Speaker 1: Hello, and welcome to another episode of the All Thoughts podcast.
Speaker 1: I'm Tracy Allaway and I'm Joe Wisental. So, Joe, I
Speaker 1: feel like there's a bit of a consensus emerging that maybe,
Speaker 1: in the midst of the biggest economic crisis in decades,
Speaker 1: and in the midst of rising death toll from coronavirus,
Speaker 1: that there might be a greater role for the government.
Speaker 1: Does it feel like that, Yeah, absolutely, I mean, of course,
Speaker 1: you know, there's a public health crisis, uh, and so
Speaker 1: it can't really be addressed in a compelling way without
Speaker 1: some sort of broader government plan. But from an economic perspective,
Speaker 1: and this is something that we've been talking about a lot,
Speaker 1: and I think it is huge ramification the degree to
Speaker 1: which government, both in terms of spending and also in
Speaker 1: terms of thinking about their sort of domestic industrial strategy.
Speaker 1: This crisis has really, uh really brought forth a lot
Speaker 1: of talk about how important that role is, right, what
Speaker 1: the potential role is. And it can fall under a
Speaker 1: bunch of labels. One of them, of course, is modern
Speaker 1: monetary theory, so I went ahead and said it. The
Speaker 1: other one is fiscal stimulus. Exactly how does the government
Speaker 1: insert itself to try to break our current economic cycle
Speaker 1: downward spiral. But I feel like whenever we have these conversations,
Speaker 1: we talk about there is a role for government, but
Speaker 1: we don't often talk about what that government itself could
Speaker 1: and should book Like, Yeah, that's absolutely true. I mean
Speaker 1: I do think, you know, this is sort of the
Speaker 1: big question, but what that really looks like? How much
Speaker 1: should spending be used to permanently provide a safety net,
Speaker 1: to permanently provide more spending to lower income households? These
Speaker 1: are huge questions. I mean, hey, we don't really know
Speaker 1: if the momentum that we see on government spending will
Speaker 1: really last, but even if it does, the future feels
Speaker 1: very wide open on what the sort of the new
Speaker 1: economic consensus could look like. And part of it is
Speaker 1: stuff like free market capitalism versus central planning from the government.
Speaker 1: That's kind of obvious, but some of it goes, I
Speaker 1: think even deeper than that, and we start talking about
Speaker 1: freedom of the individual and what sort of rights should
Speaker 1: people have under a government that's trying to guarantee or
Speaker 1: secure a particular economic future. Yeah. It's kind of a
Speaker 1: weird point, isn't it. Because there is this growing consensus
Speaker 1: about the need for more government activity. And yet, you know,
Speaker 1: at least in the US context, whether it's on the
Speaker 1: right or the left, you know, just straordinary amount of
Speaker 1: skepticism about government in different ways. It's different on either side,
Speaker 1: but there is this weird tension between how much the
Speaker 1: government is thought to need to do versus the confidence
Speaker 1: that people have in government to do anything effectively. Yeah, exactly.
Speaker 1: So today we're going to be diving deep, deep, deep
Speaker 1: into that question, and we're going to talk with Victor Schutz.
Speaker 1: He's the head of Asia strategy over at mcquarie. He
Speaker 1: actually has a new book out which is all about
Speaker 1: this topic. It's called The Great Rupture, Three Empires, Four
Speaker 1: Turning Points, and the Future of Humanity. So I just
Speaker 1: want to say one quick thing, which is that I
Speaker 1: wasn't here for that last episode, that interview that you
Speaker 1: did with Victor last year, so I listened to it
Speaker 1: this morning is part of the prep and I was like, wow,
Speaker 1: this is a topic that the interview that you guys
Speaker 1: did was extremely timely in the head of the curve
Speaker 1: because it felt like you guys were talking about this
Speaker 1: at the end of last year. Now everyone's talking about it,
Speaker 1: so that got me super impressed, and I was very
Speaker 1: I'm very excited for this conversation. Ah, thank you, Joe.
Speaker 1: I do do better on this podcast when you're not here.
Speaker 1: It's true. Okay, let's bring on. I'm just kidding. Let's
Speaker 1: bring on Victor. Victor. It's so good to have you again.
Speaker 1: Thanks very much, Tracy, and I'm very happy to be here.
Speaker 1: So one thing I've always wondered. You know, I said,
Speaker 1: you're one of my favorite analysts. But one of the
Speaker 1: things I really like about your research is there's always
Speaker 1: a touch of history to it and always a touch
Speaker 1: of philosophy. You're sort of like this philosophy philosophical analyst
Speaker 1: of philosopher, king of the cell side. I guess how
Speaker 1: did you develop this unique approach. Well, it's a it's
Speaker 1: a good question. Um. I was born in the Old
Speaker 1: Soviet Union. I sort of grew up in the communist system.
Speaker 1: I migrated when I was around twenty. I moved to
Speaker 1: Australia and I had a very classical I get economics
Speaker 1: and finance education. I worked in the banking industry for
Speaker 1: a long time in Russia, in Britain, in the US,
Speaker 1: in Australia, in Hong Kong and China, covering variety of
Speaker 1: areas from stocks and sectors to strategy to politics. UM.
Speaker 1: And I guess it's sort of amalgamation of what I've
Speaker 1: learned When I was younger, I used to specialize in
Speaker 1: Marxist Leninism and all the way to a more classical
Speaker 1: economics and monetarist economics. UM. I guess it's a blend
Speaker 1: of all of those things have come together, and for
Speaker 1: me personally, two thousand, two thousand one dot com crisis
Speaker 1: and even more importantly two thousand eight global financial crisis
Speaker 1: really brought at home that economics cannot be separated from politics,
Speaker 1: finance cannot be separated from economics, market signals cannot be
Speaker 1: separated from people or philosophy. And I guess over the
Speaker 1: last ten ten to twelve years, my views UM kind
Speaker 1: of evolved and hardened UH and become not just economics
Speaker 1: and finance, but a bridge between that and UH and politics, philosophy,
Speaker 1: and most importantly history. History really educates us and really
Speaker 1: shapes us. So, as I was saying to Tracy, I
Speaker 1: really enjoyed the conversation that you did last year because
Speaker 1: it struck me as just incredibly timely because Okay, here
Speaker 1: we have this crisis and a lot of people think
Speaker 1: there's gonna be this new rethink about the economic consensus,
Speaker 1: probably more government spending. You were talking about the rethink
Speaker 1: the new consensus last year, even before this crisis. So
Speaker 1: setting aside the coronavirus, what were you already seeing in
Speaker 1: terms of the sort of shifting uh, shifting tectonic plate
Speaker 1: towards a rethink about what what the government's role is
Speaker 1: in the economy. Why was that already something happened in ee, Well,
Speaker 1: you can actually go all the way to my first crisis.
Speaker 1: I was a young analyst in Sydney, Australian seven during
Speaker 1: the Black Monday, and that's where green spent put option
Speaker 1: for the first time really appeared. And as we've gone
Speaker 1: through nineties, whether it was seven, two thousand one, two
Speaker 1: thousand eight, two thousand, fifteen, two thousand twenty, every time
Speaker 1: we are in at the intersection or a t junction
Speaker 1: and the question is raised, should we rebase our economies,
Speaker 1: should we make them much more liberal capitalism economies? The
Speaker 1: answer universally from people and politics is no. And the
Speaker 1: reason it's no is because for the last thirty or
Speaker 1: forty years, we really were growing much faster than our
Speaker 1: productivity would allow. And how we finance that is primarily
Speaker 1: by bringing future consumption to the present, and eventually we
Speaker 1: to ourselves to asset prices. And then when you do that,
Speaker 1: eventually neither central banks nor treasury departments can tolerate any
Speaker 1: volatility at all. Zero volatility is your right answer. But
Speaker 1: the problem with that is that monetary policies become incredibly,
Speaker 1: incredibly toxic and the side effects are extreme. So what
Speaker 1: I felt for the last five years at least possibly longer,
Speaker 1: that we need to change policy tools. Either we allow
Speaker 1: liberal capitalism to succeed, but that's going to be incredibly
Speaker 1: painful because we will need to recognize decades of excesses. Alternatively,
Speaker 1: we switched the tools are public sector is still critical,
Speaker 1: but instead of using purely monetary levels, they're going to
Speaker 1: use fiscal levels. They're going to be much more aggressive
Speaker 1: in directing and managing cycles than what they were even
Speaker 1: in the last sort of thirty or forty years. And
Speaker 1: the way I tend to look at it, it's like
Speaker 1: a bridge. We've got on that bridge in let's let's
Speaker 1: call it. That's that's your deadline that that's your beginning.
Speaker 1: For about thirty forty years, we essentially used monetary levers.
Speaker 1: The next twenty or thirty years will be essentially fiscal
Speaker 1: and m MT style policies. What lies on the other
Speaker 1: side of the bridge twenty or thirty years from now,
Speaker 1: nobody really knows, but my guess it will be nothing
Speaker 1: like conventional capitalism. We can debate whether it's communism, whether
Speaker 1: it's feudalism, whether it's a despotism. There is a variety
Speaker 1: of labels and sort of use you can have, but
Speaker 1: ultimately it's not going to be a liberal capitalism. And
Speaker 1: the reason for that is very simple. As I said,
Speaker 1: every time we have a choice, we prefer not to
Speaker 1: have the adjustment. And so when people say I was
Speaker 1: Green spent to blame for it? Was Bernaki blamed for it,
Speaker 1: was Janet Ellen? My answer is no, it's you, it's us,
Speaker 1: it's people. We buy in large, did not want to
Speaker 1: have an ajustment, and politics delivered what we wanted, which
Speaker 1: is wealth and income beyond our productivity. So every time
Speaker 1: we're faced with the crisis or this sort of turning point,
Speaker 1: it feels like we avoid that adjustment and policymakers sort
Speaker 1: of turn inwards on themselves. I guess, can you give
Speaker 1: us some historical examples that go beyond the nineties, because
Speaker 1: I think this is the basis of your book. You
Speaker 1: actually look at three empires, three major turning points, and
Speaker 1: how those different authorities responded to the turning points. Can
Speaker 1: you describe that? Yeah? Absolutely, Well, if you think of
Speaker 1: the greatest quality that humans have, and that's quality to
Speaker 1: resist change. Nobody wants change, and some societies are being very,
Speaker 1: very resistant to change. And what the book describes are
Speaker 1: the reason why China, Russian Empire, and the ultimates really
Speaker 1: preferred stagnation and no change to embracing new things exploration,
Speaker 1: scientific revolution, industrial revolutions. And it also discusses why Western Europe,
Speaker 1: which is really a small rain swept peninsula of Eurasia,
Speaker 1: decided to take a different course in the same sort
Speaker 1: of five hundred years and as a result conquered the world.
Speaker 1: So we have seen similar degree of resistance in the past,
Speaker 1: and as I said, some societies really cannot overcome depth resistance.
Speaker 1: And I described in the book the role the Mongols,
Speaker 1: for example, played, the role the Black Desk played, the
Speaker 1: role rejuvenation of human spirit in the fifteenth century played
Speaker 1: But whatever the reasons were, Chinese never got off the
Speaker 1: doomsday highway. Neither did the Russians. But Western Europe, prepared
Speaker 1: to be flexible, prepared to exchange ideas, views, products, services, explore,
Speaker 1: change things, enhanced Europe One and any European settlement, including
Speaker 1: the United States, was part of that winning team. The
Speaker 1: key question, however, now is whether, in fact, the same
Speaker 1: recipe for success that ensured that the West is going
Speaker 1: to be dominant is rapidly changing. And if it is changing,
Speaker 1: is it possible that for the first time in five years,
Speaker 1: East is much better structured to the world I had
Speaker 1: and and part of that is the role of the government.
Speaker 1: Part of that is a role of technology, and and
Speaker 1: and and what role the place in our daily life.
Speaker 1: Part of it is financialization that we have done over
Speaker 1: the last thirty forty years. And that's really, I guess
Speaker 1: the crux of the book. We know what succeeded in
Speaker 1: the last five hundred years. We know why the West
Speaker 1: was successful and why you know, Chang dynasty collapse. The
Speaker 1: interesting saying is that are we changing now to a
Speaker 1: stage that a different front rules and a different success
Speaker 1: flammul level up life m M. One thing I keep
Speaker 1: coming back to, and I you know, this is obviously
Speaker 1: very sort of like big picture and thought provoking stuff,
Speaker 1: but I always sort of end up like coming back
Speaker 1: to this question in terms of like the markets ramifications
Speaker 1: of a turn like we've had forty years or whatever
Speaker 1: of this current economic consensus of almost entirely relying on
Speaker 1: monetary authorities to uh stabilize the economy and now we've
Speaker 1: gotten ourselves. And even I think Jay Polos acknowledged this
Speaker 1: as a jackson the whole speech where it's all about
Speaker 1: financial conditions and anytime there's any sort of deflation risk
Speaker 1: because of all the leverage that's been built up, the
Speaker 1: FED has can't tolerate that and to do a rate.
Speaker 1: If we have this big shift, what is the new
Speaker 1: sort of what does that mean for investors? Like does
Speaker 1: that fundamentally change from your perspective, how investors should be
Speaker 1: thinking about portfolio To answer your question, absolutely, investment strategies
Speaker 1: are going to change. One of the big paradigms or
Speaker 1: paradigm shifts UH that is likely to occur, and one
Speaker 1: of the big questions that investors will have to consider
Speaker 1: is whether we're shifting from a dec inflationary climate over
Speaker 1: the last twenty or thirty years too much more inflationary.
Speaker 1: And the reason why investors have such a difficulty deciding
Speaker 1: what to do is it most market signals have died,
Speaker 1: or if they have not died, they degraded to a
Speaker 1: stage that they no longer have any meaning. So, for example,
Speaker 1: when people worry about saints like yield curve, Now, what
Speaker 1: message does a yield curve conveyed of the marketplace? If
Speaker 1: central bank determines force, quantity, and price. The answer is none.
Speaker 1: Why do we need prime dealers for when in fact
Speaker 1: central banks determined posts, price, and quantity. Well, the answer,
Speaker 1: we don't need them. Why do we need commercial banks? Well,
Speaker 1: the answer we don't. So the problem for investors is
Speaker 1: the playbook that they've used for decades no longer exists.
Speaker 1: Market signals don't convey what they're supposed to convey. Reactions
Speaker 1: in the marketplace are completely different. Again, that's a merger
Speaker 1: of financialization and technology um And at the same time
Speaker 1: they know that the environment is changing. State will be
Speaker 1: driving and already is driving most of the business cycles.
Speaker 1: State will determine capital market cycles. State will determine the
Speaker 1: winners and losers. Now at that point, what do you
Speaker 1: do as a fund manager? How do you position yourself?
Speaker 1: Um And the answer that is, if you continue on
Speaker 1: the current paths of using primarily monetary policy, interest rates
Speaker 1: eventually will be negative everywhere because we must generate more
Speaker 1: and more capital than what we need. What that implies
Speaker 1: as interest rates go down, cost of equity goes down.
Speaker 1: At that point, every company can beat for any project
Speaker 1: because any project is viable. As I continue to compete,
Speaker 1: return on projects decline, which means it brings cost of
Speaker 1: equity even lower. At that point, you reach singularity. There
Speaker 1: is no returns and there is no cost of capital.
Speaker 1: Now what does it do to stocks? What does it
Speaker 1: do to the bob market? Well, the ounce any case
Speaker 1: of stocks, some become infinitely expensive, others just become average
Speaker 1: and continue to degrade, and its stocks have become infinitely expensive,
Speaker 1: just as quickly can fall down if suddenly they're no
Speaker 1: longer capable of delivering growth rates. So how your structure
Speaker 1: portfolio is different. It's no longer value versus growths, it's
Speaker 1: no longer value versus quality. It's no longer defensive versus
Speaker 1: north defense. It is no longer bay markets a bull markets.
Speaker 1: We can now have a bay market in the afternoon
Speaker 1: and a bull market in the morning, whereas in a
Speaker 1: past bay markets would last five ten years. So it's
Speaker 1: a completely different environment. Just on the notion of the
Speaker 1: cost of capital declining, I mean, presumably that sort of
Speaker 1: hastens the technological shift or the technological advances that have
Speaker 1: led to or contributed to declining productivity in the first place.
Speaker 1: So I imagine you kind of get a cycle where
Speaker 1: the cost of capital goes lower, technology improves, and I
Speaker 1: guess um, dissatisfaction with employment and the general state of
Speaker 1: affairs kind of increases. Yes. Absolutely, the way I look
Speaker 1: at it, financialization is like pouring oil on the bonfire
Speaker 1: of information age. Technology is a human spirit, it's a
Speaker 1: human ingenuity. But the speed with which technology progresses depends
Speaker 1: on the cost of capital. The lower your cost of capital,
Speaker 1: the faster it grows. And as it grows faster and faster,
Speaker 1: it's started disintermediating people from fruits of their labor. It
Speaker 1: start disintermediating corporates from their products, their brands, their distribution systems.
Speaker 1: It started increasing disinflationary pressure. So the dissatisfaction in the
Speaker 1: society increases. And what I do I call it in
Speaker 1: the book Fujiwarre effect, which is a merger of two hurricanes.
Speaker 1: One hurricane is a human spirit, which is technology, but
Speaker 1: the other hurricane is financialization. Is what we have done
Speaker 1: over the last thirty or forty years. And those two
Speaker 1: hurricanes continue to merge and reinforce each other and strengthen
Speaker 1: as we go forward. As I said, one of those
Speaker 1: hurricanes is the good saying, it's our ingenuity, but the
Speaker 1: other one is a self inflicted wound. We did not
Speaker 1: have to have financialization. Those two working together do several saints.
Speaker 1: Number one, they reduce the cost of capital of the time.
Speaker 1: Number two, they accelerate disintermediation of society. Number three, they
Speaker 1: cause income and wealth inequalities to skyrocket. It creates social
Speaker 1: geopolitical pressures. It's quite deadly. And if you think of
Speaker 1: m MT policies or government policies, the objective of those
Speaker 1: policies is not to restore liberal capitalism. The objective of
Speaker 1: those policies to reduce the speed with which we're falling
Speaker 1: to zero. So here's here's the question that I thought
Speaker 1: of earlier, and you answer there sort of reminded me
Speaker 1: of it. But what is the value of these labels
Speaker 1: of saying, Okay, this is capitalism, this is communism, this
Speaker 1: is socialism, this is something else. Do we need to
Speaker 1: have words? Or if we have an economy in which
Speaker 1: the government plays a much more robust role in spending money,
Speaker 1: uh to without the business cycles, whatever it is, is
Speaker 1: it important that we label it? Does that necessarily help
Speaker 1: us understand this or could there just be like a
Speaker 1: blend of different models and it's you know, kind of
Speaker 1: free markets but also with more regulation and so forth. Well,
Speaker 1: you you know, you're absolutely right. If you think of
Speaker 1: the United States in nineties fifties, and for a chunk
Speaker 1: of nineteen sixties as well, it was incredibly constrained society
Speaker 1: post economically, financially, and politically. If you think of Europe
Speaker 1: in nineties fifties, it was incredibly constraint. Nobody would recognize
Speaker 1: those societies as liberal capitalism. In other what the premus
Speaker 1: of the private sector. The premise of the private sector
Speaker 1: signals the government essentially stands aside and create environment in
Speaker 1: which businesses are prosper or fail. That was not nineteen fifties,
Speaker 1: and so the way look at it, we're going closer
Speaker 1: to nine fifties and sixties than we are to. But
Speaker 1: there is a twist, and the twist is that technology
Speaker 1: now allows us to create totalitarian dictatorships that no longer
Speaker 1: will suffer from shortage of ideas, from shortage of wealth, productivity,
Speaker 1: or anything else. In the past, a totalitarian system such
Speaker 1: as imperial China or the Soviet Union, where a sort
Speaker 1: of places of stagnation, where places of lack of growth,
Speaker 1: lack of opportunity. The technology now can create societies that
Speaker 1: are illiberal, some potentially quite at all, but nevertheless society
Speaker 1: is that will not suffer from stignation as set of ideas, inventiveness, growth,
Speaker 1: or anything else. And that's one of the lessons from
Speaker 1: the book is to say that as we go over
Speaker 1: the next couple of decades, it is quite possible that
Speaker 1: not only we will not have what we recognize as
Speaker 1: liberal capitalists, that it's going to be much closer to
Speaker 1: nies and sixties, where the government will be directing capital,
Speaker 1: where regulatory structures will be much stricter than what they
Speaker 1: are today. But in addition to that, at least part
Speaker 1: of the world that maybe big chunks of the world
Speaker 1: will decide that personal freedom is also optional. It is
Speaker 1: not actually necessary for your success. Um, can you elaborate
Speaker 1: on that last point? So not actually necessary for your success,
Speaker 1: But I guess the question is it necessary for your happiness?
Speaker 1: And if the thing we're trying to solve is resolve
Speaker 1: is um people's relationship with labor and how happy they
Speaker 1: feel in their jobs, then then doesn't that become important? Yes,
Speaker 1: it does. But one of the things to remember, of course,
Speaker 1: is that labor is becoming less and less critical most
Speaker 1: marginal utility and marginal returns, and labor has been declining
Speaker 1: for two decades and that decline is accelerating. Many professions
Speaker 1: are no longer exist anything like what they used to
Speaker 1: twenty or thirty years ago. Over the next two decades,
Speaker 1: whether you are truck driver, whether your plumber, whether your
Speaker 1: PhD in computer science, you will feel the same pressure
Speaker 1: of irrelevancy, or the same pressure that you're no longer
Speaker 1: contributing what you used to contribute. So one of the
Speaker 1: saints that societies are trying to understand it what is
Speaker 1: the role of labor in industrial age? In the ninety century,
Speaker 1: it was very straightforl labor was a critical productivity driver
Speaker 1: and needed to be trained and skilled to hire and
Speaker 1: high level to grow productivity. In the twenty one century,
Speaker 1: that is no longer, so labor is no longer the
Speaker 1: key productivity driver. The same happens was capital. If you
Speaker 1: think of nineteen twenty century, capital generally was scarce. It
Speaker 1: needed to be allocated carefully to whatever utilization people want
Speaker 1: to do. That's why we have a DCF model and
Speaker 1: capital as a pricing model. Most of our activities were
Speaker 1: highly capital intensive. Today most of our activities are not
Speaker 1: capital intensive at all. We have a surplus of capital.
Speaker 1: We are drowning in capital. We have at least five
Speaker 1: ten times more than we need, and that's as a
Speaker 1: result of our financialization. And at the same time, as
Speaker 1: I said, the need for capital is declining and so
Speaker 1: cost of capital continues to fall. But in addition to that,
Speaker 1: the nature of capital is also changed. In the past,
Speaker 1: it was a hard capital, it was roads, factories, machinery,
Speaker 1: plant Today it's mostly intangible capital. It's a software, digital capital,
Speaker 1: social capital. Now the heart and soft capital have different
Speaker 1: different properties and they behave differently, and so you find
Speaker 1: compared to industrial capitalism what you can argue industrial societies,
Speaker 1: not only labor or nature of labor changes dramatically, but
Speaker 1: in addition, nature in demand for capital also changes. Now,
Speaker 1: if you don't have free labor selling services in the
Speaker 1: free market in order to maintain their upkeep and life expenses,
Speaker 1: and if you don't have capital as a critical part
Speaker 1: of your system, it is no longer capitalism as we
Speaker 1: know it. Now you can call it variety of ways.
Speaker 1: As I said, you can put various labels, and eventually
Speaker 1: different countries will find different relationships, but they will be different. So,
Speaker 1: if you are a human being, how do you find happiness?
Speaker 1: If it's not through work, if it is not through money,
Speaker 1: if it is not through power, What gives you happeness?
Speaker 1: And can society delivered that happeness. That's where you're go
Speaker 1: into the ideas of universal or basic income guarantees. That's
Speaker 1: where you get two ideas of how educational and skilling
Speaker 1: systems are going to change. That's where you've got too
Speaker 1: many other ideas of building a different society funded by
Speaker 1: the state, because private sector will never fund any of
Speaker 1: that and will never be prepared to do so. And
Speaker 1: that's why the way describe it. Whether you look at
Speaker 1: m MT, whether you look at perpetuals, whether you look
Speaker 1: at other Neo Kinsian models, whatever your model is, the
Speaker 1: objective of the government is to reduce the pace at
Speaker 1: which we go to zero. It's not to create inflation.
Speaker 1: It's not to reflate the debt away, it's not to
Speaker 1: inflate the dead away. It is purely to reduce the
Speaker 1: speed with which post value of capital and labor decline.
Speaker 1: So you said companies will never step in to provide
Speaker 1: those sorts of services, things like teaching people new skills
Speaker 1: that might be essential in this new technology driven age.
Speaker 1: But why do you think that is? Because I know
Speaker 1: there are some visions of our future. I mean, I
Speaker 1: mean Margaret Atwood's books kind of spring to mind, or
Speaker 1: one of them does, where she envisions companies as taking
Speaker 1: over the role of the government and providing security services,
Speaker 1: health services, educational services for their respective employee. Is because
Speaker 1: governments won't step in to do it. So why are
Speaker 1: you convinced that it's going to be governments and not
Speaker 1: corporate entities that take this on. I basically said, not
Speaker 1: so much. Take it on funded pay for it. If
Speaker 1: you think called bell laps. Bell laps in nineteen fifties
Speaker 1: forties fifties six is invented almost everything we use today.
Speaker 1: Bell laps were private, but they were fully funded by
Speaker 1: the federal government. Federal government in the US in sixties
Speaker 1: used to spend two of GDP on basic scientific research.
Speaker 1: Today that number is down to point six point seven,
Speaker 1: and even that is grossly exaggerated because a lot of
Speaker 1: senal funding is really applied. So the way I look
Speaker 1: at a private sector, private sector never invents private sector innovates,
Speaker 1: and there's a big difference, and so inventions always have
Speaker 1: to come from the public sector. Innovation always have to
Speaker 1: come from the private sector, and so you have a
Speaker 1: combination of the two. I mean, one of the classic
Speaker 1: questions is if a private company discovered, for far, private
Speaker 1: pharmaceutical company discovered that a certain product or a certain
Speaker 1: drug works incredibly well, but it will benefit their competitor,
Speaker 1: not themselves, would they develop that drug? And the answer
Speaker 1: largely is known. So there is a whole range of
Speaker 1: activities from community support to basic income guarantee consumption support
Speaker 1: to some of the infrastructure, to basic scientific R and
Speaker 1: D thinks like rescuing NASA and NIH and CDC and
Speaker 1: the rest of it. That is a rule for the government,
Speaker 1: and the government does it generally better than the private sector.
Speaker 1: So this idea that whatever problem you have, that private
Speaker 1: sector solution is always the best is really a relatively
Speaker 1: new idea. It only came in in late seventies. If
Speaker 1: you go back the fifties and sixties, neither John Maynard
Speaker 1: Ken's John Gilbride felt that there was a huge difference
Speaker 1: between a private and public sector. So when I talk
Speaker 1: about public sector, what I mean they're going to initiate it,
Speaker 1: they're gonna fund it, they're going to find They're going
Speaker 1: to create regulatory structures around it to encourage and sometimes
Speaker 1: compel the private sector to participate in those projects in
Speaker 1: and in those endeavors. I think the time of creating
Speaker 1: British Layland, of British steel, on nationalizing Amtrak, that that
Speaker 1: sort of time is gone. I don't think anybody will
Speaker 1: try to do that. But the private sector will be courseted,
Speaker 1: it will be regulated, capital will be directed in a
Speaker 1: certain fashion, and the government increasingly will be doing it.
Speaker 1: But as I said, the alternative is if you continue
Speaker 1: to use monetary tools the way we have done over
Speaker 1: the last thirty or forty years, disinflation will get stronger,
Speaker 1: grows will get narrower, and we income in well cite
Speaker 1: equalities will continue to rise. Eventually societies will simply blow up,
Speaker 1: and so there is really no choice but to adopt
Speaker 1: a different strategy. You probably remember in one of my
Speaker 1: reports I outlined two or three alternatives. One is a war.
Speaker 1: War is capable of destroying excess capital access resources. The
Speaker 1: other one is to send some of the resources to
Speaker 1: another planet, uh, and basically exit the existing system. But
Speaker 1: the only other third alternative to me is a more
Speaker 1: aggressive stance by the public sector. I don't think private
Speaker 1: sector is capable anymore of actually reversing what occurred over
Speaker 1: the last four decades. Uh. This is such great stuff,
Speaker 1: and I have like a million thoughts, but you know,
Speaker 1: sort of big picture. And I mentioned at the beginning
Speaker 1: that you anticipated a lot of the debate the mainstream
Speaker 1: is having today in the coronavirus praises. Last year during
Speaker 1: your last interview, this area of the government funding basic
Speaker 1: research obviously another area that's coming back into vogue with
Speaker 1: the hunt for a vaccine and all the money that's
Speaker 1: being spent there. In general, would you say, this crisis
Speaker 1: has mostly just accelerated the trends and accelerated your thesis
Speaker 1: about where things were going. Absolutely, and that's what I find.
Speaker 1: Every time we have a crisis, we have acceleration. If
Speaker 1: it goes through history and you say, why didn't people
Speaker 1: do things that they were supposed to do? If you
Speaker 1: go to you know, Alexander the first start of Russia
Speaker 1: in eighteen o one, didn't you served them was a
Speaker 1: bad say he knew it was holding back Russia? Why
Speaker 1: didn't he do something about And generally speaking, people don't
Speaker 1: do things and leslie have to unless there is absolutely
Speaker 1: no alternative. And what happens every time we come to
Speaker 1: this t junk and every time we have come to intersection,
Speaker 1: we need to make a decision. And so the importance
Speaker 1: of fiscal policy has already been on the horizon for
Speaker 1: at least the last five or six years. In fact,
Speaker 1: look at it, for the last five years we've been
Speaker 1: tolerating much higher deficits than we would have tolerated ten
Speaker 1: or fifteen years ago. In fact, the markets were encouraging
Speaker 1: higher deficits. So this this shift from monetary to fiscal
Speaker 1: policy has already been on the goal at least the
Speaker 1: last five or six years. What coronavirus has done to
Speaker 1: fiscal policy is what global financial crisis have done to
Speaker 1: monetary policy. It accelerated it um and doesn't mean that
Speaker 1: that we already at the stage that people are prepared
Speaker 1: to accept a very close coordination of fiscal and monetary policy,
Speaker 1: a fusion or emerger of fiscal and monetary policy into
Speaker 1: m MTY or something else. Well, the answer is no.
Speaker 1: As you earlier on said Joe, people are reluctant to
Speaker 1: accept that the core premise of their livelihood. In other words,
Speaker 1: private sector is dominant. It's always better to have Walts creators.
Speaker 1: Private sector solution always better that to change that takes
Speaker 1: time and so and so the way the way I
Speaker 1: look at it, we probably need another crisis. It doesn't
Speaker 1: matter whether it's men made or nature made. It doesn't
Speaker 1: really matter where it comes wrong. But and the next
Speaker 1: crisis will happen sometime over the next two or three
Speaker 1: or four or five years. And when it does happen,
Speaker 1: then all the ideas were discussing now, whether it's a
Speaker 1: regulatory changes, educational changes, health care changes, m MT and
Speaker 1: how the government gets funded, all of that will fuse.
Speaker 1: It's like a broken volt. Whether you're twenty five or
Speaker 1: forty five, your your bold takes time to fuse. That's
Speaker 1: exactly what's going to happen. And I think at that
Speaker 1: point in time everybody will accept it. And when people
Speaker 1: say it's going to be terrible it's going to be
Speaker 1: hyper inflation, No, it doesn't need to be. Or it's
Speaker 1: going to be a runaway wasteful spending. Again, it can be,
Speaker 1: but it doesn't have to be. Uh. And in fact,
Speaker 1: I would argue for bulk of the population, it's probably
Speaker 1: going to be a much better world. And that's the
Speaker 1: idea to reduce social tension. The whole purpose of shifting
Speaker 1: policy tools is to quiet in societies down and reduce
Speaker 1: the degree of geopolitical or social tension. Do we really
Speaker 1: need another crisis? And for I would I would love
Speaker 1: like a longer break from crisis. Can we maybe wait
Speaker 1: like ten years for the oven? Yes, I usually say.
Speaker 1: I usually say to my clients that, And I think
Speaker 1: I mentioned in the book as well that if I
Speaker 1: could just go back toies and liberal capitalism that I
Speaker 1: used to enjoy so much, I will do it. But
Speaker 1: the problem is you can't you can't go backwards. You
Speaker 1: can only go forwards. And remember Mike Bears at the bridge.
Speaker 1: In the bridge, we passed the first part of the bridge,
Speaker 1: which was monetory. We are now on the second part
Speaker 1: of that bridge. That bridge will go on for several decades.
Speaker 1: As I said, at the end of the bridge, at
Speaker 1: different world looms. And one of the things I discussed
Speaker 1: in the book what that world would look like. What
Speaker 1: will be the right policies to make sure that it's
Speaker 1: not disruptive enough for all of us that we don't
Speaker 1: have war, we don't have conflict, we don't have extreme inequalities.
Speaker 1: And so we are on that bridge. Now on that bridge,
Speaker 1: the life will change gradually more and more. As I said,
Speaker 1: a number of policies will change. Clearly, taxation policies will
Speaker 1: change massively, whether it's a corporate taxation, whether it's closure
Speaker 1: of the loopholes, whether it's rules regarding CEO compensation, whether
Speaker 1: it's ability to do share by backs. There will be
Speaker 1: other rules that will change. Capital gains tax wealth taxes,
Speaker 1: mentioned taxes, and a lot of those taxes will believed
Speaker 1: not to finance government. I think the government will get
Speaker 1: financed mostly through central banks. As what's happening today. I
Speaker 1: think all of those policies will be introduced to make
Speaker 1: a fairer society. So, in other words, the way I
Speaker 1: look at it, baby boomers, like myself wanted to be independent.
Speaker 1: Baby Boomers wanted to tell the government, we don't want
Speaker 1: to leave me alone, let me do what I want
Speaker 1: to do. And baby boomers created Ronald Reagan and Magnufacturer
Speaker 1: and Milton Friedman and the rest of it. The new
Speaker 1: millennium and Z generations are are different. They're asking for
Speaker 1: different things, they're looking for different things. And so what
Speaker 1: you find the new generation values fairness, their value equality. Well,
Speaker 1: the older generation valued choice, freedom, efficiency. Now those two
Speaker 1: concepts iron conflict. And remember in the US, within the
Speaker 1: next five seven years, millenniums and Z generation will be
Speaker 1: the electoral majority. And when they are, fairness and equality
Speaker 1: will really trump efficiency. And I don't mean to use
Speaker 1: the world trump, but really will will exceed efficiency, um, freedom, choice,
Speaker 1: all these things that Baby boomers and ex generation really
Speaker 1: believed in. In love and it's not it's not gonna
Speaker 1: be easy for a number of people who are somewhat
Speaker 1: older to accept that the world has changed. But by
Speaker 1: the way. The same happened in nineteen fifties. As they said,
Speaker 1: if you go back to nineteen fifties, if you have
Speaker 1: a different view, you could be sacked from your job.
Speaker 1: If you go back to nineteen fifties, if you do
Speaker 1: not believe in ideology of the United States, you can
Speaker 1: be deported, or you can lose your job. If you
Speaker 1: have any devions either political or sexual or whatever, or religious, again,
Speaker 1: you did not have a good life. And so there
Speaker 1: were many periods in the past that those sorts of
Speaker 1: generational changes created societies that strove to be fairer, more equal,
Speaker 1: but gave you less freedom, less opportunity. And that's a
Speaker 1: question in the book, is to say, between changing generations,
Speaker 1: between technology and financialization, how much freedom can we keep?
Speaker 1: Just going back to uh, the markets right now, so
Speaker 1: I'm looking at a chart of the spire and we're
Speaker 1: not that far away from the pre March peak in
Speaker 1: the market. When when you see what's happening in global
Speaker 1: markets in asset prices, how does that fit into your
Speaker 1: framework of thinking about things? Well, you have to remember
Speaker 1: that we are still financialized. We're highly financialized globally. The
Speaker 1: debt to GDPs in excessive three to one. In a
Speaker 1: number of countries it's as high as five to one.
Speaker 1: But if you think of value of financial instruments, not debt,
Speaker 1: real financialization is at least five ten times GDP. Now
Speaker 1: that's why interest rates cannot go up. But it also
Speaker 1: means that we're all committed to asset prices. Uh consumer
Speaker 1: decision whether to splash or to say, corporate decision whether
Speaker 1: to do share buy backs or to do investments are
Speaker 1: now increasingly driven by asset classes. Now, what that implies
Speaker 1: the policymakers central banks, treasury departments, ministries of finance is
Speaker 1: that you can't allow holistically defined asset prices to contract
Speaker 1: because as soon as you have those contractions, real life
Speaker 1: impact for people living under the cloud of finance are
Speaker 1: going to be terrible, are going to be devastating. And
Speaker 1: so what you do You make sure that Humpty Dumpty
Speaker 1: stays on the wall. And the only way to do
Speaker 1: it is to continue to generate more liquidity than what
Speaker 1: you require, more capital than you require, and at the
Speaker 1: same time very rapidly act to suppress us any sign
Speaker 1: of molatility or spreads. And given that finance has different
Speaker 1: rules to economies, people saying that finance and economics are
Speaker 1: the same thing. They're not. They're completely two different beasts.
Speaker 1: Eventually finance cannot survive with out the economy, but for
Speaker 1: years decades they do not obey the same rules. And
Speaker 1: so the objectives of central banks is not specific level
Speaker 1: of s ANDP. The objective is to reduce molatilities and
Speaker 1: shrink the spreads. And because cloud of finance is based
Speaker 1: on digits, it's not based on factories or roads. You
Speaker 1: can change narrative in a matter of seconds. That's why
Speaker 1: we have the fastest bear markets and the fastest bull
Speaker 1: markets right now. Because you can change the narrative, you
Speaker 1: can change communication in a matter of seconds. And that's
Speaker 1: why I said earlier we can have a bear market
Speaker 1: in the afternoon and a bull market in the morning
Speaker 1: because none of it is real. It bits in the sky,
Speaker 1: its numbers. But those numbers are very important if you
Speaker 1: don't look after them. Which you find is that people
Speaker 1: under that that live on the ground, that going to work,
Speaker 1: feeding their children, living in their houses, they're going to suffer.
Speaker 1: And and so to me, central banks are caught an
Speaker 1: impossible dilever that people are demanding wealth, their demanding income,
Speaker 1: financial markets demanding growth, and they mass delivered because the
Speaker 1: alternatives are will be far, far worse. And so the
Speaker 1: only way out of this dilemma either you allow productivity
Speaker 1: to mushroom massively, and we believe it's going to take
Speaker 1: several decades before productivity will sustainably rise, so that's not
Speaker 1: really an option. Alternatively, you change the policy tools. Instead
Speaker 1: of using laboratory tools, you start using fiscally oriented tools,
Speaker 1: which much more focused and less wasteful, although as I
Speaker 1: say earlier, you can scraw up anything, and fiscal tools,
Speaker 1: particularly in combination was monetary, are very dangerous and not
Speaker 1: many countries can actually pursue those policies. Victor, absolutely fantastic
Speaker 1: having you on the show. As always, I love that
Speaker 1: there's an analyst out there who's sort of thinking these
Speaker 1: big picture questions about what our political systems and monetary
Speaker 1: and economic systems might and could and should look like
Speaker 1: and how they sort of fit into I guess, the
Speaker 1: meaning of human life making people happy. Um, thank you again,
Speaker 1: Thank you very much, Thanks Victor, and that was fantastic. Joe,
Speaker 1: did you enjoy that conversation. I'm glad you got to
Speaker 1: play into one of the Victor Schwetz Interviews that was
Speaker 1: so good and kind of like, I'm glad I missed
Speaker 1: the last one so I could just like listen to
Speaker 1: the old one and be a fan and then get
Speaker 1: really excited about this one. It was great, and I
Speaker 1: feel like nobody has sort of as well as he
Speaker 1: can tie all of these big themes together, because there's
Speaker 1: a lot going on. Obviously, politics is one, the financialization
Speaker 1: of the economy is another, this sort of accelerant effect
Speaker 1: of the inequality derived from our focus on monetary policy,
Speaker 1: the sort of m MT ideas of leaving more on
Speaker 1: fiscal and I think he really pulls them all together
Speaker 1: extremely well, especially his point about sort of generational attitude
Speaker 1: changes and how that it affects the policy mix that
Speaker 1: people voters are going to prefer just just great stuff. Yeah,
Speaker 1: And I think what I really like about the way
Speaker 1: he's thinking about things is it's sort of it brings
Speaker 1: the focus back to politics, which I think has always
Speaker 1: been my one criticism of m m T is that
Speaker 1: if we agree that, you know, the only thing binding
Speaker 1: government debt is inflation, the government still has to make
Speaker 1: a decision about issuing new debt and where it's going
Speaker 1: to spend it. So it always comes down to politics
Speaker 1: history in some respects, and I feel like Victor's starting
Speaker 1: point is always politics and history and how that feeds
Speaker 1: into economics. So I really like that framework. Now I
Speaker 1: completely agree. I think, you know, to some extent, markets
Speaker 1: have always been their downstreaming from politics, and that if
Speaker 1: an attempt to separate them has always been very arbitrary.
Speaker 1: But I think Victor is right that going forward that
Speaker 1: link is going to be extremely clear to people. What
Speaker 1: what will the next stimulus bill look like? What will
Speaker 1: the next president if we get a different president, if
Speaker 1: it's Biden or even if it's Trump, whatever, Like, what
Speaker 1: will they decide in terms of permanently changing how we trade,
Speaker 1: permanently changing the tax code, thinking about fiscal transference. Like,
Speaker 1: these things are gonna be really real, and if you
Speaker 1: want to understand them, you have to be sort of
Speaker 1: a big consumer of economic political analysis. Yeah. Absolutely, Well,
Speaker 1: we'll have to get Victor back on in in a
Speaker 1: year's time to discuss what's happened in the interim, But
Speaker 1: shall we leave it there for now? Okay, this has
Speaker 1: been another episode of the All Thoughts podcast. I'm Tracy Alloway.
Speaker 1: You can follow me on Twitter at Tracy Alloway and
Speaker 1: I'm Joe Wisenthal. You could follow me on Twitter at
Speaker 1: The Stalwart. Follow our producer Laura Carlson at Laura M. Carlson.
Speaker 1: Follow the Bloomberg head of podcast, Francesca Levi at Francesca Today,
Speaker 1: and check out all of our podcasts at Bloomberg onto
Speaker 1: the handle at podcasts. Thanks for listening to