WEBVTT - Why Governments Won’t Let Inflation Go Away 0:00:00.280 --> 0:00:04.640 Hi, John, Now listen, we are talking just after the 0:00:04.640 --> 0:00:07.360 Bank of England has raised interest rates brainnother half a 0:00:07.360 --> 0:00:09.720 percent to take them to four percent, which seems kind 0:00:09.720 --> 0:00:12.360 of okay, right, four percent feels like a normal kind 0:00:12.360 --> 0:00:14.720 of range for interest rates, all other things being equal, that, 0:00:14.760 --> 0:00:17.480 of course, all other things that are not equal. But nonetheless, 0:00:17.520 --> 0:00:21.160 if safe, for example, inflation was somewhere around the Bank 0:00:21.160 --> 0:00:23.960 of England target of two percent, then you would expect 0:00:24.040 --> 0:00:26.439 interest rates to be about four percent. The fact that 0:00:26.640 --> 0:00:29.040 inflation is around tempercent, we'll put that one side at 0:00:29.040 --> 0:00:31.520 the moment. This first my progress, right, Yeah, it's nice 0:00:31.560 --> 0:00:36.879 to get away from zero's. It feels somewhere approaching something, 0:00:37.560 --> 0:00:41.520 getting towards normality. And if inflation actually does come down, 0:00:42.680 --> 0:00:45.960 obviously it's going to come down next year and next year, 0:00:46.640 --> 0:00:49.800 but if it does kind of stay around maybe four 0:00:49.880 --> 0:00:51.920 or five percent in the long run, then the Bank 0:00:51.960 --> 0:00:55.320 England doesn't have that much although it should. I mean, 0:00:55.360 --> 0:00:59.360 obviously it's not planning to reads them much further at 0:00:59.400 --> 0:01:03.160 all effort all actually, but we'll see, and certainly not 0:01:03.160 --> 0:01:05.520 planning to raise them above inflation, because you know that 0:01:05.560 --> 0:01:11.960 would be crazy and old fashioned. But it does mean 0:01:12.480 --> 0:01:15.240 it does mean that if we have an even vaguely 0:01:15.280 --> 0:01:17.840 consumer phacing bank, we should be able over the next 0:01:17.840 --> 0:01:20.800 few months, just like getting proper interest on our deposits, 0:01:20.800 --> 0:01:23.759 not more than inflation. Obviously isn't a real return on cash, 0:01:24.040 --> 0:01:25.840 but a return on cash the less. Yeah, and I 0:01:25.840 --> 0:01:28.160 mean there's quite a few fix Street boinds know that 0:01:29.040 --> 0:01:31.119 you don't alsus have to lock up for that long. 0:01:31.200 --> 0:01:34.360 You get over four per cent, may even be high 0:01:34.400 --> 0:01:37.440 on the um. And then there's a few accounts you 0:01:37.480 --> 0:01:40.080 can get stuff. I mean, obviously with the Continent account 0:01:40.160 --> 0:01:42.560 you can't see really white money in it, but I'm 0:01:42.600 --> 0:01:45.400 sure I saw one that was picking up above sex 0:01:45.480 --> 0:01:49.280 or seven percent actually recently, I don't believe you. Now listen, 0:01:49.320 --> 0:01:53.080 you can get above four percent on UK equities as well, right, 0:01:53.120 --> 0:01:54.840 And one of the great things about UK equities is 0:01:55.040 --> 0:01:59.040 that they are usually dividend paying and not particularly expensive. 0:01:59.120 --> 0:02:00.720 And I put up a chance the other day on 0:02:00.960 --> 0:02:03.640 twitship that everyone got right across about pointing out that 0:02:03.760 --> 0:02:09.120 in capital terms, real the UK market hasn't actually moved 0:02:09.160 --> 0:02:11.760 since the nineteen sixty seven, which meant everyone go, oh, 0:02:11.800 --> 0:02:13.880 you can't like this, You've forgotten about dividends, and I 0:02:13.880 --> 0:02:15.560 haven't got about dividends. I was just putting up an 0:02:15.600 --> 0:02:18.280 interesting chart and people didn't find it interesting. I found 0:02:18.280 --> 0:02:21.120 it quite interesting. But nonetheless, you've had a perfectly reasonable 0:02:21.120 --> 0:02:23.760 return from the UK market thanks to dividends, right, Yeah. 0:02:23.760 --> 0:02:26.160 And I think this is actually really important because and 0:02:26.200 --> 0:02:28.240 that's it's really important in the context of a very 0:02:28.240 --> 0:02:31.639 specific thing today, which is a Shell obviously just reported 0:02:31.680 --> 0:02:34.959 its results as well, and it's made draka profits blah 0:02:35.000 --> 0:02:38.240 blah blah, and of course everyone is kind of disgusted, appalled, 0:02:38.480 --> 0:02:40.440 blah blah, et cetera. But this and one of the 0:02:40.520 --> 0:02:43.760 things they always highlight is it pays out there's something 0:02:43.919 --> 0:02:47.280 of dividends to share holders. But if I called up 0:02:47.320 --> 0:02:50.359 a chart the Royal Dutch Shall over the past ten years, 0:02:51.520 --> 0:02:55.280 if you include dividends re invested, it has made exactly 0:02:55.320 --> 0:02:57.120 as much as if you put your money and a 0:02:57.160 --> 0:03:00.840 foot who shared tracker. If you don't rest the dividends, 0:03:00.880 --> 0:03:04.440 the capital gain is less than six percent, So I 0:03:04.440 --> 0:03:07.280 think that's a good measure of Look, the dividends are 0:03:07.360 --> 0:03:10.400 part of the reward to shareholders for owning the stock. 0:03:10.480 --> 0:03:14.120 They are not actually egregious and they are not, you know, 0:03:14.480 --> 0:03:18.760 flying ahead of every other company in the country. Um. 0:03:18.840 --> 0:03:20.960 So that that's kind of like I think one could 0:03:21.000 --> 0:03:23.960 measure that helps to separate the can effect from the 0:03:24.000 --> 0:03:29.880 fiction side. This argument about whether kind of energy companies, etcetera. 0:03:29.960 --> 0:03:33.440 Are making profits that are kind of over the top. Um, 0:03:33.800 --> 0:03:36.320 and you know, the discussion about wind fall taxes, etcetera. 0:03:36.800 --> 0:03:39.560 Greedy shareholders. I mean that's the story, isn't it. You 0:03:39.680 --> 0:03:42.800 greedy shareholders. You shouldn't want those dividends. Everyone forgets that 0:03:42.840 --> 0:03:45.680 those dividends are paying their pensions. Yeah. And also those 0:03:45.720 --> 0:03:48.320 greedy shareholders would have been like far, far, far better 0:03:48.440 --> 0:03:51.280 off by being invested in the SMP five hundred for 0:03:51.440 --> 0:03:55.560 those ten years. So we should be we should be grateful, 0:03:55.680 --> 0:03:59.800 grateful to those greedy shareholders exactly, these sacrificed returns and 0:04:00.200 --> 0:04:01.760 wait for this. I'm gonna wait for the thank you 0:04:01.880 --> 0:04:06.600 letters now. In terms of anything but the US, which 0:04:06.640 --> 0:04:08.920 is kind of where most investors are beginning to get 0:04:08.960 --> 0:04:11.240 to these days. One of the things that I'm talking 0:04:11.240 --> 0:04:15.120 about in the podcast that you're about to hear fantastic 0:04:15.160 --> 0:04:17.839 conversation with with Russell Napier or other. He's fantastic. I 0:04:17.920 --> 0:04:19.480 just sit there as usual, but you know, he does 0:04:19.480 --> 0:04:22.240 say some really interesting things. One of the things he 0:04:22.320 --> 0:04:26.840 points out is that in pretty much every environment similar 0:04:26.839 --> 0:04:29.240 to the one we have today i inflationary or one 0:04:29.839 --> 0:04:33.120 jammed with the financial oppression measures, the best way to 0:04:33.200 --> 0:04:36.039 invest is to invest in stuff that is cheap. And 0:04:36.200 --> 0:04:40.520 outside of the US almost everything is reasonably prized. You know, 0:04:40.560 --> 0:04:43.120 look at the the MSCI World Index if you take 0:04:43.120 --> 0:04:46.120 out the US, and again it's barely budged for a decade. Yeah, 0:04:46.160 --> 0:04:48.760 I mean, I think this is really good. It's it's 0:04:48.760 --> 0:04:51.279 actually I mean, this is the nice thing that interest 0:04:51.520 --> 0:04:55.800 is going up. We've get something closer to normal environment. 0:04:55.960 --> 0:04:58.239 We are you can also put your money, are we 0:04:58.200 --> 0:05:01.960 we haven't a or in sort of like really weird 0:05:02.040 --> 0:05:05.240 conditions lasting forever, which is what you had to do, 0:05:05.480 --> 0:05:09.200 you know, maybe five years ago. Um. And I think, 0:05:09.240 --> 0:05:11.320 I mean, one of the things I've been writing about 0:05:11.360 --> 0:05:16.279 this morning the zou Ki equity income investment trusts, and 0:05:16.360 --> 0:05:18.920 one of the brokers was out talking about basically how 0:05:19.200 --> 0:05:22.400 cheap they look, and it wasn't exactly I kind of 0:05:23.560 --> 0:05:26.919 is it. The UK might quite possibly be quite a 0:05:26.960 --> 0:05:29.520 good place to be this year. So it's not like 0:05:29.560 --> 0:05:32.240 a ringing endorsement. God, it's hard for people to It's 0:05:32.279 --> 0:05:34.320 hard for people to say this isn't it after all 0:05:34.360 --> 0:05:37.000 these years are saying the UK is rubbish, rubbish, rubbish. 0:05:37.160 --> 0:05:39.320 The fact that it looks like a perfectly really bras 0:05:39.400 --> 0:05:42.240 market with good dimit impayment, it's really hard for some 0:05:42.279 --> 0:05:44.839 of these professionals to force themselves to say, but you 0:05:44.880 --> 0:05:46.760 know what, the more it goes up, the easier they're 0:05:46.800 --> 0:05:49.960 going to find it. Well, yeah, I mean, interesting thing 0:05:50.000 --> 0:05:53.440 is the Investment Association came out it's annual figures on 0:05:53.680 --> 0:05:56.640 where we've been putting our money basically, and last year 0:05:56.760 --> 0:05:59.560 was the first year ever, including two thousand and eight, 0:06:00.040 --> 0:06:02.760 the UK retail investors have actually had a net outflow. 0:06:02.800 --> 0:06:05.839 In other words, we took money out of funds and 0:06:05.880 --> 0:06:09.480 of course the hardest sector again was UK equity funds 0:06:09.480 --> 0:06:13.800 generally something like twelve billion outfloor is the only thing 0:06:13.839 --> 0:06:16.760 going up? Yeah, and then well this is you know, 0:06:16.800 --> 0:06:18.720 it's good news for anyone who's got a kind of 0:06:18.760 --> 0:06:24.040 contrarian bent because it's still really widely detested. It's not 0:06:24.160 --> 0:06:27.360 quite as heated as it was in September, but that's 0:06:27.400 --> 0:06:32.560 really not seeing very much relative hatred. Wonderful thing, right, John, 0:06:33.240 --> 0:06:41.760 Thank you very much. Thanks. Welcome to Mary Talks Money, 0:06:41.839 --> 0:06:44.480 the podcast in which people who know the markets explain 0:06:44.560 --> 0:06:47.600 the markets. I'm there in sum Stweb this week. Our 0:06:47.640 --> 0:06:51.000 guest is Russell Napier. He's author of The Solid Ground Investment. 0:06:51.600 --> 0:06:54.200 Well it's a newsletter, really report anyway, it's brilliant. If 0:06:54.200 --> 0:06:56.280 you can't get your hands on it, do He's also 0:06:56.320 --> 0:06:58.920 the author of two excellent books, Anatomy of the Bear, 0:06:58.960 --> 0:07:00.719 which I think we might be eating over the next 0:07:00.720 --> 0:07:04.919 few years, and The Asian Financial Crisis, both absolute must 0:07:05.040 --> 0:07:08.160 reads now rather than I started by discussing one of 0:07:08.200 --> 0:07:11.280 the things that is absolutely crucial to Russell's analysis, which 0:07:11.280 --> 0:07:15.560 is understanding where the global economy is heading. And to 0:07:15.880 --> 0:07:17.880 look at that, we need to look at government debt 0:07:17.960 --> 0:07:21.240 and private debt relative to g d P. Has it, pete, 0:07:21.520 --> 0:07:24.200 Is it at a point where something has to change? Now? 0:07:24.200 --> 0:07:26.800 If we can understand where we are with that, then 0:07:26.840 --> 0:07:30.200 we can start to understand how governments will react. And 0:07:30.240 --> 0:07:32.040 if we know what governments are going to do, then 0:07:32.080 --> 0:07:34.760 we can get a sense of how markets are going 0:07:34.760 --> 0:07:37.679 to react. So my first question to Russell was where 0:07:37.720 --> 0:07:40.960 are we right now? Globally in terms of public and 0:07:41.000 --> 0:07:43.880 private debt levels. I mean, one of the biggest questions 0:07:43.880 --> 0:07:46.600 and finances when it's too much debt, too much debt. 0:07:47.000 --> 0:07:49.720 Throughout my entire career, debt to GDP ratios have been 0:07:49.720 --> 0:07:52.080 going on. Either's more debt, but yet it always seems 0:07:52.120 --> 0:07:54.680 to be sustainable. So we have to focus on why 0:07:54.760 --> 0:07:59.000 suddenly that isn't the case. Let's talk about three metrics. 0:07:59.120 --> 0:08:01.560 So one is debt to GDP ratio, and that would 0:08:01.560 --> 0:08:02.880 be the debt of the government, the dead of the 0:08:02.880 --> 0:08:05.640 household sector, and the debt of the non financial corporate 0:08:05.640 --> 0:08:08.000 sector as a percentage GDP. Well, it's at the highest 0:08:08.080 --> 0:08:11.400 level ever recorded. Often when people look at this data, 0:08:11.440 --> 0:08:13.920 they look just at government data, and you could show 0:08:13.960 --> 0:08:16.120 for the Hunted Kingdom, for instance, that it's below where 0:08:16.120 --> 0:08:18.200 it was at the end of World War two. But 0:08:18.360 --> 0:08:20.760 if one looks at the whole lot, which includes the 0:08:20.800 --> 0:08:24.240 households and the corporates, were at a higher level. America, 0:08:24.320 --> 0:08:25.880 for instance, would have got to the end of World 0:08:25.880 --> 0:08:28.280 War two with its debt burden on those three sectors 0:08:28.320 --> 0:08:31.400 at about a hundred and GDP. It's now two hundred 0:08:31.400 --> 0:08:34.880 and sixty to GDP. So it's not marginally higher, it 0:08:35.000 --> 0:08:38.040 is significantly higher. So you'd come to the conclusion it's 0:08:38.040 --> 0:08:40.199 the highest level of debt to GDP and human history. 0:08:40.920 --> 0:08:43.640 That still doesn't mean it's too much, but it doesn't 0:08:44.120 --> 0:08:46.880 raise the vibraes as to why it might be too much. Now, 0:08:46.960 --> 0:08:49.000 let's look at the other metrics, because the problem with 0:08:49.040 --> 0:08:51.760 that the GDP is it's measuring a stock, which is 0:08:51.800 --> 0:08:54.480 the debt to a flow which is GDP that's the 0:08:54.559 --> 0:08:58.880 annual amount of the production of the economy. A second 0:08:58.920 --> 0:09:01.160 one people can look at is the Bank of International 0:09:01.200 --> 0:09:04.280 Settlements Early Warning Indicators, and they have back tested this 0:09:04.440 --> 0:09:06.760 and look at the growth rate off debt to GDP 0:09:06.840 --> 0:09:10.040 relative to trend, and a deviation from trend on the 0:09:10.120 --> 0:09:12.880 upside as produced as a very high prospect of a 0:09:12.880 --> 0:09:15.199 private sector debt crisis. In other words, there's too much 0:09:15.200 --> 0:09:18.200 debt because the private sector can't possibly service it. So 0:09:18.280 --> 0:09:20.920 that's another indicator. And the one that I like to 0:09:21.000 --> 0:09:24.400 look at is private sector debt service ratios. So that's 0:09:24.559 --> 0:09:26.959 just the private sector and not the government, and it's 0:09:27.000 --> 0:09:30.240 the total amount of income private sector income needed to 0:09:30.320 --> 0:09:32.320 service the debts. And there are many many countries where 0:09:32.360 --> 0:09:36.960 that's above. That's always been a warning signal, particularly if 0:09:37.000 --> 0:09:39.520 interest rates are going up and you're already at And 0:09:39.559 --> 0:09:41.240 the problem we have today is they're going up from 0:09:41.280 --> 0:09:45.040 five thousand year loans. And when interest expense goes up, 0:09:45.080 --> 0:09:48.120 interest rates go up from five thousand year loans, interest 0:09:48.160 --> 0:09:52.160 expense goes up particularly quickly. Anybody with the UK mortgage 0:09:52.160 --> 0:09:54.880 it's maturing this year will be all too familiar with 0:09:54.880 --> 0:09:57.320 that dynamic. So you put all that together, I think 0:09:57.360 --> 0:10:00.000 it's too high. It's dangerously high. It risks a prior 0:10:00.040 --> 0:10:03.840 that sector debt crisis if interest rates properly reflect the 0:10:03.880 --> 0:10:07.040 inflation outlook. So that's the final little bit of the 0:10:07.160 --> 0:10:09.040 ingredient that is now in the in the pudding. If 0:10:09.040 --> 0:10:11.959 you like, inflation is high, interest rates are supposed to 0:10:12.000 --> 0:10:15.360 go high to correct that bring it down. But can 0:10:15.400 --> 0:10:18.240 the system, this geared system, live with the level of 0:10:18.280 --> 0:10:20.640 indust rates that will do that. My answer is no one. 0:10:20.720 --> 0:10:25.199 So finally, too much debt is too much debt. Okay, Well, 0:10:25.200 --> 0:10:27.120 that sounds like there's a really simple solution here. We 0:10:27.200 --> 0:10:30.199 just keep interest rates low forever everything I'll be fine. 0:10:31.120 --> 0:10:33.640 I think that is the solution. There's a problem with 0:10:33.679 --> 0:10:36.480 that because short term rates are controlled by the central bank, 0:10:36.520 --> 0:10:38.400 and long term rich are supposed to be controlled by 0:10:38.400 --> 0:10:41.320 you and me the saver. They're not supposed to be 0:10:41.400 --> 0:10:43.199 within the control of the government. Remember one of the 0:10:43.240 --> 0:10:44.640 reasons that we took it out of the control of 0:10:44.640 --> 0:10:47.000 the government as they did such a bad job of it. 0:10:47.520 --> 0:10:50.199 And that is why we made the Bank of independent 0:10:50.280 --> 0:10:52.840 in the nineties. That is why we give our central 0:10:52.840 --> 0:10:56.679 banks targets. That is why we left this up to them. Uh. 0:10:57.160 --> 0:10:59.280 And if the market you and I demand the correct 0:10:59.440 --> 0:11:02.240 level of interest strates to compensate us for future inflation 0:11:02.320 --> 0:11:05.760 one if that's just simply too high and forces everybody 0:11:05.800 --> 0:11:08.360 to default or forces mass default in the private sector. 0:11:08.400 --> 0:11:10.240 And if you look at the British government profit and 0:11:10.280 --> 0:11:11.880 loss account of the minute, and look at how much 0:11:11.880 --> 0:11:15.400 money we're paying on interest expense and the inflation compensation 0:11:15.440 --> 0:11:18.920 we pay on indexlling guilts, and the transfers were making 0:11:18.920 --> 0:11:21.880 to the Bank of England to compensate them for their losses, 0:11:22.160 --> 0:11:24.440 and the transfers will soon be making to the commercial 0:11:24.440 --> 0:11:27.120 banking system to compensate them for the losses on the 0:11:27.120 --> 0:11:30.360 COVID loans that the government guaranteed. You know this number 0:11:30.360 --> 0:11:32.640 is rapidly getting to about a hundred and thirty hundred 0:11:32.720 --> 0:11:37.120 forty billion sterling, quite close to the budget for the 0:11:37.200 --> 0:11:40.160 National Health Service. So I focused on the private sector 0:11:40.240 --> 0:11:42.800 and say, you know, the private sector couldn't cope with 0:11:42.880 --> 0:11:44.959 higher rates. But if we stick with the status quo 0:11:45.320 --> 0:11:48.640 where a central bank independent sets short term rates and 0:11:48.720 --> 0:11:51.640 bond investors right even the set long term rates, we 0:11:51.760 --> 0:11:55.439 may not have a feasible economic system. What should interest 0:11:55.520 --> 0:11:57.960 rates be at the moment to compensate us for inflation? 0:11:58.040 --> 0:12:00.400 You know, CPI is branning knocking around ten the center, 0:12:00.440 --> 0:12:02.400 so that we should be getting twelve on our deposit 0:12:02.440 --> 0:12:05.280 accounts in a way. Well, in short term rates, yeah, 0:12:05.280 --> 0:12:07.559 and in long term rates it's a bit more problematical. 0:12:07.640 --> 0:12:10.480 There are lots of distortions already in the long term 0:12:10.480 --> 0:12:13.760 bond market, Lots of force buyers already, and those buyers 0:12:13.800 --> 0:12:16.000 will be life funds and pension funds when they're doing 0:12:16.040 --> 0:12:19.319 their liability management and matching. Those were their aspects, So 0:12:19.360 --> 0:12:21.839 they're already distorting the rates. The central bank ownership is 0:12:21.880 --> 0:12:25.640 distorting the rates. And there's a unique function post Great 0:12:25.640 --> 0:12:30.280 Financial Crisis, of which many organizations used government debt as 0:12:30.360 --> 0:12:33.880 a form of collateral for borrowing, and that also distorts rates. 0:12:33.920 --> 0:12:37.320 So yeah, we're showing much much higher, but they are 0:12:37.360 --> 0:12:39.560 not going higher. And part of that is a government 0:12:39.679 --> 0:12:43.679 action through forcing savings some savings institutions to buy this 0:12:43.840 --> 0:12:47.360 part of it is a central bank distortion. But I 0:12:47.360 --> 0:12:50.120 think it's very difficult to argue that these rates are 0:12:50.160 --> 0:12:53.720 properly set by a market and fully compensates for future inflation. 0:12:53.800 --> 0:12:56.360 So there's some distortion already there. But let's go back 0:12:56.360 --> 0:12:58.240 a little bit to the last time that that debt 0:12:58.320 --> 0:13:00.679 was extremely high, although as you set year is different 0:13:00.720 --> 0:13:02.600 because we're talking about the post war period when it 0:13:02.640 --> 0:13:07.000 was public debt alone that was the major problem, and 0:13:07.040 --> 0:13:10.360 then didn't see massive distortion of the relationship between interest 0:13:10.440 --> 0:13:13.600 rates and inflation or how how did that work? Well, 0:13:13.640 --> 0:13:16.840 it worked by forcing the savings institutions to buy government bonds. 0:13:16.880 --> 0:13:19.560 So I want to quote from Isaac Newton here, and Newton, 0:13:19.640 --> 0:13:21.679 as you probably know, quite a lot to do with finance, 0:13:21.720 --> 0:13:23.760 and his time was Master of the Mint, and that 0:13:23.880 --> 0:13:26.360 was particularly go to executing people for forgery. But we'll 0:13:26.400 --> 0:13:29.120 leave that as a as a separate issue. So UT's 0:13:29.160 --> 0:13:31.320 third laws dates that for every action there is an 0:13:31.320 --> 0:13:35.160 opposite and equal reaction. And what I will now arrogantly 0:13:35.200 --> 0:13:37.680 called Napier's laws is that for the modern investor, for 0:13:37.760 --> 0:13:41.360 every market action, there is an opposite, never equal, and 0:13:41.480 --> 0:13:45.680 always distortionary government reaction. So let's talk about the reaction, 0:13:45.840 --> 0:13:48.439 but more importantly, let's talk about some of the distortions 0:13:48.440 --> 0:13:51.920 that it causes to the entire systems. So during warfare, 0:13:51.920 --> 0:13:53.839 it's quite easy to get people to buy government bonds. 0:13:53.840 --> 0:13:56.079 I mean, the sacrifices people make during war are much 0:13:56.080 --> 0:13:59.400 bigger than finances, so they there are war born drives. Also, 0:13:59.480 --> 0:14:02.440 your institution Usians are forced by government bonds through ferties 0:14:02.440 --> 0:14:05.839 Freeconian measures. In World War Two, the savings institutions of 0:14:05.840 --> 0:14:08.199 the United Kingdom had the hand over all of their 0:14:08.280 --> 0:14:12.160 offshore assets, particular dollar assets, to the government and they 0:14:12.240 --> 0:14:14.880 got government bonds in return. So there's a pretty blunt 0:14:15.000 --> 0:14:18.040 sledgehammer approach to this. Obviously, there was a dollar assets 0:14:18.040 --> 0:14:21.200 where liquidated and used to purchase war materials, but the 0:14:21.240 --> 0:14:25.000 investors suddenly find themselves for herself or in government bonds. 0:14:25.040 --> 0:14:27.560 After World War Two, it's more tricky to make the 0:14:27.640 --> 0:14:31.080 case that we should continue financial repression. But the case 0:14:31.200 --> 0:14:33.240 is made, and then that we have to switch and 0:14:33.280 --> 0:14:36.640 say this was not about preserving the state and preserving 0:14:36.720 --> 0:14:39.680 the welfare and the liberty of the people. This is 0:14:39.720 --> 0:14:42.720 about their safety. And this is because we have to 0:14:42.760 --> 0:14:44.760 get them into really safe assets, because we all know 0:14:44.840 --> 0:14:48.480 how dangerous assets. Other assets are not that difficult after 0:14:48.480 --> 0:14:51.920 World War Two, given the prolonged her performance from equities 0:14:52.080 --> 0:14:56.400 which began famously in October nine and had lasted really 0:14:56.440 --> 0:14:58.720 throughout that entire period. But we now have to say 0:14:58.760 --> 0:15:01.240 that it's government bonds that are saying if the yield 0:15:01.240 --> 0:15:03.120 has capped, in particular, if you don't let the price 0:15:03.120 --> 0:15:05.840 of bonds fall, there won't be a capital loss. The 0:15:05.920 --> 0:15:09.200 yield is reasonable, it can be argued there is no 0:15:09.320 --> 0:15:11.480 risk of principle not being paid, There is no risk 0:15:11.520 --> 0:15:14.280 of interest not being paid. Why wouldn't you want this 0:15:14.520 --> 0:15:17.040 coercy of our set right in the middle of your portfolio. 0:15:17.440 --> 0:15:19.280 And then we go to the institutions under the guise 0:15:19.280 --> 0:15:21.760 of macropotential regulation and say you need to have x 0:15:21.840 --> 0:15:24.800 percentage in government bonds. And a nice little example of 0:15:24.800 --> 0:15:27.400 the legacy of this, which has only just disappeared, is 0:15:27.440 --> 0:15:31.320 the need to force retiring pensioners to put all the 0:15:31.360 --> 0:15:34.320 money into ennuities, and the nuities are backed by government bonds. 0:15:34.400 --> 0:15:37.080 So there's lots of little works of the system you 0:15:37.120 --> 0:15:40.760 can put in place to force the compulsory ownership of 0:15:41.120 --> 0:15:43.760 government bonds. Okay, so I can see how it works 0:15:43.800 --> 0:15:47.200 that time around. How might this work this time around? 0:15:47.200 --> 0:15:49.040 I mean, obviously, what we're trying to do here is 0:15:49.120 --> 0:15:52.840 to get investors to hold onto government bonds at lower 0:15:52.920 --> 0:15:56.720 yield than our appropriate given the inflation environment, that gradually 0:15:57.000 --> 0:15:59.560 eats away at government debt in real terms. And the 0:15:59.560 --> 0:16:01.880 problem is that stop, friend, So it works, I mean, 0:16:01.920 --> 0:16:06.560 it works, so there is an upside here, right, Yeah. 0:16:06.600 --> 0:16:08.440 I think a nice little example of that is I 0:16:08.480 --> 0:16:11.280 think it's nineteen fifty seven where Harold McMillan said to 0:16:11.320 --> 0:16:13.080 the people of the United Kingdom, you've never had it 0:16:13.160 --> 0:16:16.000 so good. By that stage, I think you've already lost 0:16:16.040 --> 0:16:18.240 thirty percent of your money in real terms investing in 0:16:18.280 --> 0:16:20.920 British government bottoms. So you've never had it so good. 0:16:20.920 --> 0:16:23.080 It was clearly in that one section of the population, 0:16:23.160 --> 0:16:26.160 but not necessarily in another section of the population. So 0:16:26.200 --> 0:16:29.080 if you're a portfolio investor and you can see how 0:16:29.120 --> 0:16:32.040 wealth maybe realigned during this period. You can do something 0:16:32.040 --> 0:16:34.280 about that as long as you're free to do so, 0:16:34.800 --> 0:16:37.040 and you can look at it to invest in equities 0:16:37.040 --> 0:16:39.840 and shares of companies that might benefit from such realignments 0:16:39.840 --> 0:16:42.760 of wealth. So it's being alive to the opportunities to 0:16:42.840 --> 0:16:46.600 do something rather than believing that this is temporary. And 0:16:46.640 --> 0:16:48.680 I think that's the other thing worth stressing. Could last 0:16:48.760 --> 0:16:51.040 a long time. It doesn't last a year or two years. 0:16:51.480 --> 0:16:53.680 This to get our to GDP and say, oh, I 0:16:53.720 --> 0:16:55.960 mean the advanced economy, it's not just the United Kingdom. 0:16:56.160 --> 0:16:57.960 To get it back into line, I think it's a 0:16:58.040 --> 0:17:01.080 decade's work. Don't own government bonds unless they force you 0:17:01.200 --> 0:17:04.240 own them. Well, let's come back to how financial repression, 0:17:04.280 --> 0:17:07.080 because that's what this is. How finance repression might work 0:17:07.160 --> 0:17:08.920 this time around. We talked about how it worked last 0:17:08.920 --> 0:17:10.560 time around and has some of the remnants of it. 0:17:10.600 --> 0:17:13.840 For example, annuities being as something we're forced about exceptionaly, 0:17:13.840 --> 0:17:17.679 they're relatively recently fallen away, right, But nonetheless, if we're 0:17:17.680 --> 0:17:20.919 going to start again, how how might it happen or 0:17:21.000 --> 0:17:23.280 is it happening already? I think the other that might 0:17:23.320 --> 0:17:25.720 be Yes, yeah, I think it's happening already, depending on 0:17:26.080 --> 0:17:28.600 My main job is to advise financial institutions, and the 0:17:28.600 --> 0:17:31.880 more I'm talking to longer term pension funds and life funds, 0:17:31.920 --> 0:17:33.840 the more they'll tell me this is already happening to them. 0:17:33.880 --> 0:17:37.159 If I'm talking to mutual funds, they'll say, what's financial repression? 0:17:37.640 --> 0:17:39.640 So in the obviously easy answer that is just hang 0:17:39.680 --> 0:17:41.840 around and you'll find find out. So it has to 0:17:41.880 --> 0:17:45.240 spread down through the system. It's like low hanging fruit. 0:17:45.280 --> 0:17:48.040 The low hanging fruit to be repressed. It has to 0:17:48.080 --> 0:17:50.480 be regulated, but it has to be natural owners of 0:17:50.560 --> 0:17:53.520 government bonds. If you like multi asset funds, so multi 0:17:53.600 --> 0:17:56.320 asset I shouldn't call them funds. Multi asset pools have 0:17:56.480 --> 0:17:59.240 been the easy place to repress because it's not revolutionary 0:17:59.280 --> 0:18:01.720 to tell them that forced them to buy more government bonds. 0:18:02.000 --> 0:18:04.359 As if we ever get beyond that two funds that 0:18:04.440 --> 0:18:06.680 are dedicated to equities, or if we get to your 0:18:06.760 --> 0:18:10.200 SIP or your ISA, that's when it becomes more revolutionary. 0:18:10.240 --> 0:18:11.919 So the minute they've just been plucking off the low 0:18:12.000 --> 0:18:14.720 hanging fruit, and I think it's about to become much more, 0:18:14.920 --> 0:18:18.440 much more dramatic than somewhere sometime we're going to see 0:18:18.800 --> 0:18:22.280 an institution or a form of savings compelled to buy, 0:18:22.320 --> 0:18:25.159 say to buy bonds that we just didn't think was 0:18:25.280 --> 0:18:28.040 ever going to be owning bonds, and that may be 0:18:28.160 --> 0:18:31.600 coming to Japan before it comes here. Well, it's interesting, 0:18:31.600 --> 0:18:33.720 I mean, we've heard a little bits involves that suggest 0:18:33.760 --> 0:18:35.359 to us that various things might be coming that we 0:18:35.400 --> 0:18:38.320 will find uncomfortable. I mean, but until up until now, 0:18:38.359 --> 0:18:41.520 we've seen, for example, defined benefit pension funds providing people 0:18:41.520 --> 0:18:45.320 with their defined benefit pensiants having to hold larger amounts 0:18:45.320 --> 0:18:47.439 of bonds than possibly some people might think is sensible 0:18:47.520 --> 0:18:51.399 under the circumstances for regular reasons. But we've heard mutterings 0:18:51.440 --> 0:18:54.359 recently about the suggestions, for example, that perhaps all penci 0:18:54.400 --> 0:18:56.440 of funds may be the ones that people hold under 0:18:56.520 --> 0:19:01.520 order enrollment, might be persuaded to invest in various government 0:19:01.640 --> 0:19:04.240 initiatives via green bomb system, that kind of thing. So 0:19:04.560 --> 0:19:07.960 what you're talking about having to having to assist the 0:19:08.000 --> 0:19:10.840 government bio iss that already kind of feels like it's 0:19:10.840 --> 0:19:13.120 out there to a degree, doesn't it. Well, the Bike 0:19:13.200 --> 0:19:15.760 of England, and this is before COVID formed a committee 0:19:15.760 --> 0:19:18.080 I think it's called the Bank of England Working Group 0:19:18.119 --> 0:19:21.359 on Productive Investment. Now I'm I'm not sure that the 0:19:21.359 --> 0:19:24.160 Bank of England knows a lot about productive investment, but anyway, 0:19:24.160 --> 0:19:26.640 it has a working Group on Productive Investment which includes 0:19:26.920 --> 0:19:29.720 h m r C, includes the regulator and includes Last 0:19:29.720 --> 0:19:33.159 time I looked about seventeen financial institutions people are listening to. 0:19:33.160 --> 0:19:34.919 This will be interesting to know that they're not banks, 0:19:35.320 --> 0:19:37.360 that the people who look after your money. So they're 0:19:37.400 --> 0:19:39.000 sitting in a room and what are they discussing. Well, 0:19:39.000 --> 0:19:40.800 that's all over the newspapers you can read about it. 0:19:40.880 --> 0:19:44.359 But it's effectively about getting those institutions to buy more 0:19:44.520 --> 0:19:48.520 long term securities, and those long term securities are ultimately 0:19:48.560 --> 0:19:51.040 aimed at achieving some sort of political goals. Now those 0:19:51.040 --> 0:19:53.720 political goals can be in renewables, but can they be 0:19:53.760 --> 0:19:56.800 all the political goals? And the high biling is what 0:19:57.359 --> 0:20:00.720