WEBVTT - Viktor Shvets On Why There’s No Going Back To Pre-COVID Capitalism 0:00:11.320 --> 0:00:14.800 Hello, and welcome to another episode of the All Thoughts podcast. 0:00:14.920 --> 0:00:19.320 I'm Tracy Allaway and I'm Joe Wisental. So, Joe, I 0:00:19.360 --> 0:00:24.360 feel like there's a bit of a consensus emerging that maybe, 0:00:24.640 --> 0:00:29.400 in the midst of the biggest economic crisis in decades, 0:00:29.840 --> 0:00:34.040 and in the midst of rising death toll from coronavirus, 0:00:34.120 --> 0:00:37.919 that there might be a greater role for the government. 0:00:38.640 --> 0:00:42.920 Does it feel like that, Yeah, absolutely, I mean, of course, 0:00:43.120 --> 0:00:45.960 you know, there's a public health crisis, uh, and so 0:00:46.560 --> 0:00:49.880 it can't really be addressed in a compelling way without 0:00:49.960 --> 0:00:54.040 some sort of broader government plan. But from an economic perspective, 0:00:54.400 --> 0:00:57.480 and this is something that we've been talking about a lot, 0:00:57.520 --> 0:01:01.279 and I think it is huge ramification the degree to 0:01:01.320 --> 0:01:06.160 which government, both in terms of spending and also in 0:01:06.280 --> 0:01:10.440 terms of thinking about their sort of domestic industrial strategy. 0:01:10.600 --> 0:01:14.080 This crisis has really, uh really brought forth a lot 0:01:14.120 --> 0:01:16.760 of talk about how important that role is, right, what 0:01:16.840 --> 0:01:19.640 the potential role is. And it can fall under a 0:01:19.640 --> 0:01:22.000 bunch of labels. One of them, of course, is modern 0:01:22.000 --> 0:01:25.399 monetary theory, so I went ahead and said it. The 0:01:25.440 --> 0:01:29.200 other one is fiscal stimulus. Exactly how does the government 0:01:29.319 --> 0:01:35.520 insert itself to try to break our current economic cycle 0:01:35.840 --> 0:01:40.200 downward spiral. But I feel like whenever we have these conversations, 0:01:40.200 --> 0:01:42.440 we talk about there is a role for government, but 0:01:42.520 --> 0:01:47.319 we don't often talk about what that government itself could 0:01:47.640 --> 0:01:50.920 and should book Like, Yeah, that's absolutely true. I mean 0:01:50.960 --> 0:01:52.680 I do think, you know, this is sort of the 0:01:52.720 --> 0:01:56.440 big question, but what that really looks like? How much 0:01:57.040 --> 0:02:02.920 should spending be used to permanently provide a safety net, 0:02:02.960 --> 0:02:07.800 to permanently provide more spending to lower income households? These 0:02:07.840 --> 0:02:10.720 are huge questions. I mean, hey, we don't really know 0:02:10.760 --> 0:02:13.079 if the momentum that we see on government spending will 0:02:13.080 --> 0:02:16.280 really last, but even if it does, the future feels 0:02:16.360 --> 0:02:19.000 very wide open on what the sort of the new 0:02:19.040 --> 0:02:22.640 economic consensus could look like. And part of it is 0:02:22.720 --> 0:02:28.040 stuff like free market capitalism versus central planning from the government. 0:02:28.280 --> 0:02:31.000 That's kind of obvious, but some of it goes, I 0:02:31.040 --> 0:02:33.959 think even deeper than that, and we start talking about 0:02:35.080 --> 0:02:38.400 freedom of the individual and what sort of rights should 0:02:38.440 --> 0:02:42.320 people have under a government that's trying to guarantee or 0:02:42.480 --> 0:02:46.960 secure a particular economic future. Yeah. It's kind of a 0:02:46.960 --> 0:02:50.519 weird point, isn't it. Because there is this growing consensus 0:02:50.520 --> 0:02:54.600 about the need for more government activity. And yet, you know, 0:02:54.680 --> 0:02:57.760 at least in the US context, whether it's on the 0:02:57.919 --> 0:03:01.360 right or the left, you know, just straordinary amount of 0:03:01.400 --> 0:03:07.040 skepticism about government in different ways. It's different on either side, 0:03:07.720 --> 0:03:10.600 but there is this weird tension between how much the 0:03:10.680 --> 0:03:14.679 government is thought to need to do versus the confidence 0:03:14.720 --> 0:03:19.160 that people have in government to do anything effectively. Yeah, exactly. 0:03:19.360 --> 0:03:23.240 So today we're going to be diving deep, deep, deep 0:03:23.320 --> 0:03:26.520 into that question, and we're going to talk with Victor Schutz. 0:03:26.639 --> 0:03:29.800 He's the head of Asia strategy over at mcquarie. He 0:03:29.880 --> 0:03:32.919 actually has a new book out which is all about 0:03:32.919 --> 0:03:36.680 this topic. It's called The Great Rupture, Three Empires, Four 0:03:36.680 --> 0:03:40.080 Turning Points, and the Future of Humanity. So I just 0:03:40.080 --> 0:03:42.040 want to say one quick thing, which is that I 0:03:42.080 --> 0:03:45.760 wasn't here for that last episode, that interview that you 0:03:45.800 --> 0:03:48.400 did with Victor last year, so I listened to it 0:03:48.680 --> 0:03:51.400 this morning is part of the prep and I was like, wow, 0:03:51.440 --> 0:03:54.400 this is a topic that the interview that you guys 0:03:54.400 --> 0:03:56.680 did was extremely timely in the head of the curve 0:03:56.720 --> 0:03:58.880 because it felt like you guys were talking about this 0:03:59.000 --> 0:04:02.440 at the end of last year. Now everyone's talking about it, 0:04:02.680 --> 0:04:05.119 so that got me super impressed, and I was very 0:04:05.240 --> 0:04:08.600 I'm very excited for this conversation. Ah, thank you, Joe. 0:04:08.880 --> 0:04:11.440 I do do better on this podcast when you're not here. 0:04:11.480 --> 0:04:16.440 It's true. Okay, let's bring on. I'm just kidding. Let's 0:04:16.440 --> 0:04:18.919 bring on Victor. Victor. It's so good to have you again. 0:04:19.480 --> 0:04:22.000 Thanks very much, Tracy, and I'm very happy to be here. 0:04:23.000 --> 0:04:26.040 So one thing I've always wondered. You know, I said, 0:04:26.040 --> 0:04:27.680 you're one of my favorite analysts. But one of the 0:04:27.720 --> 0:04:30.159 things I really like about your research is there's always 0:04:30.160 --> 0:04:32.560 a touch of history to it and always a touch 0:04:32.560 --> 0:04:37.400 of philosophy. You're sort of like this philosophy philosophical analyst 0:04:37.480 --> 0:04:41.560 of philosopher, king of the cell side. I guess how 0:04:41.600 --> 0:04:45.240 did you develop this unique approach. Well, it's a it's 0:04:45.240 --> 0:04:48.400 a good question. Um. I was born in the Old 0:04:48.440 --> 0:04:52.520 Soviet Union. I sort of grew up in the communist system. 0:04:53.040 --> 0:04:56.839 I migrated when I was around twenty. I moved to 0:04:56.880 --> 0:05:00.760 Australia and I had a very classical I get economics 0:05:00.800 --> 0:05:04.440 and finance education. I worked in the banking industry for 0:05:04.480 --> 0:05:09.200 a long time in Russia, in Britain, in the US, 0:05:09.560 --> 0:05:13.760 in Australia, in Hong Kong and China, covering variety of 0:05:13.839 --> 0:05:19.240 areas from stocks and sectors to strategy to politics. UM. 0:05:19.279 --> 0:05:22.080 And I guess it's sort of amalgamation of what I've 0:05:22.160 --> 0:05:25.240 learned When I was younger, I used to specialize in 0:05:25.320 --> 0:05:29.440 Marxist Leninism and all the way to a more classical 0:05:29.440 --> 0:05:33.120 economics and monetarist economics. UM. I guess it's a blend 0:05:33.320 --> 0:05:36.200 of all of those things have come together, and for 0:05:36.240 --> 0:05:40.920 me personally, two thousand, two thousand one dot com crisis 0:05:41.120 --> 0:05:46.360 and even more importantly two thousand eight global financial crisis 0:05:47.000 --> 0:05:51.880 really brought at home that economics cannot be separated from politics, 0:05:52.320 --> 0:05:57.359 finance cannot be separated from economics, market signals cannot be 0:05:57.480 --> 0:06:00.880 separated from people or philosophy. And I guess over the 0:06:00.960 --> 0:06:05.200 last ten ten to twelve years, my views UM kind 0:06:05.200 --> 0:06:09.280 of evolved and hardened UH and become not just economics 0:06:09.279 --> 0:06:14.279 and finance, but a bridge between that and UH and politics, philosophy, 0:06:14.480 --> 0:06:18.599 and most importantly history. History really educates us and really 0:06:18.640 --> 0:06:22.200 shapes us. So, as I was saying to Tracy, I 0:06:22.240 --> 0:06:27.800 really enjoyed the conversation that you did last year because 0:06:27.839 --> 0:06:30.680 it struck me as just incredibly timely because Okay, here 0:06:30.720 --> 0:06:32.640 we have this crisis and a lot of people think 0:06:32.960 --> 0:06:35.800 there's gonna be this new rethink about the economic consensus, 0:06:35.839 --> 0:06:40.200 probably more government spending. You were talking about the rethink 0:06:40.600 --> 0:06:44.720 the new consensus last year, even before this crisis. So 0:06:44.760 --> 0:06:48.800 setting aside the coronavirus, what were you already seeing in 0:06:48.920 --> 0:06:52.359 terms of the sort of shifting uh, shifting tectonic plate 0:06:52.520 --> 0:06:56.720 towards a rethink about what what the government's role is 0:06:56.800 --> 0:07:00.920 in the economy. Why was that already something happened in ee, Well, 0:07:01.200 --> 0:07:04.560 you can actually go all the way to my first crisis. 0:07:04.680 --> 0:07:09.440 I was a young analyst in Sydney, Australian seven during 0:07:09.520 --> 0:07:13.720 the Black Monday, and that's where green spent put option 0:07:13.880 --> 0:07:17.280 for the first time really appeared. And as we've gone 0:07:17.320 --> 0:07:23.640 through nineties, whether it was seven, two thousand one, two 0:07:23.640 --> 0:07:28.320 thousand eight, two thousand, fifteen, two thousand twenty, every time 0:07:28.440 --> 0:07:31.720 we are in at the intersection or a t junction 0:07:32.080 --> 0:07:35.560 and the question is raised, should we rebase our economies, 0:07:35.960 --> 0:07:40.360 should we make them much more liberal capitalism economies? The 0:07:40.440 --> 0:07:45.280 answer universally from people and politics is no. And the 0:07:45.320 --> 0:07:48.160 reason it's no is because for the last thirty or 0:07:48.160 --> 0:07:51.640 forty years, we really were growing much faster than our 0:07:51.640 --> 0:07:56.160 productivity would allow. And how we finance that is primarily 0:07:56.200 --> 0:07:59.760 by bringing future consumption to the present, and eventually we 0:08:00.160 --> 0:08:03.960 to ourselves to asset prices. And then when you do that, 0:08:04.360 --> 0:08:08.440 eventually neither central banks nor treasury departments can tolerate any 0:08:08.520 --> 0:08:12.480 volatility at all. Zero volatility is your right answer. But 0:08:12.560 --> 0:08:16.800 the problem with that is that monetary policies become incredibly, 0:08:16.840 --> 0:08:20.760 incredibly toxic and the side effects are extreme. So what 0:08:20.840 --> 0:08:24.480 I felt for the last five years at least possibly longer, 0:08:24.760 --> 0:08:28.400 that we need to change policy tools. Either we allow 0:08:28.600 --> 0:08:32.400 liberal capitalism to succeed, but that's going to be incredibly 0:08:32.480 --> 0:08:38.000 painful because we will need to recognize decades of excesses. Alternatively, 0:08:38.080 --> 0:08:41.720 we switched the tools are public sector is still critical, 0:08:42.040 --> 0:08:45.640 but instead of using purely monetary levels, they're going to 0:08:45.840 --> 0:08:49.760 use fiscal levels. They're going to be much more aggressive 0:08:49.920 --> 0:08:53.839 in directing and managing cycles than what they were even 0:08:53.880 --> 0:08:57.120 in the last sort of thirty or forty years. And 0:08:57.160 --> 0:08:58.720 the way I tend to look at it, it's like 0:08:58.760 --> 0:09:03.000 a bridge. We've got on that bridge in let's let's 0:09:03.000 --> 0:09:05.679 call it. That's that's your deadline that that's your beginning. 0:09:06.040 --> 0:09:09.920 For about thirty forty years, we essentially used monetary levers. 0:09:10.360 --> 0:09:13.480 The next twenty or thirty years will be essentially fiscal 0:09:14.360 --> 0:09:18.040 and m MT style policies. What lies on the other 0:09:18.120 --> 0:09:21.120 side of the bridge twenty or thirty years from now, 0:09:21.480 --> 0:09:24.880 nobody really knows, but my guess it will be nothing 0:09:25.000 --> 0:09:29.280 like conventional capitalism. We can debate whether it's communism, whether 0:09:29.320 --> 0:09:32.679 it's feudalism, whether it's a despotism. There is a variety 0:09:32.880 --> 0:09:35.520 of labels and sort of use you can have, but 0:09:35.960 --> 0:09:39.000 ultimately it's not going to be a liberal capitalism. And 0:09:39.040 --> 0:09:42.079 the reason for that is very simple. As I said, 0:09:42.120 --> 0:09:45.880 every time we have a choice, we prefer not to 0:09:45.920 --> 0:09:49.440 have the adjustment. And so when people say I was 0:09:49.520 --> 0:09:52.720 Green spent to blame for it? Was Bernaki blamed for it, 0:09:52.800 --> 0:09:56.640 was Janet Ellen? My answer is no, it's you, it's us, 0:09:56.720 --> 0:09:59.560 it's people. We buy in large, did not want to 0:09:59.559 --> 0:10:03.480 have an ajustment, and politics delivered what we wanted, which 0:10:03.520 --> 0:10:08.600 is wealth and income beyond our productivity. So every time 0:10:08.679 --> 0:10:11.560 we're faced with the crisis or this sort of turning point, 0:10:12.120 --> 0:10:15.840 it feels like we avoid that adjustment and policymakers sort 0:10:15.880 --> 0:10:18.959 of turn inwards on themselves. I guess, can you give 0:10:19.040 --> 0:10:24.800 us some historical examples that go beyond the nineties, because 0:10:24.840 --> 0:10:27.120 I think this is the basis of your book. You 0:10:27.120 --> 0:10:31.760 actually look at three empires, three major turning points, and 0:10:31.840 --> 0:10:35.840 how those different authorities responded to the turning points. Can 0:10:35.880 --> 0:10:40.079 you describe that? Yeah? Absolutely, Well, if you think of 0:10:40.120 --> 0:10:43.840 the greatest quality that humans have, and that's quality to 0:10:43.960 --> 0:10:50.240 resist change. Nobody wants change, and some societies are being very, 0:10:50.440 --> 0:10:54.360 very resistant to change. And what the book describes are 0:10:54.360 --> 0:10:58.880 the reason why China, Russian Empire, and the ultimates really 0:10:58.960 --> 0:11:04.360 preferred stagnation and no change to embracing new things exploration, 0:11:04.480 --> 0:11:10.040 scientific revolution, industrial revolutions. And it also discusses why Western Europe, 0:11:10.080 --> 0:11:14.720 which is really a small rain swept peninsula of Eurasia, 0:11:14.960 --> 0:11:18.520 decided to take a different course in the same sort 0:11:18.520 --> 0:11:22.600 of five hundred years and as a result conquered the world. 0:11:22.960 --> 0:11:26.000 So we have seen similar degree of resistance in the past, 0:11:26.280 --> 0:11:30.520 and as I said, some societies really cannot overcome depth resistance. 0:11:31.000 --> 0:11:33.840 And I described in the book the role the Mongols, 0:11:33.880 --> 0:11:37.240 for example, played, the role the Black Desk played, the 0:11:37.360 --> 0:11:41.320 role rejuvenation of human spirit in the fifteenth century played 0:11:41.679 --> 0:11:45.440 But whatever the reasons were, Chinese never got off the 0:11:45.520 --> 0:11:50.280 doomsday highway. Neither did the Russians. But Western Europe, prepared 0:11:50.320 --> 0:11:57.240 to be flexible, prepared to exchange ideas, views, products, services, explore, 0:11:57.720 --> 0:12:03.679 change things, enhanced Europe One and any European settlement, including 0:12:03.720 --> 0:12:07.559 the United States, was part of that winning team. The 0:12:07.640 --> 0:12:12.160 key question, however, now is whether, in fact, the same 0:12:12.320 --> 0:12:16.280 recipe for success that ensured that the West is going 0:12:16.320 --> 0:12:20.079 to be dominant is rapidly changing. And if it is changing, 0:12:20.840 --> 0:12:25.040 is it possible that for the first time in five years, 0:12:25.240 --> 0:12:28.280 East is much better structured to the world I had 0:12:29.080 --> 0:12:32.160 and and part of that is the role of the government. 0:12:32.600 --> 0:12:35.560 Part of that is a role of technology, and and 0:12:35.559 --> 0:12:38.000 and and what role the place in our daily life. 0:12:38.440 --> 0:12:41.440 Part of it is financialization that we have done over 0:12:41.440 --> 0:12:45.080 the last thirty forty years. And that's really, I guess 0:12:45.120 --> 0:12:47.640 the crux of the book. We know what succeeded in 0:12:47.640 --> 0:12:50.920 the last five hundred years. We know why the West 0:12:51.000 --> 0:12:55.280 was successful and why you know, Chang dynasty collapse. The 0:12:55.360 --> 0:12:58.240 interesting saying is that are we changing now to a 0:12:58.360 --> 0:13:02.240 stage that a different front rules and a different success 0:13:02.240 --> 0:13:19.160 flammul level up life m M. One thing I keep 0:13:19.200 --> 0:13:21.640 coming back to, and I you know, this is obviously 0:13:21.760 --> 0:13:25.160 very sort of like big picture and thought provoking stuff, 0:13:25.840 --> 0:13:28.120 but I always sort of end up like coming back 0:13:28.160 --> 0:13:31.960 to this question in terms of like the markets ramifications 0:13:31.960 --> 0:13:34.480 of a turn like we've had forty years or whatever 0:13:34.720 --> 0:13:39.920 of this current economic consensus of almost entirely relying on 0:13:40.120 --> 0:13:44.800 monetary authorities to uh stabilize the economy and now we've 0:13:44.840 --> 0:13:48.960 gotten ourselves. And even I think Jay Polos acknowledged this 0:13:49.040 --> 0:13:52.199 as a jackson the whole speech where it's all about 0:13:52.240 --> 0:13:55.680 financial conditions and anytime there's any sort of deflation risk 0:13:56.000 --> 0:13:58.280 because of all the leverage that's been built up, the 0:13:58.400 --> 0:14:01.160 FED has can't tolerate that and to do a rate. 0:14:02.080 --> 0:14:04.480 If we have this big shift, what is the new 0:14:04.559 --> 0:14:07.280 sort of what does that mean for investors? Like does 0:14:07.320 --> 0:14:11.760 that fundamentally change from your perspective, how investors should be 0:14:11.800 --> 0:14:17.479 thinking about portfolio To answer your question, absolutely, investment strategies 0:14:17.840 --> 0:14:21.760 are going to change. One of the big paradigms or 0:14:21.800 --> 0:14:26.280 paradigm shifts UH that is likely to occur, and one 0:14:26.280 --> 0:14:29.040 of the big questions that investors will have to consider 0:14:29.440 --> 0:14:32.920 is whether we're shifting from a dec inflationary climate over 0:14:32.920 --> 0:14:36.120 the last twenty or thirty years too much more inflationary. 0:14:36.480 --> 0:14:40.479 And the reason why investors have such a difficulty deciding 0:14:40.560 --> 0:14:44.160 what to do is it most market signals have died, 0:14:44.960 --> 0:14:47.200 or if they have not died, they degraded to a 0:14:47.360 --> 0:14:52.880 stage that they no longer have any meaning. So, for example, 0:14:53.000 --> 0:14:57.840 when people worry about saints like yield curve, Now, what 0:14:57.960 --> 0:15:01.480 message does a yield curve conveyed of the marketplace? If 0:15:01.560 --> 0:15:06.920 central bank determines force, quantity, and price. The answer is none. 0:15:07.360 --> 0:15:10.240 Why do we need prime dealers for when in fact 0:15:10.280 --> 0:15:14.320 central banks determined posts, price, and quantity. Well, the answer, 0:15:14.360 --> 0:15:17.600 we don't need them. Why do we need commercial banks? Well, 0:15:17.760 --> 0:15:21.800 the answer we don't. So the problem for investors is 0:15:21.840 --> 0:15:26.720 the playbook that they've used for decades no longer exists. 0:15:27.160 --> 0:15:31.600 Market signals don't convey what they're supposed to convey. Reactions 0:15:31.600 --> 0:15:35.120 in the marketplace are completely different. Again, that's a merger 0:15:35.120 --> 0:15:39.360 of financialization and technology um And at the same time 0:15:39.400 --> 0:15:42.960 they know that the environment is changing. State will be 0:15:43.040 --> 0:15:46.600 driving and already is driving most of the business cycles. 0:15:46.800 --> 0:15:51.560 State will determine capital market cycles. State will determine the 0:15:51.640 --> 0:15:55.040 winners and losers. Now at that point, what do you 0:15:55.120 --> 0:15:58.040 do as a fund manager? How do you position yourself? 0:15:58.720 --> 0:16:01.920 Um And the answer that is, if you continue on 0:16:01.960 --> 0:16:06.800 the current paths of using primarily monetary policy, interest rates 0:16:06.840 --> 0:16:11.160 eventually will be negative everywhere because we must generate more 0:16:11.200 --> 0:16:15.119 and more capital than what we need. What that implies 0:16:15.520 --> 0:16:18.360 as interest rates go down, cost of equity goes down. 0:16:18.840 --> 0:16:22.760 At that point, every company can beat for any project 0:16:22.800 --> 0:16:26.320 because any project is viable. As I continue to compete, 0:16:26.480 --> 0:16:30.320 return on projects decline, which means it brings cost of 0:16:30.320 --> 0:16:33.840 equity even lower. At that point, you reach singularity. There 0:16:33.920 --> 0:16:36.800 is no returns and there is no cost of capital. 0:16:37.320 --> 0:16:40.400 Now what does it do to stocks? What does it 0:16:40.440 --> 0:16:43.240 do to the bob market? Well, the ounce any case 0:16:43.280 --> 0:16:49.040 of stocks, some become infinitely expensive, others just become average 0:16:49.200 --> 0:16:53.640 and continue to degrade, and its stocks have become infinitely expensive, 0:16:53.800 --> 0:16:57.800 just as quickly can fall down if suddenly they're no 0:16:57.840 --> 0:17:02.840 longer capable of delivering growth rates. So how your structure 0:17:02.880 --> 0:17:06.040 portfolio is different. It's no longer value versus growths, it's 0:17:06.080 --> 0:17:10.600 no longer value versus quality. It's no longer defensive versus 0:17:10.640 --> 0:17:14.720 north defense. It is no longer bay markets a bull markets. 0:17:14.760 --> 0:17:17.200 We can now have a bay market in the afternoon 0:17:17.320 --> 0:17:19.919 and a bull market in the morning, whereas in a 0:17:20.000 --> 0:17:24.000 past bay markets would last five ten years. So it's 0:17:24.000 --> 0:17:27.439 a completely different environment. Just on the notion of the 0:17:27.480 --> 0:17:31.760 cost of capital declining, I mean, presumably that sort of 0:17:31.800 --> 0:17:37.520 hastens the technological shift or the technological advances that have 0:17:37.600 --> 0:17:41.560 led to or contributed to declining productivity in the first place. 0:17:42.080 --> 0:17:46.560 So I imagine you kind of get a cycle where 0:17:46.560 --> 0:17:50.480 the cost of capital goes lower, technology improves, and I 0:17:50.520 --> 0:17:56.600 guess um, dissatisfaction with employment and the general state of 0:17:56.640 --> 0:18:00.960 affairs kind of increases. Yes. Absolutely, the way I look 0:18:01.000 --> 0:18:06.720 at it, financialization is like pouring oil on the bonfire 0:18:07.000 --> 0:18:11.399 of information age. Technology is a human spirit, it's a 0:18:11.560 --> 0:18:16.080 human ingenuity. But the speed with which technology progresses depends 0:18:16.080 --> 0:18:19.120 on the cost of capital. The lower your cost of capital, 0:18:19.320 --> 0:18:23.000 the faster it grows. And as it grows faster and faster, 0:18:23.160 --> 0:18:27.399 it's started disintermediating people from fruits of their labor. It 0:18:27.480 --> 0:18:32.879 start disintermediating corporates from their products, their brands, their distribution systems. 0:18:33.200 --> 0:18:39.639 It started increasing disinflationary pressure. So the dissatisfaction in the 0:18:39.760 --> 0:18:43.320 society increases. And what I do I call it in 0:18:43.359 --> 0:18:47.920 the book Fujiwarre effect, which is a merger of two hurricanes. 0:18:48.480 --> 0:18:52.119 One hurricane is a human spirit, which is technology, but 0:18:52.200 --> 0:18:55.720 the other hurricane is financialization. Is what we have done 0:18:56.040 --> 0:18:58.880 over the last thirty or forty years. And those two 0:18:59.000 --> 0:19:04.080 hurricanes continue to merge and reinforce each other and strengthen 0:19:04.240 --> 0:19:06.720 as we go forward. As I said, one of those 0:19:06.800 --> 0:19:11.000 hurricanes is the good saying, it's our ingenuity, but the 0:19:11.040 --> 0:19:14.000 other one is a self inflicted wound. We did not 0:19:14.200 --> 0:19:19.719 have to have financialization. Those two working together do several saints. 0:19:20.119 --> 0:19:23.200 Number one, they reduce the cost of capital of the time. 0:19:23.560 --> 0:19:28.800 Number two, they accelerate disintermediation of society. Number three, they 0:19:28.960 --> 0:19:33.560 cause income and wealth inequalities to skyrocket. It creates social 0:19:33.640 --> 0:19:37.960 geopolitical pressures. It's quite deadly. And if you think of 0:19:38.080 --> 0:19:42.320 m MT policies or government policies, the objective of those 0:19:42.359 --> 0:19:47.000 policies is not to restore liberal capitalism. The objective of 0:19:47.000 --> 0:19:50.719 those policies to reduce the speed with which we're falling 0:19:50.760 --> 0:19:56.240 to zero. So here's here's the question that I thought 0:19:56.280 --> 0:19:59.320 of earlier, and you answer there sort of reminded me 0:19:59.400 --> 0:20:02.480 of it. But what is the value of these labels 0:20:02.520 --> 0:20:06.920 of saying, Okay, this is capitalism, this is communism, this 0:20:07.040 --> 0:20:11.320 is socialism, this is something else. Do we need to 0:20:11.880 --> 0:20:14.760 have words? Or if we have an economy in which 0:20:14.760 --> 0:20:18.440 the government plays a much more robust role in spending money, 0:20:19.080 --> 0:20:22.879 uh to without the business cycles, whatever it is, is 0:20:22.920 --> 0:20:26.800 it important that we label it? Does that necessarily help 0:20:26.880 --> 0:20:29.879 us understand this or could there just be like a 0:20:29.880 --> 0:20:32.320 blend of different models and it's you know, kind of 0:20:32.600 --> 0:20:35.760 free markets but also with more regulation and so forth. Well, 0:20:35.840 --> 0:20:38.480 you you know, you're absolutely right. If you think of 0:20:38.520 --> 0:20:42.440 the United States in nineties fifties, and for a chunk 0:20:42.480 --> 0:20:46.720 of nineteen sixties as well, it was incredibly constrained society 0:20:46.880 --> 0:20:51.080 post economically, financially, and politically. If you think of Europe 0:20:51.160 --> 0:20:56.160 in nineties fifties, it was incredibly constraint. Nobody would recognize 0:20:56.200 --> 0:21:00.000 those societies as liberal capitalism. In other what the premus 0:21:00.119 --> 0:21:03.400 of the private sector. The premise of the private sector 0:21:03.480 --> 0:21:08.359 signals the government essentially stands aside and create environment in 0:21:08.440 --> 0:21:14.080 which businesses are prosper or fail. That was not nineteen fifties, 0:21:14.320 --> 0:21:16.520 and so the way look at it, we're going closer 0:21:16.880 --> 0:21:21.679 to nine fifties and sixties than we are to. But 0:21:21.920 --> 0:21:25.879 there is a twist, and the twist is that technology 0:21:26.000 --> 0:21:32.760 now allows us to create totalitarian dictatorships that no longer 0:21:32.800 --> 0:21:39.000 will suffer from shortage of ideas, from shortage of wealth, productivity, 0:21:39.119 --> 0:21:43.120 or anything else. In the past, a totalitarian system such 0:21:43.160 --> 0:21:47.400 as imperial China or the Soviet Union, where a sort 0:21:47.400 --> 0:21:50.800 of places of stagnation, where places of lack of growth, 0:21:51.000 --> 0:21:56.280 lack of opportunity. The technology now can create societies that 0:21:56.720 --> 0:22:02.120 are illiberal, some potentially quite at all, but nevertheless society 0:22:02.200 --> 0:22:07.080 is that will not suffer from stignation as set of ideas, inventiveness, growth, 0:22:07.200 --> 0:22:10.720 or anything else. And that's one of the lessons from 0:22:10.760 --> 0:22:13.640 the book is to say that as we go over 0:22:13.680 --> 0:22:17.000 the next couple of decades, it is quite possible that 0:22:17.080 --> 0:22:20.400 not only we will not have what we recognize as 0:22:20.480 --> 0:22:23.399 liberal capitalists, that it's going to be much closer to 0:22:23.600 --> 0:22:27.840 nies and sixties, where the government will be directing capital, 0:22:28.240 --> 0:22:32.600 where regulatory structures will be much stricter than what they 0:22:32.600 --> 0:22:36.600 are today. But in addition to that, at least part 0:22:36.640 --> 0:22:38.919 of the world that maybe big chunks of the world 0:22:39.560 --> 0:22:44.439 will decide that personal freedom is also optional. It is 0:22:44.480 --> 0:22:49.159 not actually necessary for your success. Um, can you elaborate 0:22:49.200 --> 0:22:53.160 on that last point? So not actually necessary for your success, 0:22:53.280 --> 0:22:57.560 But I guess the question is it necessary for your happiness? 0:22:57.640 --> 0:23:00.880 And if the thing we're trying to solve is resolve 0:23:01.760 --> 0:23:05.960 is um people's relationship with labor and how happy they 0:23:06.000 --> 0:23:10.920 feel in their jobs, then then doesn't that become important? Yes, 0:23:10.960 --> 0:23:14.439 it does. But one of the things to remember, of course, 0:23:14.720 --> 0:23:18.359 is that labor is becoming less and less critical most 0:23:18.400 --> 0:23:23.000 marginal utility and marginal returns, and labor has been declining 0:23:23.160 --> 0:23:28.480 for two decades and that decline is accelerating. Many professions 0:23:28.480 --> 0:23:31.280 are no longer exist anything like what they used to 0:23:31.359 --> 0:23:34.639 twenty or thirty years ago. Over the next two decades, 0:23:34.720 --> 0:23:37.880 whether you are truck driver, whether your plumber, whether your 0:23:38.000 --> 0:23:41.680 PhD in computer science, you will feel the same pressure 0:23:41.720 --> 0:23:44.920 of irrelevancy, or the same pressure that you're no longer 0:23:45.000 --> 0:23:49.320 contributing what you used to contribute. So one of the 0:23:49.400 --> 0:23:54.600 saints that societies are trying to understand it what is 0:23:54.640 --> 0:23:58.760 the role of labor in industrial age? In the ninety century, 0:23:58.840 --> 0:24:02.879 it was very straightforl labor was a critical productivity driver 0:24:03.240 --> 0:24:06.240 and needed to be trained and skilled to hire and 0:24:06.400 --> 0:24:10.280 high level to grow productivity. In the twenty one century, 0:24:10.359 --> 0:24:13.239 that is no longer, so labor is no longer the 0:24:13.359 --> 0:24:17.720 key productivity driver. The same happens was capital. If you 0:24:17.800 --> 0:24:22.119 think of nineteen twenty century, capital generally was scarce. It 0:24:22.200 --> 0:24:26.080 needed to be allocated carefully to whatever utilization people want 0:24:26.119 --> 0:24:28.840 to do. That's why we have a DCF model and 0:24:28.960 --> 0:24:32.640 capital as a pricing model. Most of our activities were 0:24:32.760 --> 0:24:36.959 highly capital intensive. Today most of our activities are not 0:24:37.080 --> 0:24:41.359 capital intensive at all. We have a surplus of capital. 0:24:41.440 --> 0:24:43.800 We are drowning in capital. We have at least five 0:24:43.800 --> 0:24:47.040 ten times more than we need, and that's as a 0:24:47.080 --> 0:24:50.600 result of our financialization. And at the same time, as 0:24:50.600 --> 0:24:54.080 I said, the need for capital is declining and so 0:24:54.240 --> 0:24:57.600 cost of capital continues to fall. But in addition to that, 0:24:57.960 --> 0:25:01.280 the nature of capital is also changed. In the past, 0:25:01.440 --> 0:25:05.040 it was a hard capital, it was roads, factories, machinery, 0:25:05.440 --> 0:25:12.320 plant Today it's mostly intangible capital. It's a software, digital capital, 0:25:12.440 --> 0:25:16.360 social capital. Now the heart and soft capital have different 0:25:16.760 --> 0:25:21.040 different properties and they behave differently, and so you find 0:25:21.160 --> 0:25:26.960 compared to industrial capitalism what you can argue industrial societies, 0:25:27.359 --> 0:25:32.480 not only labor or nature of labor changes dramatically, but 0:25:32.560 --> 0:25:36.720 in addition, nature in demand for capital also changes. Now, 0:25:36.760 --> 0:25:39.960 if you don't have free labor selling services in the 0:25:40.119 --> 0:25:45.320 free market in order to maintain their upkeep and life expenses, 0:25:45.640 --> 0:25:48.600 and if you don't have capital as a critical part 0:25:48.640 --> 0:25:51.560 of your system, it is no longer capitalism as we 0:25:51.640 --> 0:25:54.439 know it. Now you can call it variety of ways. 0:25:54.520 --> 0:25:57.960 As I said, you can put various labels, and eventually 0:25:58.119 --> 0:26:02.600 different countries will find different relationships, but they will be different. So, 0:26:02.840 --> 0:26:06.840 if you are a human being, how do you find happiness? 0:26:07.840 --> 0:26:10.800 If it's not through work, if it is not through money, 0:26:11.400 --> 0:26:14.880 if it is not through power, What gives you happeness? 0:26:14.960 --> 0:26:18.639 And can society delivered that happeness. That's where you're go 0:26:18.720 --> 0:26:23.160 into the ideas of universal or basic income guarantees. That's 0:26:23.160 --> 0:26:27.720 where you get two ideas of how educational and skilling 0:26:27.800 --> 0:26:30.399 systems are going to change. That's where you've got too 0:26:30.440 --> 0:26:35.280 many other ideas of building a different society funded by 0:26:35.400 --> 0:26:39.119 the state, because private sector will never fund any of 0:26:39.160 --> 0:26:42.439 that and will never be prepared to do so. And 0:26:42.560 --> 0:26:46.000 that's why the way describe it. Whether you look at 0:26:46.119 --> 0:26:49.320 m MT, whether you look at perpetuals, whether you look 0:26:49.320 --> 0:26:53.080 at other Neo Kinsian models, whatever your model is, the 0:26:53.160 --> 0:26:56.640 objective of the government is to reduce the pace at 0:26:56.680 --> 0:26:59.639