Speaker 1: Bloomberg Audio Studios, Podcasts, radio News. I have news. AI
Speaker 1: isn't actually magic. It might have the potential to transform
Speaker 1: our world, but like everything else out there, it is
Speaker 1: only a function of the amount of energy it uses,
Speaker 1: and it uses a lot, an awful lot. How much
Speaker 1: for that? I've got a new column out on Bloomberg
Speaker 1: dot Com I want you to go and look at.
Speaker 1: I talk about the various estimates of how much energy
Speaker 1: it uses, and the most most quoted estimates suggests it's
Speaker 1: going to be using as much as a small western
Speaker 1: country within the next couple of years. There are more
Speaker 1: excitable for custom that so either way, we are talking
Speaker 1: an awful lot of energy. Where is it going to
Speaker 1: come from? I think if you've been listening to this
Speaker 1: podcast for a while, you know where we think the
Speaker 1: electricity to power everything from the transition to AI is
Speaker 1: going to come from. It's going to come from nuculus.
Speaker 1: If you're insted in AI, be interested in uranium, which
Speaker 1: brings me to John. Hi, John, Hey Maan, It's nearly
Speaker 1: icy season, right? You love ice? The season is the.
Speaker 2: Season is clear, It's even better than budget season.
Speaker 1: Yeah, y season is the best because ice season we
Speaker 1: get to talk about how you can save twenty grand
Speaker 1: a year into a wrapper and you can put pretty
Speaker 1: much anything you like in that wrapper, even UK stocks,
Speaker 1: even UK stocks you can put in that wrapper. And
Speaker 1: then you can just leave it all sitting in there
Speaker 1: and you never pay another penny of tax on that money.
Speaker 1: It's absolutely brilliant. The only thing you have to do
Speaker 1: is try and find the money to put in the wrapper,
Speaker 1: and then try and figure out what to invest that
Speaker 1: money in once it's in the wrapper. And that's why
Speaker 1: we have you John for ideas. What do we do
Speaker 1: with that money? Here we are, we're so lucky, We've
Speaker 1: got twenty grand sitting in a wrapper. What are we
Speaker 1: going to do?
Speaker 2: I'm glad that you asked that question, man. In fact,
Speaker 2: I was waiting about this very morning. First of all,
Speaker 2: does cash, if you are interested in cash, cash is
Speaker 2: suddenly getting your actually getting your real root on on
Speaker 2: your cash, which is not something that we've had for
Speaker 2: a very very long time.
Speaker 1: Yeah, and you know what, we haven't had it for ages.
Speaker 1: But and you can. You can buy a money market fund,
Speaker 1: you know, you can get your four five percent. And
Speaker 1: this is really interesting. I was talking to someone the
Speaker 1: other day who was saying to me that the capital
Speaker 1: preservation investment trust, the ones that you and I love
Speaker 1: so much or have loved so much over the years,
Speaker 1: capital gearing, personal assets, ri etc. They've all been suffering
Speaker 1: a little. And one of the reasons there, I am told,
Speaker 1: is because you know, if you want capital preservation now
Speaker 1: in the old days, you know, oh, I don't really
Speaker 1: want cash because it's not preserving my capital because it's
Speaker 1: being eroded gradually by inflation. But now get a proper
Speaker 1: return on cash or a money market fund for example.
Speaker 1: So if you want to preserve your capital, if you
Speaker 1: want to get rid of your risk but keep up
Speaker 1: with inflation, then you know, you can just go cash.
Speaker 1: You don't have to go for one of these big trusts.
Speaker 1: I love these big trusts still. But nonetheless it's not
Speaker 1: you don't have to do.
Speaker 2: It, yeah exactly, And I mean I think it's that
Speaker 2: a thing where actually your money is going to go
Speaker 2: ahead of inflation, and so you then have to think, well, actually,
Speaker 2: maybe two or three percent rail is a perfectly decent
Speaker 2: return if that's you know, that's what you're looking for,
Speaker 2: and if you're looking for something that you needed, I
Speaker 2: mean I would still say cash is mostly just for
Speaker 2: either diversification and that everyone should have a bit of
Speaker 2: cash or for the short term something that you can't
Speaker 2: afford to invest for more than five years. But if
Speaker 2: you do like income but you also like investing, then wow,
Speaker 2: have we got some ideas for you. The AIC just
Speaker 2: released its latest Dividend Heroes list of investment trusts. So
Speaker 2: these are investment trusts that have raised their dividends for
Speaker 2: various you know, like every single year. And at the
Speaker 2: top you've got ones that have actually lifted their dividends
Speaker 2: every year for fifty seven years in a row. And
Speaker 2: to make this list.
Speaker 1: Is quite impressive, come on, quite impressive that a lot
Speaker 1: of stuff has happened over the last fifty odd years
Speaker 1: and to be able to continue to raise your dividends
Speaker 1: for it higher period suggests some fairly good management in place.
Speaker 2: If you look at the long term returns, and obviously
Speaker 2: a big chunk of these returns do come from the
Speaker 2: dividend and reinvested dividend. But if you are looking for
Speaker 2: something that is consistently mice to kind of you know,
Speaker 2: keep paying you an income over a prolonged period of time,
Speaker 2: and I realize obviously that you know, investment trusts can
Speaker 2: take dividend income out of their capital rather than just
Speaker 2: the dividends that they're getting paid. But even then, if
Speaker 2: something's mice to do it for fifty odd years without
Speaker 2: any major hitches, then as you say, you have to
Speaker 2: think that something's going right. So they kind of the
Speaker 2: top of the last that fifty seven years is the
Speaker 2: City of London Investment.
Speaker 1: Trust, Great Trust.
Speaker 2: Yeah, I think that one that comes very popular was
Speaker 2: about paying about five percent, and this book treating on
Speaker 2: a minor, very very small discount go on the list.
Speaker 2: John more than Less, bank Kill's Investment Trust, Alliance Trust,
Speaker 2: Caledonia Investments. That's why we quite like.
Speaker 1: Yeah, we like both of them. I mean, Alliance has
Speaker 1: had a difficult time five six years ago, pull yourself together,
Speaker 1: put a new system for managing the money in place
Speaker 1: and has done really well ever since. Caledonian of course,
Speaker 1: had a lot of private stuff and so we you know,
Speaker 1: if you're not interested in a big trust that has
Speaker 1: various private investments, don't touch that one. If you are
Speaker 1: worth a look what comes after that.
Speaker 2: Come on another couple on the UK equity income, said
Speaker 2: JP Morgan Claverhouse and also the muddy income trust Merchants Trust.
Speaker 2: UK equity Income. Actually Scottish mort gets us on this
Speaker 2: is it.
Speaker 1: Well, they've done a great job too in raising their
Speaker 1: different end, if not necessarily and not listening, but you know,
Speaker 1: UK equity income is a great place to look and
Speaker 1: we've talked about this before. You know, it's one of
Speaker 1: the few markets where you can get a proper dividend
Speaker 1: yield on your money. And Mark Dampierre at Huger's Landsdown,
Speaker 1: we've talked about this before as well. He was used
Speaker 1: to refer to these great big companies as Nature's annuity
Speaker 1: and can buy these big trusts. You can get your
Speaker 1: your four percent or so every year and you can
Speaker 1: still have control over your capital and that's really worth something. Well,
Speaker 1: you might not make the amazing capital returns that you've
Speaker 1: made in the US market over the last decade or so,
Speaker 1: but you've certainly had stability and an income. And Scottish mortgage,
Speaker 1: of course, this is interesting. Scottish mortgage, which of course
Speaker 1: has had an absolute horrid time since the end of
Speaker 1: the growth bubble. They did announce relatively recently this huge buyback,
Speaker 1: you know, a billion pounds worth of cash put to
Speaker 1: one side to buy back the shares and try and
Speaker 1: close that discount in the idea that they're being to suggest. Well,
Speaker 1: in fact, the portfolio that they have at the moment,
Speaker 1: they believe it's a great portfolio. They believe it's cheap,
Speaker 1: so the best thing they can do for shaholder is
Speaker 1: to use spare cash to buy shares in themselves. So
Speaker 1: you know, that's quite a vote of confidence in the trust.
Speaker 1: Hose surprised that its shapheres didn't move more on the news,
Speaker 1: but it didn't. You know, it's still an interesting trust,
Speaker 1: even though I am aware that lots of listener as
Speaker 1: well have lost a big pile of money on it
Speaker 1: over the last few years.
Speaker 2: That is an interesting move on the buy back, And
Speaker 2: as you say, I do think it's quite a significant
Speaker 2: vote of confidence either. And people can be snooty about it,
Speaker 2: and they can you point out that the nature I
Speaker 2: buy back is in many ways not different to any
Speaker 2: other form of capital return. But the point is that
Speaker 2: you know they've got the conviction that this is a
Speaker 2: good idea because they you know, you look kind of
Speaker 2: stupid if you did this and then the share price
Speaker 2: continued to fall, So I like to see that kind
Speaker 2: of conviction, particularly in an area like investment trust, where
Speaker 2: you know, arguably a lot of the issues with the
Speaker 2: sector just now are a bit like the issues with
Speaker 2: the UK at large, which is it's more sentiment driven
Speaker 2: than any kind of actual underlying issue with anything. The
Speaker 2: other couple of interests once black Rock smaller companies and
Speaker 2: tenders and smaller companies, or a couple of these kind
Speaker 2: of UK smaller companies on that list. They've both raised
Speaker 2: a dividend for yeah, twenty years and at all dividend
Speaker 2: levels around about three percent, and you still.
Speaker 1: End up with that, You'll end up with it, Okay,
Speaker 1: a yield of around three percent. It's not awful. It's
Speaker 1: not awful at all. And you know, if if we're right,
Speaker 1: which we may or may not be, about how cheap
Speaker 1: UK small caps are and how when people come back
Speaker 1: to this market, it'll move quite fast and those will
Speaker 1: be interesting places to be anyway. So that's quite interesting list,
Speaker 1: a couple of ideas for anyone looking at their eyes
Speaker 1: of this year. But the key thing, the absolutely key thing,
Speaker 1: is to remember that if you can afford to put
Speaker 1: cash into your ICA, you really really should It's a
Speaker 1: fantastic wrapper and a great way to say, right, John,
Speaker 1: if you've got anything negative to say about isis John.
Speaker 2: No, I don't not at all. Actually not In the
Speaker 2: other quick thing, you can't lie or in tax allowances
Speaker 2: to shield you from the tax on your interest income
Speaker 2: anymore cause of raising and trade streets. So if you're
Speaker 2: twenty percent and come tax period, you've got one thousand
Speaker 2: pound personal savings and loans. But if you get anything
Speaker 2: over twenty thousand pounds in a decent cash aer or
Speaker 2: in a decent cash account, though, then that will bump
Speaker 2: you over that limit. So that's why it's also what
Speaker 2: thinking about your eyes are particularly this year. We're just
Speaker 2: perhaps in the past that hasn't been on the cash seed.
Speaker 1: Okay, look at that tax advice on top of everything.
Speaker 1: Thanks John. Welcome to Meron Talks Money, the podcast in
Speaker 1: which people who know the markets explain the markets. I'm
Speaker 1: Maren zumset Web. Now this week we're going to do
Speaker 1: things a little bit differently. I did an absolutely fantastic
Speaker 1: interview with one of the most interesting men in economics
Speaker 1: a few weeks ago, the economist and author Bernard Connolly.
Speaker 1: You may know him from the Rotten Heart of Europe,
Speaker 1: The Dirty War for Europe's Money, a book that was
Speaker 1: not popular with the EU that I rather enjoyed, and
Speaker 1: You Always Hurd the one you Love, Central Banks and
Speaker 1: the Murder of Capitalism. Now, what we're going to do
Speaker 1: here is that John and I are going to talk
Speaker 1: all the way through the interview, not just at the end.
Speaker 1: So bad luck for those of you who've just come
Speaker 1: to listen to the new Voices. This time you get
Speaker 1: to listen to me and John interrupting the entire way through.
Speaker 1: Here we go and thank you so much for joining
Speaker 1: us today. But we haven't spoken to you and I
Speaker 1: properly since gosh, mid twenty twenty, I don't think so.
Speaker 1: Since then you have published the book that we talked about.
Speaker 1: Then it's a whopper. It's called You Always Hurt, the
Speaker 1: Ones you Love, Central Banks and the Murder of Capitalism.
Speaker 1: It's very well reviewed. Right there on the front is
Speaker 1: a quote from Mervyn King Connolly does not Take Prisoners
Speaker 1: a book to be read by.
Speaker 3: Anyone interested in political economy today, which it most certainly is.
Speaker 3: But what it's really about, and I suppose an alternative
Speaker 3: title for it could have been the big mistake, right,
Speaker 3: Because what we're talking about here is what has gone
Speaker 3: wrong with capitalism based on a big mistake made by
Speaker 3: the World Central Bank.
Speaker 1: So why don't we start with that. If we started,
Speaker 1: say with the mid nineties, big place a good place
Speaker 1: to start with a big mistake began.
Speaker 4: I think it would for two reasons. First of all,
Speaker 4: certainly if one's thinking about the US, which of course
Speaker 4: is the most important economy, the mid nineties were a
Speaker 4: period of what one can troll, what can call into
Speaker 4: temporal equilibrium. That is to say that it appeared that
Speaker 4: the plans of businesses investors on the one hand, and
Speaker 4: savers consumers on the other were in some sort of
Speaker 4: reasonable alignment. And in those conditions it's possible to have
Speaker 4: equilibrium in the short term full employment and inflation at
Speaker 4: a target at a target rate. And in the long
Speaker 4: term that's to say that the balance of supply and
Speaker 4: demand in the economy will remain balanced, not just today
Speaker 4: but in the future. And ensuring that means getting the
Speaker 4: interest rate right. The interest rates is the link between
Speaker 4: the present and the future.
Speaker 1: Okay, John, I want to interrupt here. I know I'm
Speaker 1: interrupting quite early, but there's a really crucial idea that
Speaker 1: runs through all of Bernard's work that is about intertemporal equilibrium.
Speaker 1: And I'll just read you a little bit from the
Speaker 1: introduction of the book. Central to the thesis of this
Speaker 1: book is an emphasis on intertemporal relations, the economic relations
Speaker 1: between the present, including the legacy of the past and
Speaker 1: the capital stock and the future. That emphasis points to
Speaker 1: an essential feature of capitalism. It is stored up something.
Speaker 1: So everything is stored up something. And we talked about
Speaker 1: this in the context of energy, right everything around you
Speaker 1: is the result of stored up and then used energy.
Speaker 1: And when he talks about everything to do with economics,
Speaker 1: he's talking about the interest rate, seeing the instrument of
Speaker 1: allocating resources between time, and if you get the interest
Speaker 1: rate too low, you pull resource use forward, and if
Speaker 1: you set it too high, you push it away. So
Speaker 1: what you're looking for is a correct interest rate that
Speaker 1: allows the allocation of capital to be correct and so
Speaker 1: to be correctly allocated between what we invest in and
Speaker 1: what we consume. Is that how you understand it as well?
Speaker 4: Yeah?
Speaker 2: Absolutely, I mean I think the most interesting thing about it,
Speaker 2: and obviously Bernard goes on to talk about this is
Speaker 2: the fact that this is technically the most important number
Speaker 2: in markets, and it's also the one that is set
Speaker 2: artificially by central banks. So you do have to wonder
Speaker 2: if there would be a better way of setting this
Speaker 2: number in such a way that to actually distributed resources
Speaker 2: or allocated resources correctly over time. But yes, I think
Speaker 2: he ends up getting to that.
Speaker 1: Yeah. So the key thing here is that we do
Speaker 1: have an organization that sets the most important number in
Speaker 1: the world, the interest rate, and we rely on them
Speaker 1: to get it right. And the key thing that Bernard
Speaker 1: talks about is them getting it wrong and how they
Speaker 1: got it wrong, and the miserable consequences of all that.
Speaker 1: But that it might I just want to read one
Speaker 1: more a little bit from the book. I'm basically doing
Speaker 1: this to prove to you that I have read the book,
Speaker 1: which is for six hundred. As long as everyone understands
Speaker 1: that bit, it is a monster, but it's an excellent monster. Now,
Speaker 1: there is an interesting bit, and I think a lot
Speaker 1: of people have forgotten this, which is that pre nineteen
Speaker 1: ninety six, there was no explicit inflation target in the US.
Speaker 1: This whole two percent nonsense did not exist, and it
Speaker 1: wasn't clear that it was going to be two percent.
Speaker 1: So there was a point in nineteen ninety six, in
Speaker 1: July one of the Central Bank meetings meetings of the FOMC,
Speaker 1: he was pushed into trying to defy price sability what
Speaker 1: that means. Because the FED was responsible for price stability,
Speaker 1: they don't really defined it, and so Janet Yellen, who
Speaker 1: was a FED governor at the time and is now
Speaker 1: obviously in charge of everything, asked him to describe it
Speaker 1: and define it. And at the time he said, we're
Speaker 1: talking about Alan Greenspan here, the state in which expected
Speaker 1: changes in the general price level do not effectively alter
Speaker 1: business or household decisions, right, so you don't change the
Speaker 1: way you behave based on where you expect inflation to go.
Speaker 1: But she wasn't having even anything that big. She wanted
Speaker 1: a real number, so she pushed and pushed from to
Speaker 1: put a number on it. And do you know what
Speaker 1: he initially said. He said, I would say the number
Speaker 1: is zero if it is properly measured. So there was
Speaker 1: a little chance in there where the inflation target was
Speaker 1: going to be not two percent but zero. Anyway, everyone
Speaker 1: else kind of pushed back and there was a big
Speaker 1: discussion and At the end of the discussion, Greenspan said,
Speaker 1: we have now all agreed on two percent, and from
Speaker 1: that meeting in nineteen ninety six, it all begins.
Speaker 2: Before then, the Bank in New Zealand had already gone
Speaker 2: for two percent, and I actually seem to remember them
Speaker 2: at one point in having a discussion of it whether
Speaker 2: it should be as high as five percent. So it's interesting.
Speaker 2: That's interesting the Greenspan pointed zero.
Speaker 4: In the mid nineties, there was the beginning of a
Speaker 4: very favorable change in the US economy, a change in
Speaker 4: productivity growth as results of improved business practices, an improved
Speaker 4: political environment in terms of acceptance of capitalism, and of
Speaker 4: course technological advances. What on a green span. The Chairman
Speaker 4: of the FED at the time was to call the
Speaker 4: new economy. Now, what happens when there's a favorable change
Speaker 4: in productivity expectations, initially on the part of firms, because consumers'
Speaker 4: households don't see that. As soon as the relevant firms do,
Speaker 4: the rate, the expected rates of return on investment for
Speaker 4: those firms who have got the favorable opportunities goes up.
Speaker 4: You can go up a long long way, as we
Speaker 4: saw in many instances Now, for the economy as a whole,
Speaker 4: a sharp rise in the rate of return in a
Speaker 4: subset of firms means a more moderate rise in what
Speaker 4: we could call the economy wide average expected rates of return. Now,
Speaker 4: what should happen in those circumstances is that the ex
Speaker 4: anty real rates of interest goes up to match that
Speaker 4: increase in the economy wide expected rates of return. And
Speaker 4: what does that increase in the rate of interest were
Speaker 4: it to happen, what does it do well? It doesn't
Speaker 4: affect the high rates of return companies at all. They
Speaker 4: just carry on. Their rate of return is far higher
Speaker 4: than the economy wide average. It does hold back investment
Speaker 4: in other sectors with lower rates of return, lower future
Speaker 4: productivity expectations, and it somewhat holds back consumption. Now, I
Speaker 4: think it's important to recognize that by and large, it's
Speaker 4: not truly in every single case, but by and large,
Speaker 4: productivity improvement requires physical investment first, and physical investment while
Speaker 4: it's being done adds to aggregate demand. When it's being done,
Speaker 4: it's added to aggregate supply. So what one needs is
Speaker 4: other elements of demand to be held back during the
Speaker 4: period of strong investment growth in high rates of return companies,
Speaker 4: and that's done by an increase in the interest rate.
Speaker 4: When that investment has been done, other things being equal,
Speaker 4: aggregate demand falls, aggregate supply has gone up, the interest
Speaker 4: rate comes back down, and previously postponed if investment projects
Speaker 4: in other senctions of the economy get done previously postponed
Speaker 4: consumption comes into play, and the trusts and valleys of
Speaker 4: the economy can be smoothed out. Now that didn't happen,
Speaker 4: And why didn't it happens because central banks and the
Speaker 4: economists who work in central banks were increasingly bewitched by
Speaker 4: an academic macroeconomic model with a mathematical elaboration. Now, Greenspan
Speaker 4: was very quick, quicker than most people, to see the
Speaker 4: productivity growth in the United States is going to improve.
Speaker 4: But the conclusion he drew from that was the wrong one,
Speaker 4: just as Niger Lawson had drawn the wrong conclusion in
Speaker 4: Britain in somewhat similar circumstances a decade before. He thought,
Speaker 4: improved productivity growth lower rates of inflation at every rate
Speaker 4: of interest, so I don't need to raise interest rates,
Speaker 4: And he held off raising interest rates until there was
Speaker 4: such an obvious, massive speculative boom by the end of
Speaker 4: the nineteen nineties, he had no choice. Now, the speculative
Speaker 4: boom itself was in part or in large part, the
Speaker 4: result of keeping interest rates below an appropriate level given
Speaker 4: the future, as well as the president. When the boom
Speaker 4: collapsed in two thousand, the Fed realized it was going
Speaker 4: to have to cut interest rates to prevent a recession.
Speaker 4: It didn't realize how far it was going to have
Speaker 4: to cut rates, so how long you would have to
Speaker 4: keep rates low, And it didn't realize just how deep
Speaker 4: the recession could have been in the absence of that
Speaker 4: rescue operation from the Fed.
Speaker 1: Okay, John, I'm just going to stop again here. This
Speaker 1: is where the whole thing happened when what he called,
Speaker 1: you know, the original sin was made when Alan Greenspent
Speaker 1: recognized that productivity was going to rise sharply. This looks great,
Speaker 1: but then he made the wrong decision. It's so simple,
Speaker 1: all the way Bernard describes it. It's so simple. One
Speaker 1: misinterpretation of how capitalism should really work, of how he
Speaker 1: should have shifted interest rates, and all crises follow from there.
Speaker 2: Right, Yeah, And I mean I'm glad to see Greenspan
Speaker 2: getting name checked in this because I think people forget
Speaker 2: now that he is ultimately certainly in marview, and it's
Speaker 2: nice to see in Bernards as well, the architect of
Speaker 2: essentially everything that has happened in the last twenty odd years,
Speaker 2: you know. And it's basically does boil, don't you this
Speaker 2: mistake with interest rates? So as I understand the way
Speaker 2: that ber Nuds can only put it, he's saying that
Speaker 2: productivity is shot up, and rather than worrying about the
Speaker 2: effect has had one in inflation effectively, because it basically
Speaker 2: meant inflation was going down along with all the other
Speaker 2: geopolitical stuff that was happening. Greenspancher dencognites, this was a
Speaker 2: good thing. Just put up with the not cut interest
Speaker 2: rates or reduced interest rates, maybe even put them up,
Speaker 2: and that would have encouraged all the investment to go
Speaker 2: into the most productive bit of the economy at that point,
Speaker 2: rather than being misallocated and a lot can of flop
Speaker 2: around the edges. Is that basically what he's saying.
Speaker 1: Absolutely, And you know, the extraordinary thing is that he
Speaker 1: did recognize that productivity change. I mean that was you know,
Speaker 1: there was a genius there because other people didn't. And
Speaker 1: again I'm going back to the book, page one ninety nine.
Speaker 1: For those of you who think I haven't read it all,
Speaker 1: it will go page one ninety nine, really motoring through now,
Speaker 1: where Bernard talks about various papers that have been written
Speaker 1: on this and notes that the productivity trend in the
Speaker 1: US accelerated quite markedly in the period from nineteen ninety
Speaker 1: five to two thousand and one as compared to the
Speaker 1: period from seventeen ninety three to nineteen ninety five, with
Speaker 1: nineteen ninety five marked out as a very significant year
Speaker 1: and inflection point for productivity in the US. And we're
Speaker 1: talking about a paper here written by Mangled Larry Meyer,
Speaker 1: who wrote the Greenspan's call on the productivity acceleration was
Speaker 1: a truly great one. He got it right before the
Speaker 1: rest of us did. But he got it right, and then,
Speaker 1: oh boy, oh boy, did he get it wrong. So Greenspan,
Speaker 1: having spotted a coming acceleration in productivity not yet apparent
Speaker 1: in the data, took the view that he could keep
Speaker 1: interest rates lower than otherwise. And here's interesting as well.
Speaker 1: He did this in the face of anguished please from
Speaker 1: several other FMAC members that rapidly falling unemployment was likely
Speaker 1: to lead to accelerating inflation. So when people look back
Speaker 1: at this, they see it as a great triumph of
Speaker 1: his chairmanship, the great brilliance of Greenspan that he didn't
Speaker 1: rate interest at the time. But of course the premise
Speaker 1: for Bernard is that it was the worst mistake anyone
Speaker 1: has ever made. Now well, in economic terms anyway, won't
Speaker 1: be not the worst, there's got to be worse, but
Speaker 1: pretty bad, pretty bad. And I want to go back
Speaker 1: to where the UK did something very similar. So we're
Speaker 1: going to go on here and we're going to talk
Speaker 1: about the US. But if you go back in Bernard's book,
Speaker 1: page one twenty eight, we get to a point where
Speaker 1: we talk about how this happened in the UK. So
Speaker 1: there were voices in the bank, notably Mervin Kings. We've
Speaker 1: had We've talked to Mervin King a lot before you
Speaker 1: and I, and we have a meeting's mind in various
Speaker 1: things in favor of higher interest rates to restrain domestic
Speaker 1: demand and prevent a dangerous bubble. The debate within the
Speaker 1: bank was settled for a short time in the early
Speaker 1: two thousands when the Governor Eddie George averred that unbalanced
Speaker 1: growth is better than no growth. And here we get
Speaker 1: her a nice little assigne, very Bernard style, a phrase
Speaker 1: that may have inspired Theresa May and her baffling conviction
Speaker 1: that a bad deal with the EU was better than now.
Speaker 1: There in Britain, as in the US, the damage that
Speaker 1: already been done by the early two thousands into temporal
Speaker 1: dis equilibrium was firmly established. Miseries on miseries.
Speaker 2: Well, the one other thing I wonder about with that
Speaker 2: is I'd like to know, and I don't know bernadreits
Speaker 2: about this, but how much of this was just an
Speaker 2: element of political spinelessness as well, because Greenspan could really
Speaker 2: badly burnt in nineteen ninety four when he basically crashed
Speaker 2: the US bond market by raising interest rates faster than
Speaker 2: markets would have liked. And I've always had the impression
Speaker 2: that really after that he was kind of keeping one
Speaker 2: eye on Wall Street as to how pleased or happy
Speaker 2: they were with the way he was doing things, because
Speaker 2: at the end of the day he also lower in
Speaker 2: interest rates, or so keeping them lower than they should
Speaker 2: be is the easy way out most of the time,
Speaker 2: unless like inflation is going absolutely bonkers like it did here. Recently.
Speaker 2: Nobody's going to complain that you aventry streets are loyal
Speaker 2: than they should be, because that's when you get to
Speaker 2: run out and spend lots of money. Basically, so it's
Speaker 2: kind of a modal feeling, not until.
Speaker 1: They see the consequences a decade later, a Moorral failing too. Yeah.
Speaker 1: I do think Alan Greenspan's ever going to come on
Speaker 1: this podcast, is.
Speaker 2: He let's try and get hope be.
Speaker 1: Good, right onwards back to Bernard. Okay, so just be
Speaker 1: clear where we've got to hear is that when this
Speaker 1: great productivity boom or potential productivity boom became clear, the
Speaker 1: correct thing for Alan Greenspun to have done, and he
Speaker 1: noticed it, which is a good, good thing, right, we
Speaker 1: praise him for that he noticed it happening. What he
Speaker 1: should have done is allowed interest rates to rise or
Speaker 1: put up interest rights, put up interest rates to encourage
Speaker 1: investment only in these very productive sectors. Hold off investment elsewhere,
Speaker 1: hold off consumption because people could get more money with
Speaker 1: their money on deposit than elsewhere, So it holds off
Speaker 1: consumption for a while. Then we get this investment in
Speaker 1: the productive sectors that's complete. And then of course we
Speaker 1: need the consumption to come in, and we need other
Speaker 1: sectors to use these new productive ways of working in
Speaker 1: their own businesses. That should all come in then and
Speaker 1: everything would be absolutely fine. Interest rates would have done
Speaker 1: their job in translating the present into the future and
Speaker 1: we would have been in a wonderful place. Instead of
Speaker 1: which Greenspan, despite noting this, made the wrong choice, kept
Speaker 1: interest rate too low, and then we got that first
Speaker 1: bubble that then led us into the next bit. We're
Speaker 1: having had a bubble, and that bubble then collapsed. We
Speaker 1: move in for a recessionary environment, where upon central bankers,
Speaker 1: and I'm moving us a little further forward here, central
Speaker 1: bankers panic push interest rates down again, further and further
Speaker 1: and on we go from there. The so that first
Speaker 1: mistake led us into the environment where interest rates became
Speaker 1: almost permanently too low.
Speaker 4: Yeah, So what does too low mean? When you push
Speaker 4: interest rates down in the face of a recession, you
Speaker 4: get an initial bump, but you're going to trend down
Speaker 4: again afterwards, unless well unless, what unless you keep reducing
Speaker 4: interest rates, which the Fed did all the way from
Speaker 4: twenty and two thousand and four, or you create a
Speaker 4: bubble another bubble. Now, it's perhaps worth distinguishing two kinds
Speaker 4: of bubble. What I think in the book I call
Speaker 4: the trader's bubble. That's to say, a boom in asset prices, equities,
Speaker 4: and very important in the United States at that time,
Speaker 4: in the housing market. And doing that creates a kind
Speaker 4: of illusory wealth that gives people the impression that even
Speaker 4: that their future incomes are going to go up sharply,
Speaker 4: and even if their growth of spending is less than
Speaker 4: their expected growth, they're expected very sharp growth of income
Speaker 4: is still faster than the actual growth of income, the
Speaker 4: actual growth of productive potential. A second bubble is in credit,
Speaker 4: where rather than thinking, oh my goodness, I'm spent today,
Speaker 4: I'm going to have to pay back tomorrow, so I
Speaker 4: have less to spend tomorrow, people think, oh, it just
Speaker 4: doesn't matter. I can borrow as much as as I like,
Speaker 4: never going to have to pay it back. And those
Speaker 4: two bubbles in asset prices and in credits were characteristic
Speaker 4: of the US economy from round about two thousand and
Speaker 4: three until the end of two thousand and six in
Speaker 4: the housing market, two thousand and seven in the credit markets,
Speaker 4: the end of the equity market Okay.
Speaker 1: So very brief interruption here. Low interest rates were kept
Speaker 1: too low for too long. We get this kink in
Speaker 1: what should have been a time, a different kind of timeline,
Speaker 1: where these very low interest rates dragged consumption forwards from
Speaker 1: the future in a way that we really shouldn't have allowed.
Speaker 1: So you get too much too early, and that's when
Speaker 1: everything goes wrong, because that begins to turn into bubbles. Right.
Speaker 2: Yeah, And as I understood that, the problem is that
Speaker 2: basically the consumer consumed too much, and then they're coinstantly
Speaker 2: trying to run in the standstill because they haven't to
Speaker 2: catch up with themselves because they've overspent, basically, And the
Speaker 2: only way to get around that is to keep pushing
Speaker 2: the interest rates law and law still, and then you
Speaker 2: get even more misallocation, and then that's what leads to
Speaker 2: the bubbles.
Speaker 1: Yeah, and you create a credit bubble at the same time,
Speaker 1: people get forced into debt because they've pilled their spending
Speaker 1: forwards and they have to borrow to catch up later. Yeah. Well,
Speaker 1: very very difficult, but it did. All these bubbles represented
Speaker 1: effectively the same thing, the pulling ford, pulling back should
Speaker 1: I say, of what should have been future spending and
Speaker 1: futuring future investment. So you're messing around with time. It's
Speaker 1: there what you call an inter temper of dis equilibrium.
Speaker 1: All bubbles represent that pulling forward of stuff that should
Speaker 1: be happening ten to fifteen, twenty years out.
Speaker 4: And that's a big problem for capitalism because what capitalism
Speaker 4: is about the relationship between the present, notably the capital stock,
Speaker 4: and the future, and the market that regulates those relationships
Speaker 4: is the most obviously rigged market of all. Now, it
Speaker 4: may be necessary to rig that market. Central banks may
Speaker 4: be necessary. That's the debate one can have perhaps another time.
Speaker 4: But given that central banks are there and they are
Speaker 4: rigging their market, if they get it wrong, it is
Speaker 4: a potential and in fact an actual disaster for capitalism. Now,
Speaker 4: when one thinks about the crisis in two thousand and eight,
Speaker 4: I think recognize that yes, was irresponsible, greedy, stupid behavior
Speaker 4: on the part of quite a number of financial market
Speaker 4: institutions and players. We can't deny that. But I think
Speaker 4: it's also important to stress that those institutions and players
Speaker 4: were responding to the incentives that the market for time,
Speaker 4: the market for money rigged by the central bank, had
Speaker 4: given them. The central bank needed that irresponsible behavior in
Speaker 4: order to create the pretense that things were going back
Speaker 4: to normal. Having slashed interest rates between two thousand and
Speaker 4: one and two thousand and four, the Fed managed to
Speaker 4: get short rates at any rate back up to something
Speaker 4: like what they considered a normal level by two thousand
Speaker 4: and six. They would not have been able to do
Speaker 4: that without the bubbles, without the irresponsible behavior for which
Speaker 4: they had given the incentives, and one could see a
Speaker 4: repeat of that post crisis. The central banks were concerned
Speaker 4: to try to return turned to normal, and by normal
Speaker 4: they meant a situation in which short rates of interest
Speaker 4: were sort of where they've been in the middle of
Speaker 4: the two thousands and again, in order to do that,
Speaker 4: they had to deliberately induce bubbles.
Speaker 1: Okay, now, the next interesting bit is when we start
Speaker 1: talking about COVID, because this really, or the responses to COVID,
Speaker 1: should we say, the policies around the pandemic rather than
Speaker 1: the pandemic itself, because this is when things really began
Speaker 1: to shift in an extreme direction. As far as far
Speaker 1: as Bernard's is it, so he's that whether whether you
Speaker 1: approve of lockdowns or not of lockdowns, et cetera, it
Speaker 1: became a period when we began to develop even more
Speaker 1: of a fiscal bubble than we had had before, and
Speaker 1: that is where he gets very concerned.
Speaker 2: Well, the interesting things about this is that the the
Speaker 2: in the way, the obvious response and what we got
Speaker 2: after two thousand and eight was basically sovereigns as in
Speaker 2: countries taken on all of the date that had accrued
Speaker 2: in the private sector, and that then just kind of
Speaker 2: like chalk the economy for quite some time, and it
Speaker 2: was COVID that kind of led to, I guess what
Speaker 2: we've got now, which is the kind of very prominent
Speaker 2: fiscal bubble, which I guess I would have expected to
Speaker 2: have happened actually potentially much earlier after two thousand and eight,
Speaker 2: but centers now long that's kind of taken to come
Speaker 2: with fruission.
Speaker 1: A lot of things take longer than you think, and
Speaker 1: then you have an awful lot of people who think
Speaker 1: if something doesn't happen, but then the first year or
Speaker 1: the first year and a half, it's never going to happen.
Speaker 1: A lot of new things are very slow burn. Now.
Speaker 1: A lot of the fiscal difficulties here they stem from
Speaker 1: the beginning of the response to COVID, right. I mean,
Speaker 1: there was the beginnings of a sense that there might
Speaker 1: be a fiscal responsibility underway pre COVID, and then we
Speaker 1: moved into this environment where governments had no choice. Was
Speaker 1: certainly felt that they had no choice to go on
Speaker 1: one of the greatest fiscal splurges ever and one of
Speaker 1: the greatest monetary splurges ever, and we're now suffering from
Speaker 1: the after effects of that. But of course the interesting
Speaker 1: thing being that the deficits aren't coming back to levels
Speaker 1: that you might have expected, So the COVID defics, it'd
Speaker 1: be persisting rather than disappearing.
Speaker 4: Yes, it is. I agree with you that well, given
Speaker 4: the fact of lockdowns, at least the initial lockdowns, it
Speaker 4: would have been socially explosive for the government not to
Speaker 4: support the incomes of those people who've been told sorry,
Speaker 4: you're not allowed to go to work anymore. Whether the
Speaker 4: lockdowns themselves sensible is a big question. I think a
Speaker 4: lot of the evidence since then suggests that they weren't.
Speaker 4: But let's leave that aside. The problem has been the
Speaker 4: problem has been had since then. The extension and the
Speaker 4: repeated nature of lockdowns culcated a sort of feeling that well,
Speaker 4: governments will always bail everyone out whatever goes wrong, not
Speaker 4: just the financial system as they did in two thousand
Speaker 4: and eight, but the ordinary man in the street, if
Speaker 4: you like, the ordinary woman in the street, in a
Speaker 4: whole range of circumstances, and of course I'm sitting here
Speaker 4: in London and Britain is perhaps the prime example of
Speaker 4: a country where people seem to have given up work,
Speaker 4: or a great many people seem to have given up work,
Speaker 4: and absent some man of from heaven. Perhaps I come
Speaker 4: back to that again in a moment. Absent some man
Speaker 4: of from heaven, productivity growth is just going to get
Speaker 4: lower and lower. Regulation, high taxation, the transformation of the
Speaker 4: education system into indoctrination, camps in political correctness, a seeming
Speaker 4: unwillingness to work on the part of a large part
Speaker 4: of the population. None of those are conducive to productivity growth,
Speaker 4: or indeed even to the maintenance of the level of
Speaker 4: productive potential. And in those circumstances, budget deficits and simply
Speaker 4: not going to come down. And that the bubbles we
Speaker 4: saw in the second half of the nineties, the bubbles
Speaker 4: we saw in the two thousands, and again during COVID
Speaker 4: induced by monetary policy and now being supplemented by a
Speaker 4: public finance bubble. It is not possible for people to
Speaker 4: spend in the future what they think their incomes will
Speaker 4: be unless that public finance bubble continues and debt ratios
Speaker 4: grow and grow and grow until there is inevitably a
Speaker 4: physical crisis. And the risk is that the physical crisis
Speaker 4: will be met by a renewed resort to bond buying
Speaker 4: by central banks, and of course the outcome of that,
Speaker 4: in the circumstances positive, will be in flame and conceivably
Speaker 4: even hyperinflation. So it's not a pleasant picture.
Speaker 1: Do you expect to see inflation fallback down again, do
Speaker 1: you expect to see rates follow them down? Or do
Speaker 1: you expect an outbreak of common sense among the central
Speaker 1: bankers of the world.
Speaker 4: Common sense won't be enough. And I tried to explain
Speaker 4: why part of the inflation that we've seen since twenty
Speaker 4: twenty one was indeed not just transient and it would
Speaker 4: just go away, but actually transitory in the sort of
Speaker 4: technical statistical sense of the term that the price that
Speaker 4: goes up would come back down again. And the reason
Speaker 4: part of the inflation was to do with the disruption
Speaker 4: of production, the disruption of supply chains, very sharp increases
Speaker 4: in the prices of a whole range of raw and
Speaker 4: the dustrial materials, and it was reasonable to expect from
Speaker 4: let's say, from the starting point of the autumn of
Speaker 4: twenty twenty, that some of those prices would come back
Speaker 4: down again. And indeed a little bit of that has happened,
Speaker 4: only a little bit, but it's happened with goods. Prices
Speaker 4: in the US, for instance, have been falling from about
Speaker 4: the middle of last year. However, that's what the transitory
Speaker 4: nature of inflation is. What would have happened if the FEDS,
Speaker 4: if these central banks hand indulged in the massive spurge
Speaker 4: of bond buying in which they did indulge during the pandemic.
Speaker 4: They created super tight labor markets, very low rates of unemployment,
Speaker 4: massive numbers of vacancies are worse than efficiency of the
Speaker 4: labor market in terms of matching vacancies, and the unemployed
Speaker 4: inevitably created inflation, which is not transitory. Now what we've
Speaker 4: started to see again, let me focus on the US
Speaker 4: because that tends to lead and to direct everything else is.
Speaker 4: But the indications are that unless the economy weakens and
Speaker 4: weakens quite soon and quite significantly. The non transit chair
Speaker 4: elements of inflation are not going to go down any further,
Speaker 4: and they could even start going up again, and that
Speaker 4: is a big problem the same. I think it's true
Speaker 4: of Britain for instance. Now it's a big problem for
Speaker 4: the central banks because they're looking at an inflation rate
Speaker 4: which may not go down any further. It's still significantly
Speaker 4: above target, much more so here in Britain than this
Speaker 4: is in the United States. Of course, some tentative indications
Speaker 4: of a little bit of weakening in the economy. Now
Speaker 4: what do they do. Do they say, Oh, we think
Speaker 4: inflation rate is going to continue to come down and
Speaker 4: the economy, like we could a bit, let's cut rates.
Speaker 4: If they do that quickly, and if they do that substantially,
Speaker 4: then I think we're going to be off to the
Speaker 4: races again in terms of inflation. If they don't do
Speaker 4: it will be continued and aggravated weakening of real economies.
Speaker 4: I think the idea that with the notions of immaculate
Speaker 4: disinflation and self landing are simply wrong. Unfortunately, that's not
Speaker 4: what's going to happen.
Speaker 1: Okay, Now, this bit, John, I find this bit really
Speaker 1: interesting because there is this whole question of to what
Speaker 1: extent do central banks have self knowledge or have they
Speaker 1: developed self knowledge? Are they beginning to understand what they're doing?
Speaker 1: How long term are they beginning to think in terms
Speaker 1: of their models and their ideas. And we know that
Speaker 1: a Bank of England, for example, are beginning to question
Speaker 1: their models, and we know that their forecasts have been
Speaker 1: absolutely awful. Interesting. I was reading something the other day
Speaker 1: looking at independent forecasts of interest rates and central bank
Speaker 1: forecasts of interest rates, and interestingly, the independent ones, while
Speaker 1: also awful, marginally better than the central bank ones, which
Speaker 1: begs the question is why anyone ever listens to central
Speaker 1: banks at all? Because models are even worse than the
Speaker 1: private sector models. So I have this conversation with Bernard
Speaker 1: about whether we're beginning to see some change there in
Speaker 1: and I feel a little change and a little culpability.
Speaker 1: But but Bernard, really he just doesn't. He's not giving
Speaker 1: any quarter here, is he.
Speaker 2: No, he's definitely not having the optimistic view. I suppose
Speaker 2: they'd probably be more endured camp from the point of
Speaker 2: view that I think it's clear that there are questions
Speaker 2: being asked. I think that there are a lot of
Speaker 2: central bankers who are aware that their power is actually
Speaker 2: probably reaching far beyond what it should in a democratic
Speaker 2: society as well, although to be fair, a lot of
Speaker 2: those ones used to be in the MPC, and I
Speaker 2: don't hear that kind of talk from the ones who
Speaker 2: are currently in the NPC. But I think part of
Speaker 2: the problem with central banks in general is that you
Speaker 2: have to question whether the institution and its current form
Speaker 2: should exist at all. I mean it goes back to
Speaker 2: that point we were making earlier about if the industry
Speaker 2: is the most important number in markets, then why is
Speaker 2: it being set by a small group of people in
Speaker 2: a room somewhere. I mean, it is effectively central planning
Speaker 2: of you know what we're arguing is the most important
Speaker 2: number in finance. So why is the kind of like
Speaker 2: the lynchpin of the capitalist economy basically a classic example
Speaker 2: of central planning. That's kind of a philosophical issue. Should
Speaker 2: they even exist?
Speaker 1: Yeah? Yeah, And you know what, John, you've gone off topics. Yes,
Speaker 1: but then it's totally interesting. So I'm gonna leave that.
Speaker 1: I'm going to let you get away with that one.
Speaker 1: Like right back to Bernard, do not have a sense Bernard.
Speaker 1: But I am getting that the central bankers are beginning
Speaker 1: to understand what they have done, and that they are
Speaker 1: looking at very very very long term interest rate trends
Speaker 1: and thinking for themselves, we need to find a way
Speaker 1: to keep rates up there with five thousand dear trends
Speaker 1: and maybe trying to hang in there around four and
Speaker 1: five percent, as opposed to wanting to go straight back
Speaker 1: down again. We know, for example, that the Bank of
Speaker 1: England is questioning their model. Obviously they're questioning with the
Speaker 1: wrong people, and they look at their models to already
Speaker 1: agree with that model. But there's definitely a sense of questioning,
Speaker 1: how did we let this happen? What have we done wrong?
Speaker 1: Because you know, while they might present themselves as being
Speaker 1: victims of global circumstances, I think inside central banks there
Speaker 1: is definitely an awareness that they hold a degree of culpability.
Speaker 4: I think you're being a little bit optimistic. The point
Speaker 4: about the canonical model is that it says you the
Speaker 4: sharks are both in a explicable YEP and unpredictable. You
Speaker 4: can't predict the next anity, you can't explain them expost.
Speaker 4: Now that's been a tenetive central bank thinking for twenty
Speaker 4: five years. How long can they continue to do that
Speaker 4: in the face of what has been a mess. They
Speaker 4: will hope that they get a self landing. They will
Speaker 4: hope that things go back to normal again. There hasn't
Speaker 4: been the sort of questioning, either of macroeconomic orthodoxy or
Speaker 4: of central bank practice that there was in the nineteen thirties.
Speaker 4: After things have very obviously gone wrong, there's a whole
Speaker 4: new paradigm. Not necessarily a better paradigm, but there's a
Speaker 4: whole new paradigm. There's a ferment of intellectual activity in economics,
Speaker 4: which maybe it's passed me by, but I'm not that
Speaker 4: radical examination of the foundations of the economic theory that
Speaker 4: drives central banks is happening.
Speaker 1: All right, Maybe not, but there must be an awareness.
Speaker 1: And one of the things that you say a lot
Speaker 1: in the book is you make the point over and
Speaker 1: over again that if we can't deliver for the young,
Speaker 1: we will lose capitalism and democracy along the way. The
Speaker 1: young and much of the world are disenchanted by capitalism's
Speaker 1: the parent failure to liver for them. They're beguiled by
Speaker 1: socialism promises and cruelly voish by its fake morality and
Speaker 1: elsewhere in the book you say that if we can't
Speaker 1: respect the public's wishes to make capitalism something that brings
Speaker 1: benefit to everybody rather than something that is equated with
Speaker 1: bringing markets and making the rich richer, democracy nor capitalism
Speaker 1: we can survive. These are very big things. And central banks,
Speaker 1: as much as governments, are surely aware that the way
Speaker 1: that we're running economies at the moment is not good
Speaker 1: for the many. It's in the main good for the few.
Speaker 1: We've corrupted capitalism to the point where we're on the
Speaker 1: edge of bringing it down. So with that awareness, one
Speaker 1: likes to think that between them, elected governments and central
Speaker 1: banks may perhaps do something very pessimistic that anything will
Speaker 1: be done, and if it isn't, we end up in
Speaker 1: a world that is either either communist or hyperinflationary.
Speaker 4: Well, governments like to think that they will do things.
Speaker 4: It's quite hard to think of anything terribly positive that
Speaker 4: Western governments have done over the past few years. It's
Speaker 4: quite hard to think of anything that, for instance, the
Speaker 4: present British government has done at all. The idea that
Speaker 4: one needs to capitalism is around, but unfortunately, the predominated
Speaker 4: idea for rebooting capitalism is essentially corporatist. It's the ideas
Speaker 4: of what one might call Davos man. Davos's man appears
Speaker 4: to have an enormous degree of control would be the
Speaker 4: wrong word, but influence over elected governments. Populations are increasingly
Speaker 4: disenchanted with their elected governments, and we're seeing everywhere a
Speaker 4: swing towards what one used to call populist ideas, but
Speaker 4: I think are rather more worrying than populist ideas in
Speaker 4: the present. I just don't see a willingness even and
Speaker 4: certainly not an ability on the behalf of governments to
Speaker 4: even attempt to put things right.
Speaker 1: Okay, So, Bernard, what I'm going to do is I'm
Speaker 1: going to put you in charge of the world right
Speaker 1: now for ten years. Okay, I mean that's quite a gift, right.
Speaker 4: Or a curse?
Speaker 1: What ten years is long enough?
Speaker 4: Years?
Speaker 1: Long enough? You have full control for ten years. This
Speaker 1: is very democratic. But you know, let's go with it.
Speaker 1: Let's go with it. What do you do to make
Speaker 1: this right? What do you do to get it out
Speaker 1: of this environment where we have this huge amount for
Speaker 1: you call a Losory wealth, where we've pulled the wealth
Speaker 1: of the future forward into the present, where we've got
Speaker 1: in first. Rates simply don't reflect the way economies should
Speaker 1: be run. Where we have massive debt and deficit problems
Speaker 1: in every Western government, and we have stagnating productivity and
Speaker 1: angry populations. What would you do to make this okay?
Speaker 1: And I know that you could go back and say, well,
Speaker 1: I wouldn't have started where they did in the nineteen nineties,
Speaker 1: and that would be fair.
Speaker 4: But here we are, here we are what do we
Speaker 4: do from here? Well? I think there are two essential
Speaker 4: elements of what should be done. One is, at first
Speaker 4: the recognition which I perhaps you to see Marin Premps,
Speaker 4: but I don't yet of what has gone wrong intellectually,
Speaker 4: if you like, with the macroecoing model. And second, it
Speaker 4: requires a radical program of de rigging of markets, taking
Speaker 4: control away or influencing away from danbos Man and giving
Speaker 4: you back to markets. Now, I'm not generally regarded as
Speaker 4: being into the eastern left wing, and I'm not, but
Speaker 4: I think that the rather left wing Nobel laureate Joe
Speaker 4: Stiglitz had a lot of sensible things to say about
Speaker 4: the how one can rig d rig markets. My way
Speaker 4: of doing it would perhaps be rather a bit different
Speaker 4: from his. There needs to be deregulation, or perhaps more precisely,
Speaker 4: there needs to be a change in regulation to avoid
Speaker 4: regulatory capture by the nomenclatura as I think one could
Speaker 4: one can call it. There needs to be a shift
Speaker 4: in the taxation system away from disincentivizing thrift, enterprise initiative,
Speaker 4: sensible commercial risk taking.
Speaker 1: If you were doing a budget right now and you
Speaker 1: could make one big tax change to existing taxes, I
Speaker 1: know you have a I know you have a thought
Speaker 1: on a new tax, but on existing taxes. But what
Speaker 1: would it be one thing you could.
Speaker 4: Do onistic taxes. Given the state of the public finances
Speaker 4: and given the difficulty of cutting public expenditure, although that
Speaker 4: certainly needs to be done, one can't just cut a
Speaker 4: tax without an offset somewhere else. And you mentioned a
Speaker 4: possible upset, but let's leave them aside from the moment.
Speaker 4: I would cut high rates of income tax, not just
Speaker 4: a single tax rate that that can solve those problems, right,
Speaker 4: But I would stress that, you know, I mean, there
Speaker 4: was a lot of what was right in the Trust
Speaker 4: Quarteng experiment. There were things that were disastrously wrong with it.
Speaker 4: I think what was disastrously wrong apart from the very
Speaker 4: hand fisted presentation of the ideas was a failure to
Speaker 4: recognize that budget deficits have gotten somehow got to be
Speaker 4: brought down.
Speaker 1: Okay, I just want to interrupt at this point with
Speaker 1: Bernett talking about the importance of cutting the operates of
Speaker 1: income tax. And it's interesting to look at the burden
Speaker 1: that top rate taxpayers are paying at the moment, the
Speaker 1: top one percent of the top ten percent, because obviously
Speaker 1: the top rate is significantly lower than it has been
Speaker 1: at important points in the past, but it's still the
Speaker 1: burden they're carrying is enormous. So the top ten percent
Speaker 1: of taxpayers back in nineteen seventy eight, seventy nine, these
Speaker 1: are ifs numbers, by the way, nineteen seventy eight seventy nine,
Speaker 1: the top ten percent, we're paying thirty five percent of
Speaker 1: all income tax. Sounds quite high, right in twenty three
Speaker 1: twenty four, it's sixty percent. Right, the top one percent
Speaker 1: we're paying eleven percent. Back in nineteen seventy eight seventy nine.
Speaker 1: Today twenty three, twenty four they are paying twenty nine percent.
Speaker 1: So what you've got there is a big shift in
Speaker 1: the burden of income tax to the people at the
Speaker 1: very top of the tree. You may think that's okay,
Speaker 1: that's fine. It's just different. And some of it, of course,
Speaker 1: is about income inequality, because that may have changed in
Speaker 1: the interviewing period, But a lot of it, an awful
Speaker 1: lot of it, is policy choices. So that's that's worth saying,
Speaker 1: given that this is one of Bernard's suggestions. Okay, so
Speaker 1: those things now that all sounds and people are going
Speaker 1: to listen to this and they're going to say, well,
Speaker 1: that's just that's just right wing stuff. This is just
Speaker 1: about making live easier for the rich, which of course
Speaker 1: is the opposite of what you intend. But the other
Speaker 1: thing that you suggest is a new tax that is
Speaker 1: designed to bring the general population back on side by
Speaker 1: showing that despite introducing say, deregulation and lower income tax
Speaker 1: rightly or corporate tax rates, etc. Which might feel like
Speaker 1: it's working against them, there's another element to what you
Speaker 1: suggest that should make it clear that that that's not
Speaker 1: the case. What is that tax on the tax?
Speaker 4: The suggestion is that one has to tax what I've
Speaker 4: called illusory wealth, and by illusory wealth, I mean wealth
Speaker 4: whose possession reduces sustainable few uture consumption possibilities for everyone else.
Speaker 4: And that's exactly what bubbles do. They create apparent wealth
Speaker 4: for those who hold the stocks, or the houses, or
Speaker 4: the most egregiously of all, perhaps crypto assets, and they
Speaker 4: don't increase future productive potentials. So any attempt by the
Speaker 4: holders of wealth to spend their wealth means there's less
Speaker 4: to go around for everyone else. And that's what I
Speaker 4: mean by illusory and politically, I'm not talking about morals here.
Speaker 4: Politically unacceptable wealth and there needs to be a way
Speaker 4: of taxing that. And the way I propose is a
Speaker 4: tax on unrealized bubble gains. And let me stress that
Speaker 4: is not a wealth tax. It's certainly not a tax
Speaker 4: on real wealth. It's a tax on illusory bubble gains. Now,
Speaker 4: how would that operate? All taxation requires accounting effort, This
Speaker 4: suggestion would also require a little bit, not a great deal,
Speaker 4: of economic effort. That's to say, there would be The
Speaker 4: tax would be on the difference between what those assets
Speaker 4: would have been worth had their valuation, as approximated roughly
Speaker 4: by price ownings ratios for equities or price rent ratios
Speaker 4: for houses, for instance, what the value would have been
Speaker 4: in the absence of a bubble, and taxing the difference
Speaker 4: between that and the present value over a holding period.
Speaker 4: If you bought something last year, you wouldn't be taxed
Speaker 4: on again. Since nineteen ninety five you don't be taxed
Speaker 4: on again. If there was any a bubble gain over
Speaker 4: the past year, now, that would not be a tax
Speaker 4: on real wealth. It could be combined with reductions in taxes.
Speaker 4: Are this incentives to the creation of real wealth? And
Speaker 4: it would have to go. It could only really work
Speaker 4: if there was first of all, a recognition of the
Speaker 4: faults of the present model, and secondly an improvement in
Speaker 4: productivity growth. You need all the other things together, all
Speaker 4: the other things we talked about, the deregulation, the education,
Speaker 4: the de ringing of markets, and so on. And I
Speaker 4: have to say regretfully that it's quite hard to imagine
Speaker 4: the set of political circumstances that would allow all these
Speaker 4: things to come together. The taxation of unrealized bubble gains,
Speaker 4: the de rigging of market, the switch and taxation, the
Speaker 4: improvement in education systems, and so on. I can't claim
Speaker 4: to be optimistic, but one has to try. And the
Speaker 4: suggestion I put forward, I think, were it possible for
Speaker 4: it to happen, and that's the question for politicians to
Speaker 4: decide as much as they're even more than economists would
Speaker 4: in combination with a most sensible macroeconomic management policy model,
Speaker 4: would help get the tons of things. Now, I'm pessimistic
Speaker 4: about that.
Speaker 1: Okay, John, you're not a fan of wealth taxes, what
Speaker 1: about this one? It's not as Bannard describes it. It's
Speaker 1: not a tax on actual wealth. It's a tax on
Speaker 1: illusory wealth. Wealth you shouldn't have anyway wealth. It is
Speaker 1: ill Goshian.
Speaker 2: I mean, like, I approve in theory, but I don't
Speaker 2: see how you even begin to do this in a
Speaker 2: practical basis. You know you're saying that. I mean, there's
Speaker 2: a massive argument about whether you can even tell if
Speaker 2: something in a bubble or not. So how you I mean,
Speaker 2: and people always talk about the legal battles that would
Speaker 2: ensure we aligned value tax for example, I mean, this
Speaker 2: is like that on steroids is how do you say,
Speaker 2: which chunk of this paper profit is not a real
Speaker 2: paper profit? So I'm afraid I just think it's a
Speaker 2: complete annoying starter.
Speaker 1: Yeah, I'm afraid. All right. It's a great idea, but
Speaker 1: one that that simply won't work. I can't see how
Speaker 1: it could work anyway, although one must try, As Bernard says,
Speaker 1: one must try.
Speaker 2: I can think it easier things to have a goat.
Speaker 4: Is there another way? I mentioned manner from Heaven a little.
Speaker 1: Earlier, the optimistic of the podcast.
Speaker 4: Could it be, It's a question I put to myself,
Speaker 4: Could it be that AI will provide that manner from heaven?
Speaker 4: It boosts rates of productivity, growth and potential, but in
Speaker 4: such a way that it could, so to speak, validate
Speaker 4: ex post the levels of asset valuations which are currently illusory. Well, yes,
Speaker 4: that is that is a logical possible ability, and one
Speaker 4: very much hopes that it will happen. But stress again that,
Speaker 4: however important and useful and potentially by itself game changing,
Speaker 4: AI is is fighting against the tide.
Speaker 1: If we were going to go back to what we
Speaker 1: were talking about earlier and we're saying, look here there's
Speaker 1: a fabulous new technology in AI. This is something really
Speaker 1: interesting with the potential to massively change productivity, then under
Speaker 1: the terms of the discussion we're having earlier about interest
Speaker 1: rates and innovation, interest rates should be rising right now.
Speaker 4: Yeah, Would it be a rerun of the experience the
Speaker 4: mid nineteen nineties, And that's a very applesite question. Well,
Speaker 4: I think if AI were the only things that were happening,
Speaker 4: and there was an expected improvement in a significant expected
Speaker 4: improvement in overall productivity growth in the economy, then real
Speaker 4: interest rate should be going up. They should be going
Speaker 4: up to match and expected increase in the bridge of
Speaker 4: return on investment. But it's not the only thing that's happening.
Speaker 4: And a big difference from ninety nine five is that
Speaker 4: we are not starting from a position of intertemporal equilibrium.
Speaker 4: And yes, one wishes, what could go back to a
Speaker 4: situation like nineteen ninety five and have AI, and that
Speaker 4: would be and that we could have the productivity improvement
Speaker 4: without the mistakes that Greenspan may without the bottles and someone.
Speaker 4: But we're not starting from nineteen ninety five. We are
Speaker 4: starting from here, as he reminded me a little while ago,
Speaker 4: and that does complicate things quite extensively. It becomes a
Speaker 4: very difficult question, indeed, to sort out what should be
Speaker 4: happening to real interest rates in these circumstances. There are
Speaker 4: questions of fact or future fact. How much difference is
Speaker 4: AI actually going to make? Will it be more than enough,
Speaker 4: just enough not to counteract all the forces that are
Speaker 4: tending towards low rates of productivity growth. First of all,
Speaker 4: we don't know. We also have to take account of
Speaker 4: the fact that, unlike the innovations of the mid nineteen
Speaker 4: ninety the innovations came a little bit earlier, but the
Speaker 4: implementation of those innovations in the mid nineteen nineties. Those
Speaker 4: innovations largely involve the creation of new products. You know,
Speaker 4: known that how smartphones and everything that goes along with them.
Speaker 4: AI today. My understanding of it may not be as
Speaker 4: correct as it should be, but my understanding of it
Speaker 4: is that AI involves new processes for doing the same
Speaker 4: things with fewer people. That's a big difference. The optimism
Speaker 4: of the second half of the nineties was I certainly
Speaker 4: would have been widespread, not right at the beginning, but
Speaker 4: as people realize what was going on, and partly because
Speaker 4: they're misled by speculator booms. Admittedly, there was a feeling
Speaker 4: that things were getting better and potentially getting better for everyone.
Speaker 4: That is not the case with AI. There are a
Speaker 4: lot of people who, despite the fact that the overall
Speaker 4: economy might improve, are going to worry about their jobs.
Speaker 1: Can, I ask you, But it under these circumstances and
Speaker 1: AI is interesting and exciting. There are lots of interesting
Speaker 1: certain things around. But we also have valuations at bizarre levels.
Speaker 1: We have all the problems that we've talked about. What
Speaker 1: is the ordinary investor to do? Is there any way that,
Speaker 1: under the circumstances that you see over the next couple
Speaker 1: of decades, we can preserve our wealth. Obviously you don't
Speaker 1: want everyone to preserve their wealth. I get that. But
Speaker 1: ordinary listeners what can they do?
Speaker 4: Well? If one thinks that the ultimate outcome is going
Speaker 4: to be some sort of socialist economy, then the thing
Speaker 4: to do is to be on the right side of
Speaker 4: the people who've been running it. We can see that
Speaker 4: happening already. If one thinks the outcome is going to
Speaker 4: be hyperinflation, then the traditional hedges I think have some
Speaker 4: value gold in particular. Does crypto do that? You probably know.
Speaker 4: I don't often agree with the ECB, but I do
Speaker 4: agree with an ECB research paper that came out last
Speaker 4: week that said fair value for bitcoin, for example, is zero.
Speaker 4: The bitcoin craze risks bankrupting a lot of people while
Speaker 4: making other people very rich if they get out in time,
Speaker 4: So I wouldn't recommend that. I think one does come
Speaker 4: back to gold as an inflation hedge. There is I
Speaker 4: think there's still some way to go in AI related stocks.
Speaker 4: They've gone up an awfully long way and they look
Speaker 4: very highly value. But the same was true of the
Speaker 4: new technology stocks, or not all of them, some of
Speaker 4: them to go bus of course, but some of the
Speaker 4: new technology stocks of the nineties. So you know, invest
Speaker 4: in productivity growth if you think that's going to be there.
Speaker 4: Invest in gold if you think that there's no way
Speaker 4: out other than inflation. Get on the right side of
Speaker 4: the people who are going to be on power if
Speaker 4: you think we end up with an even more corporate system,
Speaker 4: socialized system.
Speaker 1: Now, the question I normally ask at the end of
Speaker 1: this podcast is would you choose gold or bitcoin over
Speaker 1: a ten year period? But I answered that one, so
Speaker 1: I don't need to ask that one. But thank you
Speaker 1: so much. That was fascinating. Thanks for joining us today
Speaker 1: and Mary listeners. Listeners read the book. So Bernard is
Speaker 1: not a fan of bitcoin, John, I don't ask him
Speaker 1: about bitcoin and gold here because I think by the
Speaker 1: end we can kind of get given that he says
Speaker 1: the bitcoin craze. We're bankrupting a lot of people while
Speaker 1: making other people very rich if they get out in time.
Speaker 1: So I think he comes back to gold as an
Speaker 1: inflation hedge, and John it kind of looks like a
Speaker 1: few other people are beginning to think of it like
Speaker 1: this as well. We've seen gold begin to break out,
Speaker 1: We've seen it hit new highs. We know that a
Speaker 1: lot of the central banks have been buying significant amounts
Speaker 1: of gold, which of course takes that gold out of
Speaker 1: the market because they're not traders, they're just long term buyers.
Speaker 1: We have seen outflows out of gold ETFs, which means
Speaker 1: that retail buyers haven't been quite so enthusiastic as central
Speaker 1: bank buyers and physical buyers in the emerging markets, for example.
Speaker 1: But nonetheless, even with the outflows from ETF the gold
Speaker 1: price is on the up, which is kind of interesting
Speaker 1: in itself, isn't it.
Speaker 2: Yeah, And I mean if you think that to me,
Speaker 2: that implies that the markets either think the monetary policy
Speaker 2: is going to remain loose or the inflation is going
Speaker 2: to mean high held dine central banks expect, which is
Speaker 2: basically the same thing. So in a way that they're
Speaker 2: sort of backing Balan's argument. And that's I guess as
Speaker 2: the argument comes, don't either ye s inflation or a
Speaker 2: productivity medical And that's there isn't really any other option
Speaker 2: except that. So holding some gold as a hedge seems
Speaker 2: like a good idea.
Speaker 1: Okay, So I think we can just sum the whole
Speaker 1: thing up with a wholesome gold pray for a productivity miracle.
Speaker 1: Roll on, AI, let's get that energy going. Somebody builds
Speaker 1: some small modular reactors.
Speaker 2: Oh, fusion.
Speaker 1: That about the size of it, yep, fusion. Yeah, Thanks John,
Speaker 1: Thanks for listening to this week's Maren Talks Money. We'll
Speaker 1: be back after the Easter weekend. In the meantime. If
Speaker 1: you like us show, rate, review, and subscribe wherever you
Speaker 1: listen to your podcasts, or if you want to get
Speaker 1: in touch, please do email us at Meren Money at
Speaker 1: Bloomberg dot net. We've seen your emails and we're working
Speaker 1: through the guest suggestions. We hope we'll get some of
Speaker 1: those fabulous sounding people on. This episode was hosted by
Speaker 1: me maren' umset web. It was produced by some Sosiety.
Speaker 1: Additional editing by Rishie Bujakol and special thanks to Bernard
Speaker 1: Connolly and as ever John Steppeck. Thank you John,