Speaker 1: Hello, and welcome to another episode of the Odd Lots Podcast.
Speaker 1: I'm Tracy Alloway.
Speaker 2: And I'm Joe. Isn't thal Joe?
Speaker 1: Do you remember what we were doing this time last year?
Speaker 2: No?
Speaker 3: Oh no, no, I have no idea, And that feels
Speaker 3: like ages ago, So no, I have no idea.
Speaker 1: We were actually talking to Sultan Posar about his vision
Speaker 1: of a Breton three. Do you remember that?
Speaker 3: Okay, yes, yes, absolutely, I do remember that conversation very specifically,
Speaker 3: setting aside that sort of Bretton Wood's three framework specifically,
Speaker 3: I do think like overall, like he sort of anticipated
Speaker 3: extremely well a lot of the discussions that people are having,
Speaker 3: like over the course of the next year, and then
Speaker 3: so it's some respects, I think that's held up well.
Speaker 2: Right.
Speaker 1: So, there were a lot of different themes in that note,
Speaker 1: including this idea of more of an emphasis on real
Speaker 1: assets or commodities. But one of the big ideas that
Speaker 1: was in there was this theme of a more multi
Speaker 1: polar world and possible challenges to US hegemony in the
Speaker 1: financial system, including the dollars very unique role in that system.
Speaker 1: And while it is true that the dollars spent most
Speaker 1: of the past year being really strong, and we put
Speaker 1: out a couple episodes on that. I think we have
Speaker 1: seen efforts at de dollarization, or at least we've seen
Speaker 1: a lot of discussion of dedollarization that has really increased
Speaker 1: in the same time period.
Speaker 3: Yeah, there's sort of a few interesting dimensions here. So
Speaker 3: for one, of course, like price does what it's going
Speaker 3: to do in the short term, and ultimately I don't
Speaker 3: think like prices the ultimate orbitter, but you know, late
Speaker 3: last year or middle of last year, the dollar rallied
Speaker 3: a lot. The other thing is, you know, you get
Speaker 3: these headlines about dedollarization or the rise of the un
Speaker 3: or some barrel of oil somewhere in the world was
Speaker 3: not priced in dollars, and everyone starts to flip out
Speaker 3: about whatever that means. And on the one hand, okay,
Speaker 3: that's interesting. But on the other hand, like again you
Speaker 3: and I, like how many times have we heard this story?
Speaker 1: People love talking about this possibility.
Speaker 3: Yeah yeah, Oh suddenly some benchmark barrel of oil somewhere
Speaker 3: is gonna be priced at something and that's the end
Speaker 3: of dollar hedgemony. But I will say, like there's a
Speaker 3: couple things like I don't want to say it's different
Speaker 3: this well, why I think it's still worth having this
Speaker 3: conversation because obviously a lot of things have changed. You know,
Speaker 3: one of my theses that I talk a lot about
Speaker 3: all the time is how like the twenty twenties are
Speaker 3: sort of the inverse twenty tens, And so I do
Speaker 3: think to some extent it's a good time to revisit
Speaker 3: our assumptions. And when you do start to see you know,
Speaker 3: expanding China trade and so forth, and talk of decoupling
Speaker 3: and rising role of the UN, I think it is
Speaker 3: worth having that conversation again, even if sometimes it seems
Speaker 3: like some of these end of the dollar stories are
Speaker 3: a little bit overcooked.
Speaker 1: Or premature or premature. On that note, one of the
Speaker 1: things that has been happening is we've heard a lot
Speaker 1: of noise from the Bricks group of countries, so that's Brazil, Russia, India, China,
Speaker 1: and South Africa about possibly creating some sort of alternative
Speaker 1: to the dollar. So we really need to dive into
Speaker 1: the de dollarization story from an emerging markets perspective, and
Speaker 1: who better to do that with than with Paul McNamara.
Speaker 1: He's an investment director over at GAM. We've had him
Speaker 1: on the show before and we are going to do
Speaker 1: another deep dive with him now.
Speaker 2: Yeah.
Speaker 1: Wait, Paul, thanks so much for coming back on all thoughts.
Speaker 2: Thanks very much for having me.
Speaker 1: So maybe just to begin with give us the state
Speaker 1: of play when it comes to de dollarization talks, because
Speaker 1: I know there have been all these little bits and
Speaker 1: pieces over the past year or so, but what has
Speaker 1: jumped out at you the most.
Speaker 4: I think the thing that we're focused on is we've
Speaker 4: seen very big current account surpluses, especially in the oil exporters,
Speaker 4: so Saudi Arabian particular. I mean, Russia is obviously another story.
Speaker 4: I mean, the surpluces in China are not as big
Speaker 4: as they've been. But what's been interesting is that the
Speaker 4: Saudis in particular, and I think that some evidence that
Speaker 4: Abu Dhabi as well have not been pushing money straight
Speaker 4: into US treasuries or well U S securities markets in particular,
Speaker 4: but sort of treasury treasuries. I mean, there's there's been
Speaker 4: a lot of talk in terms of China for a
Speaker 4: long time. You know, China has run the Belton Road
Speaker 4: program has clearly been that there is a general drive
Speaker 4: for those companies which continue to run these big external
Speaker 4: surpluses they're clearly trying to branch out significantly away from well,
Speaker 4: let's just stick it in medium duration treasuries, you know,
Speaker 4: and if they're really adventurous into listed US equities into
Speaker 4: a all globally diversified basket. It's not just about sanctions
Speaker 4: and what happened to Russia's reserves in the aftermath of
Speaker 4: the attack on Ukraine, but clearly that's given it fresh impetus.
Speaker 2: So okay, so this is interesting.
Speaker 3: There is something going on, like I think it sounds
Speaker 3: like from your answer, and as Tracy and I said
Speaker 3: in the beginning, and I'm sure you've heard it for
Speaker 3: many years and year long in the illustrious career, this
Speaker 3: l of the dollars over, the dollars over, and usually
Speaker 3: it is sort of overcooked. But just based on even
Speaker 3: just your preliminary answer, it sounds like there is something
Speaker 3: going on that maybe there is some impulse to try
Speaker 3: something new.
Speaker 4: I think there is, and I think you mentioned salten Poza,
Speaker 4: this idea of a multipolar world. I mean, we have
Speaker 4: moved away from you know, the US being by far
Speaker 4: the globally dominant economy to China. You know, the Chinese
Speaker 4: economy is now about the same size as the US.
Speaker 4: So I mean, clearly there's got to be some sort
Speaker 4: of rebalancing in terms of finance to match the economic
Speaker 4: dominance and the political movement that goes with it.
Speaker 2: Absolutely.
Speaker 4: I mean the two people you always hear spoken about
Speaker 4: in this context is well, obviously number one is Sultan.
Speaker 4: Number two would be Michael Pettis and co author Matthew Klein,
Speaker 4: who would make the point that, Okay, if you've got
Speaker 4: these big surpluses being generated, then they have to end
Speaker 4: up somewhere else, and the only place they can end
Speaker 4: up is the US, because the US is the only
Speaker 4: economic block which is generating these big deficits to soak
Speaker 4: up the surpluses. Historically, I think it's not clear that
Speaker 4: it's as simple as that, but I think as long
Speaker 4: as the policy in China relies, the whole framework of
Speaker 4: economic policy in China relies on running very big external surpluses,
Speaker 4: they invest a lot, but they save even more. Those
Speaker 4: excess savings, you know, they have to end up somewhere,
Speaker 4: and it is going to be very difficult to put
Speaker 4: them somewhere else. The question that is historically, you know,
Speaker 4: difficult is not the same as impossible. You know that
Speaker 4: before the US dollar, you know, you had the sterling zone,
Speaker 4: and ok, it was linked to gold, but you did
Speaker 4: have a reserve currency, which wasn't the dissavor of last resort,
Speaker 4: you know. So I mean there are two things which
Speaker 4: are not the same, which I think are being confused.
Speaker 4: Which is one the rise of China being an economy
Speaker 4: of similar importance to the US, which I think is indisputable.
Speaker 4: And two, you know, does China or the global none
Speaker 4: Western bloc have as many options if they don't want
Speaker 4: to change the policy mix which has been very reliant
Speaker 4: on running very large external surfaces.
Speaker 1: So I definitely want to get into more of the
Speaker 1: challenges of you know, moving away from treasuries and into
Speaker 1: other assets. But before we do that, you mentioned the
Speaker 1: idea that there are some emerging market economies that have
Speaker 1: been buying fewer treasuries recently, and I guess my question
Speaker 1: is like what is driving that and is it the
Speaker 1: case that there definitely trying to move away from US
Speaker 1: exposure or is it the case that maybe in an
Speaker 1: environment of high rates and inflation and general uncertainty, maybe
Speaker 1: it doesn't make a lot of sense to buy US
Speaker 1: treasuries at that particular moment.
Speaker 2: There's a bunch of things.
Speaker 4: I mean, we have more assertive politics in pretty much
Speaker 4: every large country. We talk about a lot about the bricks,
Speaker 4: which I think is problematic in this context because sort
Speaker 4: of Russia and South Africa and Brazil really don't matter
Speaker 4: that much in a global context, whereas, for example, Saudi Arabia,
Speaker 4: which has you know, very nearly a trillion dollars of
Speaker 4: assets abroad, clearly does you know, and they have different reasons,
Speaker 4: but you know, if it's NBS in Saudi Arabia, if
Speaker 4: it's Mody in India, you know, as you go to
Speaker 4: the countries, you know there is more and more pushback
Speaker 4: against you know, US hegemony. However you want to describe it,
Speaker 4: and I think politics is part of it. The other is,
Speaker 4: you know one you probably want to diversify a bit
Speaker 4: more generally too. You know, you're very dependent on FED policy.
Speaker 4: I mean last year was a horrible year for pretty
Speaker 4: much any asset. I mean, clearly you might want to
Speaker 4: look a bit beyond that, you know, so that you
Speaker 4: know that there's I wouldn't say it's just one reason,
Speaker 4: but it really is striking, you know that for example,
Speaker 4: just how big the surplus is, especially in the OPEC
Speaker 4: countries have been over the last year, and how little
Speaker 4: we've seen a tick up, you know, not just in
Speaker 4: holdings some treasuries, but in you know, specifically US securities themselves,
Speaker 4: you know, I mean part of the problem is that
Speaker 4: it really hits quite hard to put large amounts of money.
Speaker 4: You end up putting it in stuff like the Vision
Speaker 4: fund or credit sweee or you know, or stuff like that.
Speaker 2: Is oh, you already said vision fund. Yeah.
Speaker 4: Yeah, I mean there's a whole rabbit hole here and
Speaker 4: it's always tricky, but you know, it's very difficult. There
Speaker 4: aren't a lot of places to put large chunks of
Speaker 4: money like this, and especially where you could expect you
Speaker 4: won't be the dominant in yes, which yeah, yes, it
Speaker 4: brings some perks, but it also brings some you know,
Speaker 4: some very significant problems with it as well.
Speaker 3: You could build like what is it, like, a two
Speaker 3: hundred mile long city in the middle of the desert
Speaker 3: and have it be a blockchain capital at the universe. Anyway,
Speaker 3: I'm digressing a little bit. I want to actually go
Speaker 3: back to the comment you made about a sort of politics,
Speaker 3: because we could talk economics, we could talk about the
Speaker 3: rise of trade with China, but obviously a lot of
Speaker 3: some of these impulses are going to come from domestic
Speaker 3: political choices. What is going on, like, what are you
Speaker 3: seeing specifically, and what is the sort of common thread
Speaker 3: across multiple countries that you say is driving this sort
Speaker 3: of like shift in political or global political consideration.
Speaker 4: I think the sanctions applied to Russia, you know, after
Speaker 4: the invasion of Ukraine stand out because I mean it's
Speaker 4: usually spoken about in the context of a possible Chinese
Speaker 4: attack on Taiwan, but you go around pretty much every
Speaker 4: country has reasonably severe disagreements with the US, with the
Speaker 4: West in various ways. There is you know, a huge
Speaker 4: amount of resentment, which really is not something I should
Speaker 4: be trying, you know, trying to diagnose the politics. But
Speaker 4: I think, you know, it just ensure practical terms that
Speaker 4: at least three hundred billion and we think probably a
Speaker 4: decent chunk more of Russian money was put beyond the
Speaker 4: use of the Russians simply because it was placed within the.
Speaker 2: US financial system.
Speaker 4: I think that's given a lot of urgency, you know,
Speaker 4: even to countries you know, who might not expect to
Speaker 4: have a major dispute with the US the way that
Speaker 4: the Russians have it really does become then a question
Speaker 4: of well, you know, how do we protect this savings pot.
Speaker 1: You know, there is that argument, and you touched on
Speaker 1: it already a little bit, but there is an argument
Speaker 1: to be made that maybe for reasons of financial stability,
Speaker 1: this would make sense. So you know, if you're an
Speaker 1: emerging market economy, maybe you don't want your country to
Speaker 1: be tied too closely to what the US is doing,
Speaker 1: because maybe the US is raising rates at a time
Speaker 1: when you really need financial conditions to loosen. And we've
Speaker 1: spoken with Jun Sung Shin at the Bank for International
Speaker 1: Settlements a lot about this. He's done a lot of
Speaker 1: research on the topic. How valid are those concerns and
Speaker 1: how do you disaggregate the sort of financial conditions diversification
Speaker 1: argument versus the political sanctions concerns about future financial control
Speaker 1: type thing.
Speaker 2: I mean it comes back to the old quote.
Speaker 4: I mean, I think this is from the seventies that
Speaker 4: you know, a US policy make has said, you know,
Speaker 4: it's our currency and your problem. That you know, we've
Speaker 4: seen that US financial conditions just affect anywhere else if
Speaker 4: you look at I mean you have to disaggregate that
Speaker 4: we've had a big burst of inflation everywhere, and interest
Speaker 4: rates would have gone up everywhere. This has not been
Speaker 4: the Fed chasing everybody else's interest rates around the last
Speaker 4: year or so. But high US rates have led to
Speaker 4: a stronger dollar, and a stronger dollar does mean significantly
Speaker 4: tight of financial conditions for anyone who borrows in dollars,
Speaker 4: you know, the cost of repaying that debt. And this
Speaker 4: is I think a lot of what people are talking
Speaker 4: about when they say that, you know that they want
Speaker 4: independence from the dollar.
Speaker 2: I mean whether you necessarily want.
Speaker 4: The renmn b instead, and if you think the renmen
Speaker 4: mimi is going to be much easier, that's another question.
Speaker 4: But yeah, I mean, as long as the borrowing currency
Speaker 4: of choice. And you know, I kind of agree with
Speaker 4: Joe that, you know, just because somebody invoices a barrel
Speaker 4: of you know, awesome gas that they bought from Abu
Speaker 4: Dhabi for dollars and then they sell it to somebody
Speaker 4: else for renmen b, I'm not sure that's quite the
Speaker 4: game changer it's being pitched to be. I mean, you
Speaker 4: can send me a gas bill in bitcoin and I
Speaker 4: will turn my pounds into bitcoin, and I will pay
Speaker 4: the gas bill and whoever is you know, and whoever
Speaker 4: sells me that gas will sell the bitcoin for sterling.
Speaker 4: And I'm not really sure that's quite the game changer
Speaker 4: it's being pitched at. What does matter is, you know,
Speaker 4: especially these surplus countries, One, are they going to continue
Speaker 4: to run these surpluses? And to what extent can they
Speaker 4: immunize themselves from US political influence, to the extent that
Speaker 4: they're still holding a lot of their assets in dollars.
Speaker 4: My view is, and the impact on markets will be
Speaker 4: is it's very, very difficult because you know, the surpluses
Speaker 4: coming out of China are a fraction of what they
Speaker 4: were in I mean, they're down to about two and
Speaker 4: a half percent of GDP now when they were up
Speaker 4: at ten around the time of the financial crisis. But
Speaker 4: if you know, if the renminb is going to become
Speaker 4: a reserve currency, then effectively it becomes impossible for China
Speaker 4: to run surpluces. You know, so at a minimum, you're
Speaker 4: closing off possible policy options in the future. And really,
Speaker 4: i mean, does the rest of the world really, you know,
Speaker 4: want to start denominating its debt in that of a
Speaker 4: currency where they might suddenly start, you know, moving to
Speaker 4: moving to huge surpluses versus the rest of the world,
Speaker 4: and then that's going to impact the monetary policy everywhere
Speaker 4: everywhere else on Earth. Yeah, I mean, it's it's not
Speaker 4: it's not simple as never a satisfactory answer, but I think,
Speaker 4: you know, the problems are. It's very easy to say
Speaker 4: that these countries want to be independent of US agnominia
Speaker 4: of the US dollar, but in almost every case that's
Speaker 4: going to involve policy choices which are going to have
Speaker 4: difficult policy ramifications. I mean, we got here for a reason, you.
Speaker 3: Know, speaking of policy choices. However, and you talk about
Speaker 3: the sort of assertiveness of some various nations, there's also
Speaker 3: policy choices happening in the US. It appears, I mean
Speaker 3: you arguably the US itself is becoming more inward looking,
Speaker 3: and arguably it started under Trunk. But there seems to
Speaker 3: be a lot of content with Biden in terms of
Speaker 3: some of these domestic investments, whether it's semiconductors, whether it's energy.
Speaker 3: Some of these investments particularly antagonizing allies or friends in
Speaker 3: Europe who feel we're sort of like pulling away the
Speaker 3: supply chain from them. Like, how much of this is also,
Speaker 3: like now just a story about US trading partners turning
Speaker 3: away from the US or turning away from sort of
Speaker 3: dollar assets, but a US decision to sort of focus
Speaker 3: more inward and you know, rely less on the rest
Speaker 3: of the world.
Speaker 2: I yeah, I don't really see that.
Speaker 4: I mean, whatever your objections to the US as a hegemon,
Speaker 4: you know, try somebody else. I mean, the specific example
Speaker 4: that sticks with me is the is the dollar swap
Speaker 4: lines which were extended to you know, the big Western
Speaker 4: ally central you know, and specifically the Western allies that
Speaker 4: you know, they weren't extended to certain other countries which
Speaker 4: could have benefited from them. While the US does make
Speaker 4: it clear that in monetary policy is not run for
Speaker 4: the benefit of anybody but Americans. You know that we
Speaker 4: had a big push in the ninety seven Asian crisis,
Speaker 4: and then ninety eight everybody was saying, well, you know,
Speaker 4: you can't keep hiking, because that's going to screw things
Speaker 4: up for everybody else, to which the u s response
Speaker 4: was rightly, well, too bad. You know, US monetary policy,
Speaker 4: you know, the FED has no mandate to look after
Speaker 4: anybody who isn't an American but you know, these the
Speaker 4: swap lines were absolutely critical in protecting the rest of
Speaker 4: the world, especially during two thousand and eight, you know,
Speaker 4: but also during COVID we saw the lines rolled out
Speaker 4: in the past that you know, however much you know
Speaker 4: the rest of US might you know, complain or be
Speaker 4: unkind about, you know, about Donald Trump or anybody else.
Speaker 4: The US has always, you know, go back to the
Speaker 4: Marshall Plan or whatever, you know, the US has always
Speaker 4: at a minimum had a defensible case that of enlightened
Speaker 4: self interest. And you know, and I think there are
Speaker 4: question marks about whether you know the alternatives, whether it's gold,
Speaker 4: whether it's the RENMN be.
Speaker 2: Mean, let's be honest, those are the only two.
Speaker 4: You know, The rubles no use to anyone, you know,
Speaker 4: or bitcoin or whatever mad scheme you have. That you
Speaker 4: know that there are policymakers in the US who are
Speaker 4: making choices which I think benefit the rest of the world,
Speaker 4: and it's not clear that the alternatives would be adequate
Speaker 4: for the rest of us.
Speaker 1: So just to kind of crystallize this idea in our minds,
Speaker 1: like walk us through what would need to happen in
Speaker 1: order to make some other types of reserve assets more
Speaker 1: viable options than US treasuries, Like what would make a
Speaker 1: South African bond a proper replacement for a US tenure
Speaker 1: or what would make I don't know, a Brazilian bond
Speaker 1: of replacement.
Speaker 4: Well, I mean those two countries, I think, are you're
Speaker 4: making absolute maximum difficulty because.
Speaker 1: I ask the hard question.
Speaker 2: Both of those economies rise and fall with commodity prices.
Speaker 4: You know, Brazil its iron ore and soybeans, South Africa
Speaker 4: sort of platinum, palladium in particular, also coal that you know,
Speaker 4: as commodity prices rise and fall, that dictates everything for
Speaker 4: those economies. It even dictates the credit cycle because Brazil
Speaker 4: and South Africa are in a much better position to
Speaker 4: cut interrast rates when the external balances are healthy and
Speaker 4: commodity prices are overwhelmingly driven by China, I mean, especially
Speaker 4: in Brazil. I think Brazil you know, comes second after
Speaker 4: Australia in terms of economies sort of most driven by
Speaker 4: the Chinese property cycle.
Speaker 2: So you know, I don't see scope there.
Speaker 4: I mean what you're looking at are well, one is
Speaker 4: alternatives to US treasuries sort of within US financial markets.
Speaker 4: But you know, a US investment grade corporate bond doesn't
Speaker 4: really trade that much. I mean, an investment grade emerging
Speaker 4: market debt bond in dollars, you know, does tend to
Speaker 4: trade very much off the treasury market, and the extent
Speaker 4: it doesn't very much of US dollar denominated credit.
Speaker 2: It's very, very difficult.
Speaker 4: I mean, the question is also is China, And again
Speaker 4: it's China, It's not anyone else. Maybe the Saudist to
Speaker 4: a certain extent, doing this in a context where they're
Speaker 4: continuing to use the external surplus, they're continuing to have
Speaker 4: massive excess savings for domestic policy means, because deploying ten
Speaker 4: percent of GDP is a colossally more difficult task than
Speaker 4: deploying you know, two percent of GDP.
Speaker 2: Which is where they are at the moment.
Speaker 4: You can probably slip two percent of GDP into emerging
Speaker 4: markets and venture capital and Europe and whatever else. You
Speaker 4: can't put ten percent of GDP. I mean, the problem
Speaker 4: with emerging markets is that they're allocated as a special
Speaker 4: asset class to people like me because they are different.
Speaker 4: You know, the legal rules are very difficult. You know,
Speaker 4: the idea that a minority shareholder should get some benefit
Speaker 4: from the success of a company in Russia is really
Speaker 4: regarded as ludicrous by most, you know, by most people
Speaker 4: of influence within Russia. It's you know, if you can
Speaker 4: go through the history, if you you know, you look
Speaker 4: at ucas, you look at the contact, you know, sort of.
Speaker 4: I mean, Russia is a particularly bad example, but it's
Speaker 4: not out there. You can look at what's going on
Speaker 4: with the Dani in India. You know, the the returns
Speaker 4: on a long horizon from emerging market investments have been
Speaker 4: absolutely dismal for a long time. And I think that
Speaker 4: institutional backdrop that you know, that does narrow the field
Speaker 4: for profitable investments. So is there a supply of you know,
Speaker 4: not necessarily liquid, because there's nothing remotely as liquid as treasuries,
Speaker 4: but you know, investible with a reasonable chance of positive
Speaker 4: economic returns in the medium term that isn't plugged into
Speaker 4: the US or its or its allies.
Speaker 2: I think, you know that there's quite a big question
Speaker 2: mark over that.
Speaker 4: I mean, that's not to say that you can't do
Speaker 4: what Turkey is doing, you know, and sell influence, you know,
Speaker 4: and I think that there's a lot of money going
Speaker 4: into places like Turkey sort of to buy influence rather
Speaker 4: than you know, for pure economic reasons.
Speaker 3: But what do you mean I want to ask you
Speaker 3: a question about China, but can you explain what you
Speaker 3: mean by by influence what's going on in Turkey?
Speaker 4: Yeah, I mean Turkey is an interesting one because you're
Speaker 4: never sure if this is purely driven by what the
Speaker 4: current Turkish administration wants to do, purely, you know, for
Speaker 4: its own reasons, or.
Speaker 2: Whether they're doing it. The Turks are running a very
Speaker 2: big external deficit.
Speaker 4: They've they've pegged the lira effectively to the US dollar
Speaker 4: for about nine months now, even as they're running sort
Speaker 4: of double digit credit growth, growing external surplus, and yet
Speaker 4: at the same time their growth, foreign exchange reserves are
Speaker 4: growing with it.
Speaker 2: You know, it's pretty clear.
Speaker 4: That there's Saudi and ka Tari money, probably some Abudhabi
Speaker 4: money in as well. At the same time, Turkey is
Speaker 4: a major conduit for sanctions busting gas flows out of Russia.
Speaker 4: They've been instrumental in holding out the expansion of NATO,
Speaker 4: you know, they you know, at the same time, you know,
Speaker 4: the NATO air base in in Chillik is still open.
Speaker 2: It's there's a question.
Speaker 4: Of whether this is just Turkish pre electoral politics or
Speaker 4: whether that there are you know, they they're relying on
Speaker 4: or they've been paid off. Sounds awfully crude, but you
Speaker 4: know that there are financial flows which are playing part
Speaker 4: of that calculation. You know, we've seen it with Hungary,
Speaker 4: the promise of cheap gas that doesn't seem seem to
Speaker 4: have been fulfilled. But you know, as you go around
Speaker 4: the even stuff like you know, Honduras recently took itself
Speaker 4: off the very short list of countries which recognized Taiwan
Speaker 4: as an independent country.
Speaker 2: You know, that's not a huge amount of money in.
Speaker 4: Chinese terms, but certainly there were financial flows involved there.
Speaker 3: Since you mentioned China there, and I wanted to ask
Speaker 3: a broader follow up on it, which is that Okay,
Speaker 3: Like Tracy asked the really hard question, the almost a
Speaker 3: possible question of what does the world look like or
Speaker 3: a Brazilian or a ten year or a South African
Speaker 3: ten years a replacement for a treasury, But like, let's
Speaker 3: ask the less hard question of, like, okay, what would
Speaker 3: it for the R and B or Chinese debt to
Speaker 3: start really becoming a meaningful global reserve asset? What would
Speaker 3: be the policy choice that China would have to make
Speaker 3: domestically or the trade off that China would have to
Speaker 3: make behind just trading globally and expanding its trade position.
Speaker 3: In order for its financial assets to play their role globally,
Speaker 3: the Chinese would.
Speaker 4: Have to stop creating such vast surpluses, which means that
Speaker 4: all the various incentives in place to create massive excess
Speaker 4: saving in China, or some of them, are going to
Speaker 4: have to be relaxed. You know, if you're a Chinese person,
Speaker 4: there's a very weak social safety net. Until recently, you're
Speaker 4: only allowed one child. So to protect yourself with the future,
Speaker 4: you had to make sort of much higher levels of
Speaker 4: financial saving than pretty much anyone else in the world, you.
Speaker 2: Know, financial oppression. You can't invest abroad.
Speaker 4: That whole apparatus for creating you know, savings forty to
Speaker 4: fifty percent of GDP has to be at.
Speaker 2: The very least wound back.
Speaker 4: You probably need to relax capital controls materially. You need
Speaker 4: to reframe economic policy very seriously. I mean, the thing
Speaker 4: that makes China so important to the global financial system
Speaker 4: means that it's actually not a great destination for capital
Speaker 4: because you know, to the extent that the Chinese want
Speaker 4: to get rid of these excess savings, they certainly don't
Speaker 4: want excess Saudi or Indian or anybody else's savings because
Speaker 4: that just makes the task that much more difficult. But
Speaker 4: I think, you know, it has to address this issue
Speaker 4: of huge excess savings.
Speaker 1: So the idea of certain emerging market economies kind of
Speaker 1: banding together to do this, And I mentioned this in
Speaker 1: the intro, But we have seen the bricks, for instance,
Speaker 1: make some noises about. I think Russia slash Vladimir Putin
Speaker 1: talked explicitly about this common currency bricks idea. But what
Speaker 1: is the driving force there? Like who stands to benefit
Speaker 1: the most? Is it Russia or China? And I guess
Speaker 1: what I'm kind of getting at is what is the
Speaker 1: common thread that unites these countries if there are any.
Speaker 4: I mean, I think it's a negative rather than a positive.
Speaker 4: It's independence from you know, one, the effect of US
Speaker 4: policy actions on asset prices, that if you have asset
Speaker 4: prices that aren't overwhelmingly denominated in US dollars, then you
Speaker 4: have a little bit more detachment from the US.
Speaker 2: Two is independence from US.
Speaker 4: Financial regulation and US sanctions, And I think those two
Speaker 4: are really the big driver. Ideally, there's a de linking
Speaker 4: from the impact of the US dollar that you but
Speaker 4: I mean, whatever you switch to, you're going to have
Speaker 4: the same issues with So I'm not sure that's as
Speaker 4: central as as it's been been pitched at. But mostly
Speaker 4: it's you know, it's de linking from the dollar. It's
Speaker 4: a negative. Rather than that there's you know that there's
Speaker 4: some holy grail out there that might be attainable. I mean,
Speaker 4: I you know, I made this comparison before, but you know,
Speaker 4: the bricks really isn't you know that it's not the
Speaker 4: bricks that matter. It's China that matters. China is seventy
Speaker 4: two percent of bricks GDP, it's eighty percent of bricks growth. Yeah,
Speaker 4: it's you know, it's the bulk of the external surplus.
Speaker 4: It's you know, it's it's everything else. I mean, I
Speaker 4: made the Dictator of Albanian and Vohoha used to sort
Speaker 4: of say, together the Chinese and the Albanians are a
Speaker 4: quarter of the world's population, you know, And I think,
Speaker 4: you know, it's a it's an overstatement. You know, I'm
Speaker 4: in India, clearly you know matters a bit. But you know,
Speaker 4: I think we spend a lot of time talking about
Speaker 4: the bricks when we really should be talking about China.
Speaker 3: Well, we did an episode recently with Henry Williams and
Speaker 3: David Ogg's sort of taking a long term view one
Speaker 3: global development, and it was sort of the same theme
Speaker 3: that there are all these numbers that look really good
Speaker 3: in terms of the globe is getting richer and people
Speaker 3: are rising, et cetera. And really that number is just
Speaker 3: it's a large part basically the incredible boom in Chinese
Speaker 3: wealth over the last decades. When you sort of look
Speaker 3: ex China, the numbers are significantly less rosy.
Speaker 2: So that makes sense.
Speaker 3: You know, let's just say there, let's accept the sort
Speaker 3: of premise that there is this sort of new impulse
Speaker 3: among multiple countries to tilt somewhat the reserve mix, to
Speaker 3: think about maybe being less inclined to automatically put money
Speaker 3: in treasuries. Is there a cost to the US from that,
Speaker 3: because I mean, you know, if we go back to
Speaker 3: the sort of like Michael Pettis Matthew Klein framework that
Speaker 3: you mentioned, the dominant role of the dollar, maybe it
Speaker 3: was making it artificially or sort of like I don't
Speaker 3: know if artificial is the right word, but a premium
Speaker 3: that was parstly in some way to US workers and
Speaker 3: so forth, like in your view, like what is the
Speaker 3: cost of some of these shifts to sort of US interests?
Speaker 2: That's it. That's it.
Speaker 4: I mean, it's an incredibly complicated question. You know, does
Speaker 4: the US you know, the exorbitant privilege? I mean it
Speaker 4: the main thing the US has which nobody else has
Speaker 4: is that it really doesn't have to care about anybody else.
Speaker 4: You know that You've that not only have you got
Speaker 4: relatively closed economy, but nobody else is really you know,
Speaker 4: the decisions of other central banks aren't affecting US monetary conditions.
Speaker 4: You don't have to adjust for that. And I think
Speaker 4: that's the key case. I think the very low cost
Speaker 4: of borrowing in the US. I mean, it's most clearly
Speaker 4: felt in the treasury market. I mean of a total trade.
Speaker 4: I mean, the total treasury stock is about thirty billion,
Speaker 4: and about a quarter of that is owned by foreigners,
Speaker 4: you know, and that include you know, and the biggest
Speaker 4: holder is Japan. So it's not all breaks and it's
Speaker 4: not all countries which are looking at the paradigm. But
Speaker 4: I think the idea that excess savings elsewhere feed through
Speaker 4: to the US exceptionally because of dollar dominance, so you've
Speaker 4: had a lower cost of capital, but you know, have
Speaker 4: financial conditions. Has a US benefited unconditionally from looser financial
Speaker 4: conditions over the last twenty years. I think there's a
Speaker 4: very strong case that it hasn't. The impact of the
Speaker 4: dollar has been that financial conditions have been we have
Speaker 4: been looser, that treasury yields have been lower as a
Speaker 4: result of it. But I mean it's a removal of control,
Speaker 4: I think, and it's having to factor in thing, you know,
Speaker 4: decisions made by people who don't have your best interests
Speaker 4: at heart, that that suddenly becomes a consideration for US policymakers.
Speaker 1: Again, I want to go back to this idea of
Speaker 1: you know, a lot of merging market narrative being basically
Speaker 1: all about China. And this is again Joe already mentioned
Speaker 1: the episode that we recently did on the failure of globalization.
Speaker 1: But is the takeaway from all of this that, you know,
Speaker 1: we have been having conversations about the global economy pivoting
Speaker 1: towards ems, pivoting towards places like China, India, Brazil for
Speaker 1: literally decades now, and maybe in the case of China,
Speaker 1: there is some evidence that it's happening in China is
Speaker 1: now the world's second biggest economy, but for the most part,
Speaker 1: a lot of the EM strength that was anticipated hasn't
Speaker 1: actually materialized. Is that the big takeaway here that the
Speaker 1: EM narrative just is failing.
Speaker 2: Yeah, I mean, as an EM professional, am.
Speaker 1: I basically asking are you in the wrong job?
Speaker 2: You're asking, you know, have I wasted my career? I
Speaker 2: think there's a reasonable case that I have.
Speaker 4: It's just I mean you divide it in sort of
Speaker 4: two that sort of pre two thousand and eight, before
Speaker 4: the global financial crisis, you had emerging markets rely on
Speaker 4: growing about two three percent faster than developed markets, and
Speaker 4: you could use that to build the narrative of the bricks.
Speaker 4: You know that there's catch up that a wildly disproportionate
Speaker 4: part of marginal growth is going to accrue to emerging.
Speaker 2: Markets and people.
Speaker 4: And as you say, people got very confused and started
Speaker 4: attributing to emerging markets when they actually meant China. But
Speaker 4: pre two thousand and eight, you could make it. You
Speaker 4: could really make a case that something important was happening
Speaker 4: in emerging markets that weren't China or India. I think
Speaker 4: since the global financial crisis, or more precisely since twenty eleven,
Speaker 4: when we got past the immediate impacts of the huge
Speaker 4: Chinese stimulus, which whacked up commodity prices and got Brazil
Speaker 4: and Prue and all the metals exporters humming again. Since then,
Speaker 4: it's been very, very hard to make a convincing case
Speaker 4: that there's anything that's really going to matter to the
Speaker 4: rest of the world that isn't really pretty much all
Speaker 4: about China and maybe India, which is something for me
Speaker 4: to reflect on.
Speaker 1: Yeah, I think that's a good place to leave it
Speaker 1: with Paul in Existential Crisis. Paul McNamara, thank you so
Speaker 1: much for coming on all lots. Appreciate your insights and
Speaker 1: your reflection on your own career.
Speaker 2: Thanks very much. Chiz.
Speaker 3: Yeah, that was great, Paul, thank you so much.
Speaker 2: Great talking to.
Speaker 4: Joe.
Speaker 1: I found that really interesting. I mean, I do think
Speaker 1: we have to get Zultan back on the podcast at
Speaker 1: some point, but this was like a very good overview
Speaker 1: of some of the issues. Because people throw around the
Speaker 1: dedollarization idea all the time without actually thinking through a
Speaker 1: lot of the technicalities, and I think Paul's point about
Speaker 1: what are the viable alternatives or substitutes is a really
Speaker 1: salient one, and we have It is true that we
Speaker 1: have seen some central banks start to move away from
Speaker 1: US treasuries. I know there's been a big boom in
Speaker 1: gold buying by official accounts over the past here, but realistically,
Speaker 1: you need a big market to actually put that money into,
Speaker 1: and there aren't that many viable options.
Speaker 2: No, totally.
Speaker 3: I mean I think you nailed it.
Speaker 2: Well.
Speaker 3: What's striking to me, just sort of broadly, is this
Speaker 3: is a perennial or every decade conversation, the end of
Speaker 3: the dollar, dedollarization, et cetera. It's usually and probably even
Speaker 3: still is today somewhat overhyped and overcooked. But to hear
Speaker 3: someone like Paul say like, look, there is something real
Speaker 3: here going on. They can't be entirely dismissed that there
Speaker 3: is a political shift in several countries around the world,
Speaker 3: whether they look at the loss of foreign reserves that
Speaker 3: Russia experienced or other things that even preceded the war,
Speaker 3: perhaps related to inflation as well. I think we have
Speaker 3: to stand up and sort of take note. Absolutely, still
Speaker 3: a long way.
Speaker 1: Yeah, absolutely, it's never It's never good when you know,
Speaker 1: if you think about the US's biggest export, it's financial assets, right,
Speaker 1: it's US treasuries, And it's never good when your customers
Speaker 1: are actively and vocally trying to get away from you.
Speaker 1: I do think it's worth discussing and even thinking back
Speaker 1: to a year ago again when Sultan's first research note
Speaker 1: came out and there was this idea of the multipolar
Speaker 1: world deed auorization. There was a lot of pushback on that,
Speaker 1: but over the past year or so we've seen that
Speaker 1: theme sort of calcify.
Speaker 3: But the other thing, too, I completely agree.
Speaker 2: Like the other thing too is I.
Speaker 3: Think to some extent, like the US, starting under Trump,
Speaker 3: is making this sort of I don't know how purposeful
Speaker 3: it is, but kind of purposeful sort of assessment of, well,
Speaker 3: maybe we don't want our biggest export to be financial assets.
Speaker 3: And so when you see like some of the shift
Speaker 3: towards domestic manufacturing, domestic chip capability, building, more LNG export terminals,
Speaker 3: et cetera. But no, I think, but I just think
Speaker 3: like both parts both are moving parts. Like I don't
Speaker 3: think we could totally dismiss that there's something going on
Speaker 3: domestically the US where it's like, no, totally also making
Speaker 3: this decision where we don't really love the status quo either.
Speaker 1: But the counter argument to that would be, do you
Speaker 1: want an economy in which the main buyers of US
Speaker 1: treasuries are all domestic financial institutions like banks?
Speaker 2: Sure? And then yeah, sure, and then we.
Speaker 1: Have problems like what we saw over the past month.
Speaker 1: I think you and I could talk about this, probably
Speaker 1: for another hour and go round it around.
Speaker 2: We'll get some guests on instead.
Speaker 1: Yeah, follow up, Let's do that. Okay, shall we leave
Speaker 1: it there?
Speaker 2: Let's leave it there.
Speaker 1: This has been another episode of the Odd Thoughts podcast.
Speaker 1: I'm Tracy Alloway. You can follow me on Twitter at
Speaker 1: Tracy Alloway.
Speaker 3: And I'm Joe Wisenthal. You can and follow me on
Speaker 3: Twitter at the Stalwart. Follow our guest Paul McNamara. He's
Speaker 3: at m Underscore Paul McNamara. Follow our producers Carmen Rodriguez
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