WEBVTT - 44: What a 12-Year Knows About Money That an Economist Doesn't 0:00:00.160 --> 0:00:02.320 But knowledge to work and grow your business with c 0:00:02.520 --> 0:00:06.680 i T from transportation to healthcare to manufacturing. C i 0:00:06.760 --> 0:00:10.520 T offers commercial lending, leasing, and treasury management services for 0:00:10.600 --> 0:00:13.480 small and middle market businesses. Learn more at c i 0:00:13.560 --> 0:00:25.000 T dot com put Knowledge to Work. Hello and welcome 0:00:25.040 --> 0:00:29.160 to another edition of the Odd Lots Podcast. I'm Joe Wisenthal, 0:00:29.280 --> 0:00:33.320 Managing editor of Bloomberg Markets, and I'm Tracy Alloway, Executive 0:00:33.440 --> 0:00:37.360 editor of Bloomberg Markets. Uh so, Tracy, do you know 0:00:37.400 --> 0:00:42.519 what money is? It's, um that thing that we all 0:00:42.560 --> 0:00:46.440 want more of. Right, that's actually a really uh that's 0:00:46.479 --> 0:00:48.839 a really good definition. Actually, I think we can just 0:00:49.080 --> 0:00:52.600 pretty much leave it at that. Oh we're done, Okay, good, Okay, 0:00:52.600 --> 0:00:57.160 great podcast. Uh No, but but in all seriousness, um, 0:00:57.200 --> 0:00:59.720 you know, money is one of these things that like 0:00:59.800 --> 0:01:02.080 every one, as you say, just sort of take for granted. 0:01:02.120 --> 0:01:05.560 We want more of it, We want to use it 0:01:05.600 --> 0:01:10.920 to buy stuff obviously, but it's surprisingly difficult for people 0:01:11.120 --> 0:01:14.959 to define or to describe what exactly it is. And 0:01:15.080 --> 0:01:19.360 some people say it's a unit of measurements. Some people 0:01:19.440 --> 0:01:23.399 say it's a medium of exchange. Uh. Some people say 0:01:23.400 --> 0:01:25.840 it has to be backed by something. Some people say, 0:01:25.880 --> 0:01:32.479 it's just this completely fictitious sociological abstract. There doesn't really 0:01:32.520 --> 0:01:35.360 seem to be any clear answer of what this uh, 0:01:35.600 --> 0:01:37.600 what money is, even though we sort of use it 0:01:37.640 --> 0:01:39.760 and depend on it all the time. Well, I was 0:01:39.760 --> 0:01:41.520 gonna say, it's kind of funny, isn't it, Because you 0:01:41.560 --> 0:01:44.160 and I obviously when we're talking about markets, we are 0:01:44.280 --> 0:01:48.640 talking about money and the ask nation of monetary values 0:01:48.720 --> 0:01:51.320 to certain assets. And then in our day to day lives, 0:01:51.680 --> 0:01:54.880 of course we are all pursuing money in one way 0:01:55.120 --> 0:01:58.640 or another. Yet we don't actually have a firm definition 0:01:58.680 --> 0:02:00.560 of it, right, And you'd think it would be a 0:02:00.560 --> 0:02:03.000 pretty big deal that we talk about all the time, 0:02:03.040 --> 0:02:05.400 but that don't know, I don't really know what it is. 0:02:05.440 --> 0:02:07.280 But we just sort of, uh, we just sort of 0:02:07.560 --> 0:02:10.240 skipped to the next part. I think usually, yeah, if 0:02:10.240 --> 0:02:13.440 we had to define our variables for every story that 0:02:13.520 --> 0:02:16.639 we write, we might be in trouble. Actually true, but 0:02:16.800 --> 0:02:19.800 it turns out that what money is is actually a 0:02:19.880 --> 0:02:25.440 really important concept, and that um errors in thinking about 0:02:25.440 --> 0:02:30.720 what money is have huge implications for society and for policy. 0:02:30.840 --> 0:02:35.119 That that people said, and with us today we are 0:02:35.120 --> 0:02:37.880 going to be talking with Eric Lonergan he's a hedge 0:02:37.880 --> 0:02:41.919 fund manager and he's also written a book about what 0:02:42.120 --> 0:02:46.120 is money? And um, it's sort of attempts to answer, 0:02:46.639 --> 0:02:49.359 at least get it an answer of what this, uh, 0:02:49.440 --> 0:02:53.320 what it really is? Great? Great, So let's bring in 0:02:53.520 --> 0:02:56.760 Eric and let's see if we can, um see a 0:02:56.960 --> 0:03:10.480 what money is and why it's worth figuring out. Eric Lonergan, 0:03:10.560 --> 0:03:13.240 thank you very much for joining us on the podcast. 0:03:13.360 --> 0:03:15.600 It's a pleasure. Joe and Tracy. I thought you guys 0:03:15.639 --> 0:03:18.400 were doing fine though without me. I'm very happy to 0:03:18.440 --> 0:03:23.480 sign off right here. So I don't know why did 0:03:23.560 --> 0:03:26.040 you write a book about what money is? Why is 0:03:26.080 --> 0:03:30.680 this an important topic? Right? Well, I guess I've been 0:03:30.680 --> 0:03:32.400 thinking about it for a long time. So there were 0:03:32.480 --> 0:03:35.360 kind of two motivations. One was to do with book writing, 0:03:36.040 --> 0:03:39.560 and then the other one was very specifically about issues 0:03:39.600 --> 0:03:43.880 around money. So I've given a talk and actually and 0:03:44.240 --> 0:03:46.240 a publisher came up to me afterwards and said, would 0:03:46.240 --> 0:03:48.240 you like to write a book about that? And it 0:03:48.280 --> 0:03:51.480 was on the sort of subject of finance and money, um, 0:03:51.520 --> 0:03:53.680 and I really didn't just want to write something that 0:03:53.840 --> 0:03:56.480 I didn't really believe in. So I've kind of been 0:03:56.520 --> 0:03:58.760 thinking about these issues for the best part of twenty years, 0:03:58.800 --> 0:04:01.760 and this was a chance to write right down the thoughts. 0:04:01.760 --> 0:04:03.920 But the other thing that became very clear to me, 0:04:04.560 --> 0:04:06.800 UM is I guess I experienced an awful lot of 0:04:06.840 --> 0:04:11.520 frustration during the financial crisis, after the financial crisis and 0:04:11.560 --> 0:04:15.600 then in the euro crisis, because particularly sitting in the UK, 0:04:16.360 --> 0:04:20.360 it's very curious that the UK's biggest industry, both by 0:04:20.440 --> 0:04:26.120 size and strategically is the financial sector, and yet there 0:04:26.320 --> 0:04:31.960 is I would say, complete lack of understanding of what's 0:04:32.000 --> 0:04:33.960 going on in the financial sector, and that was very, 0:04:34.080 --> 0:04:36.880 very apparent, And so I thought, you know, maybe I 0:04:36.920 --> 0:04:41.480 could bring those two components together to try and give 0:04:41.560 --> 0:04:43.880 some perspective and what all of these things actually mean 0:04:43.960 --> 0:04:46.880 and are about UM and at the same time bring it, 0:04:46.920 --> 0:04:48.400 make it in a way that was more relevant to 0:04:48.400 --> 0:04:51.960 people's lives and had more general implications for other areas 0:04:51.960 --> 0:04:55.640 of people's lives. And does this misunderstanding of how the 0:04:55.680 --> 0:05:00.479 financial sector works? Does it stem from a misunderstand in 0:05:00.560 --> 0:05:03.440 your view of based concepts such as what is money? 0:05:03.760 --> 0:05:06.120 I mean absolutely, so I think again, a lot of 0:05:06.160 --> 0:05:08.880 people and I remember, you know, as you do if 0:05:08.880 --> 0:05:11.520 you're if you're commuting into the city. In London, you'll 0:05:11.560 --> 0:05:14.839 overhear people talking about issues of finance, and I did 0:05:14.880 --> 0:05:17.640 hear people sort of saying, I assumed there was a 0:05:17.680 --> 0:05:21.080 safe deposit box with my deposit in it. And so 0:05:21.279 --> 0:05:24.360 I think people one of the fascinating things if you're 0:05:24.440 --> 0:05:28.599 predisposed like I am, to think about these issues how 0:05:28.760 --> 0:05:31.680 the sort of banking system works, is most of the 0:05:31.760 --> 0:05:35.440 time you completely ignore it, and it's really very very 0:05:35.560 --> 0:05:38.000 rare that it's working has become relevant to you, and 0:05:38.040 --> 0:05:40.960 I think that's one of the reasons why that people 0:05:41.000 --> 0:05:42.919 haven't given a lot of thought. So so there was 0:05:43.000 --> 0:05:46.000 there was a point about I think individuals getting on 0:05:46.040 --> 0:05:48.880 with their daily lives didn't really understand what was going 0:05:48.920 --> 0:05:51.479 on behind them, what was keeping what was the lifeblood 0:05:51.480 --> 0:05:53.680 of the economy, and we didn't really understand that or 0:05:53.720 --> 0:05:56.240 think about it until it stopped. And then the other 0:05:56.279 --> 0:05:59.960 thing I think is is that people really didn't under 0:06:00.040 --> 0:06:04.159 to policymakers, really didn't understand some essential distinctions. So to 0:06:04.240 --> 0:06:06.479 take a very concrete example that that I think is 0:06:06.520 --> 0:06:10.039 important is I think if you understand money correctly, you 0:06:10.160 --> 0:06:15.719 can't simultaneously engage in quantitative easing and austerity because it's 0:06:15.720 --> 0:06:19.160 completely inconsistent. Um And yet of course you know we 0:06:19.200 --> 0:06:23.120 saw that in in lots of countries. UM. So, so 0:06:23.160 --> 0:06:25.480 I think you had like, sorry you, I think you 0:06:25.520 --> 0:06:27.960 have this level of misunderstanding right at a very basic, 0:06:28.080 --> 0:06:30.919 everyday life level of what does it mean to have 0:06:31.000 --> 0:06:34.040 a deposit all the way through to what's been happening 0:06:34.040 --> 0:06:38.279 with with macro policy. But how much was the confusion 0:06:38.480 --> 0:06:43.200 about money and finance post the financial crisis, about the 0:06:43.279 --> 0:06:47.159 evolution of financial markets and the financial industry, the idea 0:06:47.240 --> 0:06:51.159 that everything became electronic. We had very very big numbers, 0:06:51.240 --> 0:06:56.200 Everything was sort of abstract versus actual confusion about what 0:06:56.560 --> 0:07:00.320 money is or was, say, two hundred or three hundred 0:07:00.400 --> 0:07:03.520 years ago. Because it seems like those two have kind 0:07:03.520 --> 0:07:07.600 of grown in tandem. Yeah, I think that's right, And 0:07:07.640 --> 0:07:10.280 I think I think that what's really interesting about this 0:07:10.400 --> 0:07:16.760 area is the misunderstandings go from all the way from 0:07:16.880 --> 0:07:20.400 people who have have paid very little attention to the 0:07:20.440 --> 0:07:24.080 financial sector all the way through to experts. So, for example, 0:07:24.120 --> 0:07:27.880 I find it very interesting that economists, an awful lot 0:07:27.880 --> 0:07:32.120 of economists think of money as a debt. I mean 0:07:32.200 --> 0:07:33.960 down to the point of, you know, thinking of a 0:07:34.280 --> 0:07:37.960 of a a dollar bill as a liability of the government, 0:07:38.000 --> 0:07:41.280 which I think is actually just a very basic analytical error. Now, 0:07:41.320 --> 0:07:43.560 what's interesting about that is is that you know, if 0:07:43.560 --> 0:07:47.160 you said to a cab driver, ah, does the government 0:07:47.160 --> 0:07:49.920 know you anything for your ten dollar bill, you just 0:07:49.960 --> 0:07:52.040 get an odd look. I mean, they might think there's something, 0:07:52.080 --> 0:07:54.000 they might be a bit have reservations about letting you 0:07:54.040 --> 0:07:58.040 in the cab. And their instinct is absolutely correct. It's 0:07:58.040 --> 0:08:02.400 not a liability. Um. That's that's actually crystal clear. And 0:08:02.480 --> 0:08:05.200 yet economists have have have made it a liability because 0:08:05.200 --> 0:08:07.000 in their models it's much more easy to deal with 0:08:07.040 --> 0:08:08.680 it if it's a liability, because then it's just part 0:08:08.680 --> 0:08:10.320 of the government stock of debt, and then I know 0:08:10.320 --> 0:08:11.600 how to deal with it, and I can come up 0:08:11.640 --> 0:08:15.360 with equations, and it's and and that very simple point. Now, 0:08:15.840 --> 0:08:19.520 I think Paul Krugman's made that error. Uh. And Paul Krugman, 0:08:19.600 --> 0:08:22.680 he's a Nobel Prize winning economist. Now I need to 0:08:22.680 --> 0:08:24.080 be a little bit careful saying it, because you're a 0:08:24.120 --> 0:08:26.520 bit worried saying he's made a basic analytical error. But 0:08:26.520 --> 0:08:29.880 but the logical conclusion of that leads Mervyn King to 0:08:29.920 --> 0:08:32.200 go I'm doing Quwie, but I want you to typen 0:08:32.200 --> 0:08:36.040 fiscal policy, and arguably that's a really big error. So 0:08:36.480 --> 0:08:38.320 I think you're you're You're absolutely right. You've had an 0:08:38.360 --> 0:08:42.719 awful lot of innovation and opacity complexity entered into the 0:08:42.760 --> 0:08:46.640 financial system. You've also got some really simple areas of 0:08:46.679 --> 0:08:50.520 misunderstanding which I think have deep psychological roots, probably and 0:08:50.559 --> 0:08:53.040 go back to you know what, what you and Joe 0:08:53.080 --> 0:08:55.839 were discussing right at the beginning, which is one one 0:08:55.840 --> 0:09:00.480 of these psychological discomforts, is the fact that something that 0:09:00.600 --> 0:09:05.240 is so important to us, which is money, has no 0:09:05.440 --> 0:09:08.760 value in the sense that most goods have a value. Um. 0:09:08.800 --> 0:09:12.120 It's its value is entirely I mean it's it's just 0:09:12.200 --> 0:09:15.440 a digit on a screen, um, and its value is 0:09:15.600 --> 0:09:18.920 entirely contingent on the fact that other people will accept 0:09:18.960 --> 0:09:22.880 its use. So it's intrinsically social. So you also have 0:09:22.960 --> 0:09:26.480 this very intriguing aspect with money that it goes to 0:09:27.520 --> 0:09:33.080 sometimes to our very acquisitive, selfish motivations, and yet the 0:09:33.280 --> 0:09:36.920 entire basis of it is a social basis. Yeah, there's 0:09:36.960 --> 0:09:40.560 one of the So obviously you make a point out 0:09:40.600 --> 0:09:45.240 that this error that professional economists make about thinking of debt, 0:09:45.480 --> 0:09:48.600 thinking of money as a liability of the government leads 0:09:48.679 --> 0:09:54.520 to profound policy errors. What are some of the misunderstandings 0:09:54.559 --> 0:09:58.400 that people who aren't economists have about money? And how 0:09:58.440 --> 0:10:03.040 does that, um manifest itself? How do these errors of 0:10:03.080 --> 0:10:05.640 our thinking, those of us who aren't economists, how do 0:10:05.760 --> 0:10:09.120 they How do these errors manifest themselves in our lives? Well, 0:10:09.160 --> 0:10:11.840 that's a that's a really good question, Joe. I mean, actually, 0:10:11.880 --> 0:10:17.040 I think most people's intuitions are it's a very interesting area. 0:10:17.080 --> 0:10:20.560 I think people's intuitions may well be better than the 0:10:20.600 --> 0:10:23.800 people who have studied it. So so I think people 0:10:24.240 --> 0:10:27.120 get when people start thinking about it, they're much more 0:10:27.160 --> 0:10:32.439 likely to get confused. Um. And this is what leads 0:10:32.520 --> 0:10:36.360 people to to to either assume. I mean again, you 0:10:36.400 --> 0:10:39.319 found there were people who assumed that the dollars were 0:10:39.320 --> 0:10:43.520 still backed by gold. So people, once people start to 0:10:43.559 --> 0:10:46.360 look at it, they try to seek a greater degree 0:10:46.440 --> 0:10:49.120 of meaning or a stronger basis in a sense of 0:10:49.120 --> 0:10:52.440 the money. So I think people's everyday understanding of it, 0:10:52.480 --> 0:10:56.960 which is that it's something profoundly useful and profoundly important. Uh, 0:10:57.000 --> 0:11:00.000 you know, it's not obvious to me that by by 0:11:00.720 --> 0:11:02.959 studying economics, you get to have a deeper understanding. I 0:11:03.000 --> 0:11:08.920 think where people's understanding is very weak is more broadly 0:11:08.920 --> 0:11:11.199 when you look at the financial system. So what is 0:11:11.240 --> 0:11:13.000 the role of the stock market, Why do we have 0:11:13.080 --> 0:11:18.280 stock markets? What is involved in investing? Um? These kind 0:11:18.280 --> 0:11:20.840 of what? What? What is happening within the banking system? 0:11:20.920 --> 0:11:24.040 How are deposits being created there? I think economics is 0:11:24.080 --> 0:11:27.720 extremely helpful. Um and and you know, people who aren't 0:11:27.840 --> 0:11:31.360 economists are having studied these things, uh, you know, really 0:11:31.360 --> 0:11:34.360 don't have a high degree of understanding. There's also, then, 0:11:34.400 --> 0:11:37.080 of course, a very interesting other dimension to all of this, 0:11:37.200 --> 0:11:41.040 which again economists tend to exclude. But but but normal 0:11:41.120 --> 0:11:42.880 humans for want of a better term, talk about all 0:11:42.920 --> 0:11:45.360 the time, which is the whole emotional side of these things. 0:11:45.559 --> 0:11:47.800 And so one of the things I learned an awful 0:11:47.840 --> 0:11:50.960 lot from from being involved in markets is that the 0:11:51.160 --> 0:11:57.840 human is ever present. Markets are psychological phenomena. Uh, there 0:11:57.840 --> 0:12:01.400 are groups, um there our emotions. You know, if you 0:12:01.440 --> 0:12:03.960 sit me in front of my Bloomberg terminal and if 0:12:04.000 --> 0:12:07.080 you had a little dial that could control the you know, 0:12:07.240 --> 0:12:10.360 the the SMP ticker, you could start to affect my 0:12:10.400 --> 0:12:13.960 heart rate you could probably start to affect where blood 0:12:14.000 --> 0:12:17.880 is flowing within my brain. Um And there's absolutely no 0:12:17.960 --> 0:12:24.720 doubt that these evolved, semi dysfunctional instincts become very very 0:12:24.760 --> 0:12:30.840 important when you get things like recessions or financial panics. UM. So, 0:12:30.840 --> 0:12:33.440 so I think those are Yeah. That the role of 0:12:33.520 --> 0:12:37.600 the role of emotion and psychology is is something that 0:12:37.600 --> 0:12:40.160 that that we will all talk about, but you won't 0:12:40.200 --> 0:12:42.560 find in any very rarely will you find it in 0:12:42.559 --> 0:12:45.600 an economics book. Let's take a quick break. Note from 0:12:45.640 --> 0:12:50.040 a word from our sponsor, but knowledge to work and 0:12:50.080 --> 0:12:53.400 grow your business with c i T from transportation to 0:12:53.480 --> 0:12:57.480 healthcare to manufacturing. C i T offers commercial lending, leasing, 0:12:57.520 --> 0:13:01.600 and treasury management services for small middle market businesses. Learn 0:13:01.640 --> 0:13:05.120 more at c i T dot com put Knowledge to Work. 0:13:06.120 --> 0:13:09.320 And we're back with Eric Lonergan. He's a hedge fund 0:13:09.400 --> 0:13:13.640 manager and the author of a book about money. And 0:13:13.720 --> 0:13:18.280 we're just talking about the sort of psychological elements of 0:13:18.480 --> 0:13:23.480 markets and misunderstandings about markets, and I wanted to uh 0:13:23.800 --> 0:13:26.440 talk about ask one question about this. You make a 0:13:26.559 --> 0:13:29.520 really interesting point in your book that if you were 0:13:29.559 --> 0:13:33.720 to ask people, including most financial market practitioners, what the 0:13:33.720 --> 0:13:38.200 point of financial markets is they would actually get it wrong. 0:13:38.280 --> 0:13:42.200 Most people don't understand the purpose of financial markets. What 0:13:42.240 --> 0:13:44.800 do most people say financial markets are for and what 0:13:44.840 --> 0:13:47.480 are they actually for. Well, if you take the stock 0:13:47.520 --> 0:13:50.640 market as an example, that the standard answer is it's 0:13:50.679 --> 0:13:54.599 about allocating capital. It's so diverting capital to its to 0:13:54.720 --> 0:13:58.840 its best uses now, But if you actually think about 0:13:58.840 --> 0:14:00.920 and reflect on it, that's not really why we have 0:14:00.920 --> 0:14:04.040 stock markets. So historically, the origin of stock markets, and 0:14:04.080 --> 0:14:08.800 it remains their function today, is actually about diversification. In fact, 0:14:08.840 --> 0:14:12.600 stock markets are a very early form of securitization, which 0:14:12.679 --> 0:14:17.760 is the converting something that's privately owned into tradeable securities. 0:14:17.960 --> 0:14:19.680 So if you go back in history and see why 0:14:19.680 --> 0:14:22.920 did we set up joint stock companies, was largely to 0:14:23.000 --> 0:14:27.040 facilitate trade because people wanted to diversify risk. So the 0:14:27.080 --> 0:14:29.920 idea was you had a rather risky venture if you 0:14:29.960 --> 0:14:33.560 were sending ships overseas to engage in trade. No single 0:14:33.600 --> 0:14:35.840 individual would want to commit all of their capital or 0:14:35.880 --> 0:14:39.200 they wouldn't engage in taking on that risk, and so 0:14:39.320 --> 0:14:42.000 joint stock companies were set up to diversify that risk. 0:14:42.560 --> 0:14:45.400 So if you look at actually who does the capital allocation. 0:14:45.520 --> 0:14:48.560 It's not really the stock market. Most of it is 0:14:48.600 --> 0:14:51.200 done by by companies and stuff. So what companies decide 0:14:51.200 --> 0:14:54.880 to do with retained earnings or if you are areas 0:14:54.920 --> 0:14:58.960 like private equity, you get more direct allocation of capital. 0:14:59.160 --> 0:15:01.720 But the stock markets primary function is in fact insurance. 0:15:01.760 --> 0:15:05.320 It's actually to diversify risk. So most of what financial 0:15:05.360 --> 0:15:08.480 markets are trying to do is precisely that. It's actually 0:15:08.560 --> 0:15:13.640 insurance um and insurance um at the risk of of 0:15:13.640 --> 0:15:17.240 of causing people to fall asleep. Insurance is you know, 0:15:17.280 --> 0:15:19.360 it is again a difficult area to understand, but has 0:15:19.640 --> 0:15:23.240 has been profoundly beneficial because it increases the propensity of 0:15:23.240 --> 0:15:25.040 society is to take risk if we can, if we 0:15:25.080 --> 0:15:27.920 can ensure and diversify. And so that's why in a 0:15:28.000 --> 0:15:30.920 sense you can, uh, you know, societies we may be 0:15:30.960 --> 0:15:33.960 willing to invest in much more risky things than we 0:15:33.960 --> 0:15:37.120 would otherwise be willing to do as individuals. It feels 0:15:37.120 --> 0:15:39.960 to me like those are key concepts to grasp again 0:15:40.000 --> 0:15:42.480 in the aftermath of the financial crisis, when we have 0:15:42.640 --> 0:15:45.240 a lot of investors who were risk averse, and we 0:15:45.280 --> 0:15:47.400 had a bunch of central banks who were trying to 0:15:47.520 --> 0:15:53.040 stimulate the economy through, to borrow your phrase, the allocation 0:15:53.440 --> 0:15:57.720 of capital, walk us through how that concept, getting that 0:15:57.800 --> 0:16:02.080 concept right actually has played out to post crisis. Well, 0:16:02.120 --> 0:16:04.240 I think a post crisis I would say one of 0:16:04.240 --> 0:16:07.480 the primary factors again which isn't really again talked about 0:16:07.480 --> 0:16:11.560 an awful lot, is actually a psychological one. So what 0:16:11.600 --> 0:16:14.640 I think is much more consistent with evidence rather than 0:16:14.680 --> 0:16:17.680 a lot of this talk about things like secular stagnation 0:16:17.720 --> 0:16:20.040 and why interest rates are where they at? What why 0:16:20.120 --> 0:16:22.640 why interest rates are where they are? It is in 0:16:22.720 --> 0:16:27.080 fact a more generalized risk aversion, and more even more 0:16:27.120 --> 0:16:29.680 specific than that within the financial system, is is a 0:16:29.760 --> 0:16:35.680 volatility aversion, volatility very specifically. So if you look at um, 0:16:35.760 --> 0:16:38.720 you know, for example, that the difference in pricing between 0:16:38.800 --> 0:16:42.520 more volatile assets like equities versus assets that are perceived 0:16:42.520 --> 0:16:44.800 to have very low levels of volatility, like parts of 0:16:44.800 --> 0:16:48.200 the fixed income market, there are very very elevated levels 0:16:48.360 --> 0:16:51.480 of risk premium in the in the more volatile assets. 0:16:52.440 --> 0:16:54.600 So you know, what, what does that really mean? Well, 0:16:54.880 --> 0:16:57.400 you can think of it almost like a biological organism, 0:16:57.640 --> 0:17:00.840 which is the entire system experience. It's a very very 0:17:00.920 --> 0:17:05.520 profound shock where you know, most people never really thought 0:17:05.520 --> 0:17:09.040 that their high street bank could fail. Um. They assumed 0:17:09.080 --> 0:17:11.840 that there were you know, serious people in charge who 0:17:11.880 --> 0:17:13.560 knew what they were doing, and we're in control of 0:17:13.600 --> 0:17:16.280 the system. And they discovered that all of those kind 0:17:16.320 --> 0:17:20.959 of truths were actually based on very shaky foundations. And 0:17:21.040 --> 0:17:23.960 so it's as if the organism is recoiling from that, 0:17:24.080 --> 0:17:26.480 and that is actually reflected at lots and lots of 0:17:26.520 --> 0:17:30.120 different levels. So um, and that is one of the reasons, 0:17:30.119 --> 0:17:32.760 in fact why interest rates are in fact so low, 0:17:33.560 --> 0:17:37.880 is that you have this residual degree of of volatility 0:17:37.880 --> 0:17:41.760 a version or risk aversion. So people talk about zero 0:17:41.800 --> 0:17:44.399 interest rates. Again, what's very interesting in most economic models, 0:17:44.359 --> 0:17:47.360 there's just one interest rate. In the real world, there 0:17:47.400 --> 0:17:49.200 are loads of interest rates that go into your cost 0:17:49.200 --> 0:17:51.840 of capital, and perhaps the most important is the cost 0:17:51.840 --> 0:17:54.480 of equity capital. And the cost of equity capital in 0:17:54.480 --> 0:17:56.360 a lot of parts of the world is higher than 0:17:56.400 --> 0:17:58.680 it was ten years ago. In fact, even in the 0:17:58.760 --> 0:18:01.600 United States the SMPO, as you know, is one of 0:18:01.640 --> 0:18:05.000 the more highly rated markets on a higher p multiple, 0:18:05.240 --> 0:18:10.560 it's still relative to pre crisis on not dissimilar cost 0:18:10.600 --> 0:18:12.919 of equity to where it was pre crisis. So Although 0:18:13.359 --> 0:18:18.320 interest rates on effectively cash substitutes have absolutely collapsed, interest 0:18:18.400 --> 0:18:21.240 rates on lots of other assets that affect people's investment 0:18:21.280 --> 0:18:26.080 decision making and reflect their psychological disposition are still very elevated. 0:18:27.080 --> 0:18:30.040 So the idea that there are multiple interest rates that 0:18:30.160 --> 0:18:33.840 affect the economy and so keeping benchmark interest rates ultralow 0:18:34.000 --> 0:18:37.000 might not be as effective as central bankers might want 0:18:37.040 --> 0:18:40.920 it to. You've written about that, and you're advocating a 0:18:40.960 --> 0:18:43.720 different approach to deal with that problem, right, In fact, 0:18:43.720 --> 0:18:48.320 you're advocating more money essentially. That's right. I'm I've got 0:18:48.359 --> 0:18:54.080 the twelve year old solution, which what are the problems 0:18:54.080 --> 0:18:56.720 with this solution is? It's it's it's it's simple to 0:18:56.760 --> 0:18:59.159 the point of being embarrassing. So that the problem is 0:18:59.200 --> 0:19:01.119 I think a lot of the anomics profession is very 0:19:01.160 --> 0:19:03.080 resistant to it because if it works, people are going 0:19:03.119 --> 0:19:04.760 to say, why on earth didn't you do this sooner? 0:19:04.800 --> 0:19:08.760 It's so obvious. Um. But but my observations are very straightforward, 0:19:08.760 --> 0:19:10.280 and if you want people to spend more, give them 0:19:10.280 --> 0:19:15.800 more money, um. And it really is that simple. What's interest? 0:19:15.880 --> 0:19:18.040 And so there's interesting why there's such a high degree 0:19:18.040 --> 0:19:20.720 of resistance to this as an idea, and I again 0:19:20.760 --> 0:19:24.159 I think that's largely an accident of history. So it's 0:19:24.240 --> 0:19:25.960 very interesting. I don't know, you may have seen, you know, 0:19:25.960 --> 0:19:28.280 you've just had Jackson Hole, who was reading one of 0:19:28.280 --> 0:19:30.400 the papers at jackson Hole has just had a lot 0:19:30.440 --> 0:19:33.439 of attention, was papered by Christopher Simms, who I have 0:19:33.520 --> 0:19:35.800 to confess, I think is is very guilty of what 0:19:35.840 --> 0:19:38.120 I said at the outset about making turning money into 0:19:38.119 --> 0:19:40.720 a liability of government, because then it becomes easy to 0:19:40.720 --> 0:19:43.560 do the maths or you can fit it into your models. Um. 0:19:44.000 --> 0:19:47.439 But you know, again, one of the the kind of 0:19:47.720 --> 0:19:51.480 if you read what Christopher Sims is is talking about, 0:19:51.560 --> 0:19:56.680 you have these these kind of absolutely hyper rational individuals 0:19:56.840 --> 0:20:02.359 who are expecting future fiscal policy behave in a certain way. Again, 0:20:02.400 --> 0:20:04.800 I really don't think that's the way human psychology works. 0:20:04.840 --> 0:20:09.800 And I think what what people are not necessarily motivated 0:20:09.800 --> 0:20:12.760 by expectations. I think a lot of our beliefs are 0:20:12.800 --> 0:20:16.639 based on what we actually observe. So so the idea 0:20:16.720 --> 0:20:19.399 that that you can get people to spend more money 0:20:19.440 --> 0:20:21.639 by telling them they will be in higher inflation in 0:20:21.680 --> 0:20:24.440 the future, I just don't really think is how human 0:20:24.440 --> 0:20:28.719 beings operate. People are absolutely likely to spend more money 0:20:28.800 --> 0:20:32.160 if they see their income increasing and if they expect 0:20:32.160 --> 0:20:34.720 that either to continue to increase or they then see 0:20:34.720 --> 0:20:38.200 that as their sales increasing if they're running a business. Um. 0:20:38.280 --> 0:20:40.040 So I think people actually need to see it and 0:20:40.119 --> 0:20:43.920 experience it, and that is much more likely to change 0:20:44.440 --> 0:20:46.919 what people believe and how they behave and what they think. Right. 0:20:47.000 --> 0:20:51.160 One of the arguments against, say, more aggressive fiscal policy 0:20:51.200 --> 0:20:54.280 you hear is that, well, sure people will get more money, 0:20:54.280 --> 0:20:56.920 but then somehow they'll know that in the future their 0:20:57.000 --> 0:20:59.640 tax rate will be hired they have to make up 0:20:59.680 --> 0:21:02.480 for their at spending, and therefore it won't do anything. 0:21:02.880 --> 0:21:05.480 But you say, that's not really how humans think. That's 0:21:05.520 --> 0:21:08.520 just like how humans might think on an economic model. Yeah, 0:21:08.560 --> 0:21:11.479 and it's also not obviously rational, right. So so the 0:21:11.560 --> 0:21:15.560 model in which that's true is a model where everybody 0:21:15.640 --> 0:21:19.679 is always employed, um and there's no fluctuations in our 0:21:19.720 --> 0:21:23.080 in our productivity or there's no changes in our circumstances 0:21:23.119 --> 0:21:25.840 that are that significant. So I think it's absolutely rational 0:21:25.880 --> 0:21:29.479 if you get an effective policy. So it's it's very 0:21:29.520 --> 0:21:31.919 instinct question. If I said to you, right, you're going 0:21:31.960 --> 0:21:33.760 to get if you're in Europe at the moment, which 0:21:33.800 --> 0:21:35.680 is in a quasi depression, if there was going to 0:21:35.760 --> 0:21:40.560 be corporate tax cuts and household tax cuts, income tax 0:21:40.560 --> 0:21:43.320 cuts across the whole of the Eurozone, what would you 0:21:43.359 --> 0:21:45.639 as an individual think about what the implications are for 0:21:45.680 --> 0:21:49.480 your long term tax burden. Well, if you think that's successful, 0:21:49.680 --> 0:21:52.399 it is conceivable that you would probably have quite a 0:21:52.440 --> 0:21:54.640 neutral view. You might even have the n iron view 0:21:54.640 --> 0:21:57.240 of your prospective tax burden because the world that you 0:21:57.240 --> 0:21:59.800 would then be operating in will be a very different one. 0:22:00.080 --> 0:22:03.400 Um and so there is cyclicality in an in in economics, 0:22:03.480 --> 0:22:06.479 so you just you don't have these stable paths that 0:22:06.520 --> 0:22:08.879 we model. So a lot of these into a lot 0:22:08.880 --> 0:22:11.000 of these ideas and economics are premised on an assumption 0:22:11.040 --> 0:22:13.440 that you just have stable paths, in which case you're 0:22:13.480 --> 0:22:15.600 just bringing something forward to the future. But what you 0:22:15.680 --> 0:22:18.840 actually do now may impact what the future looks like. 0:22:19.160 --> 0:22:20.680 So there may actually be grands to be a lot 0:22:20.680 --> 0:22:22.880 more optimistic about the future, in which case these things 0:22:22.880 --> 0:22:26.040 are self reinforcing. We could talk about this topic forever, 0:22:26.119 --> 0:22:28.879 but there's such there's such a broad topic. There was 0:22:28.920 --> 0:22:32.359 another thing in your book that really struck me, and 0:22:32.440 --> 0:22:35.359 it has to do with these sort of intersection of 0:22:35.440 --> 0:22:39.399 money and culture, which struck me is very relevant today. 0:22:39.480 --> 0:22:43.440 And you pointed out that money allows a society or 0:22:43.480 --> 0:22:47.240