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Speaker 1: Alright, well, joinning is that as Neil Ferguson mill Bank Feenia,

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Speaker 1: a family senior fellow at Hoover Institution, also opinion column,

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Speaker 1: as he said to discuss how history shows that nothing

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Speaker 1: causes physical and monetary instability quite like multiple big, long

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Speaker 1: conflicts is the subject of his opinion column. How Cold

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Speaker 1: War three could turn into World War three? Right, oh,

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Speaker 1: cold War two, I should say, could turn into World

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Speaker 1: War three. Sorry about that, Neil, but gonna have you

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Speaker 1: on the program. Give us the basic thrust of your argument. Well,

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Speaker 1: the thing is, we kind of forgot what a big

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Speaker 1: war can do because in the period after the end

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Speaker 1: of Cold War One, the wars right through the nineties

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Speaker 1: and two thousands were really quite small. They were small

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Speaker 1: in terms of casualties and destruction, and their economic impact

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Speaker 1: was was minimal. I tried to argue that the thing

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Speaker 1: we called the Great Moderation, or at least central bankers

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Speaker 1: like ben Burn and Ki called the Great Moderation, was

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Speaker 1: really just a consequence of their being much less conflict

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Speaker 1: after the end of of Cold War one. And I

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Speaker 1: call it cold War one because we're now in Cold

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Speaker 1: War two. Cold War two has been going on for

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Speaker 1: at least four years, and it has escalated. It's between

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Speaker 1: the US and China. But the thing about the Cold

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Speaker 1: War is that it always has the possibility of the

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Speaker 1: real thing of a World war latent in it. We

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Speaker 1: avoided World War three through Cold War One. It's not

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Speaker 1: clear we're going to avoid World War three in Cold

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Speaker 1: War two. We already have a big conflict, a really

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Speaker 1: destructive conflict that is open ended. It's hard to see

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Speaker 1: how it stops in Ukraine. I think there's a non

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Speaker 1: trivial risk of conflict in the Middle East and the

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Speaker 1: near future, as Iran is bound to accelerate its pursuit

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Speaker 1: of of nuclear weapons. Let's not forget North Korea. And finally,

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Speaker 1: of course, the US is I think a pedal to

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Speaker 1: the metal towards a conflict with China over Taiwan. Well,

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Speaker 1: the other thing that you tease out here on your side,

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Speaker 1: Ed Lewis and the f T. I think this is

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Speaker 1: really great because as a part of our program, I've

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Speaker 1: been asking this question of a number of gear loose

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Speaker 1: rights in the FT as superpower declared war on a

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Speaker 1: great power, nobody noticed. This is the Biden administration aiming

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Speaker 1: to halt technological progress in China shutting down access to

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Speaker 1: advanced chip making technology. Do you really think that this

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Speaker 1: has the ability the potential to mushroom into something that

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Speaker 1: is really significant, Yes, I do. At loose is quite right.

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Speaker 1: If the Trump administration had done this, it would have

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Speaker 1: been front page news. In fact, it's much more drastic

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Speaker 1: than what the Trump administration did. Uh, I mean Trump

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Speaker 1: essentially went after specific companies Huawei most obviously. This cuts

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Speaker 1: all of China off from the high end semi conductors

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Speaker 1: and the machines that you need to make them and

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Speaker 1: the expertise that you need to make them. A U

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Speaker 1: S person that includes a Green card holders can't be involved,

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Speaker 1: and so so China is essentially being told you are

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Speaker 1: never going to match up with the West technologically. That

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Speaker 1: is quite a drastic thing to say, and I think

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Speaker 1: the media have underestimated the magnitude of this step. And

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Speaker 1: it's timing is extraordinary because it happened more or less

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Speaker 1: simultaneously with the Party Congress in Beijing and seem to

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Speaker 1: me to validate She shan Bing's narrative that China has

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Speaker 1: to achieve technological autonomy and that it has to be

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Speaker 1: ready for conflict for a non peaceful solution to the

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Speaker 1: Taiwan question. So I look at this as a not

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Speaker 1: not as as a one sided thing. Both China and

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Speaker 1: the United States have stepped up their their rhetoric but

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Speaker 1: also stepped up their their economic efforts, and Taiwan is

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Speaker 1: becoming the focal point for cold Well two. After all,

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Speaker 1: nine of the high end semiconductors that the US is

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Speaker 1: telling China it can't have are manufactured in Taiwan, an

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Speaker 1: island that China claims belongs to it. What could possibly

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Speaker 1: go wrong? Yeah, Neil, I mean the thing is, you're sure,

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Speaker 1: but don't forget they're designed in the US and Britain.

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Speaker 1: That's right, and that's why the West is in a

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Speaker 1: sense acting in concert here. It's a Dutch firm that

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Speaker 1: makes the most sophisticated machinery to produce these very very

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Speaker 1: sophisticated semiconductors. But let's not pretend that it's any country

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Speaker 1: other than the United States that's directing this. In just

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Speaker 1: the same way that it's the US that directs the

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Speaker 1: sanctions regime against Russia. That the US is kind of

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Speaker 1: perfected financial and economic warfare since nine eleven, and it's

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Speaker 1: now using it not only in reaction as it did

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Speaker 1: to the Russian invasion of Ukraine, it's using it preemptively

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Speaker 1: here against China, because it's not clear what Chinese aggression

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Speaker 1: in particular has prompted this ratcheting up of the economic pressure.

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Speaker 1: So let's measure that against financial markets, and you write there,

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Speaker 1: Today financial markets are more complex and therefore more fragile.

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Speaker 1: Question where does this leave central bankers in a world

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Speaker 1: that is prone to volatility if their duty is to

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Speaker 1: try to create stability. Well, the problem is that they

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Speaker 1: want to be late seventies early eighties central bankers. J

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Speaker 1: Pow wants to be Paul Volker, and that's that's his

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Speaker 1: role model. But when Paul Walker was raising rates to

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Speaker 1: squeeze inflation expectations back down to where they've been in

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Speaker 1: the sixties, he was not dealing with as as leveraged

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Speaker 1: and as complex the financial system as we have today.

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Speaker 1: It's also important to notice that when you raise rates

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Speaker 1: from very very low levels, seventy five basis points is

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Speaker 1: a lot bigger in a relative and relative terms than

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Speaker 1: seventy five bps was back in seventy nine or night.

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Speaker 1: And I think the critical point is the one that

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Speaker 1: we already learned from events in London. I know it's

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Speaker 1: all fun and games to blame the crisis in London

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Speaker 1: on on politics. Actually, the Bank of England discovered that

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Speaker 1: the guilt's market was very vulnerable to a sell off

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Speaker 1: because of hedging by pension funds. Uh. Nobody thought about

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Speaker 1: that until it suddenly surfaced as a problem. We've had

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Speaker 1: similar action in the U S treasury market, remember March

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Speaker 1: before COVID had really hit. And I think at some

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Speaker 1: point the central banks are going to discover, oh dear,

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Speaker 1: we can't actually get unemployment up to whatever we'd bring

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Speaker 1: inflation down because we'll have a financial breakage before we

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Speaker 1: do that. Now, I mean, the other thing is a

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Speaker 1: sure and you know we've got various measures showing that

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Speaker 1: liquidity in the treasury market isn't is at those levels

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Speaker 1: that you mentioned. But I want to get to the

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Speaker 1: politics of this. Is this likely to get worse? As uh?

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Speaker 1: You know you have a center by partisanship with regards

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Speaker 1: to China very quickly. It is who nobody can be

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Speaker 1: more right if you will, or everybody's doubling down on

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Speaker 1: how anti China they can be. Well, there's not only

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Speaker 1: one thing more terrifying than the polarization of America in politics,

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Speaker 1: and that's a bipartisan consensus on something. And there is

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Speaker 1: now bipartisan consensus on Cold War two, even if nobody

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Speaker 1: quite calls it by that name. That means that the

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Speaker 1: US seems to be, for domestic political reasons, partly on

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Speaker 1: collision course with China, and that, of course, is often

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Speaker 1: how world wars happen, when domestic politics takes over from

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Speaker 1: clear strategic thinking and you become a hawk for domestic reasons.

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Speaker 1: Great point, Neil, It's always a pleasure. Thank you so

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Speaker 1: much for being with us. Neil Ferguson Millbank Family Senior

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Speaker 1: Fellow at the Hoover Institution, also a Bloomberg Opinion columnist,