't settled in coins.
Speaker 3: They were very often settled by entries in ledgers, for example.
Speaker 3: But the ledgers don't exist anymore. And there'll be a
Speaker 3: whole lot of other transactions and balances which were recorded
Speaker 3: simply by word of mouth or in other formats, and
Speaker 3: they don't exist. So that can definitely skew and has
Speaker 3: skewed the perception of things. But let me take it
Speaker 3: back a step. I think in a sense it's sort
Speaker 3: of simpler than that. The curious thing about money as
Speaker 3: an institution is that from the bottom up, when you
Speaker 3: as an individual are interacting with the monetary system, certainly
Speaker 3: in the pre digital age, when notes and coins were
Speaker 3: the primary form of representation of money, from the bottom up,
Speaker 3: of course, money does look like this real thing that
Speaker 3: is what you deal with every day. It's only when
Speaker 3: you look from the top down, as it were, and
Speaker 3: you try to understand the system as a whole, it
Speaker 3: becomes completely obvious that notes and coins are just physical
Speaker 3: representations tokens, and there are lots of different kinds of
Speaker 3: tokens up of an underlying system of credits and debts
Speaker 3: which is much larger, much less substantial, and essentially abstract.
Speaker 3: I hope that allami just say, there's another important reason,
Speaker 3: which I go into in my book, as to sort
Speaker 3: of historically in Europe, and in Britain in particular, which
Speaker 3: was the financial innovator at the time. Why it is
Speaker 3: that this conventional view held sway in the face of
Speaker 3: the fact that the economy became much more financialized, banks
Speaker 3: became much more important. And even today, you know, when
Speaker 3: we live in this digital world where I think from
Speaker 3: to mas people is pretty obvious that money is an
Speaker 3: abstract thing. And it's because people don't use you know,
Speaker 3: coins and notes anymore. Why did it hold such sway?
Speaker 3: And there I tell the story of a very important
Speaker 3: debate that happened right back immediately after the founding of
Speaker 3: the Bank of England, which was a pretty epochal moment
Speaker 3: in monetary history generally and certainly in Britain, there was
Speaker 3: a genuine huge debate over this very question which we
Speaker 3: began with of what the monetary standard should be, How
Speaker 3: should a pound sterling be defined? Because with the creation
Speaker 3: of this new Bank of England, money was henceforth going
Speaker 3: to be issued not by the sovereign and the Mint
Speaker 3: as it always had been, but by this bunch of
Speaker 3: private in those days, private bankers, the Bank of England.
Speaker 3: So this question was crucially important and it all played
Speaker 3: into an existing political debate about the constitutional changes that
Speaker 3: have been going on in Britain and the shift towards
Speaker 3: what we would now call a constitutional monarchy, so political
Speaker 3: power being taken away from the absolute monarch into a
Speaker 3: system where it was shared with parliament. And as a
Speaker 3: result of that, there was a big debate between one
Speaker 3: of the most famous philosophers in British history, John Locke,
Speaker 3: the great father of political liberalism, and his sort of
Speaker 3: Tory opponents, And as a result of that, Locke made
Speaker 3: a fateful intervention in which he came down hard on
Speaker 3: the side of the conventional view of money, but for
Speaker 3: political reasons. It's a big question in my mind whether
Speaker 3: he actually believed what he was saying philosophically. But he
Speaker 3: made the argument that listened, a pound sterling just is
Speaker 3: a certain weight of silver. In those days they were
Speaker 3: talking about silver, not gold. That's what it is, that's
Speaker 3: what it means. No one can change what that weight is.
Speaker 3: Anyone who tries to change what that weight is is
Speaker 3: effectively lying, defrauding the public. So he was arguing very
Speaker 3: strongly for a fixed precious metal standard, for the idea
Speaker 3: that money is a real physical thing. But he was
Speaker 3: doing it basically for political reasons, because he wanted to
Speaker 3: tie the hands of this new institution, the Bank of England,
Speaker 3: which he thought would otherwise fall into the hands of
Speaker 3: revolutionaries and the whole republic would fall to pieces.
Speaker 2: Okay, and so she's just reading that bit in your
Speaker 2: book earlier. But that brings us can take us forward
Speaker 2: by quite a long way. This idea that money should
Speaker 2: be stable, that it should always be worth the same
Speaker 2: roughly the same sort of thing, that inflation should constantly
Speaker 2: be contained, and the idea that as we know it
Speaker 2: came out of New Zealand a couple of decades ago,
Speaker 2: that inflation should be kept by central banks at a
Speaker 2: level of two percent every year forever. And that's something
Speaker 2: that a hasn't worked for a while. And be that
Speaker 2: you have taken issue with along the way. And there
Speaker 2: is a bit in your book about the financial crisis,
Speaker 2: about how it happened where you point out that everything else
Speaker 2: was ignored, ignored completely in pursuit of this idea that
Speaker 2: nothing mattered except stable inflation. So booming house prices, a
Speaker 2: drastic underpricing of liquidity, and as it markets, the emergence
Speaker 2: of the shadow banking system that declines in lending standards,
Speaker 2: bank capital and liquidity ratios were not given the priority
Speaker 2: they merited because unlike low and stable and inflation there
Speaker 2: was simply not identified as being relevant. So I don't
Speaker 2: think very many people would accuse central banks of being
Speaker 2: wedded to sound money. But this is what it is,
Speaker 2: is the idea that money must be stable, and if
Speaker 2: you put that above everything else in a modern monecary system,
Speaker 2: you can run into all sorts of trouble.
Speaker 3: Yeah, but it's very interesting what you just said there,
Speaker 3: that no one would accuse central banks of being whaded
Speaker 3: to sound money. But that, of course is exactly now.
Speaker 3: I think if you are central bankers, they would say
Speaker 3: that's exactly what they're wedded to. And most modern important
Speaker 3: central banks do operate an inflation targeting standard these days,
Speaker 3: which intrinsically is targeting stable value of money. I mean,
Speaker 3: to be sympathetic to Lock, let's take him as the
Speaker 3: patron saint of stable money for a moment. I mean,
Speaker 3: of course, the paradox is that the monetary standard does
Speaker 3: have to be stable over time and across space, so
Speaker 3: within particular jurisdiction for it to be useful. I mean
Speaker 3: that obviously is true to some degree, but one also
Speaker 3: has to remember that because it is the unit that
Speaker 3: you're using to denominate credit and debt, and because credit
Speaker 3: and debt can grow and can go in all kinds
Speaker 3: of funny directions, and can become very inequitable, and can
Speaker 3: become become very inefficient. And we've seen that over and
Speaker 3: over again throughout monetary history. It's the nature of financial
Speaker 3: capitalism that can happen. The devaluation of the monetary unit
Speaker 3: is also an absolutely crucial escape valve for when things
Speaker 3: become unsustainable. Caines John Maynard Knes. He has a great
Speaker 3: passage where he talks about this and says, the real
Speaker 3: parents of revolution are the absolutists of contract. In other words,
Speaker 3: it's people who obsess to the exclusion of everything else
Speaker 3: about this important truth that money must be kept stable
Speaker 3: to be useful. That are the real people that end
Speaker 3: up creating revolutions. Because debt becomes completely unsustainable, one half
Speaker 3: of the population is i think he puts, it becomes
Speaker 3: enslaved to the other and so on and so forth.
Speaker 3: Now this is all a bit hyperbolic, and so and
Speaker 3: so forth. But what is totally obvious and what only
Speaker 3: becomes clear when you have a clear view of money
Speaker 3: as a system of credit and debt rather than as
Speaker 3: some sort of physical thing, is that one of the
Speaker 3: primary economic forces, and therefore one of the most important
Speaker 3: decisions that any government or central bank can make is
Speaker 3: over the value of the monetary unit because of its
Speaker 3: distributional consequences. It's distributional consequences, and that's what gets missed
Speaker 3: and has been i think missed in a lot of
Speaker 3: the last thirty years thinking about these things. It was
Speaker 3: certainly what was missed in the lead up to financial crisis.
Speaker 3: If you're focusing solely upon keeping the value of money
Speaker 3: stable in order to make transactions efficient, you lose sight
Speaker 3: of the fact that this is the most important distributional
Speaker 3: tool that the government.
Speaker 2: Yeah, yeah, Now, this is something that as you talked
Speaker 2: about on this podcast quite a lot, the idea that
Speaker 2: in many ways what we call monetary policy is effectively
Speaker 2: a fiscal policy because it has this distributional mechanism. And
Speaker 2: that brings you back to the question of whether really,
Speaker 2: really a central bank should be independent of government, because
Speaker 2: central bank policies do effectively enact what we would consider
Speaker 2: to be the results of fiscal policy or the type
Speaker 2: of results of a fiscal policy might have have. So
Speaker 2: if that is the case, and it is particularly we
Speaker 2: saw that during the Quey period, etc. Is it reasonable
Speaker 2: that a central bank should be independent of government.
Speaker 3: Yeah, I mean, of course it's a good question. The
Speaker 3: debates got sort of slightly mixed up because it's probably
Speaker 3: a bit of a bit on a bit of a
Speaker 3: rent when I wrote my book which was published more
Speaker 3: than ten years ago now and arguing against central bank independence.
Speaker 3: I mean it all comes down, of course, to the
Speaker 3: details the principles of delegating power from a sovereign parliament
Speaker 3: or from the government that it's chosen to an independent
Speaker 3: agency of any sort, a technocratic agency of any sort.
Speaker 3: I mean, the central banks are the most important example,
Speaker 3: but a lot of other examples in the modern system
Speaker 3: of governance. The principle is that you're not delegating these
Speaker 3: crucial top level political distributional decisions. Those should be made
Speaker 3: by the political authorities, legitimate political authorities, and it's the
Speaker 3: operational aspects that should be delegated to the central bank.
Speaker 3: And that is the principle of it. And as I
Speaker 3: was just describing a few minutes ago. The monetary standard
Speaker 3: the inflation type, which is inflation targeting, a two percent
Speaker 3: inflation target. In the case of the UK, for example,
Speaker 3: it is set by the chancellor. It's not set by
Speaker 3: the central bank. They can't choose their own target. So
Speaker 3: that would be the defense of central bankers, and it
Speaker 3: is legit, but up to a point, because these things
Speaker 3: do get a bit fuzzy inevitably in practice.
Speaker 2: Is the answer then to remove the target the target.
Speaker 3: Is wrong, yes, exactly. I mean all.
Speaker 2: Targets will lead to disaster. We know there and those
Speaker 2: are the things the target that doesn't lead to some
Speaker 2: kind of desire.
Speaker 3: Well, that's a very very important thing you've just mentioned,
Speaker 3: because my favorite and I think the most important precept
Speaker 3: in all of military policy, and it applies much more broadly,
Speaker 3: and it's the topic of my next book, Listeners, is
Speaker 3: Part's Law, named for the great British monetary economist Charles Goodheart,
Speaker 3: and that law. He voiced it in the context of
Speaker 3: monetary policy, and he said, any metric, when it's chosen
Speaker 3: as a target, eventually ceases to become a good target.
Speaker 3: And what he's talking about is the tendency of systems
Speaker 3: economies societies and so on to adapt, of course, around targets,
Speaker 3: to game targets so that they cease being useful. An
Speaker 3: inflation target is of course an absolutely primary example of that.
Speaker 3: So what you were describing and what I write about
Speaker 3: in my book in that part about the way that
Speaker 3: the focus on inflation targeting and your parentscept not a parent,
Speaker 3: I mean the success in targeting inflation for whatever reasons
Speaker 3: we can debate those prior to the financial crisis meant
Speaker 3: that the system adapted around it, and all the kind
Speaker 3: of imbalances which genuine economic and social imbalances which the
Speaker 3: inflation target was intended to measure and tame, in fact
Speaker 3: just emerge in all kinds of other places. It was
Speaker 3: a phenomenon that had been predicted and written about many
Speaker 3: years earlier by the American economist Simon Minsky. He said,
Speaker 3: stability breeds instability. It's the same idea. So yes, it's
Speaker 3: the system as a whole, and not just the particular
Speaker 3: system of inflation targeting, but the idea that you can
Speaker 3: choose a particular metric and you can then design policy
Speaker 3: around that particular metric, using it as a target, and
Speaker 3: that that is a sensible, effective way of trying to
Speaker 3: govern a complicated modern economy. That's where the problem lies.
Speaker 2: Okay, let's move to the problems of today. Then we
Speaker 2: talked to earlier about how when when things go wrong,
Speaker 2: you end up with unpleasant distributional impacts. We look across
Speaker 2: the Western world at the moment and what we can
Speaker 2: see exactly that a distributional problem, particularly intergenerational. Can we
Speaker 2: blame money for that system of money? How money has
Speaker 2: been managed?
Speaker 3: It's a good question. I mean, are lots of things
Speaker 3: which go into it. I mean I always tell the
Speaker 3: story about my mother and her sisters and my grandparents
Speaker 3: were trying to try to explain this generational aspect and
Speaker 3: why monetary policy is important to When I was young,
Speaker 3: I would sit around my mother and her sisters. They
Speaker 3: were always complaining about the fact that their father had
Speaker 3: been He'd been a distinguished fellow, he'd ended up running
Speaker 3: a university and vice chancellor. Wasn't quite as well paid
Speaker 3: by the way as it is these days being a
Speaker 3: vice chanceer. So but nevertheless he'd been a sort of
Speaker 3: in there.
Speaker 2: Maybe that may be temporary. By the way, get in
Speaker 2: the state of the ukc University is a bullet in
Speaker 2: the history of what Chancelett get paid well.
Speaker 3: He certainly would have been absolutely amazed if he'd seen
Speaker 3: modern university. Any Way, at the point is that having
Speaker 3: done all this, he had retired in about nineteen seventy,
Speaker 3: and he'd retired to a tiny little house back in Oxford,
Speaker 3: which he'd bought in the thirties, and he'd lived out
Speaker 3: his days, and then when he came to expire, there
Speaker 3: was nothing left. There was no sort of great inheritance
Speaker 3: to pass on. And they were just baffled by this,
Speaker 3: and they said, how could this be that this was
Speaker 3: a situation now. The reality was that at the same
Speaker 3: time that when they were making all these complaints, they
Speaker 3: were sitting in their own great, big houses in lovely
Speaker 3: university towns in England, which they had bought actually at
Speaker 3: the very beginning of the seventies. And my father used
Speaker 3: to tell me the story about how when he'd had this,
Speaker 3: they'd had their third child, me, and they outgrown their
Speaker 3: house and they went to look around bigger houses. And
Speaker 3: he'd gone around looking around with the burster of one
Speaker 3: of the colleges in Oxford where he lived. He was fretting, way,
Speaker 3: I can't afford this big house, he said in the bust,
Speaker 3: and don't worry, you know, just go ahead and buy it.
Speaker 3: You know, it'll all be fine. And he bought it
Speaker 3: and was terrified by the size of the mortgage and
Speaker 3: all this. But of course, by the end of the
Speaker 3: seventies this mortgage was worth a pittance in real terms. Now,
Speaker 3: the point about this story is where I haven't explained
Speaker 3: to every well. But the point is, of course these
Speaker 3: things were two sides of exactly the same coin. If
Speaker 3: you were of my grandfather's generation and you had retired
Speaker 3: in nineteen seventy with your handsome pension from your vice
Speaker 3: chancellorial job that you'd accumulated, and it.
Speaker 4: Was worth a tb by the way, just everyone's clear
Speaker 4: that would be a defined should get the same amount
Speaker 4: of money dumped in your bank account every month, and
Speaker 4: it should crucially be inflation linked.
Speaker 2: But I suspect what we were about to tell us
Speaker 2: was it wasn't linked to the actual rate of inflation.
Speaker 2: That possibly was capped. It's very good a lot of
Speaker 2: ones are capped at sort of three or four percent, yes, exactly.
Speaker 2: The inflation goes beyond that. The real value of your
Speaker 2: pension income willful to that is what happened to your grandfather.
Speaker 3: Exactly exactly, and so over the course of seventies, of course,
Speaker 3: you know, the value of this thing shriveled up to
Speaker 3: very little. Hence hence is unfortunate penury by the end
Speaker 3: of the decade. And whereas a young parents like my
Speaker 3: mother and father, they were on the other end of that.
Speaker 3: So this inflation over the course of the decade was
Speaker 3: fantastic because they bought some house for a few thousand
Speaker 3: quid and by the end of the decade it was
Speaker 3: worth one hundred thousand quid and the mortgage of course
Speaker 3: had shriveled away because it hadn't gone gone hung value.
Speaker 3: Now what was going on a big transfer of wealth
Speaker 3: from my grandparents' generation to my parents' generation. So in fact,
Speaker 3: my mother and her sisters need not have complained because
Speaker 3: they did get this inheritance. It just didn't come down
Speaker 3: through being passed down through the family. It came through
Speaker 3: this macroeconomic shift. Now you will spot it that that
Speaker 3: is very different from what most people understand by inheritance.
Speaker 3: And of course it is a matter of chance. Now,
Speaker 3: I mean there's different kind of chance that operates through
Speaker 3: inheritance through families. It's just where the other lucky to
Speaker 3: be born into a family with money, or who happened
Speaker 3: to accumulate some money. And this is a different kind
Speaker 3: of chance, where if my parents hadn't bought a nice,
Speaker 3: big house and stretch themselves and so on at the
Speaker 3: beginning of the seventies, well they wouldn't have received the
Speaker 3: benefits of this macroeconomic wealth transfer. So it's a different
Speaker 3: kind of complete chance involved. But of course the transfer
Speaker 3: did happen. But in that case, and this is coming
Speaker 3: to your question, it happened through the action or inaction
Speaker 3: of monetary policy. That was what led to this great
Speaker 3: inflation in the seventies. So it's a really important thing
Speaker 3: to keep in mind because it is what has it's
Speaker 3: what the focus on inflation targeting, for example, has successfully
Speaker 3: ruled out over the last thirty years, that particular kind
Speaker 3: of transfer of wealth. But you just alluded to the
Speaker 3: fact that nonetheless it appears that you can point the
Speaker 3: finger at monetary policy or financial policy more generally for
Speaker 3: all kinds of other transfers or accumulation of wealth, which
Speaker 3: many people would see as being rather unfair, being bast
Speaker 3: cross generations anyway, I come back to Kane's point. The
Speaker 3: issue is manatory policy is very powerful at affecting macroeconomic
Speaker 3: distributional changes, either by accident, by amission, or by by commission.
Speaker 3: We have to focus on that, and one has to
Speaker 3: have a deliberate policy about it.
Speaker 2: And one of the things that we have talked about
Speaker 2: on the podcast quite a lot is about whether we
Speaker 2: do need a generational reset and we need some way
Speaker 2: to get to reduce not just private debt, but also
Speaker 2: specifically public debt, and that that would require maybe close
Speaker 2: to a decade of inflation running at four or five
Speaker 2: six percent, which would necessarily mean the removal of the
Speaker 2: inflation target. There has been mutterings over the last few
Speaker 2: years heaven there about our central bankshid that I'll get
Speaker 2: to maybe three percent or something like that. But it
Speaker 2: does seem that there isn't any way out for deeply
Speaker 2: indebted Western nations at the moment. I mean, look what's
Speaker 2: happening in the bond markets across Japan, the US, and
Speaker 2: in Europe. At the moment. We see that these locations
Speaker 2: beginning had happened in the bond market, there isn't any
Speaker 2: obvious way out. Oh I mean either except genny false growth,
Speaker 2: which at this point looks relatively unlikely, or a decade
Speaker 2: of inflation.
Speaker 3: Yes, there are complications that should be mentioned. I mean,
Speaker 3: it's very notable when you suggest the idea that maybe
Speaker 3: inflation is not such a bad thing in many respects,
Speaker 3: which I've done over the last few years in a
Speaker 3: few columns for the reasons that you say. I mean, yes,
Speaker 3: of course there are costs to inflation. But it's really
Speaker 3: interesting if you look at the economic literature, the actual
Speaker 3: costs which are ascribed to inflation are really quite weird
Speaker 3: and small, and not the ones which I think most
Speaker 3: people would really think of. They are because of the
Speaker 3: way that money is conceived of in mainstream economic theory.
Speaker 3: They are costs to do with frictions, like there's more
Speaker 3: uncertainty about what the price is when you go to
Speaker 3: people have to look around more so called shoe leather.
Speaker 3: In other words, they wear out the leather on their
Speaker 3: shoes walking around finding alternative prices for things. Menu costs,
Speaker 3: you know, restaurants have to update their many I mean,
Speaker 3: people will think I'm making this up, but these are
Speaker 3: actually genuinely in the mainstream economic theories. The main costs
Speaker 3: ascribed to inflation, and you set those against what we
Speaker 3: were just describing, which are the big macroeconomic distributional effects
Speaker 3: of inflation, which might be costly or they might be beneficial.
Speaker 3: And of course you're suggesting these imbalances into generation or whatever.
Speaker 3: They might be a very unhealthy and inefficient and they
Speaker 3: are risk constraining economic growth and innovation, and therefore presumably inflation,
Speaker 3: which would be a means of alleviating these would be
Speaker 3: a positive thing. Now, that's huge, huge resistance to that.
Speaker 3: If you ever talked to anyone from the generation above us,
Speaker 3: people who remember the seventies, despite what I just said,
Speaker 3: which is that actually it was in some ways very
Speaker 3: beneficial for lab Well, it didn't. You know again, I've
Speaker 3: got a stress that there's a lot of luck involved.
Speaker 3: Like I said, you know, so the story I just
Speaker 3: told you, my parents they were lucky because it just
Speaker 3: affected actually within the family what might have happened anyway.
Speaker 3: But of course many people wait to have been in
Speaker 3: that situation. So that's where there's a problem on that front.
Speaker 3: But they're very very.
Speaker 2: Resist have to interrupt you to tell you, I have
Speaker 2: to interrupt you to tell you that I know our listeners,
Speaker 2: and I know what they're thinking right now. They're thinking,
Speaker 2: lucky old Felix, he gets that great big house.
Speaker 3: No, no, no, no, I'm afraid not I'm afraid. I mean,
Speaker 3: I mean, I wish it would say listeners, But unfortunately,
Speaker 3: I'm one of quite a few children, and the inheritance
Speaker 3: tax regime is horrendous these days, and as you would
Speaker 3: have discovered from the story, and my parents are not
Speaker 3: in any way experts in financial planning, so they haven't
Speaker 3: done any of the things that all the sensible boomers
Speaker 3: will have done to try and avoid all this stuff.
Speaker 2: So no, I'm on min, I'm sure some IFAs can
Speaker 2: get in touch now and carry on. Sorry interrupted you,
Speaker 2: Sorry we was on their minds.
Speaker 3: Yes, but there are other niggles. Today. You are describing
Speaker 3: this as an important and maybe the only way of
Speaker 3: getting out of very high levels of public debt. Now,
Speaker 3: very high levels of public debt in places like Britain
Speaker 3: and the States and Western Europe and so on. They
Speaker 3: are clearly a historical anomaly at this level in peace time,
Speaker 3: so there's a big challenge there. And it is true
Speaker 3: that inflating away debt so devaluing it in real terms,
Speaker 3: would seem to be a much less painful way of
Speaker 3: doing things than outright defaulting on debt, which seems highly
Speaker 3: unlikely and would be very, very disruptive. So that makes
Speaker 3: a lot of sense. I think that's right. And you know,
Speaker 3: we're not talking about hyperinflation, you're talking about a slightly
Speaker 3: higher inflation target, just like you mentioned. However, one of
Speaker 3: the important niggles is that we live in a very
Speaker 3: financially globalized system today and there are large imbalances between countries. Famously,
Speaker 3: of course, the US is an enormous international debtor and
Speaker 3: runs a big character counter deficit, and the same it's
Speaker 3: true on a smaller scale for the UK, and then
Speaker 3: within the Eurozone, for example, there's a lot of imbalances
Speaker 3: of that sort. And that's important because back in the seventies,
Speaker 3: what we were just talking about that was much much
Speaker 3: less true, and therefore the imbalances and their correction and
Speaker 3: the redistribution was essentially within a particular political jurisdiction within
Speaker 3: the UK, let's say, or within the US, whereas today
Speaker 3: there is a big international aspect to it, and there
Speaker 3: will be impact on exchange rates and there will be
Speaker 3: well geopolitical impact. The whole origin of the massive flare
Speaker 3: up in geopolitical tensions and the connections with economics that
Speaker 3: we've seen this year is precisely to do with this
Speaker 3: issue of international imbalances and the fact that America wants
Speaker 3: effectively to extricate itself and to impose some sort of
Speaker 3: losses on people who've lent its money. It's not quite
Speaker 3: as simple as it might have been in the puzzle.
Speaker 2: That's simple than it used to be. Yeah, all right,
Speaker 2: let's move of from that to look at actually at markets,
Speaker 2: because you just mentioned various dislocations in the US and
Speaker 2: not really. One of the things we talk about endlessly
Speaker 2: here is the US market, and one of the things
Speaker 2: I've brought up with it with a guest last week
Speaker 2: was about the decumulation of the baby boomer generation in
Speaker 2: the US and the extent to which that will effect
Speaker 2: flows into the market and hence the level of the
Speaker 2: market itself. And new used as a wonderful phrase where
Speaker 2: people say that bill markets rarely die of old age,
Speaker 2: but this one actually might.
Speaker 3: Yes, that's right. I write a column, my column for
Speaker 3: am I allowed to mention the competitor.
Speaker 2: Oh, I don't know, probably not.
Speaker 3: Okay, I went my column this week no exactly is
Speaker 3: about this. Because I was reflecting, I went back and
Speaker 3: had a look. In the late nineties, there was there
Speaker 3: was a huge panic over this. This gorely named the
Speaker 3: market meltdown hypothesis. And this was actually driven by the
Speaker 3: fact that, as some listeners may remember, the US stock
Speaker 3: market was on a great role from the sort of
Speaker 3: early eighties on, and in particular in the nineties and
Speaker 3: into the late nineties, valuations were climbing up and up
Speaker 3: every year. The famous Schiller cape cyclically adjusted price earnings ration.
Speaker 3: It hit its low in nineteen eighty two seven and
Speaker 3: it went up to forty four by the end of
Speaker 3: nineteen ninety nine. And a lot of people connected this
Speaker 3: and they said, well, well, hang on a minute. The
Speaker 3: reason why this is happening is because the Baby Boom
Speaker 3: generation is such a historical anomaly. This is true, much
Speaker 3: larger than the generation before it and the generation Gen X,
Speaker 3: that's our generation which came after it. And they said, well,
Speaker 3: I mean, obviously what's going on is they've hit their
Speaker 3: peak earnings. They're piling money into the US equity market,
Speaker 3: and this is pussing up valuations and that's all great,
Speaker 3: but obviously there's going to be a huge problem when
Speaker 3: they come into their retirement and decumulation phase, because they're
Speaker 3: going to be trying to offload all these assets onto
Speaker 3: the much smaller generation X. And this is important. The
Speaker 3: whole thesis relies only on the size of the generations.
Speaker 3: People argue a lot, correctly in my view, about whether
Speaker 3: it's really true that flows drive prices and all kind
Speaker 3: of stuff, but this argument is quite simple. It's just
Speaker 3: that the next generation is so much smaller, so naturally
Speaker 3: than demand must be lower. Anyway, it rose to an
Speaker 3: absolute height of panic. But the funny thing was, of
Speaker 3: course in the two thousands, there wasn't any big crash,
Speaker 3: and the whole sort of panic went away. There was
Speaker 3: a crash, of course, from the heights of nineteen ninety nine,
Speaker 3: but that just made everyone think, oh, well, it was
Speaker 3: all to do with the iggression of abzuber. It's everything
Speaker 3: to do with demographics. It was just a sort of
Speaker 3: classic bubble. And then it all recovered and started marching
Speaker 3: on again. And then there were lots of interesting changes,
Speaker 3: like defined contribution pensions started to take off, and that
Speaker 3: seemed to provide a sort of new supplemental source of inflows.
Speaker 3: And the boomer generation themselves they turned out to live
Speaker 3: much longer, and they were much healthier, and they didn't
Speaker 3: actually accumulate nearly as quickly as everyone said. So the
Speaker 3: whole sort of panic went away for a long, long,
Speaker 3: long type. But but meren, you're bringing it back for
Speaker 3: the purposes of my column. I went and I ferreted
Speaker 3: away in the Z one flur of funds of the
Speaker 3: United States Federal Reserve, and I've discovered a horrifying fact,
Speaker 3: which is that bang on Q, it is actually true
Speaker 3: that the US private pension system, just in the last
Speaker 3: couple of years has gone into decumulation. It is no
Speaker 3: longer a net by of assets. It's gone into net
Speaker 3: selling territory. And of course it's just as true as
Speaker 3: it ever was that gen X is indeed much much
Speaker 3: smaller than gen Y. So if you look at the
Speaker 3: so called old age dependency ratio or the inverse of it,
Speaker 3: you know it was the case in nineteen ninety that
Speaker 3: there were five and a half or six working age
Speaker 3: people for every retire and it's now about thirty or
Speaker 3: forty percent lower than that. So all the conditions are
Speaker 3: actually there in place. It is in fact happening just
Speaker 3: as was predicted. And then there's a couple of other
Speaker 3: problems which people hadn't spotted in the nineties. One is that,
Speaker 3: of course these international inflows, all this globalization, and the
Speaker 3: fact that in the two thousands, when people thought this
Speaker 3: was going to start, what actually happened was this so
Speaker 3: called global savings galut appeared. You know, there was all
Speaker 3: the Chinese and the Europeans when they were saving up
Speaker 3: in the Japanese and they were piled into the American market.
Speaker 3: So they sort of bailed out, you know, the boomers then.
Speaker 3: But unfortunately they're all in exactly the same or even
Speaker 3: worse demographic position now than the US, so you can't
Speaker 3: rely on them anymore. And as we know, capital flows
Speaker 3: are reversing from the US, they're all starting to seek
Speaker 3: back out again, So that's a big problem. And then
Speaker 3: the icing on the cake. The icing on the cake
Speaker 3: is the following It is that the Boomers, this big generation,
Speaker 3: of course, they didn't just have economic power. What it
Speaker 3: gave them was political clout. They were for the longest
Speaker 3: period of any generation, they were the largest voting cohort
Speaker 3: in the US system. So they were the biggest block
Speaker 3: of US voters and that also has just changed. About
Speaker 3: ten years ago came the crossover point, and Maren, I'm
Speaker 3: sorry to tell you it's not our generation that have
Speaker 3: displaced them, because we're the small gen X. It is
Speaker 3: the millennials and younger.
Speaker 2: Oh god.
Speaker 3: Since twenty sixteen, they have taken over as the biggest
Speaker 3: and most important voting block from the boomers. So it's JD.
Speaker 3: Vance and his cohort that are now. They are the
Speaker 3: political center of gravity in the US. And of course
Speaker 3: they do not have a vested interest in the types
Speaker 3: of policies which kept this whole show on the road
Speaker 3: for the boomers, which staved off the market meltdown hypothesis
Speaker 3: for the extra ten or fifteen years that had happened. No,
Speaker 3: they're not interested. That's why they're railing back all this
Speaker 3: stuff like globalization. They don't care that the compan these
Speaker 3: and Europeans and the Chinese no longer want to buy
Speaker 3: the US stock market. They're actively trying to stop it.
Speaker 3: Half the time.
Speaker 2: So I reckon it's here, Okay, that is really interesting,
Speaker 2: good hypothesis. I love it when things come through twenty
Speaker 2: years after they were supposed to us was fascinating. But
Speaker 2: it's something we must talk about, which is going back
Speaker 2: to our millennials. It's private currencies. The way we've been
Speaker 2: discussing money is as though it's always a power of
Speaker 2: the state and instrument of policy, etc. But given the
Speaker 2: way that you've described money as a system rather than
Speaker 2: a token, it's far from the case that money should
Speaker 2: be something that is state sponsored. And there's a huge
Speaker 2: history of private money, is back to the Endless Siege,
Speaker 2: moneies and built of sale. There's so much, there's so
Speaker 2: much private money. But now we have a private money
Speaker 2: that is beyond the scale of any previous private money
Speaker 2: because of the way it crosses borders. Right, So previous
Speaker 2: private money has been limited to particular societies, particular groups.
Speaker 2: They've always been physically limited. But bitcoin and the other
Speaker 2: cryptocurrencies are a private money that has no border. And
Speaker 2: this is a very interesting dynamic, right, And one of
Speaker 2: the makes that I've made for years now is to
Speaker 2: assume that governments would not allow a private currency to
Speaker 2: become so widely spread that they would interfere at somebody.
Speaker 2: Hasn't happened. What do you think is going on here
Speaker 2: and would you be a buyer of bitcoin.
Speaker 3: Well, when you say it hasn't happened, I mean I
Speaker 3: think your instincts were right, which is that governments are
Speaker 3: very interested in guarding jealously their monetary sovereignty, and I
Speaker 3: think they are very concerned and worried about the potential
Speaker 3: for macroeconomic disruption caused by widespread use across all the
Speaker 3: uses of money, of private currencies and cryptocurrencies. They are
Speaker 3: quite right to be so concerned because if you look
Speaker 3: at the history of many emerging markets, for example, these
Speaker 3: are countries which have long experience of only limited control
Speaker 3: grip on the franchise of money by the state. I mean,
Speaker 3: the most obvious example is in many emerging markets, as
Speaker 3: any listener who's ever been to one will know, over
Speaker 3: the last thirty years, you will find that US dollars
Speaker 3: circulate alongside the national currency. And there's a prime example. Okay,
Speaker 3: that's another state currency in that case, but it's a
Speaker 3: prime example of where you know, the state in question
Speaker 3: doesn't have full control over the institution of money, and
Speaker 3: you've got another competitor in there, and that makes managing
Speaker 3: targeting inflation or managing the distributional content. Any of these
Speaker 3: aspects of monetary policy we've been describing much more difficult,
Speaker 3: because whilst you might control the issuance of your own
Speaker 3: currency and the regulation of it, you don't control the
Speaker 3: issuance and regulation of the US dollar. So that's why
Speaker 3: they are worried about all of that, and their right
Speaker 3: to be worried about it. Clearly, the novel aspect of cryptocurrencies,
Speaker 3: exactly as you said, is not the fact that they
Speaker 3: are private moneies. It's not the fact that these are
Speaker 3: private monetary units operating on their own. Monetary standards define
Speaker 3: them in lots of different ways. It can be a
Speaker 3: very hard monetary standard like bitcoins, where you've got a
Speaker 3: set number that can ever be issued and you're going
Speaker 3: to assimpate towards set over time. But they're all kinds
Speaker 3: of rather in principle of any old kind of standard
Speaker 3: that you could use and specify for these private crypteircurrencies.
Speaker 3: It's not that private aspect of it, which is new,
Speaker 3: existed all throughout history, like you said. No, No, it's
Speaker 3: the technology, of course. It's the technology of recording these
Speaker 3: things on a digital ledger, and the fact that you've
Speaker 3: got the Internet, which is global, which is twenty four
Speaker 3: to seven, three hundred and sixty five days a year,
Speaker 3: and therefore can facilitate transactions all that time. And the
Speaker 3: fact of course that it displaces operates outside of doesn't
Speaker 3: use the conventional banking system. So that's what's new about it.
Speaker 3: And it's like everything else to do with the Internet.
Speaker 3: You know, you can have a very small proportionate constituency
Speaker 3: who are interested and want to use something, and it's
Speaker 3: massive in absolute terms, in absolute numbers, because that's the
Speaker 3: nature of the Internet. The key thing to say, however,
Speaker 3: is in terms of the use of money for transactions,
Speaker 3: to settle trade, commerce, trade in assets, and so on
Speaker 3: and so forth. It is still the case that most
Speaker 3: of these cryptocurrencies are of only limited use and are
Speaker 3: rather constrained, so mostly they are used for speculative purposes.
Speaker 3: The killer app, I think, which has been identified and
Speaker 3: seems to me people are correct about in this area
Speaker 3: for transactions is stable coins. That is to say, that's
Speaker 3: just essentially a particular type of cryptocurrency for which the
Speaker 3: standard is an existing fiat currency. So most of them
Speaker 3: are pegged to the dollar. But there's no reason why
Speaker 3: in principle you couldn't have one that was pegged to
Speaker 3: the Sterling or the EU or the All that's doing
Speaker 3: is it's marrying together that incredibly useful digital technology available
Speaker 3: twenty four, seven, three and sixty five days a year
Speaker 3: wherever you are in the world, two the existing national
Speaker 3: currency units. And I think that's a very powerful marriage.
Speaker 3: And obviously I'm not alone in thinking that everyone thinks
Speaker 3: that it is.
Speaker 2: But that does not interfere with the sovereignty of the
Speaker 2: currency issue.
Speaker 3: In principle note because it's pegged to the sovereign currency issue. However, again,
Speaker 3: look back over the history of money and the history,
Speaker 3: for example of the euro dollar market, which is in
Speaker 3: many ways analog not in all ways, but in many
Speaker 3: ways it's an analogous development. So this was developed in
Speaker 3: the nineteen sixties in Europe and it's absolutely huge market today.
Speaker 3: This is dollar denominated liabilities which are issued by banks
Speaker 3: and institutions which are not under the jurisdiction of the
Speaker 3: US federal reserves, so they are a bit like stable.
Speaker 3: They're dollars dollar denominated instruments, but they're not real dollars
Speaker 3: in the sense that you're deposit in the US banking
Speaker 3: system is. But the question you're effectively asking when you say,
Speaker 3: or the hypothesis you're putting forward, is that the existence
Speaker 3: of the eurodollar market does not have any real blowback
Speaker 3: onto monetary management by the FED. And yeah, that's not
Speaker 3: quite right. I mean, it does, unfortunately have a bit
Speaker 3: of a blowback because when when the crisis happens, usually
Speaker 3: the central banks have to bail out half of these
Speaker 3: shadow banking systems, and that would be the worry about
Speaker 3: stable coins. I would have thought from the central bank side.
Speaker 2: Okay, all right, brilliant, it doesn't sound to me like
Speaker 2: you're a buyer of bitcoin. So let me ask you this.
Speaker 2: It's gold, under the definitions we've been discussing today, is
Speaker 2: not money, but it's conceivably a store of value.
Speaker 3: Well, it's not conceivably a store of value. It's definitely
Speaker 3: a store of value.
Speaker 2: I mean, that's definitely a store of that.
Speaker 3: That's quite obvious.
Speaker 2: But it's not money, but it's no money. Should we
Speaker 2: be buyers of gold today as we see monetary up
Speaker 2: people around us?
Speaker 3: Well, I think that goes back to the earlier discussion
Speaker 3: about the scale of imbalances, the scale of inequalities, the
Speaker 3: scale of debt in these economies, and what conceivable policy
Speaker 3: you can see to get out of it if you believe,
Speaker 3: and I think it's perfectly reasonable to believe on a
Speaker 3: long term scale that the only way out of this
Speaker 3: is the devaluation of the national monetary units like sterling dollar,
Speaker 3: pounds on then quite obviously gold, but I mean any
Speaker 3: real asset, but you know, goals Wilf by some convenient
Speaker 3: ify one knows that is going to be a pretty
Speaker 3: good bet.
Speaker 2: Brilliant Felix. Thank you so much, Thank you, Bren. Thanks
Speaker 2: for listening to this week's Marin Talks Money. If you
Speaker 2: like us, share, rate, review, and subscribe wherever you listen
Speaker 2: to podcasts, and keep sending questions and comments to Merin
Speaker 2: Money at Bloomberg dot net. You can also follow me
Speaker 2: in John on Twitter or ex I'm at Mariness w
Speaker 2: and John is John Underscore Stepek. This episode was hosted
Speaker 2: by me Maren'sumset Web. It was produced by Somersidi and
Speaker 2: Moses and sound designed by Blake Maples and special thanks
Speaker 2: of course to Felix Martin.