1 00:00:11,960 --> 00:00:15,320 Speaker 1: Hello, and welcome to another episode of the All Thoughts podcast. 2 00:00:15,400 --> 00:00:19,160 Speaker 1: I'm Tracy Allaway and I'm Joe. Wisn't thal so, Joe. 3 00:00:19,280 --> 00:00:21,840 Speaker 1: You know, there's a very very important date coming up. 4 00:00:23,160 --> 00:00:28,360 Speaker 1: Mm hmm what is it. I'll give you a hint. 5 00:00:28,680 --> 00:00:33,720 Speaker 1: It's in October. Oh, right, of course. Uh, major major 6 00:00:33,760 --> 00:00:35,760 Speaker 1: deadline for the trade tariff. It took me a second, 7 00:00:35,760 --> 00:00:40,159 Speaker 1: I'm sorry. Yes, those are always happening. But there's a 8 00:00:40,240 --> 00:00:43,720 Speaker 1: date that's even more important, and it's actually really important 9 00:00:43,800 --> 00:00:47,920 Speaker 1: for the US China trade war. But it's October one, 10 00:00:48,880 --> 00:00:52,479 Speaker 1: and that is the National Day of the People's Republic 11 00:00:52,479 --> 00:00:55,880 Speaker 1: of China. And this year it's even more important than 12 00:00:56,000 --> 00:01:00,040 Speaker 1: usual because it's the seventieth anniversary of the founding of 13 00:01:00,080 --> 00:01:04,640 Speaker 1: the PRC ah Okay that that I didn't realize, Okay, 14 00:01:04,680 --> 00:01:07,360 Speaker 1: And this tends to be a sort of politically sensitive 15 00:01:07,480 --> 00:01:10,679 Speaker 1: date for the Chinese authorities. It usually comes with a 16 00:01:10,680 --> 00:01:14,679 Speaker 1: big military parade and they seed the clouds to a 17 00:01:14,680 --> 00:01:16,800 Speaker 1: couple of days before to make sure that the skies 18 00:01:16,840 --> 00:01:20,000 Speaker 1: are blue. And it's a big, huge holiday, but it's 19 00:01:20,080 --> 00:01:24,200 Speaker 1: also a chance for the authorities to sort of evaluate 20 00:01:24,520 --> 00:01:28,640 Speaker 1: or more likely, um sort of crow about everything. They've 21 00:01:28,680 --> 00:01:32,760 Speaker 1: done to improve China, including the economy. I like how 22 00:01:32,800 --> 00:01:34,759 Speaker 1: you just sort of casually throw in there that they 23 00:01:34,760 --> 00:01:38,200 Speaker 1: affect the weather for the day. Yeah, it's really interesting. 24 00:01:38,280 --> 00:01:41,320 Speaker 1: Everyone knows it's going to be good weather on October one. 25 00:01:41,720 --> 00:01:44,880 Speaker 1: That's amazing. So I thought, in connection with the October 26 00:01:45,040 --> 00:01:49,120 Speaker 1: first state, we could talk about how far China has 27 00:01:49,320 --> 00:01:52,520 Speaker 1: or hasn't come when it when it comes to the 28 00:01:52,560 --> 00:01:56,920 Speaker 1: goal of rebalancing their economy. Right, And this is something 29 00:01:56,920 --> 00:01:59,480 Speaker 1: that people have been talking about for a long time 30 00:01:59,560 --> 00:02:03,440 Speaker 1: because people look at the Chinese economy and they see, 31 00:02:03,520 --> 00:02:06,520 Speaker 1: at least on the service all kinds of crazy things 32 00:02:06,600 --> 00:02:12,360 Speaker 1: going on. There's very historically, there's been extreme fluctuations and 33 00:02:12,400 --> 00:02:16,880 Speaker 1: asset prices, real estate prices, claims of real estate bubbles, 34 00:02:17,200 --> 00:02:22,040 Speaker 1: an economy extremely geared towards investment, and so forth. And 35 00:02:22,120 --> 00:02:25,359 Speaker 1: so people look at an economy that's grown extraordinarily, well, 36 00:02:25,680 --> 00:02:28,280 Speaker 1: that's brought all kinds of wealth to people over the 37 00:02:28,360 --> 00:02:31,240 Speaker 1: last several decades, going from one of the poorest countries 38 00:02:31,280 --> 00:02:33,679 Speaker 1: in the world to uh, you know, building up this 39 00:02:33,800 --> 00:02:38,320 Speaker 1: significant middle class. But they still see extraordinary imbalances and 40 00:02:38,400 --> 00:02:42,560 Speaker 1: skewed forces domestically. That's right, and The big one is, 41 00:02:42,600 --> 00:02:46,640 Speaker 1: of course, the the imbalance between an investment driven economy 42 00:02:46,800 --> 00:02:49,799 Speaker 1: on the way to becoming more of a consumption driven economy. 43 00:02:49,880 --> 00:02:53,320 Speaker 1: That's the big one. And to talk about this, we 44 00:02:53,320 --> 00:02:56,160 Speaker 1: we really have the perfect person are. Our guest for 45 00:02:56,200 --> 00:02:59,960 Speaker 1: today is Michael Pettis. He's finance professor over at Packing 46 00:03:00,080 --> 00:03:04,799 Speaker 1: University and also senior Fellow at the Carnegie Endowment. He's 47 00:03:04,840 --> 00:03:08,760 Speaker 1: also a former banker and a trader and has been 48 00:03:08,800 --> 00:03:12,440 Speaker 1: watching exactly this and writing about it for a very, 49 00:03:12,560 --> 00:03:15,120 Speaker 1: very long time. So we're very happy to have Michael 50 00:03:15,280 --> 00:03:17,400 Speaker 1: on the show today. I can't wait. I've been I've 51 00:03:17,400 --> 00:03:20,760 Speaker 1: been wanting us to have a podcast with an episode 52 00:03:20,760 --> 00:03:22,799 Speaker 1: with Michael for a long time, So really looking forward 53 00:03:22,840 --> 00:03:26,600 Speaker 1: to jumping into this one. Yeah, no pressure, Michael, Thank 54 00:03:26,600 --> 00:03:30,880 Speaker 1: you so much for coming on. My pleasure. So maybe 55 00:03:31,000 --> 00:03:32,880 Speaker 1: just to begin with, we we could talk a little 56 00:03:32,880 --> 00:03:35,560 Speaker 1: bit about what we mean when we talk about an 57 00:03:35,600 --> 00:03:40,360 Speaker 1: investment driven economy versus a consumption driven economy. What does 58 00:03:40,400 --> 00:03:42,680 Speaker 1: that actually mean and how does it pertain to the 59 00:03:42,720 --> 00:03:46,760 Speaker 1: case of China. An investment driven economy can also be 60 00:03:46,800 --> 00:03:50,160 Speaker 1: thought of as a savings driven e company, and China 61 00:03:50,280 --> 00:03:53,200 Speaker 1: is not the only country that's followed this growth model 62 00:03:54,080 --> 00:03:57,120 Speaker 1: at least two dozen countries that since the Second World War, 63 00:03:57,840 --> 00:04:00,320 Speaker 1: and you could argue that this model was more less 64 00:04:00,360 --> 00:04:04,080 Speaker 1: invented in the nineteen thirties in the Soviet Union, but 65 00:04:04,200 --> 00:04:08,360 Speaker 1: basically in a consumption driven economy, and the classic case 66 00:04:08,440 --> 00:04:11,280 Speaker 1: that is probably the United States in the nineteenth century. 67 00:04:12,000 --> 00:04:15,880 Speaker 1: Um you had very high wage levels. It was high 68 00:04:15,920 --> 00:04:19,800 Speaker 1: wages that drove high levels of comment, which then drove 69 00:04:20,560 --> 00:04:24,440 Speaker 1: high levels of investment to those consumption needs. And it 70 00:04:24,520 --> 00:04:27,800 Speaker 1: also grow productivity growth and a bunch of other things. 71 00:04:27,839 --> 00:04:30,960 Speaker 1: In in the savings economy, what you do is you 72 00:04:31,040 --> 00:04:34,320 Speaker 1: force up the savings rate, which is usually a good 73 00:04:34,320 --> 00:04:37,800 Speaker 1: thing to do in a developing country because developing countries 74 00:04:37,920 --> 00:04:41,919 Speaker 1: tend to have insufficient investment, and they tend to have 75 00:04:41,960 --> 00:04:45,640 Speaker 1: insufficient investment because they have insufficient domestic savings. So you 76 00:04:45,680 --> 00:04:49,279 Speaker 1: force up the savings rate in order to increase the 77 00:04:49,320 --> 00:04:53,360 Speaker 1: amount of savings that are available for domestic investment, and 78 00:04:53,440 --> 00:04:57,560 Speaker 1: you can get very, very rapid growth as long as 79 00:04:57,600 --> 00:05:00,520 Speaker 1: you continue to be under invested in that's really the 80 00:05:00,600 --> 00:05:05,720 Speaker 1: problem in China in the nineties, China had gone through 81 00:05:05,839 --> 00:05:09,840 Speaker 1: five decades of Maoism, the Civil War and anti Japanese war, 82 00:05:10,520 --> 00:05:13,680 Speaker 1: and it was hugely under investment for its level of development, 83 00:05:13,680 --> 00:05:17,560 Speaker 1: for its for its the its ability to absorb investment productively. 84 00:05:18,360 --> 00:05:21,240 Speaker 1: And so a model found that really focused on pushing 85 00:05:21,279 --> 00:05:24,960 Speaker 1: up investment as rapidly as possible was the right model. 86 00:05:25,400 --> 00:05:27,760 Speaker 1: And for that you have to push up the savings rate. 87 00:05:27,800 --> 00:05:31,000 Speaker 1: And here's what I think. There's a huge amount of 88 00:05:31,320 --> 00:05:35,440 Speaker 1: misconception about China. China, as everyone knows, that's the highest 89 00:05:35,440 --> 00:05:38,360 Speaker 1: savings rate in the world. But that's not a cultural 90 00:05:38,440 --> 00:05:40,760 Speaker 1: propensity to save. It's got nothing to do with what 91 00:05:40,880 --> 00:05:44,880 Speaker 1: households want to do. China has the highest savings rate 92 00:05:44,960 --> 00:05:48,680 Speaker 1: in the world because it has the lowest household share 93 00:05:48,839 --> 00:05:53,520 Speaker 1: of GDP. In other words, they produced a hundred dollars 94 00:05:53,560 --> 00:05:58,520 Speaker 1: of GDP and their total compensation is roughly fifty dollars, 95 00:05:58,520 --> 00:06:02,800 Speaker 1: and so of course their consumption is less than that. 96 00:06:02,800 --> 00:06:05,680 Speaker 1: That's why China has such a low consumptions and such 97 00:06:05,720 --> 00:06:09,960 Speaker 1: a high saving ship. Now, this is a great model 98 00:06:10,080 --> 00:06:12,840 Speaker 1: when you have significant amount of investment that you need 99 00:06:12,880 --> 00:06:17,200 Speaker 1: to do when you're severely under invested economy, which China 100 00:06:17,360 --> 00:06:20,840 Speaker 1: was in the eighties and nine nineties. But at some point, 101 00:06:20,960 --> 00:06:22,760 Speaker 1: perhaps at the end of the nineties or beginning of 102 00:06:22,800 --> 00:06:27,159 Speaker 1: the two thousand's trying to reach the level of investment 103 00:06:27,240 --> 00:06:30,800 Speaker 1: that it could productively absorb. And and in that case, 104 00:06:30,880 --> 00:06:32,719 Speaker 1: what it should have done is that could have switched 105 00:06:32,720 --> 00:06:36,320 Speaker 1: this growth model towards more of a consumption driven growth model, 106 00:06:36,760 --> 00:06:39,760 Speaker 1: and that's what has been trying to do. But the 107 00:06:39,760 --> 00:06:42,000 Speaker 1: the the important point to remember is that if you 108 00:06:42,080 --> 00:06:47,120 Speaker 1: want the consumption share of GDP to grow, then you've 109 00:06:47,160 --> 00:06:50,600 Speaker 1: got to get the household income fare to grow. And 110 00:06:50,640 --> 00:06:52,680 Speaker 1: if you want the household incomes share to grow, you've 111 00:06:52,680 --> 00:06:56,120 Speaker 1: got to reduce someone else's share. And that's why it's 112 00:06:56,120 --> 00:07:01,120 Speaker 1: such a politically difficult problem for China. So, Michael, you've 113 00:07:01,160 --> 00:07:05,800 Speaker 1: been writing about this problem or this challenge for China 114 00:07:06,040 --> 00:07:10,040 Speaker 1: for several years, and I went back, I was over 115 00:07:10,080 --> 00:07:13,640 Speaker 1: the weekend doing so propriating your book from You're like, 116 00:07:13,680 --> 00:07:17,800 Speaker 1: it's pretty clear that in the coming years they're reaching 117 00:07:17,880 --> 00:07:22,040 Speaker 1: the absolute limits to the existing investment driven model. They 118 00:07:22,080 --> 00:07:24,760 Speaker 1: have to make the change now, because if they don't 119 00:07:24,800 --> 00:07:28,880 Speaker 1: make it gradually, it's going to be a painful adjustment. Eventually, 120 00:07:29,600 --> 00:07:33,000 Speaker 1: explain to us the sort of specific mechanism by which 121 00:07:33,040 --> 00:07:36,160 Speaker 1: the investment driven growth model has to come to an end. 122 00:07:36,200 --> 00:07:39,120 Speaker 1: Why it can't last forever, why it uh, why it 123 00:07:39,200 --> 00:07:42,480 Speaker 1: must run into a wall? And then since then, like 124 00:07:42,520 --> 00:07:45,560 Speaker 1: in recent years and before the trade war. So before 125 00:07:45,600 --> 00:07:47,640 Speaker 1: we get to like the sort of immediate stuff, how 126 00:07:47,720 --> 00:07:52,960 Speaker 1: has China done with its domestic rebalancing in your view models, 127 00:07:53,040 --> 00:07:55,960 Speaker 1: But lean have significant amounts of productive investment that you 128 00:07:56,040 --> 00:07:58,760 Speaker 1: need to do. And the way it works, since you 129 00:07:58,840 --> 00:08:03,080 Speaker 1: borrow dollars, you invested in building a factory, of building 130 00:08:03,080 --> 00:08:06,720 Speaker 1: a road, building bridge, that increases the value of the 131 00:08:06,760 --> 00:08:10,560 Speaker 1: economy by a hundred and ten dollars. So you're fine, 132 00:08:10,960 --> 00:08:14,160 Speaker 1: your debt's going up, but your your debt burden is 133 00:08:14,200 --> 00:08:17,960 Speaker 1: actually going down. That's healthy growth. But when you reach 134 00:08:18,040 --> 00:08:21,000 Speaker 1: the point at which you can no longer absorb all 135 00:08:21,000 --> 00:08:24,480 Speaker 1: of this investment productively, So again, you borrow a hundred dollars, 136 00:08:24,640 --> 00:08:28,360 Speaker 1: you build something, but there's something only creates twenty dollars 137 00:08:28,360 --> 00:08:31,560 Speaker 1: worth of value for the economy. Now you have a 138 00:08:31,600 --> 00:08:35,040 Speaker 1: hundred dollars of additional debt, but only twenty dollars of 139 00:08:35,040 --> 00:08:38,280 Speaker 1: additional debt service and capacity. So now your debt burden 140 00:08:38,400 --> 00:08:41,600 Speaker 1: is growing, and that's you know, you can argue it's 141 00:08:41,640 --> 00:08:43,720 Speaker 1: been this has been the case of the last ten years, 142 00:08:43,720 --> 00:08:46,360 Speaker 1: of the last twenty years or whatever. It's certainly been 143 00:08:46,360 --> 00:08:49,720 Speaker 1: the case. And that's why China. China's debt burden has 144 00:08:49,800 --> 00:08:54,920 Speaker 1: exploded to becoming among the highest developing countries. What do 145 00:08:54,920 --> 00:08:57,600 Speaker 1: we think about China's debt burden at the moment, because 146 00:08:57,600 --> 00:09:01,520 Speaker 1: we've had China bears warning about it for I mean, 147 00:09:01,840 --> 00:09:05,680 Speaker 1: over a decade at this point. And yet even though 148 00:09:05,720 --> 00:09:09,240 Speaker 1: we we see these concerns and we see the authorities 149 00:09:09,320 --> 00:09:13,480 Speaker 1: you know, occasionally try to reduce credit in the wider economy, um, 150 00:09:13,520 --> 00:09:15,959 Speaker 1: they tend to give up after a couple of years, 151 00:09:15,960 --> 00:09:19,400 Speaker 1: and if the economy starts to slow, they just ramp 152 00:09:19,520 --> 00:09:23,480 Speaker 1: up lending again. So is this something that can keep 153 00:09:23,480 --> 00:09:27,360 Speaker 1: going for for a while longer? It probably can for 154 00:09:27,400 --> 00:09:30,120 Speaker 1: another two or three years. Now. There are types of 155 00:09:30,240 --> 00:09:33,280 Speaker 1: China Bear warnings about the debt I would say a 156 00:09:33,360 --> 00:09:35,360 Speaker 1: lot of them have looked at the debt problem said 157 00:09:36,080 --> 00:09:38,600 Speaker 1: if that continues going, China will have a debt crisis. 158 00:09:39,160 --> 00:09:41,560 Speaker 1: I don't think that's what the history tells us. Debt 159 00:09:41,559 --> 00:09:44,360 Speaker 1: crisis one of the ways you resolve the debt problems, 160 00:09:44,920 --> 00:09:47,360 Speaker 1: but another way you resolve it have failed to resolve 161 00:09:47,400 --> 00:09:51,840 Speaker 1: it is through a really long, slow adjustment. So for example, 162 00:09:51,920 --> 00:09:56,679 Speaker 1: Japan after never had a debt crisis, I think that's 163 00:09:56,720 --> 00:10:00,040 Speaker 1: the moon likely outcome in China because that crisis it 164 00:10:00,120 --> 00:10:03,040 Speaker 1: was really a balance sheet problem, it's not a debt problem. 165 00:10:03,080 --> 00:10:05,679 Speaker 1: And in China, as long as the system was closed 166 00:10:06,280 --> 00:10:09,920 Speaker 1: and the regulators to be powerful, um, they can always 167 00:10:10,000 --> 00:10:12,960 Speaker 1: restructure liabilities, in which case you will never have a 168 00:10:13,000 --> 00:10:15,600 Speaker 1: debt crisis. But that doesn't mean you won't have a 169 00:10:15,640 --> 00:10:19,640 Speaker 1: debt problem. As the debt level grows, the debt itself 170 00:10:19,679 --> 00:10:23,600 Speaker 1: becomes a constraint on on the future growth. And the 171 00:10:23,679 --> 00:10:27,360 Speaker 1: problem is can only continue growing as long as debt 172 00:10:27,440 --> 00:10:31,880 Speaker 1: continues growing even more quickly. Now we don't know where 173 00:10:31,920 --> 00:10:35,080 Speaker 1: the limit to debt capacity is, but we certainly don't 174 00:10:35,080 --> 00:10:37,200 Speaker 1: want to find out, and I think in Beijing there's 175 00:10:37,240 --> 00:10:40,160 Speaker 1: a growing sense that wherever that limit is, we're getting 176 00:10:40,200 --> 00:10:43,000 Speaker 1: awfully close to it. So we started to see in 177 00:10:43,080 --> 00:10:47,000 Speaker 1: the last two years a much more serious attitude towards 178 00:10:47,080 --> 00:10:50,400 Speaker 1: trying to reign in debt. They haven't done, so that 179 00:10:50,559 --> 00:10:53,840 Speaker 1: continues to grow much more faster than any measure of 180 00:10:53,840 --> 00:10:58,480 Speaker 1: debt servicing capacity, but at least it's improve it. The 181 00:10:58,760 --> 00:11:02,680 Speaker 1: Chinese investment led growth model has been built on several 182 00:11:02,720 --> 00:11:09,280 Speaker 1: foundations which keep household household spending, household consumption, household income unnaturally. 183 00:11:09,360 --> 00:11:14,880 Speaker 1: Low interest rates are said artificially low, punishing or hurting savers. 184 00:11:14,960 --> 00:11:19,520 Speaker 1: Savers don't have very good investment opportunities. Worker rights aren't 185 00:11:19,520 --> 00:11:23,800 Speaker 1: particularly strong. There are other things built into the system 186 00:11:23,880 --> 00:11:27,679 Speaker 1: that is essentially create a lot of household procarity and 187 00:11:27,960 --> 00:11:32,679 Speaker 1: drive the savings rate up. Has China done anything structural 188 00:11:32,840 --> 00:11:36,400 Speaker 1: in the last few years to make a meaningful change 189 00:11:36,600 --> 00:11:41,679 Speaker 1: towards this domestic rebalancing in your view? You know, not, really, 190 00:11:41,720 --> 00:11:44,800 Speaker 1: there has been some improvement. If you look at the 191 00:11:45,760 --> 00:11:51,000 Speaker 1: consumption share of GDP, it's risen pretty significantly in the 192 00:11:51,080 --> 00:11:53,960 Speaker 1: last four or five years. But there are two things 193 00:11:54,000 --> 00:11:57,200 Speaker 1: that account for almost all of that growth. The first 194 00:11:57,240 --> 00:12:00,200 Speaker 1: thing is just that GDP has dropped to grow than 195 00:12:00,280 --> 00:12:03,719 Speaker 1: GDP has dropped significantly, so the consumption share, just as 196 00:12:03,720 --> 00:12:07,840 Speaker 1: a matter of arithmetic, gets larger and larger. The second 197 00:12:07,840 --> 00:12:10,559 Speaker 1: thing is, you know, there's two ways you can increase 198 00:12:10,720 --> 00:12:13,280 Speaker 1: the consumption share of GDP for any country, not just 199 00:12:13,360 --> 00:12:18,480 Speaker 1: for China. One way is to increase household debt. The 200 00:12:18,520 --> 00:12:21,920 Speaker 1: other way is to increase the house that income share 201 00:12:22,040 --> 00:12:25,959 Speaker 1: of GDP. Now four or five, China had very little 202 00:12:25,960 --> 00:12:30,120 Speaker 1: household debt and since then it's really exploded. But that's 203 00:12:30,120 --> 00:12:32,800 Speaker 1: not sustainable because if you're trying to solve for a 204 00:12:32,840 --> 00:12:36,480 Speaker 1: debt problem, obviously additional debt isn't the way you're going 205 00:12:36,520 --> 00:12:39,760 Speaker 1: to fix the problem. So we're probably reaching a limit there. 206 00:12:40,240 --> 00:12:43,360 Speaker 1: What they really have to do is do the transfers. 207 00:12:43,400 --> 00:12:46,680 Speaker 1: But when you go through all of the mechanics, ultimately 208 00:12:47,400 --> 00:12:50,520 Speaker 1: they have to transfer well from local governments and local 209 00:12:50,559 --> 00:12:54,160 Speaker 1: elites to the household sector. And there's you know, a 210 00:12:54,240 --> 00:12:55,920 Speaker 1: dozen different ways you can do it, and now I 211 00:12:56,000 --> 00:12:57,800 Speaker 1: have to do them all. But the problem is a 212 00:12:57,840 --> 00:13:00,440 Speaker 1: political problem, and that is the local government's the local 213 00:13:00,480 --> 00:13:04,960 Speaker 1: elites very very strongly resist these wealth transfers. Well, I 214 00:13:04,960 --> 00:13:07,760 Speaker 1: wanted to press you on this issue, and you mentioned 215 00:13:07,760 --> 00:13:10,280 Speaker 1: this already, but one thing you often hear is that 216 00:13:10,520 --> 00:13:16,360 Speaker 1: the Chinese are culturally prone to excess savings, possibly because 217 00:13:16,360 --> 00:13:18,760 Speaker 1: of recent history where there was a lot of turmoil 218 00:13:18,840 --> 00:13:22,560 Speaker 1: in the country, possibly because of a lack of social 219 00:13:22,559 --> 00:13:27,560 Speaker 1: safety net in China. So are there political solutions to 220 00:13:27,640 --> 00:13:34,600 Speaker 1: this problem and what could those realistically actually be well. 221 00:13:34,800 --> 00:13:39,880 Speaker 1: The key is increasing the household share of GDP. One 222 00:13:39,920 --> 00:13:41,960 Speaker 1: of the ways of doing so, of course, is strengthening 223 00:13:42,040 --> 00:13:44,840 Speaker 1: the social safety net, although it depends on how you 224 00:13:44,840 --> 00:13:48,079 Speaker 1: pay for it. So if you strengthen the social safety 225 00:13:48,080 --> 00:13:51,640 Speaker 1: net and pay for it by borrowing at negative real 226 00:13:51,760 --> 00:13:55,200 Speaker 1: rates from household sector, then what you're doing is you 227 00:13:55,280 --> 00:13:58,120 Speaker 1: are uh you know, with one hand you're giving them 228 00:13:58,160 --> 00:14:00,719 Speaker 1: additional income in the form of the stone safety net, 229 00:14:01,320 --> 00:14:03,199 Speaker 1: and with the other hand you're taking it away from 230 00:14:03,240 --> 00:14:05,920 Speaker 1: them in the form of a negative return on their savings. 231 00:14:06,600 --> 00:14:09,480 Speaker 1: The key is that it has to be funded by 232 00:14:09,559 --> 00:14:12,920 Speaker 1: transfers from the household sector. Let me let me give 233 00:14:12,920 --> 00:14:16,520 Speaker 1: a classic case of how this could happen. Very unlikely 234 00:14:16,520 --> 00:14:19,120 Speaker 1: because it's politically quite difficult. But as you know, in 235 00:14:19,280 --> 00:14:21,840 Speaker 1: China you have what's called the Huko system, which means 236 00:14:21,880 --> 00:14:25,120 Speaker 1: that as a Chinese you're only allowed to live and 237 00:14:25,120 --> 00:14:27,720 Speaker 1: work in the area for which you have a permit 238 00:14:27,760 --> 00:14:30,440 Speaker 1: called the hukoh So when you think about all these 239 00:14:30,640 --> 00:14:34,320 Speaker 1: migrant workers and saying Beijing, most of them here are 240 00:14:34,400 --> 00:14:37,880 Speaker 1: technically illegal. Now they're allowed to work here, but the 241 00:14:37,920 --> 00:14:43,960 Speaker 1: problem is they have a limited ability to access city services, schooling, medical, treatment. 242 00:14:44,600 --> 00:14:47,040 Speaker 1: They have limited standing and law if they ever get 243 00:14:47,080 --> 00:14:51,000 Speaker 1: into a conflict with their employers c So imagine that 244 00:14:51,120 --> 00:14:56,720 Speaker 1: you eliminate the Hukoh overnight. Immediately, migrant workers would be 245 00:14:56,840 --> 00:15:02,800 Speaker 1: richer because they would now have full access city services. Also, immediately, 246 00:15:02,880 --> 00:15:05,680 Speaker 1: the city would be poorer because it now has to 247 00:15:05,720 --> 00:15:08,640 Speaker 1: cover all of these services. This would be a classic 248 00:15:08,680 --> 00:15:11,600 Speaker 1: transfer mechanism, and it's something the Chinese have been talking 249 00:15:11,600 --> 00:15:14,880 Speaker 1: about for many years. It's just too politically difficult to 250 00:15:14,920 --> 00:15:40,520 Speaker 1: pull it off. So let's fast forward to the present day. 251 00:15:40,600 --> 00:15:43,880 Speaker 1: Because obviously, and this is something you've talked about in 252 00:15:43,920 --> 00:15:46,960 Speaker 1: your writing, is that you know, the the growth model 253 00:15:47,080 --> 00:15:50,840 Speaker 1: can continue even with all the dead even with all 254 00:15:50,840 --> 00:15:55,760 Speaker 1: the domestic imbalances, so long as there's a significant amount 255 00:15:55,800 --> 00:15:59,000 Speaker 1: of foreign demand for Chinese goods and as long as 256 00:15:59,000 --> 00:16:01,520 Speaker 1: someone is out there buying in. For a long time, 257 00:16:01,880 --> 00:16:04,280 Speaker 1: really for the whole world, but for China in particular, 258 00:16:04,400 --> 00:16:09,200 Speaker 1: the US has been a major contributor of demand for 259 00:16:09,440 --> 00:16:12,400 Speaker 1: goods of all of all sorts, and we see that 260 00:16:12,480 --> 00:16:16,400 Speaker 1: now running into an obvious problem, which is President Trump 261 00:16:16,480 --> 00:16:19,920 Speaker 1: and the trade war and this sort of general feeling 262 00:16:19,960 --> 00:16:23,000 Speaker 1: maybe in the US that the current system is going 263 00:16:23,040 --> 00:16:24,800 Speaker 1: on too far, and we don't want to be the 264 00:16:24,800 --> 00:16:29,119 Speaker 1: the demand creator of last resort for the Chinese economy. 265 00:16:30,000 --> 00:16:33,240 Speaker 1: How is that contributing to what we're seeing domestically? I mean, 266 00:16:33,240 --> 00:16:36,120 Speaker 1: we know the data for China has not been particularly good. 267 00:16:36,520 --> 00:16:40,120 Speaker 1: Some talk recently about giving up on the six percent 268 00:16:40,240 --> 00:16:43,760 Speaker 1: GDP growth goal. Talk to us about how you know 269 00:16:44,160 --> 00:16:46,760 Speaker 1: there's all these all these challenges, and how the additional 270 00:16:46,880 --> 00:16:50,160 Speaker 1: challenge of the US no no longer wanting to play 271 00:16:50,240 --> 00:16:53,240 Speaker 1: its UH the role it has been for the last 272 00:16:53,520 --> 00:16:57,840 Speaker 1: few decades. How that is affecting things. Everything that China produces, 273 00:16:57,880 --> 00:17:01,440 Speaker 1: everything that any countries has to be evolved in one 274 00:17:01,440 --> 00:17:06,520 Speaker 1: of three ways. It's either consumed domestically, or it's invested domestically, 275 00:17:07,240 --> 00:17:10,720 Speaker 1: or it's consumed or invested abroad, which is through the 276 00:17:11,000 --> 00:17:15,359 Speaker 1: through the trades, or plus. So the total UH, total 277 00:17:15,440 --> 00:17:18,640 Speaker 1: GDP that's produced in China goes into one of those 278 00:17:18,680 --> 00:17:22,000 Speaker 1: three things. Now, the consumption shares we discuss is very 279 00:17:22,119 --> 00:17:26,119 Speaker 1: very low, so much of it goes into investment and 280 00:17:26,280 --> 00:17:30,159 Speaker 1: the trades built plus investment we want to bring down 281 00:17:30,200 --> 00:17:34,679 Speaker 1: as quickly as possible because China is investing primarily and 282 00:17:34,760 --> 00:17:38,040 Speaker 1: stuff that's not productive. So that's just represents a growth 283 00:17:38,080 --> 00:17:42,280 Speaker 1: in the debt um But here's the problem. If the 284 00:17:42,400 --> 00:17:46,400 Speaker 1: US were to put in constraints that forced the Chinese 285 00:17:46,440 --> 00:17:51,480 Speaker 1: trade surplus to contract, then China either has to accept 286 00:17:51,520 --> 00:17:55,639 Speaker 1: lower growth because now it can't sell everything that it's producing, 287 00:17:55,720 --> 00:17:59,119 Speaker 1: so it has to close down factories and fireworkers, or 288 00:17:59,160 --> 00:18:00,960 Speaker 1: it has to make up for that growth in some 289 00:18:01,040 --> 00:18:03,840 Speaker 1: other way. And the only other way it can make 290 00:18:03,920 --> 00:18:07,280 Speaker 1: up for that growth is by increasing investment even further, 291 00:18:07,720 --> 00:18:11,800 Speaker 1: which means increasing the debt burden even more quickly. That's 292 00:18:11,800 --> 00:18:15,600 Speaker 1: why the trade conflict is so important for China. It's 293 00:18:15,600 --> 00:18:19,359 Speaker 1: sort of it sort of mediates the pace at which 294 00:18:19,400 --> 00:18:24,880 Speaker 1: they can bring down investment, and the smaller the trade surplus, 295 00:18:25,000 --> 00:18:28,000 Speaker 1: then the more slowly they're able to bring down investments. 296 00:18:28,000 --> 00:18:32,959 Speaker 1: And that's the big problem now, the the overall trade problem. 297 00:18:33,240 --> 00:18:35,240 Speaker 1: You know, China is not even the worst defender of 298 00:18:35,320 --> 00:18:38,120 Speaker 1: this case. The Germany and Japan have bigger current accounts 299 00:18:38,119 --> 00:18:42,240 Speaker 1: surfaces than China does, and the problem there is really 300 00:18:42,240 --> 00:18:45,440 Speaker 1: on the capital side. No, this gets a little bit technical, 301 00:18:45,560 --> 00:18:48,760 Speaker 1: but what ends up happening if you have a very 302 00:18:48,880 --> 00:18:52,760 Speaker 1: very high savings rate, uh and and and all countries 303 00:18:52,920 --> 00:18:56,400 Speaker 1: really high stavings rates. Contrary to popular opinion, they don't 304 00:18:56,440 --> 00:18:59,480 Speaker 1: have high savings rates because there are countries that value drift. 305 00:19:00,119 --> 00:19:04,560 Speaker 1: The Germans aren't particularly more thrifty than other Europeans. They 306 00:19:04,560 --> 00:19:08,399 Speaker 1: have high savings grades because the household share of DDP 307 00:19:08,720 --> 00:19:13,480 Speaker 1: is low and the share the controlled by businesses or 308 00:19:13,520 --> 00:19:16,679 Speaker 1: by the government or by the wealthiest quite high. So 309 00:19:16,840 --> 00:19:20,040 Speaker 1: those are high saving entities. You take money away from 310 00:19:20,280 --> 00:19:23,840 Speaker 1: a low saving, high confirming part of the economy and 311 00:19:23,880 --> 00:19:26,480 Speaker 1: give it to a high saving, low consuming part of 312 00:19:26,480 --> 00:19:30,400 Speaker 1: the economy, your savings right to automatically goes up. Now, 313 00:19:30,440 --> 00:19:34,480 Speaker 1: if your savings exceeds your investments, then you have to 314 00:19:34,640 --> 00:19:38,240 Speaker 1: export the excess savings, which is just the flip side 315 00:19:38,240 --> 00:19:42,080 Speaker 1: of running a current account or trade surplus. So countries 316 00:19:42,119 --> 00:19:46,840 Speaker 1: with excess savings have to export those savings somewhere. Trade 317 00:19:46,880 --> 00:19:49,560 Speaker 1: theory tells us that they export them to developing countries 318 00:19:49,600 --> 00:19:52,879 Speaker 1: that need the savings, but of course we know that's nonsense. 319 00:19:53,119 --> 00:19:56,960 Speaker 1: Most of it goes to wealthy countries that don't need 320 00:19:57,000 --> 00:20:01,200 Speaker 1: the savings, for example, the US, and as a result, 321 00:20:01,240 --> 00:20:07,719 Speaker 1: because the US is forced to absorb foreign capital that's 322 00:20:07,720 --> 00:20:11,160 Speaker 1: that's exported to the US. Then it must also run 323 00:20:11,160 --> 00:20:16,840 Speaker 1: the corresponding um current account or trade deficit. Now it's 324 00:20:16,880 --> 00:20:19,840 Speaker 1: a little pedantic, but the point of all of that 325 00:20:19,960 --> 00:20:23,520 Speaker 1: is to suggest that the reason the US runs a 326 00:20:23,560 --> 00:20:28,160 Speaker 1: trade deficit is because it runs a capital account surplus 327 00:20:28,200 --> 00:20:31,840 Speaker 1: over which it has no control. If that's the case, 328 00:20:32,640 --> 00:20:36,320 Speaker 1: then putting tariffs on Chinese goods is worse than useless. 329 00:20:36,359 --> 00:20:39,920 Speaker 1: It has no impact at all. It will reduce the 330 00:20:40,080 --> 00:20:45,320 Speaker 1: US deficit with China, but if Chinese savings continue to 331 00:20:45,440 --> 00:20:49,240 Speaker 1: pour into the US, China will continue to run a 332 00:20:49,320 --> 00:20:52,560 Speaker 1: surplus and the US will continue to run a deficit, 333 00:20:52,640 --> 00:20:55,800 Speaker 1: just not with each other. The only impact the tariffs 334 00:20:55,840 --> 00:20:59,119 Speaker 1: have is to shift trade around. They don't really affect 335 00:20:59,160 --> 00:21:02,359 Speaker 1: the overall sir plus of China or the overall deficit 336 00:21:02,400 --> 00:21:04,280 Speaker 1: of the United States. And you can see that in 337 00:21:04,320 --> 00:21:07,920 Speaker 1: the data. The US deficit with China has gone down, 338 00:21:08,560 --> 00:21:10,680 Speaker 1: the US deficit with the rest of the world has 339 00:21:10,720 --> 00:21:15,600 Speaker 1: gone up by even more, exactly as you would expect. So, 340 00:21:15,840 --> 00:21:18,159 Speaker 1: just to be clear, is the suggestion here that the 341 00:21:18,880 --> 00:21:21,200 Speaker 1: trade war between the U S and China is basically 342 00:21:21,680 --> 00:21:26,000 Speaker 1: sort of an excess money problem, and the US is 343 00:21:26,040 --> 00:21:31,760 Speaker 1: maybe indirectly trying to shrink these capital inflows by targeting 344 00:21:32,040 --> 00:21:36,520 Speaker 1: Chinese goods, because that's one way that it could possibly 345 00:21:36,760 --> 00:21:40,439 Speaker 1: alter those inflows. Yes, it's just the wrong way of 346 00:21:40,440 --> 00:21:43,639 Speaker 1: doing it, but but that's exactly right. So the country 347 00:21:43,680 --> 00:21:45,800 Speaker 1: like China has such a high savings and it's not 348 00:21:45,880 --> 00:21:51,200 Speaker 1: an accident. It's because when you have policies that force 349 00:21:51,400 --> 00:21:57,280 Speaker 1: the household sector to subsidize manufacturing, then of course that 350 00:21:57,359 --> 00:22:00,679 Speaker 1: means that ultimately the part of product she retained by 351 00:22:00,720 --> 00:22:03,520 Speaker 1: the household sector goes lower and lower. So you can 352 00:22:03,560 --> 00:22:06,680 Speaker 1: take the case of Germany in two thousands three, two 353 00:22:06,720 --> 00:22:11,160 Speaker 1: thousand four the Hearts reforms. Basically the Hearts reforms represented 354 00:22:11,720 --> 00:22:16,600 Speaker 1: a transfer of income from German workers two German businesses. 355 00:22:16,960 --> 00:22:21,680 Speaker 1: The households share went down profits sword that's why Germany 356 00:22:21,800 --> 00:22:26,200 Speaker 1: was so competitive in the international markets because basically workers 357 00:22:26,280 --> 00:22:30,479 Speaker 1: subsidize their exports. It's the same thing in China. And 358 00:22:30,520 --> 00:22:33,359 Speaker 1: that's really what the US has to address, not the 359 00:22:33,680 --> 00:22:36,640 Speaker 1: not the not through tariffs. So if you're President Trump, 360 00:22:37,480 --> 00:22:42,000 Speaker 1: or sorry, if you're advising President Trump, you'd say, don't uh, 361 00:22:42,119 --> 00:22:45,720 Speaker 1: you know, forget about all the terroraffs and soybeans or 362 00:22:45,720 --> 00:22:49,200 Speaker 1: and all these things. Pressure j and pink to get 363 00:22:49,280 --> 00:22:53,520 Speaker 1: rid of the JUCO system, transfer the domestic wealth of 364 00:22:53,560 --> 00:22:58,040 Speaker 1: the country to the workers, eliminate this excess savings that 365 00:22:58,160 --> 00:23:00,840 Speaker 1: causes all the excess money to come to the US 366 00:23:01,280 --> 00:23:03,800 Speaker 1: and actually put money in the hands of people who 367 00:23:03,880 --> 00:23:09,359 Speaker 1: might over time by stuff from the US. Absolutely, of course, 368 00:23:09,400 --> 00:23:12,119 Speaker 1: the US can't really go insane right right now, I know, 369 00:23:12,280 --> 00:23:15,760 Speaker 1: just exaggerating, But that's sort of like the contours here, 370 00:23:16,200 --> 00:23:20,040 Speaker 1: which is that And I have to admit just I know, 371 00:23:20,160 --> 00:23:22,479 Speaker 1: like you have a book coming out next year with 372 00:23:23,320 --> 00:23:26,920 Speaker 1: Matt Klein who's at Barrens, and I remember reading this, 373 00:23:27,080 --> 00:23:28,640 Speaker 1: I think a year ago. He had a really good 374 00:23:28,680 --> 00:23:31,960 Speaker 1: column sort of making this point, which is that the 375 00:23:32,040 --> 00:23:34,280 Speaker 1: real way for the US to make progress on the 376 00:23:34,320 --> 00:23:39,800 Speaker 1: trade war would be for essentially the US to pressure 377 00:23:40,040 --> 00:23:44,440 Speaker 1: a that domestic realignment that you've been talking about, so 378 00:23:44,560 --> 00:23:47,600 Speaker 1: that more of the money in China is in the 379 00:23:47,640 --> 00:23:50,199 Speaker 1: hands of consumers as opposed to people with a lot 380 00:23:50,240 --> 00:23:54,399 Speaker 1: of extra cash to put somewhere exact exactly right, you know, 381 00:23:54,800 --> 00:23:57,960 Speaker 1: when when the Chinese sell us something from a hundred dollars, 382 00:23:58,000 --> 00:24:00,680 Speaker 1: that's a hundred dollar flow from from that the US 383 00:24:00,720 --> 00:24:04,399 Speaker 1: to China. Ideally we want that money to flow back 384 00:24:05,080 --> 00:24:07,640 Speaker 1: in the form of imports of goods, it will flow back, 385 00:24:08,440 --> 00:24:11,400 Speaker 1: but it typically flows back in the form of imports 386 00:24:11,440 --> 00:24:15,320 Speaker 1: of capital. So the Chinese will buy US treasury bones 387 00:24:15,760 --> 00:24:20,359 Speaker 1: rather than US manufacturing equipment, and that's surely caused because 388 00:24:20,400 --> 00:24:24,280 Speaker 1: of the way income is distributed in China. Um. Now, 389 00:24:24,720 --> 00:24:27,439 Speaker 1: they're the only way the US can really pressure China 390 00:24:28,000 --> 00:24:30,800 Speaker 1: and Germany and Japan and the rest of them to 391 00:24:30,960 --> 00:24:35,480 Speaker 1: fix their domestic problems is by somehow refusing to allow 392 00:24:35,560 --> 00:24:39,440 Speaker 1: that capital to flow into the US, perhaps by taxing 393 00:24:39,480 --> 00:24:42,639 Speaker 1: and perhaps by quotas. I don't know, but that's really 394 00:24:42,720 --> 00:24:44,480 Speaker 1: the kind of pressure that the U s should be 395 00:24:44,480 --> 00:24:48,200 Speaker 1: able to resort, right, So this is something that keeps 396 00:24:48,240 --> 00:24:51,280 Speaker 1: coming up. And just to play Devil's advocate for a second, 397 00:24:52,280 --> 00:24:55,719 Speaker 1: can you walk us through both the positives and the 398 00:24:55,800 --> 00:24:59,680 Speaker 1: negatives of having a lot of foreign money basically poor 399 00:25:00,000 --> 00:25:02,919 Speaker 1: into the US, Because on the one hand, clearly it 400 00:25:03,000 --> 00:25:06,800 Speaker 1: affects employment through manufacturing, but on the other hand, it 401 00:25:06,880 --> 00:25:10,199 Speaker 1: does lower the US is funding costs and you know, 402 00:25:10,520 --> 00:25:13,840 Speaker 1: helps people maybe spend more than they would otherwise. So 403 00:25:14,080 --> 00:25:16,199 Speaker 1: there seem to be pros and cons. So could you 404 00:25:16,240 --> 00:25:18,440 Speaker 1: just walk us through them and how you see it? 405 00:25:18,760 --> 00:25:22,440 Speaker 1: Net net as a positive or negative. Yeah, So suppose 406 00:25:22,480 --> 00:25:26,119 Speaker 1: the rest of the world exports one hundred dollars to 407 00:25:26,200 --> 00:25:29,600 Speaker 1: the US. You know, we start from from balanced payments, 408 00:25:30,320 --> 00:25:32,840 Speaker 1: and then for whatever reason, their savings go up and 409 00:25:32,880 --> 00:25:36,280 Speaker 1: they export a hundred dollars to the US. That means 410 00:25:36,400 --> 00:25:40,440 Speaker 1: in the US we will have a hundred dollar capital 411 00:25:40,480 --> 00:25:44,760 Speaker 1: account of surplus and we must have a hundred dollar 412 00:25:45,280 --> 00:25:48,520 Speaker 1: current account deficits. So how do we get the deficit. Well, 413 00:25:48,560 --> 00:25:52,919 Speaker 1: if the US are developing country, then, for example, the 414 00:25:52,960 --> 00:25:56,639 Speaker 1: way it was in the nineteenth century, then investment in 415 00:25:56,680 --> 00:25:59,720 Speaker 1: the US there would be huge investment needs that would 416 00:25:59,720 --> 00:26:03,720 Speaker 1: be strained by the lack of domestic savings. In that case, 417 00:26:04,000 --> 00:26:06,520 Speaker 1: foreign money coming into the US would be a good thing. 418 00:26:07,280 --> 00:26:10,480 Speaker 1: It would cause American investment to go up. That's exactly 419 00:26:10,520 --> 00:26:13,520 Speaker 1: what happened in the nineteenth century when the US depended 420 00:26:13,640 --> 00:26:17,240 Speaker 1: very heavily on British capital for its domestic investment. But 421 00:26:17,320 --> 00:26:20,840 Speaker 1: the US isn't a developing country anymore. Uh. Now we 422 00:26:20,920 --> 00:26:24,359 Speaker 1: have a different problem. We have too much capital interest rate. Sorry, 423 00:26:24,520 --> 00:26:29,679 Speaker 1: historically historically low levels. American businesses have huge hordes of 424 00:26:29,720 --> 00:26:31,800 Speaker 1: cash on their balance sheet which they are unable to 425 00:26:31,840 --> 00:26:35,560 Speaker 1: invest so then they do stock buybacks and things like that. 426 00:26:36,119 --> 00:26:39,679 Speaker 1: Um So, if you increase the amount of um of 427 00:26:39,720 --> 00:26:42,480 Speaker 1: foreign savings, the increasing amount of capital and the US 428 00:26:42,520 --> 00:26:47,440 Speaker 1: by hundred doors, will US investment go up? Well, clearly 429 00:26:47,560 --> 00:26:51,160 Speaker 1: it doesn't, and we have evidence from other countries. So 430 00:26:51,400 --> 00:26:55,520 Speaker 1: for example, again Germany after two thousand three, two thousand four, 431 00:26:56,200 --> 00:26:59,720 Speaker 1: when they're savings went up and the cost of capital declimbed, 432 00:27:00,359 --> 00:27:03,800 Speaker 1: their investment didn't go up. It actually went down. And 433 00:27:03,840 --> 00:27:06,200 Speaker 1: I think that reflects the fact that we're no longer 434 00:27:06,280 --> 00:27:10,240 Speaker 1: living in a capital constrained world. We have even negative 435 00:27:10,280 --> 00:27:14,679 Speaker 1: interest rates to drive down the American savings rate, either 436 00:27:14,760 --> 00:27:19,920 Speaker 1: you increase unemployment, or you increase household debt, or you 437 00:27:20,000 --> 00:27:24,320 Speaker 1: increase the fiscal deficit. None of those are good things obviously. 438 00:27:24,840 --> 00:27:28,120 Speaker 1: So that's why for the US running a current account 439 00:27:28,119 --> 00:27:32,119 Speaker 1: deficit in a capital account surplus is a real problem. 440 00:27:32,160 --> 00:27:34,359 Speaker 1: And so that's why I think it does make sense 441 00:27:34,359 --> 00:27:38,000 Speaker 1: for the Trump administration. And Bernie Sanders said the same thing, 442 00:27:38,080 --> 00:27:40,639 Speaker 1: and and Liz with Orans said the same thing for 443 00:27:40,720 --> 00:27:44,320 Speaker 1: them to address the current account deficit. It's just that 444 00:27:44,359 --> 00:27:48,520 Speaker 1: they're addressing it the wrong way. Yeah, I thought it 445 00:27:48,600 --> 00:27:52,879 Speaker 1: was pretty striking that during one of the recent Democratic debates, 446 00:27:53,400 --> 00:27:58,679 Speaker 1: the moderator asked the candidate, who would uh immediately reverse 447 00:27:59,160 --> 00:28:02,359 Speaker 1: Trump's terror on China? And none of them raise their hands. 448 00:28:02,800 --> 00:28:05,159 Speaker 1: And so even to your point, maybe that's not the 449 00:28:05,280 --> 00:28:09,720 Speaker 1: right that's not the right approach. There is this political 450 00:28:09,760 --> 00:28:14,480 Speaker 1: alignment in the US between Trump and the Democrats where 451 00:28:14,520 --> 00:28:16,840 Speaker 1: none of them want to go back to the old 452 00:28:16,960 --> 00:28:20,600 Speaker 1: relationship with China right away. It's no one thinks it's 453 00:28:20,600 --> 00:28:24,200 Speaker 1: as simple as just reversing trumps um and that everything's fine. 454 00:28:24,960 --> 00:28:27,399 Speaker 1: And I know again, I know you have an upcoming 455 00:28:27,440 --> 00:28:30,639 Speaker 1: book sort of exploring this dimension or the sort of 456 00:28:30,680 --> 00:28:36,119 Speaker 1: the connection between class warfare and trade warfare, domestic inequality 457 00:28:36,240 --> 00:28:39,800 Speaker 1: and trade wars. Regardless of whether Trump is pursuing the 458 00:28:39,880 --> 00:28:42,360 Speaker 1: right approach, everything that you've laid out on what all 459 00:28:42,400 --> 00:28:44,960 Speaker 1: of our political leaders seemed to intuit is that there 460 00:28:45,000 --> 00:28:49,160 Speaker 1: really was something truly broken about the existing or the 461 00:28:49,680 --> 00:28:56,000 Speaker 1: the old relationship. Absolutely, it's the imbalances were much higher 462 00:28:56,000 --> 00:28:59,720 Speaker 1: than than than trade theory will submits. They last much 463 00:28:59,800 --> 00:29:02,920 Speaker 1: more more than trade theory would permit. They were created 464 00:29:02,920 --> 00:29:06,600 Speaker 1: by significant distortions. And you mentioned the book that Matt 465 00:29:06,720 --> 00:29:09,720 Speaker 1: Klein and I are are publishing. Sometimes I think it 466 00:29:09,840 --> 00:29:12,440 Speaker 1: may and and in in the book, what we try 467 00:29:12,480 --> 00:29:15,920 Speaker 1: to argue is that what looks like a conflict between 468 00:29:16,040 --> 00:29:21,000 Speaker 1: nations is really a conflict between economic sectors. The same 469 00:29:21,080 --> 00:29:25,480 Speaker 1: groups in China and in the US, or in Germany 470 00:29:25,520 --> 00:29:30,560 Speaker 1: and in Spain benefited from the imbalances, and the same 471 00:29:30,600 --> 00:29:34,400 Speaker 1: groups paid the cost of the imbalances. Who's the biggest 472 00:29:34,400 --> 00:29:37,880 Speaker 1: culprit when it comes to economic sectors? You mentioned both 473 00:29:37,920 --> 00:29:40,480 Speaker 1: in the case of the US and China, this idea 474 00:29:40,560 --> 00:29:44,720 Speaker 1: of corporates having a large size of national wealth. So 475 00:29:45,000 --> 00:29:48,720 Speaker 1: I'm just wondering, is there one particular entity that you 476 00:29:48,720 --> 00:29:52,880 Speaker 1: would say is worse than others? Well, you know, I've 477 00:29:52,880 --> 00:29:55,120 Speaker 1: spent most of my career on one street, so I 478 00:29:55,160 --> 00:29:58,240 Speaker 1: hate to say this, but the fact is, the global 479 00:29:58,280 --> 00:30:03,560 Speaker 1: banks benefit tremendous and this system from these international capital flows. Large, 480 00:30:04,280 --> 00:30:08,080 Speaker 1: large businesses that are easily able to move their operations 481 00:30:08,120 --> 00:30:12,560 Speaker 1: around benefit from it. Small producers and workers are there, 482 00:30:12,600 --> 00:30:16,600 Speaker 1: and household savers are ultimately the ones that pay for 483 00:30:16,640 --> 00:30:20,680 Speaker 1: this system. Before we go, we have to wrap it up. Surely, 484 00:30:20,680 --> 00:30:23,440 Speaker 1: I want to just turn to one other thing. It's 485 00:30:23,440 --> 00:30:27,000 Speaker 1: not directly related to this, but it touches on all 486 00:30:27,000 --> 00:30:29,600 Speaker 1: this stuff, of course, but these days there's a tremendous 487 00:30:29,640 --> 00:30:34,640 Speaker 1: amount of discussion and political pressure on Germany specifically to 488 00:30:35,640 --> 00:30:39,520 Speaker 1: expand engage in fiscal expansion. That when people look at 489 00:30:39,560 --> 00:30:42,000 Speaker 1: the imbalances in the world right now, obviously the U. S. 490 00:30:42,120 --> 00:30:44,920 Speaker 1: China trade relationship is all its issues, but that there's 491 00:30:44,960 --> 00:30:48,080 Speaker 1: this sort of obvious issue in Europe where the richest 492 00:30:48,080 --> 00:30:52,080 Speaker 1: country really should be spending a lot more and they 493 00:30:52,080 --> 00:30:55,040 Speaker 1: have this, uh, you know, obsession with balanced budgets doesn't 494 00:30:55,080 --> 00:30:58,000 Speaker 1: make any sense, and um, well, how big of a deal, 495 00:30:58,080 --> 00:31:02,960 Speaker 1: like how big of a problem is German fiscal rectitude 496 00:31:03,160 --> 00:31:07,320 Speaker 1: right now? And how what could happen if if they 497 00:31:07,400 --> 00:31:13,480 Speaker 1: don't do something to address their own imbalances. It's it's 498 00:31:13,520 --> 00:31:17,600 Speaker 1: a huge problem because you know, the problem that we 499 00:31:17,640 --> 00:31:21,760 Speaker 1: have globally is a demand side problem. We have insufficient demand. 500 00:31:22,520 --> 00:31:24,880 Speaker 1: And one of the reasons we have such weak demand 501 00:31:25,640 --> 00:31:29,760 Speaker 1: is because, thanks to income inequality and also thanks to 502 00:31:29,880 --> 00:31:34,360 Speaker 1: our cantilsm, the consuming part of the world is too small, 503 00:31:34,960 --> 00:31:39,600 Speaker 1: so there is insufficient consumption unless it's boosted by debt, 504 00:31:40,280 --> 00:31:43,680 Speaker 1: which of course is unsustainable and risky. And with that 505 00:31:43,760 --> 00:31:48,680 Speaker 1: insufficient consumption there's insufficient business investment to serve that consumption. 506 00:31:49,280 --> 00:31:52,520 Speaker 1: When Germany says that the solution for the world is 507 00:31:52,560 --> 00:31:55,880 Speaker 1: for everyone to be like us, that's a huge problem 508 00:31:55,920 --> 00:31:59,800 Speaker 1: because what that means is that everyone should continue lower 509 00:32:00,000 --> 00:32:03,080 Speaker 1: ages in order to become more competitive. But if we 510 00:32:03,160 --> 00:32:06,960 Speaker 1: all lower wages to become more competitive, we just get poor. 511 00:32:07,080 --> 00:32:10,160 Speaker 1: We run into the problem of the nineteen thirties, which 512 00:32:10,200 --> 00:32:14,080 Speaker 1: the then governor of the FED, a brilliant man by 513 00:32:14,120 --> 00:32:17,240 Speaker 1: the name of Mariner Echoes, explained it. He said that 514 00:32:17,400 --> 00:32:21,480 Speaker 1: as you keep pushing down workers wages in order to 515 00:32:21,560 --> 00:32:25,800 Speaker 1: benefit the wealthy, you're not even benefiting the wealthy because 516 00:32:25,840 --> 00:32:28,680 Speaker 1: if workers are unable to consume the things that the 517 00:32:28,720 --> 00:32:32,600 Speaker 1: wealthy produced, then everyone gets caught him this downward spiral, 518 00:32:33,360 --> 00:32:36,480 Speaker 1: and that's sort of what Germany forced onto the rest 519 00:32:36,520 --> 00:32:39,720 Speaker 1: of Europe. So I think that they're going to have 520 00:32:39,880 --> 00:32:44,280 Speaker 1: to change your fiscal rectitude, because I don't think they 521 00:32:44,320 --> 00:32:47,320 Speaker 1: really have a choice. Once the world is unable to 522 00:32:47,360 --> 00:32:50,840 Speaker 1: absorb all of Germany's excess production, and it's huge, it's 523 00:32:50,880 --> 00:32:53,560 Speaker 1: about nineotone percent a g d P, then what can 524 00:32:53,600 --> 00:32:57,200 Speaker 1: Germany do if it is unable to consume it domestically? 525 00:32:57,640 --> 00:33:01,080 Speaker 1: Then it must stop producing it, and stopping producing it 526 00:33:01,120 --> 00:33:05,440 Speaker 1: means closing down factories and firing workers, etcetera, etcetera. So ultimately, 527 00:33:05,480 --> 00:33:07,440 Speaker 1: I don't think they'll do that. I don't think. I 528 00:33:07,440 --> 00:33:10,080 Speaker 1: think they're smart enough to recognize that they have to 529 00:33:10,120 --> 00:33:13,280 Speaker 1: engage in domestic spending, and they will, but they'll only 530 00:33:13,320 --> 00:33:16,120 Speaker 1: do it when they're forced to. I think. So before 531 00:33:16,120 --> 00:33:18,959 Speaker 1: we go, one of our listeners said that we absolutely 532 00:33:19,080 --> 00:33:21,480 Speaker 1: have to ask you the following question. So I'm going 533 00:33:21,560 --> 00:33:24,120 Speaker 1: to try to tie it into some of the topics 534 00:33:24,240 --> 00:33:27,760 Speaker 1: that we've been discussing. But when you view China's economy, 535 00:33:27,920 --> 00:33:32,520 Speaker 1: are you confident that the rebalancing is going to happen? 536 00:33:33,080 --> 00:33:35,200 Speaker 1: And in what time frame do you think it might happen? 537 00:33:35,640 --> 00:33:39,360 Speaker 1: And also are you sort of positive about the direction 538 00:33:39,600 --> 00:33:43,400 Speaker 1: over of the overall China economy? And when you do 539 00:33:43,480 --> 00:33:45,520 Speaker 1: some of the other stuff that you do in Beijing, 540 00:33:45,680 --> 00:33:49,280 Speaker 1: which is you know a music label, you're involved in 541 00:33:49,320 --> 00:33:52,680 Speaker 1: the music scene over there, and I think at one 542 00:33:52,680 --> 00:33:54,640 Speaker 1: point you ran a club. I'm not sure if it's 543 00:33:54,680 --> 00:33:58,440 Speaker 1: still open or not. But what does that tell you 544 00:33:58,680 --> 00:34:03,320 Speaker 1: about the direction of the Chinese economy? Well, the question 545 00:34:03,440 --> 00:34:07,200 Speaker 1: is will rebalancing happen. Is is very obvious. Yes, it 546 00:34:07,320 --> 00:34:10,920 Speaker 1: has to happen, and it will happen. One thing historically 547 00:34:10,960 --> 00:34:14,279 Speaker 1: is we know that all great imbalances eventually reverse. The 548 00:34:14,400 --> 00:34:17,560 Speaker 1: question is how does it reverse. It could reverse in 549 00:34:17,640 --> 00:34:20,480 Speaker 1: the form of a crisis. So, for example, if you 550 00:34:20,520 --> 00:34:23,440 Speaker 1: look at the US in the early nine thirties, in 551 00:34:23,480 --> 00:34:26,480 Speaker 1: the US had many of the same problems that China did, 552 00:34:27,239 --> 00:34:30,560 Speaker 1: and the way it rebalanced was in the first three 553 00:34:30,640 --> 00:34:34,400 Speaker 1: years of the decade, GDP contracted by something like thirty 554 00:34:34,440 --> 00:34:40,520 Speaker 1: five the household income contracted by roughly half. That incredibly painful, 555 00:34:40,640 --> 00:34:44,279 Speaker 1: but it rebalanced. Another way of rebalancing is the way 556 00:34:44,320 --> 00:34:49,200 Speaker 1: the Japanese did after They also have the same imbalances 557 00:34:49,239 --> 00:34:53,560 Speaker 1: that China does. Nowhere needs the same imbalances, so they 558 00:34:53,640 --> 00:34:57,240 Speaker 1: rebalanced two, but they rebalanced in the form of two 559 00:34:57,280 --> 00:35:01,600 Speaker 1: lost decades of stagnant GDP growth. Those are basically the 560 00:35:01,640 --> 00:35:04,759 Speaker 1: models that the world gives us. Those are the two 561 00:35:04,760 --> 00:35:08,439 Speaker 1: ways you rebalance. And my guess is that China will 562 00:35:08,640 --> 00:35:13,200 Speaker 1: rebalance the Japanese way in a very long drawn out rebalancing. 563 00:35:14,200 --> 00:35:17,200 Speaker 1: Now for China, the sooner they start that process, the better, 564 00:35:17,640 --> 00:35:21,880 Speaker 1: which basically means the more rapidly GDP growth drops, the 565 00:35:21,960 --> 00:35:24,000 Speaker 1: better for China, and I have to say in the 566 00:35:24,080 --> 00:35:28,200 Speaker 1: last few months, I've been pretty impressed that they haven't 567 00:35:28,280 --> 00:35:31,920 Speaker 1: done what they always do when growth slows, and that 568 00:35:32,080 --> 00:35:35,360 Speaker 1: is the panic and stuff on the accelerator. They haven't 569 00:35:35,400 --> 00:35:39,120 Speaker 1: done that, and growth is slowing pretty sharply. I just 570 00:35:39,239 --> 00:35:41,759 Speaker 1: met with one of my former students, is very well 571 00:35:41,800 --> 00:35:44,839 Speaker 1: plugged in, and he thinks it's possible we may even 572 00:35:44,880 --> 00:35:48,759 Speaker 1: see months of five eight percent growth this year. That 573 00:35:48,920 --> 00:35:50,839 Speaker 1: I think would be a really good sign because that 574 00:35:50,880 --> 00:35:54,520 Speaker 1: means that China is really serious about getting its debt 575 00:35:54,600 --> 00:35:59,120 Speaker 1: under control. The problem is that I think they think 576 00:35:59,440 --> 00:36:02,719 Speaker 1: that is an are controlled somewhere around four and a 577 00:36:02,760 --> 00:36:06,200 Speaker 1: half the five, whereas I think it's it's got to 578 00:36:06,200 --> 00:36:10,040 Speaker 1: go below three before it gets under control. But we'll see, 579 00:36:10,080 --> 00:36:13,440 Speaker 1: We'll see what happens. And what about the music scene. 580 00:36:13,560 --> 00:36:16,280 Speaker 1: What does that tell you about the future of China. 581 00:36:16,520 --> 00:36:19,520 Speaker 1: There's been good and bad things, but one of the 582 00:36:19,680 --> 00:36:22,360 Speaker 1: one of the most exciting things about being in China, 583 00:36:22,920 --> 00:36:24,560 Speaker 1: and it's something that I think a lot of people 584 00:36:24,640 --> 00:36:27,600 Speaker 1: miss because they're looking for the wrong signals, and that 585 00:36:27,760 --> 00:36:32,760 Speaker 1: is there's this incredibly buoyant cultural explosion taking place among 586 00:36:32,800 --> 00:36:35,920 Speaker 1: the urban young China, and music is at the center 587 00:36:35,920 --> 00:36:37,480 Speaker 1: of it, but it's not the only part of it. 588 00:36:37,880 --> 00:36:39,839 Speaker 1: You see it in fashion, you see it in art, 589 00:36:39,880 --> 00:36:42,160 Speaker 1: you see it in comics, you see the movies, lots 590 00:36:42,160 --> 00:36:45,759 Speaker 1: of different things. It's really quite impressive what's happening here. 591 00:36:46,280 --> 00:36:49,400 Speaker 1: But I don't think that should be a surprise. Chinese 592 00:36:49,440 --> 00:36:52,279 Speaker 1: incomes have have have soared in the last twenty to 593 00:36:52,400 --> 00:36:55,319 Speaker 1: thirty years, and China has gone from a country that 594 00:36:55,480 --> 00:36:59,800 Speaker 1: is primarily rural to one that is primarily urban, and 595 00:37:00,000 --> 00:37:04,000 Speaker 1: and we've never seen anything take place at this speed before, 596 00:37:04,719 --> 00:37:06,799 Speaker 1: so we don't really know what the result is going 597 00:37:06,840 --> 00:37:09,640 Speaker 1: to be, but it's probably a safe bet that it's 598 00:37:09,640 --> 00:37:14,440 Speaker 1: going to be culturally extremely interesting, in something very vibrant. Alright, 599 00:37:14,520 --> 00:37:16,359 Speaker 1: Michael Pettis, we're going to have to have you come 600 00:37:16,400 --> 00:37:19,000 Speaker 1: back on just to talk about music for an episode. 601 00:37:19,040 --> 00:37:22,640 Speaker 1: I think I'd love to. That was great. Thank you 602 00:37:22,719 --> 00:37:24,719 Speaker 1: so much, Michael. That was I learned so much. I 603 00:37:24,719 --> 00:37:28,160 Speaker 1: really appreciate it. Thanks very much. I hope that was useful. 604 00:37:47,000 --> 00:37:49,480 Speaker 1: So I love that conversation and I love that we're 605 00:37:49,480 --> 00:37:52,239 Speaker 1: having at a sort of key political date in the 606 00:37:52,320 --> 00:37:56,880 Speaker 1: Chinese calendar, because I think the policy is so important 607 00:37:56,920 --> 00:38:00,440 Speaker 1: to all of this, right, absolutely, I really really liked 608 00:38:00,440 --> 00:38:05,080 Speaker 1: that conversation, and the way Michael explains things is so 609 00:38:05,200 --> 00:38:08,880 Speaker 1: clear because a lot of this type of analysis, a 610 00:38:08,960 --> 00:38:12,160 Speaker 1: lot of which is sort of based on seemingly accounting identities, 611 00:38:12,280 --> 00:38:17,600 Speaker 1: the sort of axiomatic relationship between savings investment and the 612 00:38:17,680 --> 00:38:20,600 Speaker 1: current account. It could seem like it can be. I 613 00:38:20,600 --> 00:38:25,000 Speaker 1: always have a slightly hard time keeping these relationships in 614 00:38:25,080 --> 00:38:27,799 Speaker 1: my head exactly like what moves up and so what 615 00:38:27,880 --> 00:38:30,080 Speaker 1: therefore then has to go down? And I just think 616 00:38:30,320 --> 00:38:33,399 Speaker 1: Michael did such a clear job explaining it and then 617 00:38:33,440 --> 00:38:37,759 Speaker 1: explaining how these things have real world out ramifications. Yeah, 618 00:38:37,800 --> 00:38:39,879 Speaker 1: And the other thing that seems to be coming through 619 00:38:40,400 --> 00:38:44,200 Speaker 1: on our episodes recently is the notion that there is 620 00:38:44,600 --> 00:38:48,560 Speaker 1: some sort of problem of imbalances with too much money 621 00:38:48,600 --> 00:38:51,200 Speaker 1: flowing into the US. We talked about it with David 622 00:38:51,200 --> 00:38:54,360 Speaker 1: Beckworth most recently, and Michael brought it up yet again, 623 00:38:54,520 --> 00:38:57,600 Speaker 1: and people seem to be moving towards a consensus that 624 00:38:57,680 --> 00:39:00,840 Speaker 1: there is an issue here. They just disagree how exactly 625 00:39:00,880 --> 00:39:03,319 Speaker 1: to fix it. And it's one of those things that 626 00:39:04,280 --> 00:39:06,600 Speaker 1: to the average person, they would have a really hard 627 00:39:06,640 --> 00:39:09,000 Speaker 1: time wrapping their head around why that's a problem. So 628 00:39:09,040 --> 00:39:12,560 Speaker 1: it's like, Okay, China is investing all this money, all 629 00:39:12,600 --> 00:39:16,120 Speaker 1: this exporting all this capital to the US. I think 630 00:39:16,200 --> 00:39:18,759 Speaker 1: intuitively to a lot of people like that's a good thing. 631 00:39:18,960 --> 00:39:21,239 Speaker 1: Why not have people bring their money here? But then 632 00:39:21,280 --> 00:39:24,680 Speaker 1: the way Michael explains it in terms of driving up 633 00:39:24,719 --> 00:39:29,560 Speaker 1: asset prices, driving up the dollar, etcetera, or closing ing 634 00:39:30,120 --> 00:39:33,759 Speaker 1: loosening of lending standards, and that hurts us savings. Uh, 635 00:39:33,920 --> 00:39:36,680 Speaker 1: you start to actually crystallize what it really means to 636 00:39:36,719 --> 00:39:40,280 Speaker 1: have capital flow to you as as opposed to demand 637 00:39:40,320 --> 00:39:43,160 Speaker 1: for our goods. So I just feel like that was 638 00:39:43,239 --> 00:39:46,279 Speaker 1: so instructive and just seems to explain so much of 639 00:39:46,280 --> 00:39:49,040 Speaker 1: what's happened in the economy over the last several decades. Yep, 640 00:39:49,280 --> 00:39:51,080 Speaker 1: for sure. And we'll have to hap him back on 641 00:39:51,239 --> 00:39:54,320 Speaker 1: to talk about his music label and his club as well. 642 00:39:54,600 --> 00:39:57,239 Speaker 1: All right, well, let's leave it there for now. This 643 00:39:57,320 --> 00:40:00,080 Speaker 1: has been another episode of the All Thoughts podcast on 644 00:40:00,160 --> 00:40:03,040 Speaker 1: Tracy Alloway. You can follow me on Twitter at Tracy 645 00:40:03,040 --> 00:40:05,640 Speaker 1: Alloway and I'm Joe. Why isn't thal? You could follow 646 00:40:05,719 --> 00:40:08,880 Speaker 1: me on Twitter at the Stalwart and you should definitely 647 00:40:08,960 --> 00:40:12,120 Speaker 1: follow our guest on Twitter. He's way underfollowed for how 648 00:40:12,200 --> 00:40:16,479 Speaker 1: much he knows, criminally underfollowed, criminally underfollowed. Michael Pettis, He's 649 00:40:16,520 --> 00:40:19,919 Speaker 1: at Michael X Patris. Check him out and be sure 650 00:40:19,960 --> 00:40:23,919 Speaker 1: to follow our producer on Twitter, Laura Carlson. She's at 651 00:40:24,040 --> 00:40:28,960 Speaker 1: Laura M. Carlson, as well as the Bloomberg community of podcasts, 652 00:40:29,360 --> 00:40:32,880 Speaker 1: which is under the handle at podcasts. Thanks for listening.