Speaker 1: Hello, Stephanomics. Here the podcast that brings you the global
Speaker 1: economy this week from New York, but with eyes firmly
Speaker 1: trained on Beijing, as the Chinese Communist Party sets the
Speaker 1: country's course for the next five years and the rest
Speaker 1: of the world tries to work out what on earth's
Speaker 1: going on. We're heading for a new Cold War between
Speaker 1: China and the US if we're not there already. That's
Speaker 1: the line you hear more and more often. It's the
Speaker 1: U S slaps controls on semiconductor exports to China and
Speaker 1: China ramps up its rhetoric on Taiwan. So far, Europe
Speaker 1: has tried to stay above the fray, but there's a
Speaker 1: creeping worry that Europe's leaders might be misjudging President shi
Speaker 1: Jing Bing, just as they misjudged Vladimir Putin. Europe's not
Speaker 1: dependent on Chinese gas, it's true, but of its solar
Speaker 1: panel imports come from there, and a lot of other
Speaker 1: things that might turn out to be hard to source elsewhere.
Speaker 1: We have a fascinating report on all of that from
Speaker 1: Carol and Look in Frankfurt and James Mega in Beijing.
Speaker 1: In a little while. We also have a chilling historians
Speaker 1: take on the relationship between war and inflation and the
Speaker 1: true lessons of the nineteen seventies from Professor Neil Ferguson.
Speaker 1: We know one big difference from that other Cold War
Speaker 1: with the Soviet Union, that China's economy is much more
Speaker 1: integrated with the global economy than the Soviet Unions ever was.
Speaker 1: Yet our real time understanding of what's happening at the
Speaker 1: government level is, if anything, worse than it was in
Speaker 1: Criminologist days, or at least seems to be going in
Speaker 1: that direction. This has been especially evident during the twice
Speaker 1: a decade Communist Party Congress. As we heard last week
Speaker 1: from our reporter on the ground, Callum Murphy. It is
Speaker 1: not an easy gig to cover, but Bloomberg's chief economist
Speaker 1: Tom Morlick has a better handle on what's been happening
Speaker 1: than most, having lived eleven years in Beijing and written
Speaker 1: two books on the Chinese economy. So Tom, thanks for
Speaker 1: being with us again. I guess you should start by
Speaker 1: just reminding us briefly of the significance of this event.
Speaker 1: So the Party Congress takes place once every five years,
Speaker 1: and it brings together all of China's top leaders. Two thousand,
Speaker 1: three hundred delegates, and they do a few important things.
Speaker 1: They look back on the successes and failures, They look
Speaker 1: ahead to the years to come and set the big
Speaker 1: policy directions, and crucially, they make decisions about personnel. Who's
Speaker 1: going to be the General Secretary of the Communist Party
Speaker 1: and so also normally the President of China and the
Speaker 1: head of the military, and who are going to be
Speaker 1: the Standing Committee, the group of seven flanking the General
Speaker 1: Secretary that make all the big decisions. Now we've been
Speaker 1: told that the two big things to look for come
Speaker 1: right at the beginning and at the end. We have
Speaker 1: now had the first the President's speech to the Party
Speaker 1: Faithful on Sunday. Did we learn anything from that? So
Speaker 1: when I first moved to China back in two thousand
Speaker 1: and seven, there was this public safety campaign underway, campaign
Speaker 1: to sort of get rid of accidents and make Chinese
Speaker 1: people safer. And the catchphrase of that campaign was and
Speaker 1: choin d safety first, or perhaps security first. And in
Speaker 1: shijiin Ping's report to the Party Congress, that word and
Speaker 1: choin security took on a new significance. And I think
Speaker 1: what that tells us is that priorities at the top
Speaker 1: levels of China's government have changed. Twenty years ago, the
Speaker 1: biggest word would have been far Jan development, and there
Speaker 1: had been excitement about opening and policy experimentation and collaboration
Speaker 1: with the rest of the world. This time around, the
Speaker 1: most important word is and Chwan security, and what that
Speaker 1: speaks to is a China that sees itself in a
Speaker 1: more hostile world, fighting with the United States, fighting against pandemics,
Speaker 1: trying to secure what it has rather than open up
Speaker 1: and explore your opportunities. As you mentioned at the start,
Speaker 1: we've been encouraged to think about this as a as
Speaker 1: a matter of personnel as well as policy. And at
Speaker 1: some point, probably at the weekend, we are going to
Speaker 1: see who this this new standing committee are the new
Speaker 1: senior people in China, and it seems a pretty fair
Speaker 1: bet that President Shi jing Ping and people close to
Speaker 1: him are going to still be in charge after this congress.
Speaker 1: Now there's been a lot of concern about Si Jingping
Speaker 1: getting a closer and closer hold on on power and
Speaker 1: staying in for so long, But maybe it's because I've
Speaker 1: been a bit focused on the incredible dynamics underway in
Speaker 1: the UK. It sort of feels like to me stability
Speaker 1: in China might be no bad things short term when
Speaker 1: you think about the rest of the world being in
Speaker 1: such flux and seeming rather scary. Soudan Shao Ping is
Speaker 1: remembered as China's great economic reformer Stephanie, but he was
Speaker 1: also a reformer of China's governance system, and in particular
Speaker 1: he introduced the two term limit for top leaders. Jangs
Speaker 1: are men who followed Dong observed the two term limit.
Speaker 1: Hujin Tao, who followed Jang observed the two term limit.
Speaker 1: Shijim Ping very likely is set to breach the two
Speaker 1: term limit and stay as General Secretary for three terms,
Speaker 1: and who knows, perhaps even beyond that. Now. Short term,
Speaker 1: as you mentioned, China's got a bunch of challenges with
Speaker 1: COVID zero, with property, with fracturing ties with the United States,
Speaker 1: maybe a bit of stability isn't a bad thing. Thinking
Speaker 1: longer term, the well, there was a reason why Dong
Speaker 1: Shaoping didn't want leaders to stay in power for too long.
Speaker 1: He vividly remembered the trauma which China went through in
Speaker 1: the late years under Mao Zadong. He didn't want to
Speaker 1: repeat of that. So it was is China immediately going
Speaker 1: to slide into the kind of chaos and dysfunction that
Speaker 1: we saw in Mao's Cultural Revolution. Absolutely not. Could we
Speaker 1: over time see a deterioration in governance standards just because
Speaker 1: the same people have been at the top for too long.
Speaker 1: I think that's something we're going to have to keep
Speaker 1: an eye out for. And I know this is something
Speaker 1: that you've you've focused on. I mean, even though there's
Speaker 1: no changing of the guard at the top lower down,
Speaker 1: has there been a shift of skill set or focus
Speaker 1: on the sort of more junior officials or people in
Speaker 1: key economic jobs that we should worry about. So I
Speaker 1: think it's a really interesting question, Stephanie. If we think
Speaker 1: about history of China's reform, there are these kind of
Speaker 1: characters who played a kind of really important role in
Speaker 1: the opening up of the economy and the modernization of
Speaker 1: the economic policy apparatus. Joe Cha Chwan, the former head
Speaker 1: of the People's Bank of China, springs to mind. He
Speaker 1: played a crucial role in reform of the exchange rate,
Speaker 1: reform of the interest rate, reform of the banking system,
Speaker 1: opening up of the capital account. And he could do
Speaker 1: that because he was enormously smart, Because he had a
Speaker 1: sort of a reform orientation and because he had political muscle. Well,
Speaker 1: Josh Chwan is long gone now and we have some
Speaker 1: of his disciples in charge e Gang the new head
Speaker 1: of the Central Bank, for example. The big question is
Speaker 1: who follows them, Who are going to be the new
Speaker 1: visionary reformers and are they going to have the political
Speaker 1: muscle to get things done. I don't see who's coming
Speaker 1: through in that next generation. And if we have some gray,
Speaker 1: faceless bureaucrats, some Communist Party apparachics moving into some of
Speaker 1: the top jobs at the Central Bank and the Ministry
Speaker 1: of Finance, well I think there's going to be consequences
Speaker 1: of that for China's outlook. It's funny you should say
Speaker 1: that I have a vivid memory. My first experience of
Speaker 1: Beijing was in the middle of a rather different crisis
Speaker 1: than the Asia financial crisis, when I was a bad
Speaker 1: carrier for Larry Summers and at the end of a
Speaker 1: tour of Asia and all these countries that were going
Speaker 1: through various stages of financial meltdown. He had an audience
Speaker 1: that we were all witnessed to with Unji, who later
Speaker 1: became that the premiere but had been the economic supremo
Speaker 1: in the in the nineties, and his description and explanation
Speaker 1: of what had been happening across the region in terms
Speaker 1: of the economic and the financial dynamics was more eloquent
Speaker 1: and incisive than anything I'd heard from any commentator sitting
Speaker 1: in sitting in the US or in the Okay. So
Speaker 1: that was definitely brought home to me that that quality
Speaker 1: at the center at that time. And he was obviously
Speaker 1: another important figure, the giant of Chinese reform, the man
Speaker 1: who took China into the World Trade Organization, the man
Speaker 1: who grasped the large and let go the small on
Speaker 1: the state sector of the economy, building national champions out
Speaker 1: of the biggest state firms, and allowing dynamic private sector
Speaker 1: firms to play a larger role in the economy. He's
Speaker 1: now in his nineties. Where's the next generation? We've got
Speaker 1: used to thinking that smart technocrats were in charge at
Speaker 1: the center of the Chinese strategy, and that they would
Speaker 1: continually managed to pull it off despite the ups and
Speaker 1: downs and the economy. They would defy the skeptics and
Speaker 1: not have the kind of massive bust, the massive bursting
Speaker 1: of the bubble that so many people are predicted, and
Speaker 1: indeed your own recent book talks about how they've managed
Speaker 1: to avoid a real bursting of the bubble. From what
Speaker 1: you're saying, it sounds like maybe longer term, you might
Speaker 1: be less confident of their ability to to dodge all
Speaker 1: the bullets that come their way. So I'm not sure
Speaker 1: we're seeing a deterioration in governance standards right now. People
Speaker 1: look at COVID zero and they say this is a
Speaker 1: policy failure, this is a dysfunction of China's authoritarian system.
Speaker 1: But I think you can equally make the case that
Speaker 1: COVID zero is doing a really good job of saving
Speaker 1: Chinese lives, a much better job perhaps than we've done
Speaker 1: over here in the United States or in Europe. People
Speaker 1: look at the property slump and saying this is the
Speaker 1: consequence of mismanagement, and that's right. China's policymakers did allow
Speaker 1: the property bubble to swell to nearly unmanageable proportions, but
Speaker 1: to their credit, they moved ahead of a crisis and
Speaker 1: put policies in place to try and deflate the bubble
Speaker 1: in a controlled way. Um So I think as Hi Jinping,
Speaker 1: perhaps for a third term, as we wonder about who
Speaker 1: the next generation of top economic technocrats are going to be.
Speaker 1: We're right to be concerned about the possibility of a
Speaker 1: decline in government standards and all that would mean for
Speaker 1: China's capacity to handle some really pretty formidable challenges. But
Speaker 1: I'm not sure we're actually able to say that that
Speaker 1: decline is already underway. And going back to to where
Speaker 1: I began, I mean, even experts like you are doing
Speaker 1: a bit of guess work when it comes to who's
Speaker 1: in charge or who might be in charge down the road,
Speaker 1: what the what the strategy might be in future. Just
Speaker 1: that sheer lack of information and the flow of information
Speaker 1: between China and the rest of the world. I mean,
Speaker 1: long term, does that trouble you as it troubles me?
Speaker 1: It is troubling Stephanie. I mean, I think there's there's
Speaker 1: a kind of a natural barrier there, especially on the
Speaker 1: U S side, simply from the fact that almost everything
Speaker 1: happening in China takes place in Chinese, and there's not
Speaker 1: many people in the US who have the mastery of
Speaker 1: the language to engage with it, either in the writing
Speaker 1: or in the speaking. But I think what we've seen
Speaker 1: in the last few years, first under Donald Trump and
Speaker 1: now continuing under Joe Biden, is a fracturing of ties
Speaker 1: on diplomacy, on business, on finance, even amongst academics. And
Speaker 1: what that means is the sort of the rich interchange
Speaker 1: of ideas and information just isn't there anymore. And if
Speaker 1: you couple that with the kind of the natural secrecy
Speaker 1: of China's single party state and their suspicion of sharing information,
Speaker 1: well I think you've got a bit of an information
Speaker 1: vacuum there. And that's the sort of environment where it's
Speaker 1: really easy for relations to deteriorate further and for mistakes
Speaker 1: to be made. And as has been discussed on this
Speaker 1: program before, and even at the academic level, you now
Speaker 1: have you know one would you and I both talked
Speaker 1: to eminent sinologists, people who are very expert on on
Speaker 1: every nuance of what happens in China or were and
Speaker 1: they have to admit that they have not been for
Speaker 1: several years because of COVID. So of course that has
Speaker 1: also presented quite a big barrier. Tom Warnick, thank you
Speaker 1: so much. As I mentioned at the start, the EU
Speaker 1: has not yet had the kind of fracturing in its
Speaker 1: relations with China that we've been talking about with reference
Speaker 1: to the US, but many would say it's just a
Speaker 1: matter of time and that the continents leaders are not
Speaker 1: doing nearly enough to prepare our China. Economy editor in Beijing,
Speaker 1: James Mega and Eurozone economy reporter carrodin look in Frankfurt
Speaker 1: have been taking a closer look at Europe's approach to China,
Speaker 1: and here's their report, voiced by Carolyn the Globe Alyson
Speaker 1: En folks had fatiding on decap links default and though
Speaker 1: Germany's Chancellor you just heard is making plans for his
Speaker 1: first trip to China as German leader in early November,
Speaker 1: according to reports by Bloomberg News, it comes at a
Speaker 1: sort of awkward time, with his country on the verge
Speaker 1: of a recession that, in the worst case, risks replicating
Speaker 1: the scale of the Great Financial Crisis, in large part
Speaker 1: things to Germany's outsized reliance on Russian gas. In the recording,
Speaker 1: which is from a conference he spoke out last week
Speaker 1: in Berlin, Shouts defends globalization despite the havoc that was
Speaker 1: caused by his country's economic interlinkages with Russia, arguing that
Speaker 1: so called decoupling is the wrong answer. Germany shouldn't break
Speaker 1: off ties with other countries, he says, and in particular China,
Speaker 1: Germany's top trade partner, is a country it should keep
Speaker 1: doing business with. From dinding London shift ein Germany and
Speaker 1: the wider continents, difficulties of dealing with the energy crisis
Speaker 1: sparked by Russia's war have drawn its relationship with China
Speaker 1: into sharp focus. While former US President Donald Trump started
Speaker 1: a trade war with China in an attempt to rebalance it,
Speaker 1: European nations have seen much more sanguine even as their
Speaker 1: own trade deficit with China has soared, growing by over
Speaker 1: a third last year to two hundred forty nine billion euros. Well,
Speaker 1: I mean over the last years, of course, trade relations
Speaker 1: were very, very deep and very extensive, but at the
Speaker 1: same time it was a bit lopsided if you just
Speaker 1: look at the That's York Vodka, president of the EU
Speaker 1: Chamber of Commerce in China and also the Chinese representative
Speaker 1: of German chemical maker B A. S F. He makes
Speaker 1: the point that the actual market for Europeans and China
Speaker 1: is very small. Overall, the EU exports only a little
Speaker 1: more to China each year than it does to Switzerland,
Speaker 1: and about off of what they sent to the US
Speaker 1: just to container movement China to Europe in the first
Speaker 1: half was three point five million fort containers, whereas Europe
Speaker 1: was selling into China containers. So that's the ratio of
Speaker 1: three point five to one. But for Germany and the
Speaker 1: rest of Europe, the question of what to do with
Speaker 1: China relations doesn't exactly feel like a priority compared with
Speaker 1: other priorities like the war in Ukraine and keeping European
Speaker 1: homes heated throughout the winter. Here's Jacob Gunter, an analyst
Speaker 1: at China Focused Marks think tank in Berlin. There's definitely
Speaker 1: a rethink happening um in terms of the used relationship
Speaker 1: with China, but it's it's happening at a much slower
Speaker 1: rate than I think a lot of people might have anticipated.
Speaker 1: And I think most of that is driven by the
Speaker 1: fact that you know, you have a today problem, you
Speaker 1: know on your border, whereas China is a you know,
Speaker 1: next week problem or next month or next year problem
Speaker 1: clear on the other side of But others such as
Speaker 1: that you used. Top diplomat Joseph Barrel do not think
Speaker 1: Europe can afford to keep this on the back burner.
Speaker 1: He recently called for Europe to wake up to the
Speaker 1: reality that the world it once knew, where it could
Speaker 1: rely on the US for security and on Russia and
Speaker 1: China for prosperity, is no longer there. I think that
Speaker 1: due to be in were faking a situation in which
Speaker 1: you suffered the gun sequences of a process that has
Speaker 1: been last thing for years, in which we have the
Speaker 1: couple the sources of our prosperity from the sources of
Speaker 1: our security. Increasingly, Europe's trade with China is not just
Speaker 1: lopsided but unstable. Last year, the country blocked Lithuanian exports
Speaker 1: because of a dispute over Taiwan and the Torpedoed and
Speaker 1: Investment Treaty by sanctioning European officials after Europe sanctioned Chinese
Speaker 1: officials over allegations of human rights abuses in Sinjian. The
Speaker 1: question lurking in the background is whether Europe has missed
Speaker 1: judged China and siege in Ping the same way it
Speaker 1: has missed judge Putin. What could happen with Taiwan? What
Speaker 1: would a war in the straight mean for business with
Speaker 1: investments on both sides, or investments in Japan, Korea or
Speaker 1: elsewhere in the region, who would inevitably be dragged into
Speaker 1: a conflict. How painful would it be to cut off
Speaker 1: the supply chains from China or East Asia as quickly
Speaker 1: as European firms pulled out of Russia. Is it even possible?
Speaker 1: The evidence so far is that European companies aren't being
Speaker 1: deterred too much by these questions. Definitely, the market is
Speaker 1: so vacan and the technologies are wanted. They have to
Speaker 1: be here. In chemicals, China stands for of global markets,
Speaker 1: so if you're not at the table, you're going to
Speaker 1: be on the menu. That was vodka from the EU
Speaker 1: Chamber of Commerce. Again, foreign investment has continued to rise
Speaker 1: in two thousand twenty two. Those has grown increasingly concentrated
Speaker 1: among big, mostly German players. According to data by research
Speaker 1: from Rhodium Group, for any foreign business active in China,
Speaker 1: two and a half years of COVID zero policies have
Speaker 1: taken their toll on their bottom line. Profits at foreign
Speaker 1: industrial firms in China were down twelve percent in the
Speaker 1: first nine months of the year, and foreign firms from
Speaker 1: the US and other places that are in China are
Speaker 1: talking more and more about cutting or slowing investments but
Speaker 1: according to Agatha Kratz, a director at Rhodium Group, very
Speaker 1: little of that reluctance to invest is related to the
Speaker 1: experience in Russia. But at the end of the day,
Speaker 1: we see very few companies that publicly come out and
Speaker 1: say I am uncomfortable investing in China and comfortable engaging
Speaker 1: with China given the nature of the regime um boast
Speaker 1: in terms of just it being a one month rule
Speaker 1: and second it being human rights abusing the country. So
Speaker 1: we're not seeing the way that companies when the war
Speaker 1: with Russia, well between Russia and Ukraine broke out, the
Speaker 1: way that companies said I'm pulling out, I can't be
Speaker 1: sustaining activity dairy Fressia is going to attack Ukraine. And
Speaker 1: we're not seeing companies speak as clearly and openly about
Speaker 1: the fact that they could just very well also be
Speaker 1: uncomfortable with the regime that has a lot of similarities
Speaker 1: of course in terms of its political management. Still, Cratz
Speaker 1: says that Europe's main vulnerability base of each China isn't
Speaker 1: the capital they've invested there. European companies, which are mainly
Speaker 1: German firms, have invested less in China over the last
Speaker 1: twenty years than they do in the US and a
Speaker 1: single year. I think that if tomorrow Germany had to
Speaker 1: just cut all of its ties to China in terms
Speaker 1: of outbound investment, in terms of the four companies basis
Speaker 1: and the three car makers that are in China for
Speaker 1: China at the moment um, I think this would be
Speaker 1: a very manageable blue to the German economy would be
Speaker 1: a blue. It would because it would be problematic. There's
Speaker 1: a lot of profit profits that wouldn't come Back's potentially
Speaker 1: much more dangerous as Europe's reliance on imports from China
Speaker 1: for specific products such as rare earths and industrial metals.
Speaker 1: Put it another way, when it comes to securing its
Speaker 1: energy supply in a post carbon world, Europe appears to
Speaker 1: have swapped one dependency for another. Of europe solar panel
Speaker 1: imports come from China. The biggest area of concern is
Speaker 1: if something similar to the Russia conflict in Russia you
Speaker 1: go in conflicte. Where to happen is our dependency on
Speaker 1: China and trade and on certain critical goods, critical industries,
Speaker 1: certainly in green technologies, because at the moment if we
Speaker 1: want to have a self sufficient green transition we called
Speaker 1: which is caught in Frankfurt. I'm Caroline Luck for Bloomberg News.
Speaker 1: Now to round off this episode, we have what is
Speaker 1: known in the trade as bonus material. It's part of
Speaker 1: a striking contribution that historian Neil Ferguson made to a
Speaker 1: seminar on central banking, which happened a few days ago
Speaker 1: in Washington. Unusually for Stephanomics, I wasn't involved in the
Speaker 1: event at all, International Banking Seminar hosted by the Group
Speaker 1: of thirty. I was just listening in the audience, but
Speaker 1: I thought the main message of Professor Ferguson's talk deserved
Speaker 1: a wider hearing that I should warn you right now
Speaker 1: it is a little chilling. Well, Tom, and you you
Speaker 1: promised something completely different. May I remind you that Monty Python,
Speaker 1: which made those words famous, aired between nineteen sixty nine,
Speaker 1: four significant dates. I must say I wish Paul Vulca
Speaker 1: were here. I suspect I'm not the only person in
Speaker 1: this room who misses him now more than ever. I
Speaker 1: really hope he would have approved of what I'm going
Speaker 1: to say. During the inter war era, in other words,
Speaker 1: the period between Cold War One and Cold War two,
Speaker 1: many economists and policymakers lost sight of the role of
Speaker 1: war in the global economy because the wars of the
Speaker 1: inter war era were quite small Bosnia, Afghanistan, Iraq, more
Speaker 1: closely resembling colonial policing operations. We forgot that war is
Speaker 1: history's most consistent driver of inflation, debt defaults, even famines.
Speaker 1: And that's because large scale war is similty, neously destructive
Speaker 1: of productive capacity, disruptive of trade, and destabilizing of fiscal
Speaker 1: and monetary policies. If you plot global battle deaths from
Speaker 1: interstate conflict against inflation, you'll see the behind the so
Speaker 1: called Great moderation. There was a period of declining global
Speaker 1: conflict that lasted from the mid seventies actually until the
Speaker 1: outbreak of the War in Ukraine. The coming of peace,
Speaker 1: like monetary policy acted with a lag. The events of
Speaker 1: this year have reminded us what's at stake in cases
Speaker 1: of great power conflict. The War in Ukraine qualifies as
Speaker 1: such a conflict because Russia is still clearly a great
Speaker 1: enough power that it would by now likely have achieved
Speaker 1: its annexations aims had it not been for large scale
Speaker 1: financial and military not to mention technological assistance to Ukraine
Speaker 1: from the United States, the European Union, the United Kingdom
Speaker 1: and other associated states. This is a big war, measured
Speaker 1: by both casualties and costs. Now, economists like to treat,
Speaker 1: or tend to treat wars as exogenous shocks because they
Speaker 1: kind of hard to model. But from the historian standpoint,
Speaker 1: war isn't exogenous. It's the indogenous prime mover of the
Speaker 1: historical process, the father of all things, as Harrod Clytus
Speaker 1: famously said. So two general points are really important to notice. First,
Speaker 1: wars have played a very noticeable role in the history
Speaker 1: of inflation expectations. Thanks to the excellent historical work of
Speaker 1: the Bank of England, we can trace the history of
Speaker 1: UK inflation expectations all the way back to the late
Speaker 1: seventeenth century. The peaks in short run expectation nearly all
Speaker 1: aligned with wars, and generally years when the war wasn't
Speaker 1: going well seen O Nine War Spanish Succession seventeen fifty seven.
Speaker 1: The Seven Years War eight d Napoleonic Wars nineteen seventeen,
Speaker 1: nineteen forty nineteen seventy five is the exception. But you
Speaker 1: could link that to the consequences of the nineteen seventy
Speaker 1: three Arab Israeli War. The second point is that wars
Speaker 1: have often been responsible for discontinuities in the history of
Speaker 1: interest rates. As Paul Schpeltsing has argued work that the
Speaker 1: Bank of England first published, there has been a long
Speaker 1: term downward trend in nominal and real long term rates
Speaker 1: dating back to the period after the Black Death, which was,
Speaker 1: of course almost certainly the biggest pandemic in history. The
Speaker 1: major breaks in that long downward trend were nearly all
Speaker 1: associated with wars, particularly big wars that destroyed capital stock
Speaker 1: and generated monetary financing of debt. Now, an unusual feature
Speaker 1: of the recent past is that in twenty twenty, a
Speaker 1: pandemic had the fiscal and monetary consequences of a world war.
Speaker 1: This was unprecedented. No previous pandemic, including the much more
Speaker 1: devastating nineteen Spanish influenza, had comparable responses from finance ministries
Speaker 1: and central banks. Because most not all, but most countries
Speaker 1: followed the United States in offsetting the supply shock caused
Speaker 1: by lockdowns and spontaneous behavioral changes, with both large scale
Speaker 1: deficit finance transfers and significant monetary expansion like those who
Speaker 1: thought the pandemic would last forever, Those who argued that
Speaker 1: inflation would be transitory, like at the end of World
Speaker 1: War two, turned out to be wrong. It's not just
Speaker 1: about nineteen seventy three. It's also about Vietnam and other
Speaker 1: conflicts of the nineteen seventies. In twenty two, a war
Speaker 1: played an analogous rule to the war of nineteen seventy
Speaker 1: three in pouring kerosene on an inflationary far that was
Speaker 1: already burning. Both food and energy prices were driven up
Speaker 1: by the outbreak of the war and the sanctions imposed
Speaker 1: on Russia by the US and others. It goes without
Speaker 1: saying I think that the return of great power conflict
Speaker 1: has made the life of policy makers difficult, just as
Speaker 1: it did in nineteen seventy three. I recently heard it
Speaker 1: said at are gathering rather like this one that the
Speaker 1: twenties are unlikely to be as inflationary as the nineteen seventies,
Speaker 1: on the ground that labor is less organized and so
Speaker 1: the risk of a wage price spirals lower. But I
Speaker 1: want to draw your attention to ten important differences between
Speaker 1: our contemporary situation and the situation in the nineteen seventies one,
Speaker 1: Monetary growth rates were significantly higher between Q two twenty
Speaker 1: and Q two one than at any point in the
Speaker 1: nineteen seventies, and they remained in double digits even after
Speaker 1: velocity had recovered. That was the policy mistake, in my view.
Speaker 1: To productivity. Growth is lower today, much lower actually in
Speaker 1: all O E C D countries than it was in
Speaker 1: the seventies. Three. Demographic trends are worse today, with significantly
Speaker 1: higher dependency ratios for the Fiscal positions are much worse today,
Speaker 1: with much larger stocks of debt and projected deficits, not
Speaker 1: least in the United States. Five. Financial markets are more
Speaker 1: complex today and therefore more fragile. Lots of schadenfreuder are
Speaker 1: directed at the UK in the last few days. But
Speaker 1: let's be careful and not assume that this really is
Speaker 1: all a consequence of Britain's Monty Python politics. I don't
Speaker 1: think it is. Six. Then we had pollution, now we
Speaker 1: have climate change. Seven are political stability looks a lot
Speaker 1: worse than it seemed even at the time of Watergate. Example,
Speaker 1: in a recent poll, Americans were asked, do you think
Speaker 1: the nation's democracy is in danger of collapse? Sixtent of
Speaker 1: Republicans and the same percentage of Democrats said that they
Speaker 1: did think so. Eight. The current war in Ukraine is
Speaker 1: lasting much longer than the war of nineteen seventy three,
Speaker 1: approaching eight months compared with nineteen days so far. Number nine,
Speaker 1: there's no sign of detant remember deton in the nineteen
Speaker 1: seventies in Cold War two, Quite the opposite in fact,
Speaker 1: So there's a non trivial risk that we could soon
Speaker 1: witness a confrontation between the United States and the People's
Speaker 1: Republic of China over Taiwan. Ten. And Finally, although media
Speaker 1: attention currently focuses on the women's protests sweeping Iranian cities,
Speaker 1: it's worth recalling that these coincide with the failure of
Speaker 1: the attempt to revive the around Nuclear Deal, meaning that
Speaker 1: the Iranian regime will likely speed up its effort to
Speaker 1: acquire a nuclear weapon, increasing the probability of a war
Speaker 1: in that region, because no Israeli government, whoever as Prime minister,
Speaker 1: is going to count a nuclear armed Iran. So in conclusion,
Speaker 1: we may get lucky. We may just rerun the nineteen
Speaker 1: seventies they're judging by recent events in the UK. We
Speaker 1: may do it at a rather higher speed, from the
Speaker 1: Barber Budget to the Winter of Discontent in a matter
Speaker 1: of weeks rather than years. But and this I mean
Speaker 1: very seriously, there is a scenario in which we get
Speaker 1: something closer to the nineteen forties, in which regional great
Speaker 1: park conflicts coalesced into something like World War three, albeit
Speaker 1: with smaller armies, many unarmed weapons systems, unmanned weapons systems,
Speaker 1: and far more powerful and accurate bombs. And we'll look back.
Speaker 1: I suspect on the phrase contitative tightening as an eccentric
Speaker 1: idea that almost no one was able to execute the
Speaker 1: monetary policy equivalent of Monty Python's Ministry of Silly Walks.
Speaker 1: Thank you very much. M M. That's it for Stephonomics.
Speaker 1: Next week a US focus as we look ahead to
Speaker 1: the mid term elections and consider the state of the
Speaker 1: US economy in the meantime. Do please rate the show
Speaker 1: if you like it, and check out the Bloomberg News
Speaker 1: website for more economic news and views on the global economy.
Speaker 1: You should also follow at Economics on Twitter if you
Speaker 1: haven't already. This episode was produced by Summer Sadi Young
Speaker 1: Young and Magnus Henryson. As I mentioned, before Caroline Look
Speaker 1: and James Mega worked on that report about Europe and China,
Speaker 1: and special thanks also to the Group of thirty, Tom
Speaker 1: Marlick and Professor Neil Ferguson. Mike Sasso is the executive
Speaker 1: producer of Stephanomics