Speaker 1: Hello, and welcome to another episode of the Odd Lots podcast.
Speaker 1: I'm Joe Wisn't Thal and I'm Tracy Alloway. Tracy Um.
Speaker 1: You know, of course, on our last episode we talked
Speaker 1: about the sanctions that are being imposed against Russia, and
Speaker 1: they're really extraordinarily dramatic. Obviously, we've seen the Russian financial
Speaker 1: sector get pounded, all kinds of disruptions, Russian equities listed abroad,
Speaker 1: their value in many cases going to zero, numerous companies
Speaker 1: often just voluntarily sort of washing their hands at the
Speaker 1: Russia business. But of course, as everyone understands, the one
Speaker 1: huge I guess it's the elephants in the room. One
Speaker 1: area that has not been directly targeted is is energy, right,
Speaker 1: and this is really I don't want to say the
Speaker 1: crux of the whole issue, but certainly this is something
Speaker 1: that has played into the fact that Putin invaded Ukraine
Speaker 1: in the first place. There's a huge reliance on Russian
Speaker 1: natural gas in Europe and I think this is well
Speaker 1: understood and well established now. And even before the recent actions,
Speaker 1: prices had been going up, people were talking about inflation
Speaker 1: and energy crisis, and then this all made it worse.
Speaker 1: But on the one hand, all of this plays into
Speaker 1: the geopolitical situations. So there's an argument to be made
Speaker 1: that Putin feels more empowered in invading Ukraine because he
Speaker 1: knows that Europe relies on his country for its gas needs.
Speaker 1: And of course, sorry, I don't know where I'm going
Speaker 1: with this. There's a lot to say there. There is
Speaker 1: an extraordinary meant to say. I guess one of the
Speaker 1: questions is why wasn't Europe more prepared or why wasn't
Speaker 1: Why hadn't Europe already taken steps to perhaps wean itself
Speaker 1: off Russian natural gas and oil and coal, And of
Speaker 1: course there was the annexation of Crimea, So it's not
Speaker 1: like these geopolitical concerns suddenly just came out of nowhere. No,
Speaker 1: this is where I was going with it. Actually was
Speaker 1: that Putin has a really good grasp of the energy situation.
Speaker 1: It seemed to understand that Europe needs Russian gas. But
Speaker 1: at the same time, it doesn't feel like Europe necessarily
Speaker 1: understood that, or if they understood it, it it doesn't seem
Speaker 1: like they did anything about it. Everything just sort of
Speaker 1: went on as it did before and even even after
Speaker 1: the first invasion of Ukraine and you know the situation
Speaker 1: in Crimea. In Even after that, you didn't really see
Speaker 1: Europe back away from Russia in any meaningful way, even though,
Speaker 1: as we discussed with Sultan Posar recently, you did see
Speaker 1: Russia takes steps to sort of insulate itself from the West.
Speaker 1: And of course we're talking about Europe broadly, but there's
Speaker 1: obviously sort of a specific you know, the the key
Speaker 1: country in Europe from the sort of Russian gas reliance
Speaker 1: that a lot of this revolves around is Germany. Because
Speaker 1: it is an extremely rich and successful country, it also
Speaker 1: is extremely reliant on natural gas. And you know, it's
Speaker 1: sort of taken some odd energy choices because this is
Speaker 1: a country whose leadership has talked a lot about going
Speaker 1: green and sustainability and all that, and yet it's actually
Speaker 1: really not done well on hitting some of its emissions goals.
Speaker 1: It's phased out nuclear, but it also that means it's
Speaker 1: more reliant on cold, more reliant on gas, and maybe
Speaker 1: in the long term one day beyond wind power and
Speaker 1: solar power and be all renewables, but that seems very
Speaker 1: long term right here. And now its emissions are going
Speaker 1: up and it's dependence on Russia is acute. Yeah, and
Speaker 1: I think that's become very very apparent in the way, well,
Speaker 1: just the way the whole crisis has unfolded. I will say,
Speaker 1: we're recording this on March second, and I'm looking at
Speaker 1: that gas the spot price on the Bloomberg terminal. Now
Speaker 1: it jumps sixty earlier today, and of course it's another
Speaker 1: fresh record, but it's been at fresh records for multiple
Speaker 1: times in recent days and indeed in recent weeks. So
Speaker 1: you can feel all of these tensions and all of
Speaker 1: this pressure, all of these potentially um bad policy choices
Speaker 1: UH manifesting themselves in these record energy prices exactly right.
Speaker 1: So we want to like push the conversation forward and
Speaker 1: get more insight into this crisis, this war, and the
Speaker 1: German situation specifically. I'm very excited for this conversation. We've
Speaker 1: had our guest on one time before we're going to
Speaker 1: be speaking with Matt Klein is the founder and publisher
Speaker 1: of The Overshoot, which is a phenomenal newsletter on economics
Speaker 1: and the economy, and of course he is the co
Speaker 1: author of the book Trade Wars Are Class Wars. Matt Klein,
Speaker 1: thank you so much for coming on coming back. Thank
Speaker 1: you very much for having me. So, you know we
Speaker 1: talked the last time we talked to you, I think
Speaker 1: maybe it was maybe it was, and you had published
Speaker 1: this book trade wars are class wars, and of course,
Speaker 1: you know, going back to nineteen around that time, when
Speaker 1: you think trade wars, obviously you think US China attention
Speaker 1: because of course there were the various uh Trump tariffs
Speaker 1: and so forth. But a big part of your book
Speaker 1: was not just about US China, of course, but also
Speaker 1: this third actor Germany specifically, what do you like talk
Speaker 1: about to us about like what was their role in
Speaker 1: the story before we even get to the current crisis.
Speaker 1: Why were they like sort of like a key player
Speaker 1: or actor to be understood in the sort of global context.
Speaker 1: The basic argument of the book is that for a
Speaker 1: very long time and maybe years or so, that the
Speaker 1: world economy as a whole has been suffering from the
Speaker 1: systematic shortage of consumer demand, and that's ended up creating
Speaker 1: a lot of tensions as businesses are trying to capture
Speaker 1: this finite demand and as consumers over you know, in
Speaker 1: different parts of the world trying to compensate for the
Speaker 1: lack of income. That is a result of this, and
Speaker 1: so one of the major drivers of the shortfall of
Speaker 1: consumer demand was Germany and then later Germany, uh you know,
Speaker 1: extended to the rest of Europe as a whole macro
Speaker 1: policy in terms of both business investment being weak in
Speaker 1: terms of government policy essentially over taxing, underspending, and squeezing
Speaker 1: demand for goods and services, and then that ended up
Speaker 1: redounding in all sorts of different ways in terms of
Speaker 1: higher debt levels and financial crises and stuff. And the
Speaker 1: argument of the book being that policies in Germany, not
Speaker 1: just government policies, but really the policies of business leaders
Speaker 1: and other elite actors in society ended up leading to
Speaker 1: systematic problems for the world as whole, and that ended
Speaker 1: up leading problems for people in Europe and people outside
Speaker 1: of Europe. And even if that wasn't something we think
Speaker 1: of in the trade war context, as you were saying,
Speaker 1: like the Trump and China stuff, was very you know
Speaker 1: obvious what this was, and it was nevertheless leading to
Speaker 1: tremendous amounts of tension within Europe. And you can see
Speaker 1: that throughout the eurok crisis in terms of the conflicts,
Speaker 1: and you know, you have people like the Dutch finance
Speaker 1: minister blaming lazy Southern Europeans for things, and then you
Speaker 1: have Southern Europeans talking about fascists in the north. And
Speaker 1: then that was all really, I think a reflection of
Speaker 1: the fact that you had really bad economic outcomes driven
Speaker 1: by bad econnotic policy. So you mentioned, um like a
Speaker 1: bad situation caused by policy decisions. Could you maybe just
Speaker 1: elaborate on that a little bit more as it relates
Speaker 1: to the current Russia situation and the energy landscape that
Speaker 1: we were talking about a little bit in the intro.
Speaker 1: How much does a country like Germany actually depend on
Speaker 1: Russia for its energy needs. Germany is quite dependent on Russia.
Speaker 1: So for the European Union as a whole, if we
Speaker 1: look at basically the period right before the pandemics, the
Speaker 1: pandemic kind of distorts things a little bit. It about
Speaker 1: of all energy came from Russian imports, So that's a
Speaker 1: lot of that includes natural gas, that includes coal, that
Speaker 1: includes oil. Natural gas is the most significant one for
Speaker 1: these purposes because it's not easy to substitute it. You know,
Speaker 1: if Russia doesn't sell oil to Europe, someone else is
Speaker 1: going to buy that oil. Europe can therefore buy oil
Speaker 1: from whoever you know previously was not buying Russian oil,
Speaker 1: so it's it's more fungible. Gas, on the other hand,
Speaker 1: is mostly transported by fixed pipelines, and so therefore you really,
Speaker 1: you know, you can substitute to a degree, but it's
Speaker 1: much more challenging to do that. Germany sort of compounded
Speaker 1: this problem in a couple of ways, some of which
Speaker 1: one is that they made the decision after the Fukushima
Speaker 1: nuclear disaster in Japan to start decommissioning all of their
Speaker 1: own nuclear power plants, and so a is quite substantial
Speaker 1: source of clean and uh you know, reliable, local, locally
Speaker 1: sourced energy shut off, and I think they basically they're
Speaker 1: either about to. I think that they had been currently
Speaker 1: scheduled had been scheduled to turn off the last of
Speaker 1: the nuclear plants, I think at the end of this year.
Speaker 1: I think now that's starting to change, but that was
Speaker 1: basically something that had been going on over the past
Speaker 1: ten years, turning off nuclear power. Another thing that they've done,
Speaker 1: which I think we can relate sort of more to
Speaker 1: their macropolicy mix, is that they didn't invest enough in
Speaker 1: coming up with replacements. So while there has been a
Speaker 1: real commitment since I think about towards greening the energy
Speaker 1: makes they called the energy transition. They have invested a
Speaker 1: lot in wind and solar power. Particularly wind power hasn't
Speaker 1: been enough to offset the loss of nuclear and so
Speaker 1: one of the things that actually have been you know,
Speaker 1: bridging the difference was that they increased their coal consumption
Speaker 1: quite a bit, which is ironic given their desire to
Speaker 1: be more environmentally friendly. The other thing they did, of course,
Speaker 1: that they imported even more Russian gas. So the story
Speaker 1: the connection between Russia and Germany on gas is, you know,
Speaker 1: it goes back quite a long time. Basically, you can
Speaker 1: really sort of argue that it goes back to the
Speaker 1: nine sixties before Eve Russia had gas, when the German
Speaker 1: government under Willie Brandt decided that they wanted to call
Speaker 1: ast politic and the idea that the Germany would sort
Speaker 1: of be a bridge between the rest of the West
Speaker 1: and the Eastern Bloc and have sort of friendly relations
Speaker 1: and you know, just their own sort of distinct history
Speaker 1: and culture, and they would be trying to be more
Speaker 1: friendly to the USSR and the rest of the Warsaw
Speaker 1: Pact countries. And so one of the ways that that
Speaker 1: manifest is once Russia started developing gas fields and wanted
Speaker 1: to export it that Germany was pretty eager and building pipelines,
Speaker 1: and this goes back to the early nineteen eighties, they
Speaker 1: start building the pipelines. In fact, this is something that
Speaker 1: the Raning administration criticized the German government for at the time,
Speaker 1: because they thought it would be increasing Europe's dependence on
Speaker 1: the Soviets and potentially become a security risk. The German
Speaker 1: argument was engagement is going to be better. We want
Speaker 1: to integrate Russia into you know, the Western economy. That's
Speaker 1: going to moderate their behavior. And if you look just
Speaker 1: at the nineteen eighties, maybe that was a good argument
Speaker 1: because Russian in fact, did you know, the Soviet Union
Speaker 1: rather did in fact become you know, more moderate over
Speaker 1: the course in nineteen eighties, and that did become a
Speaker 1: constructive relationship. Nevertheless, though as time progressed that, you know,
Speaker 1: the question is why do they keep sticking with this?
Speaker 1: You you mentioned that the first Russian invasion of Ukraine,
Speaker 1: the annexation of Crimea, might have led to a shift
Speaker 1: in behavior. It did not. The project that Russia and
Speaker 1: German businesses had been working on for quite some time
Speaker 1: called nord Stream to another pipeline basically to increase the
Speaker 1: Russian gastles or Germany had been in progress before that,
Speaker 1: and continue to accelerate after this. Total German imports through
Speaker 1: the first North Stream pipeline, which goes under the Baltic
Speaker 1: Sea went up, and so actually overall energy imports of
Speaker 1: gas were significantly higher by the time you get than
Speaker 1: you were even, which is the exact opposite of what
Speaker 1: you'd think would have happened if if you know, European
Speaker 1: policymakers were concerned about reliance on Russia, and it now
Speaker 1: puts them in a situation where it's kind of challenging,
Speaker 1: which is, you could theoretically cut your gas consumption by
Speaker 1: you know, a significant amount or whatever. But is that
Speaker 1: actually something you can do on a dime? Maybe? Um?
Speaker 1: I mean, I guess the good news that winter mostly
Speaker 1: over so they don't need it for heat, But you know,
Speaker 1: that does create a lot of leavorage. I mean, as
Speaker 1: you mentioned, Tracy, the pricing of natural gas is so
Speaker 1: high because the supply was already being constrained. I mean,
Speaker 1: I think one thing that hasn't been appreciated enough. I
Speaker 1: was surprised to see it myself. Is that, you know,
Speaker 1: until they stopped making their website publicly accessible, gas Prom,
Speaker 1: which is the Russian company that produces and transports the gas,
Speaker 1: they published daily data on how much gas they shipped
Speaker 1: to European Union customers and which route, and the last
Speaker 1: data we have this is the weekend before they invaded Ukraine.
Speaker 1: But you know, what you can see is that in
Speaker 1: basically starting around sort of the end of August, the
Speaker 1: gas flows start falling dramatically. And basically, if you look
Speaker 1: at the beginning of two so you've been going down
Speaker 1: kind of steadily, and if by the time you get
Speaker 1: to the beginning of so like from January one to
Speaker 1: February was bright before the invasion, we're talking about thirty
Speaker 1: six percent lower deliveries to EU customers compared to the
Speaker 1: January through August one average, So it's a really dramatic drop.
Speaker 1: And basically they're there are a whole bunch of different pipelines.
Speaker 1: A bunch go through Ukraine. There's one that goes directly
Speaker 1: to Germany, and then there's one that goes through Belarus
Speaker 1: and Poland to Germany. And with the exception, the only
Speaker 1: one that really had maintained its flow was the one
Speaker 1: that goes straight to Germany. The other ones we're getting
Speaker 1: really squeezed. I don't know what has been happening in
Speaker 1: the past year week and a half that those data
Speaker 1: are no longer available, but I mean the price signals
Speaker 1: suggested maybe they've squeezed it even further. You know, that's
Speaker 1: Tracy saying like that that I think that it was
Speaker 1: reasonable for Putin to conclude that this did give them,
Speaker 1: the Russians, of fair amount of leverage and that they
Speaker 1: were in fact trying to use that. So it's interesting
Speaker 1: you mentioned that the German Russia figurative and literal pipeline
Speaker 1: has gone back several decades. I learned on our last
Speaker 1: episode that we did actually that our current Secretary of State,
Speaker 1: Anthony B. Lincoln, several years ago even wrote a book
Speaker 1: on called Ali Versus l I America, Europe and the
Speaker 1: Siberian Pipeline Crisis about this dispute in on this exact thing.
Speaker 1: So I kind of want to read that book because
Speaker 1: now it's come up in two separate podcasts, and so
Speaker 1: it seems highly relevant. Something I'm you know, something I'm
Speaker 1: curious you know, to sort of like bridge this and
Speaker 1: I guess this is really the key question is so
Speaker 1: we talked at the beginning about this sort of and
Speaker 1: this is what your book is about, this sort of
Speaker 1: demand constraining policy, macro policy from Germany. You know, in theory,
Speaker 1: you could run balanced budgets and do better on nuclear
Speaker 1: or sorry, do better on energy investments. And theoretically they
Speaker 1: could have invested more in renewables or domestic sources of
Speaker 1: energy or energy terminals that would have allowed them to
Speaker 1: become less reliant on Russia, still maintaining a balanced budget,
Speaker 1: whether that's wise or not. But can you talk a
Speaker 1: little bit more about the sort of like macro stance
Speaker 1: that the German state has had for the last five
Speaker 1: years and the sort of sclerotic under investment that they've
Speaker 1: seen in the energy sector. The context here is is
Speaker 1: that when the Berlin Wall fell in nineteen nine and
Speaker 1: West Germany prepared the Federal Republic of Germany, West Germany
Speaker 1: prepared to absorb the states of East Germany into a
Speaker 1: new and large federal republic. There was a surge of
Speaker 1: spending both by the government and my businesses to make
Speaker 1: that transition happen. And you basically have the last like
Speaker 1: great boom in the German economy. For I guess there's
Speaker 1: point over thirty years. The Buddhist Bank, which is Germany
Speaker 1: Central Bank at the time, responds by really aggressively raising
Speaker 1: interest rates because they're worried about inflation. Then you have
Speaker 1: you know, pretty dramatic reversal by the federal government in
Speaker 1: terms of spending cuts after a couple of years later,
Speaker 1: compounded by the fact that it turns out that you know,
Speaker 1: a lot of the optimism that people had about the
Speaker 1: ability to transform East Germany into a part of Germany
Speaker 1: that be is productive as West Germany, that optimism was
Speaker 1: not validated for well ever enough a very long time.
Speaker 1: They there was a hope that a lot of East
Speaker 1: German businesses could be transformed. Um, you get this huge
Speaker 1: boom from privatization and better management. That didn't happen. You
Speaker 1: just had the government instead ended up taking a huge loss.
Speaker 1: They finally wrote it down in and then they basically
Speaker 1: spend a long period of time afterwards, there's a really
Speaker 1: nasty recession, all these people East Germany losing their jobs.
Speaker 1: You have the high interest rates in the early nineties.
Speaker 1: Even then you have essentially the budget you know, restraint
Speaker 1: cutback because the German government felt they just spent too much,
Speaker 1: and they just signed a treaty UM with their European
Speaker 1: neighbors that they that they themselves have pushed for UM
Speaker 1: for balanced budgets as part of preparation for the creation
Speaker 1: of the common currency. All that led to a huge
Speaker 1: squeeze and you can look at things like you know,
Speaker 1: construction activity, other measures of business investment. You have this
Speaker 1: massive decline in the nineteen nineties and a very long
Speaker 1: period stagnation. It was really painful and in fact was
Speaker 1: was the reason why the German left had its best
Speaker 1: elections ever in after years of you know, despite the
Speaker 1: four of reunification that was done under the German Conservative
Speaker 1: Party the Christian Democrats, you know, in the beginning of
Speaker 1: the nineteen nineties and the late nineteen eighties that the
Speaker 1: Social Democrats and the Green's come into power for the
Speaker 1: first time as a coalition in and incidentally, the person
Speaker 1: who led that coalition, Gerhard Schroeder, then later went on
Speaker 1: to become a very prominent person in gas, prominent leading
Speaker 1: the North Stream to project. I think he might still
Speaker 1: be on it, Yeah, I think he's technically as of
Speaker 1: right now, I think he's still which is kind of remarkable. Yeah,
Speaker 1: so they so that was the context there. So Schroeder
Speaker 1: comes into into power with this coalition government, and one
Speaker 1: of the things they want to do is you know,
Speaker 1: increased spending. They want to have lower interest rates, and
Speaker 1: especially after the downturn of the early two thousands, which
Speaker 1: is Germany pretty hard. It's a global downturn. The tech
Speaker 1: bus that it was not in unique United States, and
Speaker 1: they can't. Ironically, you know, we thinking now to Germans
Speaker 1: being you know, the major blocks on you know, looser
Speaker 1: monetary policy and the e c B, the Germans being
Speaker 1: the major constraint on ability for governments to borrow and
Speaker 1: spend in responsive downturns because we have a run you know,
Speaker 1: the recollection of how things were and say two thousand ten,
Speaker 1: two thousand, eleven, twelve, but if you go to like
Speaker 1: two thousand, two thousand one or even that was it
Speaker 1: was the opposite. Actually, the Germans were pressuring the e
Speaker 1: CP for looser policy because relative to their domestic needs,
Speaker 1: ECB was way too tight, and the BCP just this
Speaker 1: to no, like, you know, I there's a there's a
Speaker 1: press conference you can find. I don't remember exactly what
Speaker 1: the day was. It's in the book where some journalists
Speaker 1: asked the ECB about the request they've been getting from
Speaker 1: from Schroeder and from his finance minister Oscar La Fontaine
Speaker 1: and the head of the c B as well. I hear,
Speaker 1: but I do not listen. And you know, okay, so
Speaker 1: you know that they have another like severe downturn, and
Speaker 1: you know, they they sort of push for some modest
Speaker 1: exemptions to the budget caps. So that basically the the
Speaker 1: EU treaty that they signed um in Masstrich in the
Speaker 1: other ones back was that you can't have a budget
Speaker 1: deficit more than three percent of GDP. That number, as
Speaker 1: it happens if you go back in the history, it
Speaker 1: was basically selling that some French, relatively young French bureaucrat
Speaker 1: made up in the eighties and thought it was you know,
Speaker 1: you know, three was a nice round number. That they
Speaker 1: reminded him of the Trinity or something. But there's no
Speaker 1: economic significance to this, but it was a constraint. And
Speaker 1: so Germany and France which are both having a rough period,
Speaker 1: uh you know, downturns in early two slow recoveries pushed
Speaker 1: to get the limit of that, but it wasn't really
Speaker 1: they didn't really exceeded very much, and it didn't really
Speaker 1: help that much. They were still relative constraint in their budgets.
Speaker 1: And and the way these things generally work is that
Speaker 1: if you have a limit on how much you can
Speaker 1: spend on your budget, it's easier to cut the investment
Speaker 1: side than anything else, because what the alternative is, you're
Speaker 1: not you're gonna lay off a lot of you know,
Speaker 1: school teachers and and cut you know, unemployment benefits a
Speaker 1: lot of people like That's that compared to, well, we're
Speaker 1: gonna delay you know, fixing this road or building that
Speaker 1: bridge or whatever. It's much easier to cut the investment spending.
Speaker 1: And this is particularly true in a it's like Germany,
Speaker 1: where you know, in some ways, like the United States,
Speaker 1: is is very much of a federal system and a
Speaker 1: lot of the spending is done by the German states
Speaker 1: or by local even you know, sublocal you know, substate
Speaker 1: of local governments, and those were also subject to sort
Speaker 1: of a national constraint, and so they really are being
Speaker 1: pressured because they can't, you know, their ability to borrow
Speaker 1: is very limited so they're going to cut investment spending
Speaker 1: much harder. That sort of the setup going in really
Speaker 1: for you know, the past twenty years, and you know
Speaker 1: that the German governments certainly did also cut you know,
Speaker 1: welfare spending over this period as well, they're trying to
Speaker 1: meet its budget commitments. They later than you know, became
Speaker 1: convinced that this was such a good idea that they
Speaker 1: actually put in what's called the debt break or the
Speaker 1: schulten Brems that that was you know, very extreme, basically
Speaker 1: saying that you can't have a a cyclically adjusted budget
Speaker 1: death sit for the government as a whole of more
Speaker 1: than like half percent of GDP. And the problem of
Speaker 1: course with this, among other things, is that you know,
Speaker 1: it's very sensitive to how you define what the cycle
Speaker 1: is and and you know, if if you set it up,
Speaker 1: especially when they did after a very long period of
Speaker 1: growth being very very slow um and arguably you know,
Speaker 1: significantly below where Germany should have been, then you sort
Speaker 1: of locked yourself in permanent stagnation and that really limits
Speaker 1: your options. So even though the government did try to
Speaker 1: invest more, it didn't really get anywhere. I mean, one
Speaker 1: thing that's really striking and this is you mentioned this
Speaker 1: in the book. I mentioned it more recently as well.
Speaker 1: Is that if you look at investment spending in Germany
Speaker 1: after subtracting depreciation, which is an important thing to be considering,
Speaker 1: you know, you know what's like the new investment and
Speaker 1: net appreciation maintenance, it was negative for basically some like
Speaker 1: two thousand two until two thousand and eighteen, So you
Speaker 1: basically had a long situation of the you know, the
Speaker 1: public capital stock shrinking in real terms, and you know,
Speaker 1: unsurprisingly that's that's going to create problems. I mean, I
Speaker 1: don't think they anticipated the specific problem, but that's going
Speaker 1: to create problems all sorts of things. You had bridges
Speaker 1: collapsing and roads being shut, you know, in the twenty
Speaker 1: tents because they were just unusable and they hadn't been maintained.
Speaker 1: This is obviously much more extreme, but it's a it's
Speaker 1: a symptom of the same problem. So when it comes
Speaker 1: to spending, there is this perception out there that you know,
Speaker 1: maybe maybe it's something in the German character and they
Speaker 1: just don't like um spending money that much. But as
Speaker 1: you mentioned, you know, in recent years, it does seem
Speaker 1: like we've seen inklings of a break in that attitude,
Speaker 1: and I guess my question is, what are the chances
Speaker 1: that recent events build on that momentum and you actually
Speaker 1: see a place like Germany become more willing to spend
Speaker 1: and invest in either public infrastructure or energy security. I'm
Speaker 1: actually very optimistic about this. I mean, I was optimistic
Speaker 1: before this recent crisis, um, for the reasons that you're
Speaker 1: laying out, you know, these cultural I mean, I'm not
Speaker 1: saying culture doesn't matter, but I think it's very easy
Speaker 1: to sort of over attribute economic outcomes to cultural differences.
Speaker 1: There are a lot of examples of places where you know,
Speaker 1: people are very confident the culture is one thing, and
Speaker 1: then later they do exactly oppositely say it's the same culture.
Speaker 1: It's like, that can't be the case. Um. So I
Speaker 1: think there was a recognition even among I think the
Speaker 1: reason it was so challenging because you had such political
Speaker 1: stability in Germany for so long, stability and also stagnations
Speaker 1: so basically in the early two thousands, partly because of
Speaker 1: these constraints that they didn't really have much of a choice.
Speaker 1: You had the center left parties being the ones that
Speaker 1: actually really pushing austerity in the early two thousand's in
Speaker 1: terms of things like cutting unemployment benefits and basically squeezing
Speaker 1: investment to make room for other spending within the constraints uh,
Speaker 1: you know, Europe's budget rules. And then in two thousand five,
Speaker 1: what happens is that you have a very weird situation
Speaker 1: where the left wing parties as a whole end up
Speaker 1: winning a majority of the seats in the Bunshtad. But
Speaker 1: they don't think. The reason that happens is because you
Speaker 1: have a split of the left where basically people on
Speaker 1: the left side of the Social Democrats ally with people
Speaker 1: who had had been sort of like ex communists in
Speaker 1: East Germany and we're protesting these policy changes by the
Speaker 1: government that time. So in theory there was sort of
Speaker 1: like a you know, majority left coalition, but in practice
Speaker 1: that would never have happened because it was, you know,
Speaker 1: an opposition in existing policies. And so then you have,
Speaker 1: you know, the first of many grand coalitions where the
Speaker 1: conservative Christian Democrats ally with the Social Democrats and then
Speaker 1: end up pursuing the exact same policies. And in fact
Speaker 1: the way Merkel uncle and Merkel who becomes Prime Minister, chancellor,
Speaker 1: chancellor at this point in time. Basically Newter is the
Speaker 1: opposition for what that felt like a generation because she's like, oh, yeah,
Speaker 1: this was great that the Social Democrats did was brilliant,
Speaker 1: and we want to continue their legacy and safeguard with
Speaker 1: all the good stuff they did for Germany, which basically
Speaker 1: means that Social Democrats have a really hard time competing,
Speaker 1: and in fact, what ends up happening for many years
Speaker 1: is that they just keep allying as junior partners with
Speaker 1: the Christian Democrats, and so you have the two biggest
Speaker 1: parties at the center left and center right allied doing this.
Speaker 1: And so even though there is and there always was
Speaker 1: opposition within Germany, both politically and among sort of people
Speaker 1: who knew what they were talking about, it was never
Speaker 1: enough to really break through that deadlock, and it took
Speaker 1: a very long time for there to be movement there.
Speaker 1: The thing that changed was one you finally had an
Speaker 1: election where and this is partly due to the pandemic,
Speaker 1: partly due to sort of the good fortune of the
Speaker 1: fact that the Christian Democrats chose a singularly unpopular and
Speaker 1: incompetent chance there candidate, but they ended up losing and
Speaker 1: being cut out of power and that created an opening
Speaker 1: for the Social Democrats to come in without cooperating with
Speaker 1: Christian Democrats. They had come in with the Greens. There
Speaker 1: was originally sort of a question of would the Ally
Speaker 1: with the Greens alone with the Ally with the Greens
Speaker 1: and maybe the Left and some sort of reconciliation that
Speaker 1: didn't end up happening because they didn't win enough seats,
Speaker 1: or what ended up happening was Ally with the Free Democrats,
Speaker 1: which there was a lot of speculation there about this
Speaker 1: being negative because the Free Democrats had long positioned themselves
Speaker 1: as being the most austere and the most committed to
Speaker 1: low taxes and budget restraint and the death break. But
Speaker 1: one thing that had been you know, showed up in
Speaker 1: the campaign and I'm I'm pleased to say that I
Speaker 1: forced out of this, you know, last summer before the
Speaker 1: elections in September, was that, you know, they do say
Speaker 1: these things, but they also left themselves very open to
Speaker 1: the fact that you could get around these death break
Speaker 1: rules with some financial chicanery, and they didn't seem the
Speaker 1: mind because basically, the way the Germany's debt rules work
Speaker 1: is that if you have a you know, a sort
Speaker 1: of segregated government enterprise that does its own with its
Speaker 1: own budget, as long as it doesn't take money from
Speaker 1: the state because it's losing money. You can issue as
Speaker 1: much debt as it wants to fund investments. And that's
Speaker 1: within Germany's rules. It's incidentally not within the European rules.
Speaker 1: That could potentially be a problem, but with the Germany's
Speaker 1: rules it's fine. And the FDP repeatedly said, were implied
Speaker 1: they will be okay with that. And so you had
Speaker 1: a situation where the Greens very actively saying we need
Speaker 1: to invest more and we need to get rid of
Speaker 1: the death break to invest more. The FDP says, we
Speaker 1: don't need to get rid of the deathbreak, but we're
Speaker 1: willing to sort of look the other way. And then
Speaker 1: the STP, which for SPD for long, the Social Democrats
Speaker 1: for a long time, having been sort of on the
Speaker 1: same side as as the Christian Democrats, they had come
Speaker 1: into their own over the previous few years. They've been
Speaker 1: calling for more investment. In fact, Schultz, who's the current
Speaker 1: chance that he was the finite UH finance minister in
Speaker 1: the previous government, you know from one and while that
Speaker 1: was he was in charge, there actually investment did go up.
Speaker 1: It was the first time that investment in appreciation was positives.
Speaker 1: There was already kind of a positive set up here
Speaker 1: and people saying we need more investment. There was a
Speaker 1: recognition of the Germany that need to change. The business
Speaker 1: groups in Germany were saying there need to be more
Speaker 1: public investment, and they said, you have enough like major
Speaker 1: road and bridge bridge closures. You have people, you know,
Speaker 1: mocking Germany's train systems for being terrible compared to places
Speaker 1: like Spain. That's eventually does have an impact, I mean
Speaker 1: for twenty years, but people did pay attention and so
Speaker 1: you know, even leading up to this, there was already
Speaker 1: that momentum and I was optimistic about that. Then we
Speaker 1: see this happens, and the German response has been dramatic,
Speaker 1: absolutely dramatic. I mean, aside from the fact that ost
Speaker 1: politics throwing out the window, which was you know, the
Speaker 1: Social Democrats creation, you have a situation where the FDP,
Speaker 1: which again known for really strict you know, budget discipline,
Speaker 1: saying we're going to spend another hundred billion euros on
Speaker 1: defense and and when they were criticized by the opposition
Speaker 1: Christian Democrats in in the Bundesta. Christian Lynn was the
Speaker 1: finance minister and the head of the FDPs. He basically
Speaker 1: laughed at him and said, this is an investment or freedom.
Speaker 1: Why are you worrying about the dead levels here? We
Speaker 1: need this for our security. You know, this is an
Speaker 1: enormous number. By the way, I mean, I don't you
Speaker 1: know how it gets spread out over times is a
Speaker 1: little ambiguous. But you add that with the fact that
Speaker 1: Schultz committed to spending at least two percent of GDP
Speaker 1: on defense, which is Germany's you know, obligation of ther NATO.
Speaker 1: But you know for many years they've been spending like
Speaker 1: one percent of GDP on defense. Because again, if you're
Speaker 1: feeling budget constrained, you're someone like Augle and Merkel, cutting
Speaker 1: defense budget is a very easy way, relatively speaking, to
Speaker 1: you know, meet your targets. That would seeming like a problem.
Speaker 1: Of course, the problem to you know what the problem
Speaker 1: is that the Buddhist first like lost so much capability,
Speaker 1: and you hear all the story and how they couldn't
Speaker 1: do anything, and like there was some German I think
Speaker 1: army intelligence guy was stuck in Ukraine. He had to
Speaker 1: get like a civilian transport out or something. I mean,
Speaker 1: they didn't really have a lot of capabilities, and now
Speaker 1: they realized they need to do something dramatic. They didn't
Speaker 1: have I think, you know, you were mentioning this, they
Speaker 1: didn't have any energy import terminals. Europe as a whole
Speaker 1: does have a lot of energy UH import capacity, Germany
Speaker 1: has none. So there they are working on on fixing
Speaker 1: the stuff, and so I think I think it is
Speaker 1: encouraging that they realized that, um, you know, the situation
Speaker 1: that they as they inderstood it, you know, is a
Speaker 1: lot different than you know, what they've been thinking, that
Speaker 1: that it needs a response, which incidentally, it is consistent
Speaker 1: with a history of many other countries where you know,
Speaker 1: national security risks leads to radical changes in domestic investments.
Speaker 1: Now you mentioned that at least the last of the
Speaker 1: nuclear plants had been scheduled to UM sunset at the
Speaker 1: end of this year, and maybe that will be pushed
Speaker 1: off if I'm not mistaken. The Green Party in Germany,
Speaker 1: like this is like a core thing for them, right
Speaker 1: like they were they were like a prime mover against
Speaker 1: UH nuclear for decades. I understand. Do you think that, like,
Speaker 1: you know, there's gonna be some I don't know if
Speaker 1: like you have specific views on sort of like German
Speaker 1: energy policy down to the mix, but you know, it
Speaker 1: seems unrealistic that anytime soon you're going to have uh
Speaker 1: solar and wind really do will the lifting, especially in
Speaker 1: the lack of like with the lack of like utility
Speaker 1: grade battery tech. Do you do you said, to any
Speaker 1: meaningful change on that front, Well, so, yes, I mean
Speaker 1: I think one thing that's interesting here is that, first
Speaker 1: of all, they've said that they think they are going to,
Speaker 1: you know, not turn them all off at the end
Speaker 1: of the year, and then that is something that could
Speaker 1: not have been done without the consent of the Greens.
Speaker 1: The Greens have been known for being anti nuclear for
Speaker 1: very long time. However, they also, and this is actually
Speaker 1: arguably even more important part of their identity, at least
Speaker 1: in recent years, have been very hawkish on Russia and
Speaker 1: very much against fossil fuel dependence. And in practice, what
Speaker 1: we've seen is that turning off nuclear has not meant
Speaker 1: that Germany has gotten greener. In fact, their emissions carbon
Speaker 1: emissions record has been among the worst in any rich
Speaker 1: country precisely because they turned off the nuclear plants. Is
Speaker 1: substitutent with coal. So I think that you know, Greens
Speaker 1: can read this just as well as anyone else. I
Speaker 1: think they know this. Again, the Degreenes have been but
Speaker 1: consistently the most hawkish on Russia, in part because unlike
Speaker 1: basically every other party, they don't have any kind of
Speaker 1: weird Russia baggage in terms of you know, ideological lengths
Speaker 1: or the oil, the gas pipelines, or supporting business interests
Speaker 1: that you know, selling manufactured goods to Russia. So they
Speaker 1: they've always been the most relatively hawkish. And and and
Speaker 1: you know, talking about a foreign policy of values, and
Speaker 1: in fact the Foreign Minister is from the Green Party
Speaker 1: right now, so I mean, there's definitely the flexibility there.
Speaker 1: So if the choice that they face is turning on
Speaker 1: nuclear plants versus actively sending money to Russia in the
Speaker 1: middle of a situation where Russia is violently invading one
Speaker 1: of its neighbors, I would imagine, you know, they'd be
Speaker 1: more flexible on that front. And I think that we're
Speaker 1: seeing that. I mean, and as also, as you mentioned,
Speaker 1: like in the in the short term, you know, solar
Speaker 1: and wind are great, but they're intermittent, and so you
Speaker 1: need selling that staple, and you know it's either gonna
Speaker 1: be coal or gas or nuclear, and you know if
Speaker 1: those three, I mean nuclear is clearly going to be preferable.
Speaker 1: So I realized we've been very focused on Germany. Here
Speaker 1: can you talk a little bit about how Russia's energy
Speaker 1: links have played into the current situation. And also one
Speaker 1: of the things that keeps coming up is this idea
Speaker 1: of um, you know, the rest of the world has
Speaker 1: imposed these very strict and dramatic sanctions on Russia, but
Speaker 1: the thing they've left out is energy for obvious reasons.
Speaker 1: But now there's a sort of big question mark over
Speaker 1: whether or not that can a continue given that you
Speaker 1: see a lot of firms who are voluntarily self sanctioning
Speaker 1: and just deciding that they don't want to have anything
Speaker 1: to do with Russian assets, or they're worried about clearing
Speaker 1: through the system and things like that, so they're just
Speaker 1: not dealing in Russian energy at all. And b it's
Speaker 1: unclear whether or not Russia will able will be able
Speaker 1: to use the dollars and euros that it actually earns
Speaker 1: from its energy exports, and so there's a question of, well,
Speaker 1: why would they continue to do this if they're not
Speaker 1: going to be able to actually use that money. So
Speaker 1: how do you see all of that at the moment?
Speaker 1: Those are all great questions. I mean, it is an
Speaker 1: interesting question. Why would Russia keep pumping gas if they're
Speaker 1: getting money that they can't use. You can understand why
Speaker 1: they keep doing it if they could use the money.
Speaker 1: And there's an argument for actually setting up sanctions in
Speaker 1: a way that they are forced to keep pumping the
Speaker 1: gas but not really able to do a lot else
Speaker 1: with it, which arguably is what was set up. But
Speaker 1: it does create this tension. So, I mean, one theory
Speaker 1: I've heard I have no idea this is right, is
Speaker 1: that the Europeans actually do want Russia to cut off
Speaker 1: the gas, but they want Russia to be the ones
Speaker 1: take the blame, which I mean, I have no idea
Speaker 1: if that's right. I mean, I certainly would be a
Speaker 1: reasonable way of interpreting, you know, how things are plying out,
Speaker 1: you know, But then there's a question of how you
Speaker 1: deal with that. I mean, as I said, I mean,
Speaker 1: the good news is that winters basically over, so you
Speaker 1: don't need it for heat the way you would have before. Um,
Speaker 1: you could imagine a situation where you're rationing electricity for
Speaker 1: industrial consumers and then you know, sort of hope that
Speaker 1: things get resolved one or another before next winter. It
Speaker 1: is that is definitely a tricky question. I mean, because
Speaker 1: it's not like you Germany is uniquely depending on Russian gas.
Speaker 1: In fact, if anything, many other countries are even more
Speaker 1: dependent on on gas from Russia, basically all the countries
Speaker 1: to Germany's east and sort of southeast, because there isn't
Speaker 1: really a lot of other sources you can get. I
Speaker 1: mean that you can get gas from from cutter, gas
Speaker 1: from Norway, um, the North Sea. There's some lergy coming
Speaker 1: in from the US, although the US is sort of
Speaker 1: maxed out and we sell a lot to Asia. Um,
Speaker 1: you know, you could have rerouting of l G. I mean,
Speaker 1: there's a world where you know, Australian and American ellengy
Speaker 1: is rerouted from Asia to Europe. But then you know
Speaker 1: that creates you know, that creates new problems for other people.
Speaker 1: So there isn't an immediate obvious substitute, and that does
Speaker 1: theoretically give the Russians aut levertay is that for all
Speaker 1: we know, they've already been cutting off. I just we
Speaker 1: just don't have the hard data from like the past
Speaker 1: week we can have, so that's a sort of interesting
Speaker 1: question there, but it does potentially create I mean, one
Speaker 1: of the reasons why before any of this happened, why
Speaker 1: nord Stream to which was the planned pipeline. It's basically finished,
Speaker 1: but that would have dramatically increased Russia's ability to send
Speaker 1: gas directly to Germany under the Baltic Sea. The reason
Speaker 1: why that was so controversial before all of this it
Speaker 1: was because it would have meant that Russia could have
Speaker 1: sent gas to Germany directly and bypass all the countries
Speaker 1: that are in eastern, Central and Eastern Europe that previously
Speaker 1: were able to get gas and be confident they could
Speaker 1: get a supply of gas because it's not as if
Speaker 1: there are a lot of pipelines that Germany could could
Speaker 1: use if they wanted to supply Poland, Czech Republic, Slovakia, Austria,
Speaker 1: the Baltic States, Hungary, Romania, those all depend on gas
Speaker 1: coming from Russia and then some of that gets rooted
Speaker 1: to Germany. But if it all went to Germany directly
Speaker 1: and those countries would all get hosed. And so that
Speaker 1: was like the big concern they had before any of this,
Speaker 1: so you know, those countries are still doesn't dependent. Um,
Speaker 1: we're now in a situation where at the moment you're
Speaker 1: actually having gas being rooted from those countries to Ukraine.
Speaker 1: A lot of the pipelines run through Ukraine that had
Speaker 1: been case that the Ukrainian government made a decent amount
Speaker 1: of earned a this amount of hardcurrent, so basically getting
Speaker 1: a transit fee from gas sent from Russia through those
Speaker 1: pipelines that I'm guessing that's not happening right now. Um,
Speaker 1: and so you're having gas being sent the other ways
Speaker 1: that Ukraine can keep the you know, the power on.
Speaker 1: But yeah, I mean it's a it's a it's the
Speaker 1: situation with gas and Russian you know, entergy securities is
Speaker 1: a significant problem for all these all of Europe. Realian's
Speaker 1: basically have to used to go either as far west
Speaker 1: as places like France and Spain or north to like
Speaker 1: Sweden and Norway for it not to be an issue.
Speaker 1: And in those countries they have a lot more hydro
Speaker 1: power and a lot more nuclear and at more solar.
Speaker 1: But that's you know, where they get lergy from elsewhere.
Speaker 1: But that's not you know, but that's a lot of
Speaker 1: Europe is very depending on Russian gas. You know. One
Speaker 1: of the things that you talked about this a little
Speaker 1: bit earlier is that you know, with oil, there are
Speaker 1: multiple prices of oil, but they do tend to cluster.
Speaker 1: And so there's Brent oil and there's West Texas oil,
Speaker 1: and they're usually a few dollars of are but they
Speaker 1: go in the same direction. The gas market isn't like
Speaker 1: that at all. I mean, the gas the price of
Speaker 1: what's a cubic meter? Is that a standard? Yeah? Yeah,
Speaker 1: billions of cuban mater it's just completely different. All it's
Speaker 1: just completely different all around the world at any given time.
Speaker 1: And it's because it's so as you're described there, it's
Speaker 1: so infrastructure specific. Yeah, I mean not to like piece
Speaker 1: or obvious, but one is the liquid and one is
Speaker 1: the gas. And like liquids, it's pretty easy. You know,
Speaker 1: you can put them in barrels, you can put them
Speaker 1: on ships, and like gases, you know, it's much harder
Speaker 1: to do that. And that's why you know, the invention
Speaker 1: of liquefaction, which is where you've turned the gas, you
Speaker 1: cool it and condensed into a liquid and then you
Speaker 1: can transport it on ships. Is with such a revolutionary
Speaker 1: technology because it meant that you could move the gas
Speaker 1: all over the world. But you know, until that happened,
Speaker 1: um and even and you know, it's still expensive to
Speaker 1: do that. Pipelines is the way you did it. I
Speaker 1: mean natural gas in the US. Prices of natural gas
Speaker 1: in the US have been so much lower than in
Speaker 1: Europe and Asia for a long time because we have
Speaker 1: a lot of gas in the US and we have
Speaker 1: pipeline infrastructure can transport it, but it's very difficult to
Speaker 1: send it over to places that don't you know, have
Speaker 1: the pipeline. Sending it across an ocean is very expensive.
Speaker 1: So there is a lot of liquid faction capacity in
Speaker 1: the US. There is a tremendous amount of liquid faction
Speaker 1: capacity that's currently been approved but has not yet been built.
Speaker 1: If it does, the U S would be able to
Speaker 1: more than supply Europe and Asia with with with gas
Speaker 1: uh in theory, but you know, it's it's very expensive
Speaker 1: to do that. I mean all the transportation causes why
Speaker 1: that the differentials are so huge. So even if the
Speaker 1: U S producers are responding the way you think they
Speaker 1: would to market signals, for like if the price of
Speaker 1: gas whatever is I don't like, six times or more
Speaker 1: whatever in Europe than it is in the US, and
Speaker 1: they are responding to that. But you know, there's sort
Speaker 1: of hard physical limits and you can, you know, until
Speaker 1: the liquid faction capacity builds up a lot, until the
Speaker 1: import terminals on the other side build up a lot,
Speaker 1: you know that price differential is going to exist. And
Speaker 1: that's why Russian gas always had appeal. Europe has pipelines
Speaker 1: to gas from North Africa as well, and that's and
Speaker 1: and from you know, the North Sea and stuff. So
Speaker 1: they do get other pipeline gas, but a lot of
Speaker 1: it comes from Russia. And so I mean, it's gonna
Speaker 1: be more expensive regardless, right, but the energy is always
Speaker 1: gonna be expensive than Russian gas. But on the end
Speaker 1: of Russia is cutting off the gas or if you
Speaker 1: don't want to be dependent on Russian gas, and that's
Speaker 1: a price worth paying. I mean, as Linder would say,
Speaker 1: it's you know, it's an investment freedom and so that's
Speaker 1: a you know, it's it's worth doing, but it is
Speaker 1: going to be more expensive. So actually that leads into
Speaker 1: something else I wanted to ask, which is naturally this
Speaker 1: idea of Russia's sort of leaning or looking more towards
Speaker 1: China because of the various things and pressures that are
Speaker 1: happening in Europe. So obviously Russia exporting more energy in
Speaker 1: various forms to China would appear to be an obvious
Speaker 1: option for it here. Yeah, no, it would. I mean,
Speaker 1: but that sort of goes the other way, which is
Speaker 1: you need to build all the pipelines going the other direction,
Speaker 1: and so they could do that. They do have one
Speaker 1: pipeline they called the Power of Siberia and it runs
Speaker 1: into China, and they do export pipeline gas to China,
Speaker 1: but the volumes are pretty small. So again, if you're
Speaker 1: looking at which I think sort of the most reasonable
Speaker 1: camp you had, like Russian gas going to EU U
Speaker 1: and was not, and so China is a pretty small
Speaker 1: I mean most of China gas. I mean, China actually
Speaker 1: has a lot of gas domestically, and they get a
Speaker 1: lot of allergy. So they they've definitely been trying to
Speaker 1: get more from Russia. But it will take a long
Speaker 1: time and put those pipelines together. I mean, basically I
Speaker 1: don't know the exact timeframe of how long long it
Speaker 1: takes to build these things, but like I would not
Speaker 1: be surprised if the time it takes for Russia to
Speaker 1: build pipelines to China to substitute, you know, to fully
Speaker 1: divert all the gas from that used to go to Europe,
Speaker 1: probably would I would not be It's probably comparable time
Speaker 1: scale like building out the capacity for Europe to get
Speaker 1: ellen G from the rest of the world. So I
Speaker 1: don't know, like it's I mean, it's not going to
Speaker 1: be kind of a fast thing. And of course there's
Speaker 1: the fact that if Russia would be doing this with China,
Speaker 1: it's at a period where, unlike you know before, Russia
Speaker 1: is a pariah state, and as you said, they're not
Speaker 1: having access to all the Western oil and gas services
Speaker 1: companies that actually know how to do this stuff because
Speaker 1: all these things were built I mean like north Stream
Speaker 1: and stuff that was a joint venture with European companies.
Speaker 1: That's where a lot of the time, I mean, they
Speaker 1: have technical know how in Russia, but a lot of
Speaker 1: it was done with you know, European help. And so
Speaker 1: I'm sure China has the capacity as well because they
Speaker 1: have their own domestic as industry and Russia cast industry
Speaker 1: for a long time. But I mean it's extent that
Speaker 1: they would want help from anyone, and that Russia has
Speaker 1: become prie stay that will make it even you know,
Speaker 1: comparatively more difficult for them. Well, the the other element
Speaker 1: and the thing I've been thinking about it this conversation
Speaker 1: is like, Okay, Germany wants to spend a lot more
Speaker 1: and build up perhaps build up terminals or other other
Speaker 1: forms of energy infrastructure and other other infrastructure. It's not
Speaker 1: a great time. I mean, it's not a great time
Speaker 1: to have to build setting aside the war specifically, Uh,
Speaker 1: it's not a great time to have to build anything
Speaker 1: physical given the tightness in every commodity markets and thinking
Speaker 1: about the metal that would have to go into new pipelines,
Speaker 1: and the steel and the cement and everything else that
Speaker 1: have to go into a terminal. It sort of speaks to,
Speaker 1: I guess the tragedy of having been so spend thrift
Speaker 1: for the last at least the last decade. Yeah thrift. Yeah.
Speaker 1: I mean it's funny because the Europeans have this phrase,
Speaker 1: this is so annoying talk about you if you fix
Speaker 1: the roof when the sun is shining. And it's a
Speaker 1: good phrase if you think about it. In the right perspective,
Speaker 1: but the way they always used it was, oh, you know,
Speaker 1: your economy is not actively contracting because we're not in
Speaker 1: the depth of a global financial crisis. You should be
Speaker 1: doing budget austerity and paying down your debt. Is how
Speaker 1: that was interpreted in your That's so that's what fixing
Speaker 1: the roof in their video, fixing the roof being like
Speaker 1: lowering your debt GDP ratio. And they talked about this
Speaker 1: all that you fix the roof in the sun is shining,
Speaker 1: but so then you have the space to expand your
Speaker 1: debt to GDP ratio when you know, things go bad.
Speaker 1: There's an obvious problem here, which is that you can't
Speaker 1: fix the roof if you're not spending money like you know,
Speaker 1: they they literally did was not fix the roof when
Speaker 1: the sun was shining. And then now that it's raining
Speaker 1: and they've saved a lot of cash, it's getting wet.
Speaker 1: I mean, if I don't draw this analogy too much,
Speaker 1: like I mean, they basically had an opportunity to do
Speaker 1: all these things when natural resources prices were low, when
Speaker 1: there was a lot of labor slack, when real interest
Speaker 1: rates were negative, and they didn't take it. I mean,
Speaker 1: real instructs are still negative. But other than that, I mean,
Speaker 1: they completely missed this opportunity. I mean, I remember I
Speaker 1: mentioned this in one of my my research notes. It's
Speaker 1: a really striking that the last time Russia attacked Ukraine
Speaker 1: in a really big way, it's in early basically eight
Speaker 1: years ago, and eight years is a long time to
Speaker 1: make an adjustment, and it just didn't happen at all.
Speaker 1: And I remember writing at that time, back when I
Speaker 1: was at Bloomberg, actually writing writing a piece saying, look
Speaker 1: like Russia is doing this, but like, long term, they're
Speaker 1: not in a great strategic position because Europe always just
Speaker 1: the option to diversify away from Russian gas, then Russia
Speaker 1: is no leverage. Ironically, they didn't do that. But I
Speaker 1: mean it's not like no one was talking about this
Speaker 1: back then. They just missed their window. And now they're
Speaker 1: trying to do it, and you know, as you said,
Speaker 1: now they're doing it like the worst possible time because
Speaker 1: they're being squeezed and you know it'll get done eventually,
Speaker 1: but you know, it's it's it's really striking how they
Speaker 1: sort of missed the you know, the focus on the
Speaker 1: sort of financial savings and not on the fact that
Speaker 1: you know, there's some things that are worth doing that
Speaker 1: should have been done at some point. You're gonna do
Speaker 1: it anyway because you need to do it, but you know,
Speaker 1: if you have a chance of doing it when things
Speaker 1: are cheap, that's the best time to do. And they
Speaker 1: missed that window well before we go and then with
Speaker 1: Fantastic obviously we've talked a lot about the energy linkage
Speaker 1: is but just before before we get out, you know,
Speaker 1: you've also written a little bit about the financial LINKAGEES
Speaker 1: and the various exposures that Europe and Germany have to Russia,
Speaker 1: all of which are now almost you know, some of
Speaker 1: these value of these assets and relationships might in many
Speaker 1: cases simply go to zero. But how big are we
Speaker 1: talking about here? For some of the non energy connections.
Speaker 1: There's a lot of trade and financial links between Europe
Speaker 1: and Russia. And I mean it makes sense. Russia is
Speaker 1: a large country, it's Europe's neighbor. That's sort of you know,
Speaker 1: what you'd expect to have happened. That is probably a
Speaker 1: lot that's gonna go to zero. There's going to be
Speaker 1: an economic kid. I think one thing one of the
Speaker 1: reasons I initially had been. I was not sure. I
Speaker 1: wouldn't say Scott, but I was not sure that that
Speaker 1: Europe would be willing to kind of put in place
Speaker 1: the kind of sanctions that we've ended up seeing is
Speaker 1: because there is a carler here, which is that there's
Speaker 1: gonna be a real hit to European businesses, both businesses
Speaker 1: that export to Russia and two banks that have relations
Speaker 1: with Russian businesses, and so um, we're talking in like
Speaker 1: the hundreds of billions of dollars in terms of potential
Speaker 1: losses here. I mean, that's definitely manageable for an economy
Speaker 1: that's the size of Europe. And you know, again to
Speaker 1: use Learner's phrase, it's it's it's an investment in freedom,
Speaker 1: so it's it's worth it's a worthwhile to bear that cost.
Speaker 1: But that is it is significant. I mean you have
Speaker 1: something like in total global banks, which is global banks
Speaker 1: in this in practice basically means US, UK, EU, Japan,
Speaker 1: something like a hundred fifty billion dollars or exposure to
Speaker 1: Russian you know, borrowers that's probably gonna mostly go to zero.
Speaker 1: I mean, the good news for them is that a
Speaker 1: lot of that exposure is through local subsidiaries and so
Speaker 1: and practice. What that means is that it's Russian depositors
Speaker 1: and Russian you know, bank bond holders and other Russian
Speaker 1: banks that are going to take a lot of that hit,
Speaker 1: although not all, but a bunch of it. You know,
Speaker 1: the exporters are gonna get hit pretty soon. I mean,
Speaker 1: your Russia imported about three seventy billion dollars worth of
Speaker 1: goods and services from the rest of the world. In
Speaker 1: the majority that is from countries and that are sanctioning Russia.
Speaker 1: So that's going to be a hit. Again, We're talking
Speaker 1: about a very large economies, so you know, in the agate,
Speaker 1: it's not gonna be huge. It it's gonna feel, gonna
Speaker 1: be notable, and of course it's going to have multiplier
Speaker 1: effects as those businesses, customers, you know, react to the
Speaker 1: Lass sales. So there's a hit to be taken. I mean,
Speaker 1: I think Russia was counting on this, these kinds of relationships,
Speaker 1: preventing any kind of saying in the past. I mean,
Speaker 1: that's what happened, right like they did something that everyone
Speaker 1: said was illegal and horrible and then nothing really had
Speaker 1: I mean, things happened, but it wasn't significant the way
Speaker 1: like we're seeing now, I think, quite frankly, if it
Speaker 1: hadn't been for the fact that the Ukrainians fought back
Speaker 1: and are still fighting back, I think there's a decent
Speaker 1: chance that you're probably would have rolled over because you know,
Speaker 1: what was what would have been the point right from
Speaker 1: their perspective. The fact that it's now actually is still
Speaker 1: a live question, I think is a lot of what's
Speaker 1: motivating this and people's willingness to you know, bear that
Speaker 1: economic pain because it is real, and I think obviously
Speaker 1: if you're looking at the rest of the world globally,
Speaker 1: not to you know, point figures in any countries, but
Speaker 1: you can imagine other countries that might be thinking potentially
Speaker 1: about invading some of their neighbors at some point in
Speaker 1: the future and wondering about, you know, how those economic
Speaker 1: links is whether protect them or not from you know,
Speaker 1: Western responses. But I mean, you know, seeing this is
Speaker 1: is I think I think Putin was not crazy for
Speaker 1: thinking that this would not have happened because of those links.
Speaker 1: But at the same time, I think, like it's it is,
Speaker 1: you know, once you do something like what he did
Speaker 1: and you see the response, I think that that it's
Speaker 1: not surprising that there's been this sort of very strong
Speaker 1: pushback and willingness to take these kind of losses. Well, Matt,
Speaker 1: Matt Klein, thank you so much for coming on odd lots.
Speaker 1: I learned a ton from that, very very useful conversation. Yeah,
Speaker 1: that was great, Thanks so much. You know, I always
Speaker 1: learn a lot talking to Matt and following him on
Speaker 1: Twitter and reading his newsletter. One thing that just really
Speaker 1: strikes me as has such a good command of like
Speaker 1: the data, so a lot of you know, it's in
Speaker 1: addition to just sort of like the theoretical big ideas,
Speaker 1: like he really knows the numbers behind all of it,
Speaker 1: which is one reason it's great to talk to him. Yeah. Also,
Speaker 1: I didn't realize he had such historical knowledge of oil
Speaker 1: and gas pipeline, so that's all it's fun fun to discover. Yeah,
Speaker 1: But I mean, I guess I'm trying to think, like
Speaker 1: what the big takeaway here is. I mean, I guess, like,
Speaker 1: I guess, it does seem like even before the recent crisis,
Speaker 1: Germany had changed some of its attitude towards fiscal spending, um,
Speaker 1: you know, similar to other governments. In the wake of
Speaker 1: the pandemic, there seems to be a greater acceptance of
Speaker 1: spending on on social systems and infrastructure and things like that,
Speaker 1: and this would seem to be something that's going to
Speaker 1: to ramp that up. But at the same time, I
Speaker 1: guess the offset of all of this is we're sort
Speaker 1: of talking about building up supply chain independence, energy security independence.
Speaker 1: It does feel like we're sort of this is so
Speaker 1: this is such a cliche, but it does feel like
Speaker 1: we are moving away from that interconnected globalized world previously. Right,
Speaker 1: You're right, it is a cliche and people talk about
Speaker 1: it a lot, but here you do have this like
Speaker 1: very sharp break and it's you know, it's very hard,
Speaker 1: and you know, we talked about this in our sanctions episode,
Speaker 1: where even if the formal sanctions lift, it's very hard
Speaker 1: to imagine so many of these other ancillary actions, particularly
Speaker 1: the corporate announcements reversing is very hard to see, you know,
Speaker 1: Germany reversing on its plans to invest in domestic energy
Speaker 1: or increase its military. So there are a lot of
Speaker 1: actions that have been taken that, um, you know, we
Speaker 1: are going to be pushing ourselves into a new direction
Speaker 1: that even two or three weeks ago didn't seem didn't
Speaker 1: seem very likely. Yeah. And then the other thing I'm
Speaker 1: thinking about just in terms of things that didn't seem
Speaker 1: very likely two or three weeks ago and maybe now
Speaker 1: are is, of course restarting the nuclear plants in Germany,
Speaker 1: because it does go ahead. I was just gonna say,
Speaker 1: you know, the sort of bigger picture. The big picture
Speaker 1: thing to me was that phrase, as Matt put it,
Speaker 1: fix the roof on the sunshine. It's very interesting. It's like, well, yeah,
Speaker 1: but then the question is what is your definition of
Speaker 1: fixing the roof. So if your definition of fixing the
Speaker 1: roof is just getting your debt to GDP ratio back
Speaker 1: below some number, then it's like, okay, great, your economy
Speaker 1: is booming. Uh, cut spending and then the numbers there.
Speaker 1: But you would hope or you would think that maybe
Speaker 1: fixing the roof could mean something like, well, having a
Speaker 1: more sustainable energy mix, having a more sustainable domestic infrastructure,
Speaker 1: and so forth. And it really is costly, and maybe
Speaker 1: that's something that we have to talk about more in
Speaker 1: the context even of US infrastructure spending, which is going
Speaker 1: to go up a lot. It's like we're doing all
Speaker 1: this at a time when commodity prices are booming. Every
Speaker 1: single day I look up at the terminal and commodity
Speaker 1: prices are so ring. This is going to be much
Speaker 1: costlier from a real perspective, more difficult, more time consuming
Speaker 1: because we're now in the ear of tight commodities. Would
Speaker 1: have been much easier in a period when so many
Speaker 1: of these commodity markets were structurally loser. Well totally, but
Speaker 1: it also feels like, I mean, the message, certainly from
Speaker 1: the Biden administration has been the solution for high prices
Speaker 1: is investment, and so you know, if you want to
Speaker 1: get away from that, you're going to have to invest in.
Speaker 1: The timing is terrible, and yeah, maybe we should have
Speaker 1: done it earlier, but you kind of have to do
Speaker 1: it now otherwise it's just going to get worse. But
Speaker 1: it does feel like there are no easy solutions. Again
Speaker 1: another cliche. I'm all about cliches today Apparently, Yeah, that's okay,
Speaker 1: but now I know, I thought that was great, and
Speaker 1: just the whole world I think, you know, we want
Speaker 1: to do more. There's so much to do. I think
Speaker 1: on energy specifically this year, like all the different questions
Speaker 1: about ellen G infrastructure alone is so fascinating. We need
Speaker 1: to find someone who can really get into like, you know,
Speaker 1: the business of Okay, energy prices might be six times
Speaker 1: in Europe what they are here, but you don't have
Speaker 1: the infrastructure to move it because of liquid faction capacity,
Speaker 1: because of terminal capacity. Huge opportunities for someone, and it's
Speaker 1: just a question of like who and what is the
Speaker 1: time for Also, pipeline historians get in touch, because I'm
Speaker 1: very curious about, you know, the decisions that go into
Speaker 1: building these things and how long it takes to reverse
Speaker 1: or alter course. And I think that's gonna be a
Speaker 1: pretty important thing going forward. Totally. All right, shall we
Speaker 1: leave it there? Let's leave it there. 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 Why Isn't It All? You can follow me
Speaker 1: on Twitter at the Stalwart. Follow our guest Matthew Klein.
Speaker 1: He is the founder and editor of The Overshoot. He
Speaker 1: is at m Underscore see Underscore Klin. Follow our producer
Speaker 1: Laura Carlson. She's at Laura M. Carlson And very sad
Speaker 1: news we have to report this is Laura's last episode
Speaker 1: as our producer. She's returning to history, her her true
Speaker 1: love of history. So very said, Laura, are you there?
Speaker 1: I am, I'm here. Can you can you say a few?
Speaker 1: We're gonna miss you so much. We're gonna We're gonna
Speaker 1: it's it's on the this is devastate. We're gonna miss you.
Speaker 1: You've been an amazing producer the last I think, how
Speaker 1: long has it been three years? You've been the outliveed producer. Yeah,
Speaker 1: well you know in COVID time, it's actually been about
Speaker 1: two decades, so yeah, just about three years. That's exactly right.
Speaker 1: What are you gonna be doing next? Um, I'm as
Speaker 1: you said, I'm going back to my my my roots
Speaker 1: in history. I'm I'm writing a book. I'm gonna be
Speaker 1: doing some teaching and lecturing. Um unfortunately on on nothing
Speaker 1: related to markets or or anything like that. It's all
Speaker 1: culinary history, so so good food food history, UM, stories
Speaker 1: of restaurants, those kinds of things. So so yeah, you've
Speaker 1: definitely got to be a guest one day. I would
Speaker 1: love that. I I am there that anytime you want
Speaker 1: me to talk food history on odd lots, I'm did
Speaker 1: be the best combination of my various world So I'm
Speaker 1: up for it. Great. We we will definitely make it happen.
Speaker 1: Thank you, Thank you so much, Laura. Just it's been
Speaker 1: a it's been a real pleasure work with it. Thank
Speaker 1: you both. This has been this has been great and
Speaker 1: a wild ride. Yeah. Well, we're definitely, uh gonna continue
Speaker 1: to follow your work everyone, even after this episode, you
Speaker 1: won't be our producer anymore. Follow Laura Carlson at Laura
Speaker 1: and Carlson follow all her work. Thank you so much, Laura.
Speaker 1: Be sure to follow the head of podcast at Bloomberg
Speaker 1: Francisco Levi at Francisco Today, and check out all of
Speaker 1: our podcasts here at Bloomberg under the handle at podcast.
Speaker 1: Thanks for listening year to