1 00:00:06,160 --> 00:00:09,270 Speaker 1: Welcome to Covid Time, a podcast series on markets and 2 00:00:09,270 --> 00:00:13,940 Speaker 1: economies from DBS group research. Chief economist. Welcome to our 3 00:00:13,950 --> 00:00:19,160 Speaker 1: 86 episode. Today's guest is David. Marsh. David. Co founded 4 00:00:19,160 --> 00:00:23,090 Speaker 1: in 2009 official monetary and financial institutions forum. Better known 5 00:00:23,090 --> 00:00:26,500 Speaker 1: for its acronym AMF if it's an independent think tank 6 00:00:26,500 --> 00:00:30,870 Speaker 1: for central banking, economic Policy and public investment. Since 2018, 7 00:00:30,880 --> 00:00:33,000 Speaker 1: David has served as office chairperson 8 00:00:33,260 --> 00:00:36,140 Speaker 1: before setting up this think tank. He worked for city 9 00:00:36,140 --> 00:00:41,830 Speaker 1: merchant bank robert, Fleming corporate finance, boutique, Hotpoint, german management consultancy, 10 00:00:41,840 --> 00:00:47,270 Speaker 1: droga investment from London, Oxford and many other places, including 11 00:00:47,280 --> 00:00:50,339 Speaker 1: almost two decades in journalism spending most of that time 12 00:00:50,340 --> 00:00:53,700 Speaker 1: with the Financial Times. David has written six books, the 13 00:00:53,700 --> 00:00:57,319 Speaker 1: last of which is co authored with William keegan and 14 00:00:57,320 --> 00:01:01,350 Speaker 1: Richard roberts is titled Six Days in september black Wednesday 15 00:01:01,350 --> 00:01:03,140 Speaker 1: Brexit and the making of europe. 16 00:01:03,520 --> 00:01:06,520 Speaker 1: I think, given what has transpired lately, David, that book 17 00:01:06,520 --> 00:01:09,260 Speaker 1: needs an additional chapter. Welcome to Covid Time. David. 18 00:01:10,080 --> 00:01:12,580 Speaker 2: Thank you. Good to be with you. 19 00:01:12,590 --> 00:01:15,760 Speaker 1: It is a pleasure to have you, David. Let's start 20 00:01:15,760 --> 00:01:18,069 Speaker 1: with the very latest and with the caveat that both 21 00:01:18,069 --> 00:01:21,420 Speaker 1: you and I recognize things can turn stale between the 22 00:01:21,420 --> 00:01:24,220 Speaker 1: time we record this and the time it comes out, 23 00:01:24,230 --> 00:01:28,550 Speaker 1: the sterling crisis. David back in 92 had the pound 24 00:01:28,550 --> 00:01:31,560 Speaker 1: correcting by about 29% against the us dollar. 25 00:01:31,860 --> 00:01:34,990 Speaker 1: The latest episode of sterling weakness has transpired over a 26 00:01:34,990 --> 00:01:38,330 Speaker 1: longer period of time, much slower moving train wreck if 27 00:01:38,330 --> 00:01:42,050 Speaker 1: you will, but the adjustment hasn't been trivial either. Almost 25% 28 00:01:42,050 --> 00:01:45,649 Speaker 1: from peak to trough. I have a few questions on 29 00:01:45,650 --> 00:01:48,910 Speaker 1: the ongoing episode for you first, your assessment on the 30 00:01:48,910 --> 00:01:52,330 Speaker 1: policy actions and the economic conditions that have led to 31 00:01:52,330 --> 00:01:54,420 Speaker 1: such massive depreciation of the sterling, 32 00:01:55,370 --> 00:01:58,470 Speaker 2: The whole world is in a mess. And we have 33 00:01:58,470 --> 00:02:02,120 Speaker 2: a very strong dollar. That's the backdrop. 1992, we had 34 00:02:02,120 --> 00:02:06,990 Speaker 2: a relatively weak dollar. That was one big contrast this 35 00:02:06,990 --> 00:02:11,339 Speaker 2: time around. The government's failings have been very, very palpable 36 00:02:11,350 --> 00:02:13,040 Speaker 2: in the UK. They were 37 00:02:13,050 --> 00:02:16,130 Speaker 2: We're, of course, also evident in 1992, that was a 38 00:02:16,130 --> 00:02:18,790 Speaker 2: failure of judgment about when to go into the exchange 39 00:02:18,790 --> 00:02:21,700 Speaker 2: rate mechanism. I think that the misjudgments and the pure 40 00:02:21,710 --> 00:02:25,430 Speaker 2: incompetence this time around has been actually much worse than 41 00:02:25,430 --> 00:02:31,020 Speaker 2: in 1992. Also, the government was warned the mistress's government 42 00:02:31,150 --> 00:02:33,970 Speaker 2: and only a short time in office was warned before 43 00:02:33,970 --> 00:02:37,300 Speaker 2: the so called Mini budget on 23 September that this 44 00:02:37,300 --> 00:02:40,230 Speaker 2: could lead to a big market problem. 45 00:02:40,389 --> 00:02:44,350 Speaker 2: They were told by advisers in writing that they would 46 00:02:44,350 --> 00:02:46,519 Speaker 2: need to watch out about the market reaction, but they 47 00:02:46,520 --> 00:02:49,389 Speaker 2: were arrogant about this and they failed to take onboard 48 00:02:49,510 --> 00:02:52,590 Speaker 2: those warnings. So some of this is part of the 49 00:02:52,590 --> 00:02:56,030 Speaker 2: general rather difficult background we have with the Russian war 50 00:02:56,030 --> 00:02:59,410 Speaker 2: and the strong dollar, but I would say 80% of 51 00:02:59,410 --> 00:03:01,450 Speaker 2: this is a self inflicted wound. 52 00:03:02,470 --> 00:03:06,109 Speaker 1: And you place the blame with the Prime Minister's office 53 00:03:06,110 --> 00:03:09,130 Speaker 1: and the Treasury? What about the Bank of England and 54 00:03:09,130 --> 00:03:12,040 Speaker 1: its role. Is it like going on the opposite direction. 55 00:03:13,060 --> 00:03:18,420 Speaker 2: There are strong signs that there are strong conflicts between 56 00:03:18,419 --> 00:03:22,500 Speaker 2: the Bank of England and the Treasury and the prime minister. 57 00:03:22,500 --> 00:03:24,519 Speaker 2: And this is not good news in a crisis. And 58 00:03:24,520 --> 00:03:28,030 Speaker 2: we learned that in 1992 and in many other cases, 59 00:03:28,030 --> 00:03:30,390 Speaker 2: there was actually a surprising amount of coordination in nine 60 00:03:30,405 --> 00:03:33,304 Speaker 2: United Two between the Bank of England and the Treasury. 61 00:03:33,435 --> 00:03:37,675 Speaker 2: This time, Liz Truss has been riding roughshod over some 62 00:03:37,675 --> 00:03:42,365 Speaker 2: of her advisers. She caused the main official in the 63 00:03:42,365 --> 00:03:46,675 Speaker 2: Treasury Sir tom Scholar, to be sacked on day one 64 00:03:46,685 --> 00:03:47,744 Speaker 2: of her tenure. 65 00:03:48,000 --> 00:03:50,920 Speaker 2: This is unprecedented. That this was at the beginning of 66 00:03:50,920 --> 00:03:54,050 Speaker 2: september normally, if Prime Ministers don't like the top civil 67 00:03:54,050 --> 00:03:56,190 Speaker 2: servant in the treasury, they find a way of just 68 00:03:56,190 --> 00:03:58,880 Speaker 2: lodging that person over time, but not on day one, 69 00:03:58,980 --> 00:04:02,020 Speaker 2: This was two days before the queen died. And so 70 00:04:02,020 --> 00:04:06,000 Speaker 2: it added to the sense of great 71 00:04:06,470 --> 00:04:11,750 Speaker 2: Change and dislocation at the Bank of England just a 72 00:04:11,760 --> 00:04:15,270 Speaker 2: day ago. From the time when we're doing this podcast 73 00:04:15,280 --> 00:04:18,179 Speaker 2: did issue a very strong statement about the reasons why 74 00:04:18,190 --> 00:04:21,430 Speaker 2: it brought in this emergency action which took place at 75 00:04:21,430 --> 00:04:24,790 Speaker 2: the end of September the famous shoring up of the 76 00:04:24,790 --> 00:04:28,839 Speaker 2: Gilts market and it justified this action on the grounds 77 00:04:28,850 --> 00:04:32,010 Speaker 2: that they would otherwise have been a huge dislocation with 78 00:04:32,020 --> 00:04:36,380 Speaker 2: pension funds, about 50 billion 79 00:04:36,750 --> 00:04:41,370 Speaker 2: sterling worth of gilts had it not been for the intention, 80 00:04:41,370 --> 00:04:44,100 Speaker 2: which they made saying that they would buy up to 81 00:04:44,100 --> 00:04:46,800 Speaker 2: five billion of guilt today over 13 working days. That 82 00:04:46,800 --> 00:04:48,779 Speaker 2: will run out on the 14th of october and they're 83 00:04:48,779 --> 00:04:51,540 Speaker 2: really staying in that letter and there's very strong divergence 84 00:04:51,540 --> 00:04:54,750 Speaker 2: between what the treasury is doing under its new leadership, 85 00:04:54,800 --> 00:04:58,440 Speaker 2: basically led by truss and the quasi tang the new 86 00:04:58,455 --> 00:05:01,784 Speaker 2: charts of the exchequer and the bank itself. So this 87 00:05:01,785 --> 00:05:04,155 Speaker 2: is very dangerous for markets when you have the feeling 88 00:05:04,154 --> 00:05:08,035 Speaker 2: that these two economic actors at different ends of town, 89 00:05:08,045 --> 00:05:11,315 Speaker 2: one in the city, one in Whitehall operating on different 90 00:05:11,315 --> 00:05:14,565 Speaker 2: principles and with a different set of philosophies. This is 91 00:05:14,565 --> 00:05:16,235 Speaker 2: really very bad news for markets. 92 00:05:16,464 --> 00:05:21,235 Speaker 1: Is there a middle ground for Whitehall and the city 93 00:05:21,275 --> 00:05:22,515 Speaker 1: in this context 94 00:05:23,730 --> 00:05:29,950 Speaker 2: the unfunded tax cuts which Liz truss and her team 95 00:05:29,960 --> 00:05:31,739 Speaker 2: quasi quoting the chancellor 96 00:05:32,050 --> 00:05:35,670 Speaker 2: unveiled on the 23rd of september some of this will 97 00:05:35,670 --> 00:05:38,849 Speaker 2: have to be unwound I believe already we've had a U. 98 00:05:38,850 --> 00:05:42,440 Speaker 2: Turn on the top rate of tax. She wanted the 99 00:05:42,440 --> 00:05:45,900 Speaker 2: top rate of tax to be scrapped. She said it 100 00:05:45,900 --> 00:05:49,349 Speaker 2: was quite Teng's idea. So in a way she's throwing 101 00:05:49,350 --> 00:05:52,339 Speaker 2: him under a bus that has been unwound that only 102 00:05:52,380 --> 00:05:55,070 Speaker 2: would save a relatively small amount of money to three 103 00:05:55,070 --> 00:05:58,239 Speaker 2: billion sterling. That's not a great deal in this context. 104 00:05:58,240 --> 00:05:58,870 Speaker 2: I think they'll have 105 00:05:58,890 --> 00:06:03,090 Speaker 2: to be other measures which will basically reverse some of 106 00:06:03,089 --> 00:06:06,219 Speaker 2: the moves in the mini budget. The point is the 107 00:06:06,230 --> 00:06:10,040 Speaker 2: catastrophic fiscal position of the U. K. Has not fully 108 00:06:10,040 --> 00:06:15,270 Speaker 2: been revealed because the Chancellor and the Prime Minister didn't 109 00:06:15,270 --> 00:06:20,489 Speaker 2: want the Independent office for budgetary responsibility to come out 110 00:06:20,500 --> 00:06:24,440 Speaker 2: with its forecast at the right time. Which were operating 111 00:06:24,440 --> 00:06:25,630 Speaker 2: a bit in the dark. 112 00:06:25,950 --> 00:06:30,050 Speaker 2: But we do think that these unfunded tax cuts are 113 00:06:30,050 --> 00:06:33,410 Speaker 2: going to be extremely difficult to finance and can only 114 00:06:33,410 --> 00:06:35,979 Speaker 2: be financed at higher gilt prices. Hence the big sell 115 00:06:35,980 --> 00:06:38,650 Speaker 2: off in the government bond market that we had at 116 00:06:38,650 --> 00:06:41,430 Speaker 2: the end of september which has only been partly reversed. 117 00:06:41,640 --> 00:06:45,160 Speaker 2: So if you're looking for changes tomorrow as you're saying 118 00:06:45,170 --> 00:06:48,840 Speaker 2: then either they have to resend some of the tax 119 00:06:48,839 --> 00:06:52,380 Speaker 2: cuts and raise more money by tax or they have 120 00:06:52,380 --> 00:06:56,840 Speaker 2: to do a great deal more public borrowing that much 121 00:06:56,850 --> 00:06:57,060 Speaker 2: you 122 00:06:57,490 --> 00:07:00,700 Speaker 2: which is bad for the economy or they have to 123 00:07:00,710 --> 00:07:04,520 Speaker 2: bring in some very unpopular and very socially divisive cuts 124 00:07:04,529 --> 00:07:06,839 Speaker 2: in public spending. Those are the only three things they 125 00:07:06,839 --> 00:07:09,770 Speaker 2: can do. And the cuts in public spending. Not only 126 00:07:09,770 --> 00:07:12,520 Speaker 2: would they be unpopular, they would probably also be 127 00:07:13,080 --> 00:07:17,110 Speaker 2: bad for the economy as well. So either way in 128 00:07:17,110 --> 00:07:20,690 Speaker 2: all these three areas they're looking at a pretty difficult position. 129 00:07:20,690 --> 00:07:22,790 Speaker 2: I think they'll have to do a mixture of all 130 00:07:22,790 --> 00:07:25,050 Speaker 2: these things will be higher interest rates. There will be 131 00:07:25,050 --> 00:07:27,640 Speaker 2: some cuts in public spending but not as regressive and 132 00:07:27,640 --> 00:07:32,180 Speaker 2: especially divisive as some of the rather bad indications have 133 00:07:32,190 --> 00:07:34,370 Speaker 2: have been telling us and they will have to be 134 00:07:34,370 --> 00:07:38,460 Speaker 2: some rises in taxes which goes against the government's philosophy. 135 00:07:38,490 --> 00:07:41,200 Speaker 2: So in all these three scenarios, we're looking at political 136 00:07:41,200 --> 00:07:42,950 Speaker 2: and economic problems ahead for Britain. 137 00:07:43,680 --> 00:07:49,980 Speaker 1: Indeed, David to play devil's advocate unfunded tax cuts. This 138 00:07:49,980 --> 00:07:51,950 Speaker 1: is not the first time in history we have seen 139 00:07:51,950 --> 00:07:55,989 Speaker 1: the americans have done that many times. Reaganomics and Arthur 140 00:07:55,990 --> 00:07:58,610 Speaker 1: laughers invention of the laffer curve have been around for, 141 00:07:58,610 --> 00:08:01,540 Speaker 1: you know, four or five decades and sometimes it seems 142 00:08:01,540 --> 00:08:04,020 Speaker 1: like countries get away with it. And other times even 143 00:08:04,020 --> 00:08:07,260 Speaker 1: with the best of independent forecasts, the market doesn't, you know, 144 00:08:07,280 --> 00:08:12,110 Speaker 1: respect their decision to take some heroic fiscal moves. Um 145 00:08:12,120 --> 00:08:17,010 Speaker 1: what went wrong for this particular juncture? I mean you 146 00:08:17,020 --> 00:08:19,910 Speaker 1: have alluded to the lack of transparency being one that 147 00:08:19,910 --> 00:08:22,710 Speaker 1: the forecasts were not available. People have been acting in 148 00:08:22,710 --> 00:08:25,410 Speaker 1: the dark, but then there's also the cyclical weakness. I mean, 149 00:08:25,410 --> 00:08:27,720 Speaker 1: has this been one case of bad timing and bad 150 00:08:27,720 --> 00:08:30,880 Speaker 1: communication as opposed to the substance being fundamentally bad. 151 00:08:31,620 --> 00:08:34,710 Speaker 2: Some of the substance you could defend because you could 152 00:08:34,710 --> 00:08:37,860 Speaker 2: say that Britain's got a relatively strong national balance sheet. 153 00:08:37,929 --> 00:08:41,110 Speaker 2: Everything is relative of course, but public debt as a 154 00:08:41,110 --> 00:08:44,370 Speaker 2: portion of GDP something that 90% of GDP that's much 155 00:08:44,370 --> 00:08:46,290 Speaker 2: higher than anybody would have thought comfortable 156 00:08:46,500 --> 00:08:49,699 Speaker 2: 30 years ago, but it's still lower than Italy lower 157 00:08:49,700 --> 00:08:52,839 Speaker 2: than France lower than japan. Clearly it's a little bit 158 00:08:52,840 --> 00:08:55,580 Speaker 2: lower than the United States sterling though is not an 159 00:08:55,580 --> 00:08:57,770 Speaker 2: international currency in the way the dollar is. And I 160 00:08:57,770 --> 00:09:01,020 Speaker 2: think that's the salient difference. The americans can as we 161 00:09:01,020 --> 00:09:01,439 Speaker 2: know 162 00:09:01,950 --> 00:09:05,770 Speaker 2: funds their deficits through the famous exorbitant privilege that is 163 00:09:05,780 --> 00:09:09,099 Speaker 2: accorded to the world's number one reserve currency Britain doesn't 164 00:09:09,100 --> 00:09:13,360 Speaker 2: have that privilege. So it's a strange paradox that we 165 00:09:13,370 --> 00:09:17,140 Speaker 2: have mr quan Teng. He seems to believe that sterling 166 00:09:17,140 --> 00:09:20,400 Speaker 2: is still the world's number one reserve currency and people 167 00:09:20,410 --> 00:09:24,570 Speaker 2: will therefore fund the deficit without tears. 168 00:09:25,220 --> 00:09:27,910 Speaker 2: And that clearly isn't going to happen. So I think 169 00:09:27,910 --> 00:09:31,540 Speaker 2: it was colossal arrogance actually on the part of trials 170 00:09:31,550 --> 00:09:34,660 Speaker 2: and squatting and some of their advisors or some of 171 00:09:34,660 --> 00:09:37,760 Speaker 2: the advisors did as I say, counsel very strongly against 172 00:09:37,760 --> 00:09:42,900 Speaker 2: this plus grade poor timing plus an unwillingness to even 173 00:09:42,910 --> 00:09:47,120 Speaker 2: talk to some market participants beforehand to gauge the reaction. 174 00:09:47,410 --> 00:09:51,390 Speaker 2: So it is hubris and ignorance. I'm afraid to say 175 00:09:51,400 --> 00:09:52,900 Speaker 2: pretty bad combination. 176 00:09:52,920 --> 00:09:56,250 Speaker 1: David to your point that the pound is not an 177 00:09:56,250 --> 00:09:59,479 Speaker 1: international reserve currency, but the city of London still has 178 00:09:59,480 --> 00:10:04,160 Speaker 1: a sizable footprint in global international finance. Uh, and I 179 00:10:04,160 --> 00:10:07,110 Speaker 1: worry that what has transpired over the last few 180 00:10:07,120 --> 00:10:11,050 Speaker 1: weeks, which has been tumultuous for the UK markets but 181 00:10:11,050 --> 00:10:13,989 Speaker 1: could be a sign of things to come at a 182 00:10:13,990 --> 00:10:16,770 Speaker 1: time when global rates are going up. So could you 183 00:10:16,770 --> 00:10:20,490 Speaker 1: walk us through your sense of the international ramifications is 184 00:10:20,490 --> 00:10:23,989 Speaker 1: the sterling a canary in the coal mine, so to speak. 185 00:10:23,990 --> 00:10:26,830 Speaker 1: For greater shocks, about to hit global markets. 186 00:10:28,570 --> 00:10:31,040 Speaker 2: Well, I don't know whether it really is telling us 187 00:10:31,040 --> 00:10:33,339 Speaker 2: about anything about the future. It certainly tells us that 188 00:10:33,340 --> 00:10:38,520 Speaker 2: the past that we've seen is actually a valid yardstick. 189 00:10:38,520 --> 00:10:40,839 Speaker 2: We've seen this in emerging markets, haven't we? 190 00:10:40,970 --> 00:10:47,990 Speaker 2: In Brazil in Turkey, in Mexico, the action crisis of 1997, 191 00:10:48,190 --> 00:10:52,340 Speaker 2: So it's actually confirming the past, it's also confirming some 192 00:10:52,380 --> 00:10:56,640 Speaker 2: of the past British episodes. So we we saw the 193 00:10:56,650 --> 00:11:00,360 Speaker 2: 1976 crisis when Britain had to go to the IMF 194 00:11:00,370 --> 00:11:04,280 Speaker 2: we had the 1967 devaluation of sterling, which was the 195 00:11:04,290 --> 00:11:08,410 Speaker 2: only the duomo of years and years of problems of 196 00:11:08,410 --> 00:11:10,090 Speaker 2: battling against the current account 197 00:11:10,309 --> 00:11:13,689 Speaker 2: deficit in the time of Bretton Woods. So it's confirming 198 00:11:13,700 --> 00:11:17,200 Speaker 2: all that past history tells us that finance can be 199 00:11:17,210 --> 00:11:20,770 Speaker 2: very unstable if you get your sums wrong and if 200 00:11:20,770 --> 00:11:25,670 Speaker 2: you lose confidence, the the worry of course is that, 201 00:11:25,670 --> 00:11:29,400 Speaker 2: as you say, Britain is from a market point of view, 202 00:11:29,410 --> 00:11:32,980 Speaker 2: Britain is an important trading place. It's still without a doubt, 203 00:11:32,980 --> 00:11:33,880 Speaker 2: the number one 204 00:11:34,370 --> 00:11:38,150 Speaker 2: financial trading place in europe, despite Britain having left the 205 00:11:38,150 --> 00:11:41,390 Speaker 2: european union now a couple of years ago, after the 206 00:11:41,390 --> 00:11:46,120 Speaker 2: referendum in 2016. And Britain has taken over from Italy 207 00:11:46,120 --> 00:11:50,530 Speaker 2: now as being the one big source of instability on 208 00:11:50,530 --> 00:11:53,219 Speaker 2: the european markets and it's a bit rich really for 209 00:11:53,220 --> 00:11:56,600 Speaker 2: a conservative Prime Minister, Liz truss who now comes in 210 00:11:56,610 --> 00:11:58,630 Speaker 2: pledging some kind of stability 211 00:11:58,860 --> 00:12:02,949 Speaker 2: and go for growth strategy that she has become singlehandedly 212 00:12:03,160 --> 00:12:07,010 Speaker 2: the number one source of risk and instability on global 213 00:12:07,010 --> 00:12:09,760 Speaker 2: financial markets. This is not a good position for a 214 00:12:09,760 --> 00:12:13,160 Speaker 2: Conservative Prime Minister to be in. So I think it's 215 00:12:13,160 --> 00:12:16,290 Speaker 2: more telling us the cautionary lessons of the past are 216 00:12:16,290 --> 00:12:18,670 Speaker 2: justified rather than a 217 00:12:18,695 --> 00:12:22,095 Speaker 2: pointer to all kinds of unrest in the future. Central 218 00:12:22,095 --> 00:12:27,125 Speaker 2: bankers have been saying to me partly in jocularity, partly 219 00:12:27,135 --> 00:12:31,425 Speaker 2: in sorrow that what Liz truss and quasi squatting has 220 00:12:31,425 --> 00:12:35,495 Speaker 2: served up is actually very solitary for the new italian government, 221 00:12:35,495 --> 00:12:38,579 Speaker 2: which we think will be led by joe joe Georgia 222 00:12:39,000 --> 00:12:41,640 Speaker 2: maloney, the far right leader because it shows her what 223 00:12:41,640 --> 00:12:45,400 Speaker 2: not to do. And I'm absolutely sure that Georgia meloni 224 00:12:45,400 --> 00:12:47,809 Speaker 2: and her advisers are looking at this trust and saying, look, 225 00:12:47,809 --> 00:12:50,810 Speaker 2: this is absolutely the wrong thing to do whatever we do. 226 00:12:50,809 --> 00:12:53,400 Speaker 2: We have to maintain the trust on financial markets, We 227 00:12:53,400 --> 00:12:55,890 Speaker 2: have to do what we can to show we're going 228 00:12:55,890 --> 00:13:00,000 Speaker 2: to be good corporate citizens. They may actually have different 229 00:13:00,000 --> 00:13:04,300 Speaker 2: views altogether, but outwardly they will be showing a good 230 00:13:04,300 --> 00:13:04,620 Speaker 2: deal 231 00:13:04,633 --> 00:13:07,823 Speaker 2: of conservatism and a good deal of orthodoxy, not least 232 00:13:07,823 --> 00:13:10,433 Speaker 2: to curry favor with the creditor countries of europe who 233 00:13:10,433 --> 00:13:13,503 Speaker 2: are supplying funds for italy and I'm afraid to say 234 00:13:13,503 --> 00:13:18,033 Speaker 2: that mrs trust, forgot that she is a person who 235 00:13:18,033 --> 00:13:21,383 Speaker 2: relies on the markets to fund the current accounts ever 236 00:13:21,383 --> 00:13:26,423 Speaker 2: said Mark Carney, the previous Central black Governor coined the 237 00:13:26,423 --> 00:13:29,003 Speaker 2: phrase because I don't really agree with. But he said 238 00:13:29,123 --> 00:13:30,253 Speaker 2: Britain relies 239 00:13:30,546 --> 00:13:33,856 Speaker 2: quotes the kindness of stroke quotes to fund its current 240 00:13:33,856 --> 00:13:36,925 Speaker 2: account deficit. I don't think it's kindness is because people 241 00:13:36,926 --> 00:13:39,976 Speaker 2: think that they can make a yield in Britain. But 242 00:13:39,986 --> 00:13:42,556 Speaker 2: she's she's gone about it totally in the wrong direction 243 00:13:42,556 --> 00:13:45,016 Speaker 2: and she hasn't realized she's got a deficit to finance. 244 00:13:45,026 --> 00:13:47,096 Speaker 2: You've got to be nice to the creditors, you shouldn't 245 00:13:47,096 --> 00:13:50,866 Speaker 2: be arrogant. And that's the lesson that she's failed to comprehend. 246 00:13:50,866 --> 00:13:53,606 Speaker 2: I hope she does understand this actually. I do hope 247 00:13:53,606 --> 00:13:55,886 Speaker 2: that the last few weeks have been solitary. 248 00:13:56,830 --> 00:14:01,079 Speaker 1: So David, you have actually partially answered my next question 249 00:14:01,080 --> 00:14:03,900 Speaker 1: because I was gonna ask you, is there a silver lining? 250 00:14:03,900 --> 00:14:06,140 Speaker 1: And I think from a backhanded way you're basically saying 251 00:14:06,140 --> 00:14:08,560 Speaker 1: that it is a cautionary tale and that's the silver lining. 252 00:14:08,570 --> 00:14:10,940 Speaker 1: We will now have this lesson for the rest of 253 00:14:10,940 --> 00:14:13,950 Speaker 1: the world what not to do anything else in terms 254 00:14:13,950 --> 00:14:17,559 Speaker 1: of UK's public finance and the need for fiscal monetary 255 00:14:17,559 --> 00:14:20,860 Speaker 1: policy coordination. Do you think that the lesson from the 256 00:14:20,860 --> 00:14:25,170 Speaker 1: past few weeks would galvanize you know, better collaboration. 257 00:14:25,580 --> 00:14:31,310 Speaker 2: I think it will Liz truss is not totally unintelligent 258 00:14:31,320 --> 00:14:36,200 Speaker 2: and she's shown remarkable flexibility over the years. Don't forget 259 00:14:36,200 --> 00:14:39,880 Speaker 2: she voted to stay in the European Union in the 260 00:14:39,880 --> 00:14:43,590 Speaker 2: referendum in 2016. She's changed her tune a bit since then. 261 00:14:43,600 --> 00:14:46,260 Speaker 2: She used to be a member of the Liberal Democrats, 262 00:14:46,270 --> 00:14:46,980 Speaker 2: which she 263 00:14:46,996 --> 00:14:50,366 Speaker 2: now ab jurors, she doesn't like the liberal democrats these days. 264 00:14:50,376 --> 00:14:53,756 Speaker 2: So she's well known for her flexibility. She reminds me 265 00:14:53,756 --> 00:14:55,926 Speaker 2: a bit of Groucho Marx, he said, I'm a man 266 00:14:55,926 --> 00:14:57,976 Speaker 2: of many principles and if you don't like the ones 267 00:14:57,976 --> 00:15:00,326 Speaker 2: I've got now, I have got other ones. So it 268 00:15:00,326 --> 00:15:03,536 Speaker 2: could be that there will be a U turn in 269 00:15:03,536 --> 00:15:06,606 Speaker 2: her philosophy. I also think it's good that the Bank 270 00:15:06,606 --> 00:15:08,400 Speaker 2: of England again, as she was a time 271 00:15:08,412 --> 00:15:10,672 Speaker 2: in a slightly backhanded way, has gained a bit of 272 00:15:10,672 --> 00:15:15,572 Speaker 2: solidity and credibility through this. Andrew bailey, the governor, he's 273 00:15:15,572 --> 00:15:18,352 Speaker 2: been in office now since the Covid crisis started, there's 274 00:15:18,352 --> 00:15:19,902 Speaker 2: not been a very happy time for him over the 275 00:15:19,902 --> 00:15:22,872 Speaker 2: last 2.5 years and there'll be people gunning for him. 276 00:15:22,882 --> 00:15:25,682 Speaker 2: He's not been without blame. I have to say there 277 00:15:25,682 --> 00:15:27,672 Speaker 2: have been some mistakes by the Bank of England, but 278 00:15:27,672 --> 00:15:29,830 Speaker 2: he's sitting now in a more comfortable position 279 00:15:30,000 --> 00:15:33,270 Speaker 2: because she's undermined everything else. We have a new monarch. 280 00:15:33,270 --> 00:15:35,880 Speaker 2: We have a new prime minister, we have a new 281 00:15:35,930 --> 00:15:38,330 Speaker 2: permanent secretary of the treasury when they get around to 282 00:15:38,330 --> 00:15:41,050 Speaker 2: appointing that person. We have a new Chancellor of the Exchequer. 283 00:15:41,050 --> 00:15:43,270 Speaker 2: So I don't think they're going to change or try 284 00:15:43,270 --> 00:15:45,190 Speaker 2: to force out the Governor of the Bank of England 285 00:15:45,200 --> 00:15:47,720 Speaker 2: at the same time. He's got another five years to 286 00:15:47,720 --> 00:15:49,810 Speaker 2: go in his mandate and I think he'll be around. 287 00:15:49,870 --> 00:15:53,590 Speaker 2: So if you want a silver lining, you might have 288 00:15:53,590 --> 00:15:57,830 Speaker 2: a bit more institutional stability, particularly the Bank of England. 289 00:15:58,330 --> 00:16:01,020 Speaker 2: And they may be in a better position perhaps to 290 00:16:01,020 --> 00:16:03,910 Speaker 2: influence policy, but I still think it's going to be very, 291 00:16:03,910 --> 00:16:05,270 Speaker 2: very rocky road, I'm afraid. 292 00:16:06,370 --> 00:16:10,479 Speaker 1: Um David, one more question on the sterling crisis before 293 00:16:10,480 --> 00:16:13,770 Speaker 1: we talk a little bit about europe and for this, 294 00:16:13,770 --> 00:16:16,780 Speaker 1: I want to bring one uh you know, quotation from 295 00:16:16,780 --> 00:16:19,780 Speaker 1: your book uh in your book you write and you're 296 00:16:19,780 --> 00:16:23,280 Speaker 1: drawing a parallel between the 97 asian currency crisis in 297 00:16:23,280 --> 00:16:26,090 Speaker 1: the september 92 crash at the pound. And you write, 298 00:16:26,100 --> 00:16:29,710 Speaker 1: the root cause was misaligned exchange rates confronting countries with 299 00:16:29,710 --> 00:16:33,690 Speaker 1: the task of amending monetary conditions for international reasons in 300 00:16:33,690 --> 00:16:35,140 Speaker 1: a way that contradicted 301 00:16:35,350 --> 00:16:40,320 Speaker 1: domestic economic and political requirements. Does that parallel work for 302 00:16:40,320 --> 00:16:41,260 Speaker 1: the U. K. Today? 303 00:16:42,170 --> 00:16:45,990 Speaker 2: I think it's less for sterling, sterling was overvalued, without 304 00:16:45,990 --> 00:16:48,810 Speaker 2: a doubt against the euro and it's gone down a 305 00:16:48,810 --> 00:16:51,110 Speaker 2: bit against the euro. Although nothing like as much as 306 00:16:51,110 --> 00:16:53,320 Speaker 2: against the dollar, I don't think that we've had a 307 00:16:53,320 --> 00:16:56,910 Speaker 2: fundamental misalignment of sterling. I think the problem is that 308 00:16:56,920 --> 00:17:00,490 Speaker 2: we now have through the strong dollar a lot of 309 00:17:00,500 --> 00:17:04,830 Speaker 2: dollar problems through higher interest rates now being transmitted to 310 00:17:04,830 --> 00:17:06,530 Speaker 2: the emerging market economies. 311 00:17:06,820 --> 00:17:10,190 Speaker 2: And I do think that those emerging market economies who 312 00:17:10,190 --> 00:17:13,390 Speaker 2: have now had to suffer quite a large depreciation, they'll 313 00:17:13,390 --> 00:17:16,500 Speaker 2: be importing inflation and they also have to pay much 314 00:17:16,500 --> 00:17:19,920 Speaker 2: higher interest rates on their dollar debt without a doubt, 315 00:17:19,920 --> 00:17:23,980 Speaker 2: that's going to cause huge dislocation for the emerging markets 316 00:17:23,980 --> 00:17:24,710 Speaker 2: at a time 317 00:17:24,890 --> 00:17:28,000 Speaker 2: when energy prices have been high, although they do seem 318 00:17:28,000 --> 00:17:30,550 Speaker 2: to be coming down a bit now. So I think 319 00:17:30,560 --> 00:17:35,379 Speaker 2: that has been the main issue shades of 1997 probably 320 00:17:35,380 --> 00:17:37,800 Speaker 2: not because we don't have fixed exchange rates in the 321 00:17:37,800 --> 00:17:41,260 Speaker 2: way that we did day factor or day jury in 322 00:17:41,260 --> 00:17:46,250 Speaker 2: 1997 1998. But there has been a very strong devaluation 323 00:17:46,250 --> 00:17:48,750 Speaker 2: of some of the emerging market currencies and that will 324 00:17:48,750 --> 00:17:49,700 Speaker 2: not bring 325 00:17:49,710 --> 00:17:53,280 Speaker 2: holy good news. I also think over time that the 326 00:17:53,280 --> 00:17:56,770 Speaker 2: rise in the dollar will impede american competitiveness and will 327 00:17:56,770 --> 00:17:59,830 Speaker 2: lead to an overvalued dollar. We've not got there yet. 328 00:17:59,840 --> 00:18:02,360 Speaker 2: I think it might be partly because american manufacturing has 329 00:18:02,359 --> 00:18:04,900 Speaker 2: got a lot stronger than we thought. Maybe that's because 330 00:18:04,900 --> 00:18:08,580 Speaker 2: of technology as well as the Silicon Valley prowess has 331 00:18:08,580 --> 00:18:13,430 Speaker 2: been transferred to the old economy part of America. That's 332 00:18:13,430 --> 00:18:14,540 Speaker 2: why I, there's one 333 00:18:14,760 --> 00:18:17,540 Speaker 2: I think relatively good piece of news which is that 334 00:18:17,540 --> 00:18:20,830 Speaker 2: the american economy is more resilient than many people felt 335 00:18:20,869 --> 00:18:23,979 Speaker 2: they are piling on the interest rate pressure somewhat late 336 00:18:23,990 --> 00:18:27,260 Speaker 2: but better late than never at the Fed America is 337 00:18:27,260 --> 00:18:31,020 Speaker 2: standing up to that. So America is without a doubt 338 00:18:31,030 --> 00:18:35,139 Speaker 2: showing good signs of being the world's leading economy. The 339 00:18:35,140 --> 00:18:37,470 Speaker 2: problem is the rest of the world can't quite keep up. 340 00:18:38,180 --> 00:18:41,780 Speaker 1: Did I want to stick with the sterling one more 341 00:18:41,790 --> 00:18:45,479 Speaker 1: moment please. Um, so we don't have the peril of 342 00:18:45,480 --> 00:18:49,330 Speaker 1: a fixed exchange rate that was clearly exposed overvalued and 343 00:18:49,330 --> 00:18:52,260 Speaker 1: that needed correction 92. We didn't have that over the 344 00:18:52,260 --> 00:18:55,440 Speaker 1: last 6 to 9 months, but the pound nonetheless depreciated 345 00:18:55,440 --> 00:18:59,150 Speaker 1: by 2025%. So if you are 346 00:18:59,380 --> 00:19:02,800 Speaker 1: our primary belief is that the pound was not misaligned 347 00:19:02,800 --> 00:19:04,580 Speaker 1: and therefore it is a different case now than it 348 00:19:04,580 --> 00:19:07,470 Speaker 1: was then wouldn't that then by extension, make the pound 349 00:19:07,470 --> 00:19:11,060 Speaker 1: substantially undervalued. Now, having experienced this depreciation, 350 00:19:11,869 --> 00:19:14,720 Speaker 2: I don't think you can say it's undervalued given the 351 00:19:14,730 --> 00:19:16,500 Speaker 2: size of the problems that we have and given the 352 00:19:16,500 --> 00:19:20,000 Speaker 2: fact we don't know how the funding is going to 353 00:19:20,000 --> 00:19:23,840 Speaker 2: come in and we don't know much at all about 354 00:19:23,840 --> 00:19:25,980 Speaker 2: the future because there will be some changes in policies 355 00:19:25,980 --> 00:19:28,300 Speaker 2: as I've indicated. The one thing we do know is 356 00:19:28,300 --> 00:19:31,909 Speaker 2: that interest rates will be higher in Britain than the 357 00:19:31,910 --> 00:19:35,030 Speaker 2: government would like. That's going to probably increase the scale 358 00:19:35,040 --> 00:19:37,250 Speaker 2: of the recession even though the government is talking about 359 00:19:37,250 --> 00:19:38,930 Speaker 2: relatively shallow recession. 360 00:19:39,140 --> 00:19:42,270 Speaker 2: And so the high interest rates I think will maintain 361 00:19:42,280 --> 00:19:46,040 Speaker 2: sterling as a relatively attractive currency. It will not be 362 00:19:46,040 --> 00:19:48,370 Speaker 2: good news for people who actually live in Britain and 363 00:19:48,369 --> 00:19:50,590 Speaker 2: have to put up with these higher costs on mortgages 364 00:19:50,590 --> 00:19:53,130 Speaker 2: and so on. But that's why I'm not fearing an 365 00:19:53,130 --> 00:19:59,080 Speaker 2: actual sterling crisis. I'm fearing more a recession that will 366 00:19:59,090 --> 00:20:02,670 Speaker 2: certainly still further undermine the government and will probably lead 367 00:20:02,670 --> 00:20:04,250 Speaker 2: to a labor Party victory 368 00:20:04,410 --> 00:20:07,490 Speaker 2: at the general election. It may happen before two years, 369 00:20:07,490 --> 00:20:11,060 Speaker 2: but the next general election is due in around two 370 00:20:11,060 --> 00:20:13,830 Speaker 2: or 2.5 years, there may be an election beforehand. So 371 00:20:13,830 --> 00:20:17,150 Speaker 2: this political instability I think will not be good news. 372 00:20:17,150 --> 00:20:19,740 Speaker 2: But I don't fear a sterling crisis. I think the 373 00:20:19,740 --> 00:20:23,530 Speaker 2: institutions as we have them will be ready to withstand that. 374 00:20:23,540 --> 00:20:27,630 Speaker 2: I do fear a lot of political vicissitudes. It could 375 00:20:27,630 --> 00:20:28,169 Speaker 2: be though 376 00:20:28,190 --> 00:20:30,460 Speaker 2: That a new labor government might actually end up being 377 00:20:30,460 --> 00:20:33,929 Speaker 2: a more stable situation than the outgoing Tory government. We 378 00:20:33,930 --> 00:20:36,750 Speaker 2: saw this of course in 1997 when Gordon Brown and 379 00:20:36,750 --> 00:20:39,300 Speaker 2: Tony Blair came in and that actually led to quite 380 00:20:39,300 --> 00:20:44,190 Speaker 2: a good constellation for several years. So you can't give 381 00:20:44,190 --> 00:20:47,250 Speaker 2: up totally on Britain yet. But there will be big 382 00:20:47,250 --> 00:20:49,119 Speaker 2: oscillations politically, I believe 383 00:20:49,869 --> 00:20:53,859 Speaker 1: by all means David. Okay, we'll switch to europe now. 384 00:20:53,869 --> 00:20:57,199 Speaker 1: Um they are also, you know, confronting all sorts of 385 00:20:57,200 --> 00:21:01,990 Speaker 1: challenges and somewhat reluctantly but inevitably PCB is raising grades 386 00:21:01,990 --> 00:21:05,689 Speaker 1: and we have monetary policy normalization taking place exactly at 387 00:21:05,690 --> 00:21:07,510 Speaker 1: a time when the content is likely heading towards a 388 00:21:07,510 --> 00:21:08,200 Speaker 1: recession 389 00:21:08,470 --> 00:21:12,110 Speaker 1: and talk about sovereign problem. They also have a mountain 390 00:21:12,109 --> 00:21:15,770 Speaker 1: of sovereign debt to manage. So two sets of questions first, 391 00:21:15,780 --> 00:21:19,680 Speaker 1: how are the key institutions of european union standing up 392 00:21:19,680 --> 00:21:22,860 Speaker 1: to the threat of war stagflation and risks of yet 393 00:21:22,859 --> 00:21:24,060 Speaker 1: another debt crisis. 394 00:21:25,310 --> 00:21:29,690 Speaker 2: The E. C. B, as you say, belatedly is raising 395 00:21:29,690 --> 00:21:31,940 Speaker 2: rates and at the same time they brought in this 396 00:21:32,440 --> 00:21:35,930 Speaker 2: instrument to try to combat fragmentation because you don't need 397 00:21:35,930 --> 00:21:38,220 Speaker 2: a Nobel prize in economics to work out that when 398 00:21:38,220 --> 00:21:40,810 Speaker 2: interest rates go up quite sharply as they are doing 399 00:21:41,010 --> 00:21:43,090 Speaker 2: both short term and longer term. This makes life more 400 00:21:43,090 --> 00:21:46,060 Speaker 2: difficult for countries like Italy, which you've got a public 401 00:21:46,070 --> 00:21:49,399 Speaker 2: debt to GDP ratio of 150% 402 00:21:49,800 --> 00:21:52,629 Speaker 2: that that country is going to suffer more. So they 403 00:21:52,630 --> 00:21:57,139 Speaker 2: brought in this famous transmission protection instrument which is supposed 404 00:21:57,140 --> 00:22:00,000 Speaker 2: to mitigate this. This is actually rather akin to the 405 00:22:00,000 --> 00:22:03,090 Speaker 2: Bank of England's special facility which they brought in on 406 00:22:03,090 --> 00:22:07,030 Speaker 2: the 28th of september this, this guilt purchase instrument. The 407 00:22:07,030 --> 00:22:09,870 Speaker 2: difference is though, that the T. P. I hasn't been 408 00:22:09,869 --> 00:22:12,880 Speaker 2: spelled out in any detail and it hasn't been used 409 00:22:12,880 --> 00:22:14,090 Speaker 2: with the Bank of England has use 410 00:22:14,100 --> 00:22:19,720 Speaker 2: It's a special instrument that it unveiled on 28 September 411 00:22:19,720 --> 00:22:21,909 Speaker 2: although it hasn't used much of it quite cleverly, I 412 00:22:21,910 --> 00:22:24,680 Speaker 2: think it's not used that much. So there's some weapons 413 00:22:24,680 --> 00:22:28,020 Speaker 2: in the armaments in the arsenal of the PCB that 414 00:22:28,020 --> 00:22:30,190 Speaker 2: is not used yet. I don't think the T. P. 415 00:22:30,190 --> 00:22:33,560 Speaker 2: I will be used because it's quite difficult for Italy actually. 416 00:22:33,570 --> 00:22:36,930 Speaker 2: So I I believe therefore that the spreads will continue 417 00:22:36,930 --> 00:22:38,490 Speaker 2: to rise in 418 00:22:38,970 --> 00:22:42,180 Speaker 2: Between say Italy and the German bonds at the moment, 419 00:22:42,180 --> 00:22:45,090 Speaker 2: they're about 2.4% points. I think they'll go a bit 420 00:22:45,090 --> 00:22:49,050 Speaker 2: higher there creep up slowly without a real sense of crisis. 421 00:22:49,330 --> 00:22:53,120 Speaker 2: I believe they will be relatively shallow recession in Germany, 422 00:22:53,130 --> 00:22:56,290 Speaker 2: don't forget Germany's actually throwing the kitchen sink at this. 423 00:22:56,300 --> 00:22:58,750 Speaker 2: It's using its balance sheet as well. Not in a 424 00:22:58,750 --> 00:23:02,730 Speaker 2: very communitarian way. There's been a lot of criticism of 425 00:23:02,730 --> 00:23:03,929 Speaker 2: the 200 billion 426 00:23:04,180 --> 00:23:08,530 Speaker 2: euro package that Germany brought in to safeguard the consumers 427 00:23:08,530 --> 00:23:11,650 Speaker 2: over this energy crisis. And yet they have stopped so 428 00:23:11,650 --> 00:23:12,190 Speaker 2: far 429 00:23:12,480 --> 00:23:16,869 Speaker 2: a price cap for energy for europe as a whole 430 00:23:16,880 --> 00:23:19,879 Speaker 2: is very much a Germany first policy, I'm afraid to say. 431 00:23:20,010 --> 00:23:22,340 Speaker 2: And you've seen this on many occasions in the past, 432 00:23:22,340 --> 00:23:27,830 Speaker 2: Germany does have a pretty nationalistic or certainly a national 433 00:23:27,840 --> 00:23:30,540 Speaker 2: way of doing things. And this is not good news 434 00:23:30,540 --> 00:23:33,560 Speaker 2: for the rest of europe. So the Bundesbank would like 435 00:23:33,560 --> 00:23:35,969 Speaker 2: to have still higher interest rates and they'd like to 436 00:23:35,970 --> 00:23:38,450 Speaker 2: start quantitative tightening. That will not happen 437 00:23:38,700 --> 00:23:42,630 Speaker 2: because they are worried about italy we'll probably still have 438 00:23:42,640 --> 00:23:47,080 Speaker 2: yields and interest rates in real terms at negative levels 439 00:23:47,080 --> 00:23:51,050 Speaker 2: next year. I believe in europe, the CCB will not 440 00:23:51,050 --> 00:23:54,600 Speaker 2: slam on the brakes big time. They will not be 441 00:23:54,650 --> 00:23:59,340 Speaker 2: as aggressive as the Fed that will have to outcomes one, 442 00:23:59,350 --> 00:24:03,100 Speaker 2: it might mitigate the scale of the recession because they 443 00:24:03,100 --> 00:24:05,760 Speaker 2: will not be so uh 444 00:24:06,050 --> 00:24:09,520 Speaker 2: aggressive in monetary tightening as the americans. And I also 445 00:24:09,520 --> 00:24:12,470 Speaker 2: think we'll have a relatively weak euro, which could also 446 00:24:12,470 --> 00:24:16,300 Speaker 2: be quite helpful for the economy. So I don't foresee 447 00:24:16,310 --> 00:24:18,890 Speaker 2: a huge crisis in europe, I think they'll do just 448 00:24:18,890 --> 00:24:22,590 Speaker 2: about enough to muddle through. But all the old question 449 00:24:22,590 --> 00:24:25,860 Speaker 2: marks that we've had about monetary union ever since the beginning. 450 00:24:25,869 --> 00:24:28,570 Speaker 2: You know, the lack of real political union at a 451 00:24:28,570 --> 00:24:31,670 Speaker 2: time when you've fused together the monies 452 00:24:31,970 --> 00:24:34,730 Speaker 2: and I've got just one single currency, all these old 453 00:24:34,730 --> 00:24:37,100 Speaker 2: question marks will still be with us, I'm afraid it 454 00:24:37,100 --> 00:24:39,710 Speaker 2: will be a case of further muddling through and a 455 00:24:39,710 --> 00:24:43,619 Speaker 2: sense that monetary union is still incomplete. And and the 456 00:24:43,619 --> 00:24:47,260 Speaker 2: sense that without a lot of permanent crisis fighting, 457 00:24:47,390 --> 00:24:51,030 Speaker 2: the monetary union could break up. And that's again at 458 00:24:51,030 --> 00:24:54,590 Speaker 2: a time time of war in Ukraine, not a comfortable position, 459 00:24:54,600 --> 00:24:56,330 Speaker 2: but the very fact that there is a war in 460 00:24:56,330 --> 00:24:59,500 Speaker 2: Ukraine means I think that the politicians and the central 461 00:24:59,500 --> 00:25:02,700 Speaker 2: bank will go the extra mile to put the sticking 462 00:25:02,700 --> 00:25:07,639 Speaker 2: plaster over this unfinished edifice of monetary union. So I 463 00:25:07,640 --> 00:25:10,359 Speaker 2: don't actually foresee it will break up any time soon, 464 00:25:10,359 --> 00:25:13,070 Speaker 2: but it does remain a long term question mark. 465 00:25:13,640 --> 00:25:17,220 Speaker 1: But in the near term, you think that the fragmentation 466 00:25:17,220 --> 00:25:22,300 Speaker 1: risk coming from a likely debt crisis is mitigated by 467 00:25:22,300 --> 00:25:24,990 Speaker 1: the unity that is being forced upon europe because of 468 00:25:24,990 --> 00:25:25,850 Speaker 1: the threat of war. 469 00:25:26,420 --> 00:25:30,840 Speaker 2: That's right. They cannot afford to lose italy at this time. 470 00:25:30,850 --> 00:25:34,090 Speaker 2: And of course, Giorgia meloni knows that he knows that 471 00:25:34,090 --> 00:25:37,420 Speaker 2: she's got some strong bargaining cards. The bank of italian, 472 00:25:37,430 --> 00:25:38,949 Speaker 2: very adept at playing 473 00:25:39,200 --> 00:25:43,040 Speaker 2: This game. The Germans have already become substantial creditors of 474 00:25:43,040 --> 00:25:47,190 Speaker 2: the euro area through the target to mechanism that's now 475 00:25:47,190 --> 00:25:52,180 Speaker 2: one of well over €1 trillion Bundesbank has advanced to 476 00:25:52,180 --> 00:25:54,720 Speaker 2: the E. C. B. basically to keep the balance of 477 00:25:54,720 --> 00:26:00,250 Speaker 2: payments going throughout the euro area. So through these mechanisms 478 00:26:00,260 --> 00:26:03,369 Speaker 2: there will still be a lot of sticking plaster in place. 479 00:26:03,600 --> 00:26:05,670 Speaker 2: I think the Germans will have to show a more 480 00:26:05,670 --> 00:26:08,770 Speaker 2: community minded attitude actually over energy and they will have 481 00:26:08,770 --> 00:26:13,490 Speaker 2: to also probably advance more guarantees and more loans of 482 00:26:13,490 --> 00:26:17,560 Speaker 2: a europe wide dimension following on from the next generation 483 00:26:17,570 --> 00:26:20,370 Speaker 2: EU fund that was agreed two years ago. I think 484 00:26:20,369 --> 00:26:23,850 Speaker 2: there has to be more such super national borrowing mechanisms 485 00:26:23,859 --> 00:26:27,350 Speaker 2: to help europe through the crisis. And that will not 486 00:26:27,359 --> 00:26:30,340 Speaker 2: please the purists who say that 487 00:26:30,350 --> 00:26:35,040 Speaker 2: the EU needs to have a proper political underpinning and 488 00:26:35,040 --> 00:26:37,790 Speaker 2: you can't keep going on through these ad hoc measures 489 00:26:37,830 --> 00:26:41,119 Speaker 2: but that would that would involve treaty change to change 490 00:26:41,119 --> 00:26:43,899 Speaker 2: the whole bedrock of the european union and actually to 491 00:26:43,900 --> 00:26:47,760 Speaker 2: make it a proper union making a political union at 492 00:26:47,760 --> 00:26:50,390 Speaker 2: the moment. There's no likelihood of that happening in any 493 00:26:50,390 --> 00:26:53,670 Speaker 2: country that no country would wish to go through the 494 00:26:53,670 --> 00:26:54,390 Speaker 2: whole 495 00:26:54,840 --> 00:26:58,440 Speaker 2: upheaval of a treaty change which will lead to referendums. 496 00:26:58,440 --> 00:27:01,700 Speaker 2: Many countries will have to lead to constitutional changes in 497 00:27:01,700 --> 00:27:04,840 Speaker 2: Germany as well as other places. So we'll continue with 498 00:27:04,840 --> 00:27:07,550 Speaker 2: the sticking plaster but it'll be pretty messy. I would 499 00:27:07,550 --> 00:27:07,970 Speaker 2: say 500 00:27:08,869 --> 00:27:12,520 Speaker 1: the largest that the government of Germany is sort of, 501 00:27:12,520 --> 00:27:14,780 Speaker 1: you know, doling out to its population to deal with 502 00:27:14,790 --> 00:27:19,359 Speaker 1: the high inflation and likely sort of crunch in energy supply. 503 00:27:19,369 --> 00:27:23,540 Speaker 1: Um does that mitigate substantially the risk of recession out 504 00:27:23,540 --> 00:27:25,889 Speaker 1: of Germany or it's still not, 505 00:27:25,900 --> 00:27:30,150 Speaker 2: it's certainly there is a strong sense that the recession 506 00:27:30,150 --> 00:27:30,920 Speaker 2: in Germany 507 00:27:31,160 --> 00:27:35,790 Speaker 2: Will be relatively shallow. I'm probably not in line with 508 00:27:35,800 --> 00:27:41,690 Speaker 2: consensus here, some people are broadcasting a -2 or -3% 509 00:27:41,700 --> 00:27:47,730 Speaker 2: next year. My relatively sanguine forecast is based on the 510 00:27:47,730 --> 00:27:50,389 Speaker 2: fact that I think there'll be a relatively mild winter. 511 00:27:50,820 --> 00:27:53,680 Speaker 2: Obviously I'm not a meteorologist, but I'm just thinking that 512 00:27:53,690 --> 00:27:56,810 Speaker 2: global warming is starting to have an effect and therefore 513 00:27:56,820 --> 00:28:00,950 Speaker 2: the increase in energy prices will also encourage Germans to 514 00:28:00,950 --> 00:28:03,199 Speaker 2: switch off some of their heating and not use as 515 00:28:03,200 --> 00:28:05,770 Speaker 2: much energy as well as the relatively mild weather. And 516 00:28:05,770 --> 00:28:09,000 Speaker 2: I'm also foreseeing some national measures to help. 517 00:28:09,450 --> 00:28:12,450 Speaker 2: They're certainly not going to go back to this idea 518 00:28:12,460 --> 00:28:15,690 Speaker 2: of this fiscal break, which they've got in the constitution, 519 00:28:15,690 --> 00:28:19,590 Speaker 2: they will override that they will certainly have deficits next 520 00:28:19,590 --> 00:28:22,540 Speaker 2: year in Germany. And also they've discovered as all the 521 00:28:22,540 --> 00:28:26,220 Speaker 2: other countries have discovered the wonderful way of doing mechanisms 522 00:28:26,220 --> 00:28:27,200 Speaker 2: outside the budget. 523 00:28:27,470 --> 00:28:30,820 Speaker 2: This special fund for the defense industry, the 100 billion 524 00:28:30,830 --> 00:28:35,510 Speaker 2: shots unveiled just a couple of days after the Russian 525 00:28:35,510 --> 00:28:38,960 Speaker 2: invasion plus this new 200 billion, a lot of that 526 00:28:38,960 --> 00:28:41,840 Speaker 2: would be financed off budget? The Germans of course are 527 00:28:41,840 --> 00:28:43,940 Speaker 2: digging a hole for themselves because they've always been the 528 00:28:43,940 --> 00:28:47,330 Speaker 2: ones who are telling people they should stick to the rules. 529 00:28:47,410 --> 00:28:50,210 Speaker 2: But sometimes the Germans make rules which are really for 530 00:28:50,220 --> 00:28:54,280 Speaker 2: others rather than for themselves. So again, this may not 531 00:28:54,280 --> 00:28:56,300 Speaker 2: be perhaps the right example to give to 532 00:28:56,580 --> 00:29:00,040 Speaker 2: mrs maloney when she comes to power. The Italians are 533 00:29:00,040 --> 00:29:03,490 Speaker 2: very good also inventing all sorts of inventions and all 534 00:29:03,490 --> 00:29:06,960 Speaker 2: kinds of subterfuges outside national budgets. We're going to see 535 00:29:06,960 --> 00:29:09,360 Speaker 2: a lot of that. So tomorrow you and your colleagues 536 00:29:09,360 --> 00:29:11,220 Speaker 2: who look at all these things, you have a lot 537 00:29:11,220 --> 00:29:14,270 Speaker 2: of different budgets to study not just the national budget, 538 00:29:14,340 --> 00:29:17,630 Speaker 2: but the off budget mechanisms in lots of european countries. 539 00:29:17,640 --> 00:29:19,970 Speaker 2: That way, I think Germany will actually escape a really 540 00:29:19,970 --> 00:29:23,140 Speaker 2: severe recession. And I think that's relatively good news. I 541 00:29:23,140 --> 00:29:24,060 Speaker 2: have to say 542 00:29:24,750 --> 00:29:28,300 Speaker 1: before the sake of a thought experiment, let's assume it's 543 00:29:28,300 --> 00:29:31,100 Speaker 1: going to be a very harsh winter. You know, even 544 00:29:31,110 --> 00:29:35,270 Speaker 1: in the context of that, have there been enough safeguards 545 00:29:35,270 --> 00:29:37,590 Speaker 1: put in place in terms of energy stock in terms 546 00:29:37,590 --> 00:29:40,740 Speaker 1: of giving financial war. We're told to the likely affected 547 00:29:40,740 --> 00:29:43,610 Speaker 1: that even a harsh winter can be dealt with. 548 00:29:44,640 --> 00:29:47,040 Speaker 2: If we did have a harsh winter, then they would 549 00:29:47,040 --> 00:29:49,490 Speaker 2: have to be rationing. There would have to be gas 550 00:29:49,490 --> 00:29:51,960 Speaker 2: supplies being cut off state between four o'clock in the 551 00:29:51,960 --> 00:29:56,310 Speaker 2: afternoon and 12 o'clock at night in big cities. Even worse. 552 00:29:56,320 --> 00:30:01,160 Speaker 2: A lot of large chemical companies, for example, B A. 553 00:30:01,160 --> 00:30:02,490 Speaker 2: S F on the Ryan 554 00:30:02,760 --> 00:30:05,730 Speaker 2: the world's biggest chemical company would have to just close 555 00:30:05,730 --> 00:30:08,580 Speaker 2: down for weeks on end. You can't just close this 556 00:30:08,580 --> 00:30:10,060 Speaker 2: down for a few hours, you have to close it 557 00:30:10,060 --> 00:30:13,930 Speaker 2: down for weeks, they'd have to furlough workers. I'm not 558 00:30:13,930 --> 00:30:16,490 Speaker 2: saying that they would be civil unrest, but there clearly 559 00:30:16,490 --> 00:30:20,290 Speaker 2: would be demonstrations in the streets about this in 560 00:30:20,310 --> 00:30:23,370 Speaker 2: in Germany, the german, the german government would throw money 561 00:30:23,370 --> 00:30:26,260 Speaker 2: at it as it always does, but this could certainly 562 00:30:26,260 --> 00:30:29,350 Speaker 2: lead to a breakdown of the coalition. For example, in 563 00:30:29,350 --> 00:30:33,590 Speaker 2: that worst case scenario, any thought of tightening would have 564 00:30:33,590 --> 00:30:36,340 Speaker 2: to be put on ice. The balance sheet would continue 565 00:30:36,340 --> 00:30:37,790 Speaker 2: at a very, very high level 566 00:30:38,110 --> 00:30:42,970 Speaker 2: and Putin would clearly feel that he's won a major victory. 567 00:30:42,980 --> 00:30:45,990 Speaker 2: If large girl hardship was to take place in Germany 568 00:30:45,990 --> 00:30:48,730 Speaker 2: and Bsf were to close down his plant, say for 569 00:30:48,730 --> 00:30:51,540 Speaker 2: three months, which it might have to do in, 570 00:30:51,690 --> 00:30:55,610 Speaker 2: in the worst case scenario. And there is a parallel action. 571 00:30:55,660 --> 00:31:00,360 Speaker 2: It was 1992 here because several people in 1992 said, 572 00:31:00,450 --> 00:31:03,760 Speaker 2: europe is playing paying the price for german unification. The 573 00:31:03,760 --> 00:31:06,490 Speaker 2: Germans had to stick up the interest rates in 1991 574 00:31:06,490 --> 00:31:11,520 Speaker 2: 1992 which did lead to the pounds ejection from the 575 00:31:11,520 --> 00:31:13,969 Speaker 2: E R. M. And of course Italy left on the 576 00:31:13,970 --> 00:31:16,770 Speaker 2: same day as the pound on the 16th of september 577 00:31:16,780 --> 00:31:19,540 Speaker 2: 1992 and you could mount a case now if you 578 00:31:19,540 --> 00:31:20,580 Speaker 2: wanted to, 579 00:31:21,210 --> 00:31:24,370 Speaker 2: If you wanted to be relatively harsh on Germany, you 580 00:31:24,370 --> 00:31:27,200 Speaker 2: could say that Europe is paying the price now for 581 00:31:27,210 --> 00:31:30,970 Speaker 2: German misjudgments because Germany did undoubtedly put too many of 582 00:31:30,970 --> 00:31:35,790 Speaker 2: its energy eggs into the Russian basket over the last 583 00:31:35,800 --> 00:31:42,350 Speaker 2: 20 years, 55% of all Germany's gas imports of all 584 00:31:42,350 --> 00:31:46,380 Speaker 2: its gas use came from Russia on the eve of 585 00:31:46,380 --> 00:31:47,190 Speaker 2: the invasion. 586 00:31:47,460 --> 00:31:50,020 Speaker 2: And there's been a tremendous effort by the Germans to 587 00:31:50,030 --> 00:31:53,380 Speaker 2: make up for that by taking gas from other countries, 588 00:31:53,380 --> 00:31:56,830 Speaker 2: driving up world prices actually. And some of this is 589 00:31:56,840 --> 00:32:00,250 Speaker 2: quite unfair. It certainly means that there's less gas to 590 00:32:00,250 --> 00:32:03,080 Speaker 2: go around for everybody else, particularly the emerging markets. So 591 00:32:03,080 --> 00:32:07,240 Speaker 2: you could say there's a parallel between German misjudgments over 592 00:32:07,240 --> 00:32:09,820 Speaker 2: unification and having to finance a lot of this through 593 00:32:09,820 --> 00:32:12,560 Speaker 2: higher interest rates in 1992 594 00:32:12,810 --> 00:32:16,370 Speaker 2: and misjudgments on the energy side here. So again, we 595 00:32:16,370 --> 00:32:20,260 Speaker 2: come back to the parallels. It's not a perfect way 596 00:32:20,260 --> 00:32:23,370 Speaker 2: of saying the two episodes are similar, but there are 597 00:32:23,370 --> 00:32:28,000 Speaker 2: certainly some parallels and some convergences. I would just like 598 00:32:28,010 --> 00:32:30,450 Speaker 2: us to think we can learn from some of these parallels. 599 00:32:31,300 --> 00:32:35,150 Speaker 1: So, David, we've talked about the context of Germany and 600 00:32:35,160 --> 00:32:39,370 Speaker 1: Italy in this situation. What about the rest of europe 601 00:32:39,380 --> 00:32:43,600 Speaker 1: started with France and perhaps a few other peripheral european countries, 602 00:32:43,600 --> 00:32:47,930 Speaker 1: both the economics and energy security issues. How do you 603 00:32:47,930 --> 00:32:49,360 Speaker 1: see them playing out? 604 00:32:50,320 --> 00:32:53,219 Speaker 2: It's been very interesting to look at France in the 605 00:32:53,220 --> 00:32:56,020 Speaker 2: last few months because of course France has put a 606 00:32:56,020 --> 00:32:58,990 Speaker 2: lot of effort over the last 50 or 60 years 607 00:32:58,990 --> 00:33:02,230 Speaker 2: into nuclear energy. The civil use of nuclear energy very 608 00:33:02,230 --> 00:33:04,610 Speaker 2: tied up. Of course with the French nuclear deterrent in 609 00:33:04,610 --> 00:33:07,990 Speaker 2: the military use has been a light motive of all 610 00:33:07,990 --> 00:33:11,140 Speaker 2: the governments since the second world war. And that has 611 00:33:11,140 --> 00:33:14,880 Speaker 2: really come to a pretty sticky point at the moment. 612 00:33:14,880 --> 00:33:17,320 Speaker 2: Half of the French nuclear power stations are not 613 00:33:17,330 --> 00:33:20,650 Speaker 2: operable at the moment because of some problems over corrosion, 614 00:33:20,680 --> 00:33:24,250 Speaker 2: engineering problems, lack of water during the very hot and 615 00:33:24,250 --> 00:33:28,740 Speaker 2: dry summer. So there's big energy problems in in France 616 00:33:28,740 --> 00:33:32,170 Speaker 2: as well. There would be a good opportunity for more 617 00:33:32,180 --> 00:33:36,420 Speaker 2: gas sharing out also using some pipelines from Spain Spain 618 00:33:36,420 --> 00:33:39,190 Speaker 2: has got a lot of liquefied natural gas, but that 619 00:33:39,190 --> 00:33:43,230 Speaker 2: seems to be blocked by various disagreements and squabbles within 620 00:33:43,230 --> 00:33:44,330 Speaker 2: the european union. 621 00:33:44,340 --> 00:33:46,990 Speaker 2: So, I would like to think that there could be 622 00:33:47,000 --> 00:33:52,460 Speaker 2: much more of an energy union between say Italy Spain France, 623 00:33:52,460 --> 00:33:55,700 Speaker 2: Germany and even the UK using the interconnector that we 624 00:33:55,700 --> 00:34:01,000 Speaker 2: have underneath the english channel for nuclear exports from France 625 00:34:01,000 --> 00:34:04,940 Speaker 2: to Germany sorry, from France to the UK at the moment, 626 00:34:04,940 --> 00:34:09,430 Speaker 2: France isn't exporting electricity because of these problems I've mentioned 627 00:34:09,430 --> 00:34:11,339 Speaker 2: in the in the nuclear side. 628 00:34:11,570 --> 00:34:16,030 Speaker 2: So I'm not wholly without any kind of confidence in 629 00:34:16,030 --> 00:34:20,550 Speaker 2: the future here. There could be a new angle here 630 00:34:20,550 --> 00:34:23,790 Speaker 2: to push forward an energy union in Europe and I 631 00:34:23,790 --> 00:34:26,630 Speaker 2: would hope that over the next 1-2 years. We will 632 00:34:26,630 --> 00:34:27,500 Speaker 2: see this will see me 633 00:34:27,500 --> 00:34:31,319 Speaker 2: More efforts to share energy. Will see more efforts to 634 00:34:31,320 --> 00:34:35,380 Speaker 2: save energy. We will also see more efforts to go 635 00:34:35,380 --> 00:34:38,880 Speaker 2: further on the renewable energy side. Despite all the problems 636 00:34:38,880 --> 00:34:42,380 Speaker 2: we know about that, it is relatively cheap. So looking 637 00:34:42,380 --> 00:34:46,540 Speaker 2: at the longer term, I'm relatively hopeful it is getting 638 00:34:46,540 --> 00:34:50,480 Speaker 2: through not just this winter, but the winter 2023 2020 639 00:34:50,480 --> 00:34:52,850 Speaker 2: for that's going to be problematic. 640 00:34:53,180 --> 00:34:58,380 Speaker 2: I think Putin has without doubt underestimated the resolve of 641 00:34:58,380 --> 00:35:03,469 Speaker 2: the West to stand up to the aggression both militarily. 642 00:35:03,480 --> 00:35:07,549 Speaker 2: He's probably been surprised by that. He's been surprised by 643 00:35:07,550 --> 00:35:10,320 Speaker 2: the incompetence of his own army as well. But he's 644 00:35:10,320 --> 00:35:14,890 Speaker 2: probably also been surprised by relatively large amount of economic 645 00:35:14,890 --> 00:35:18,989 Speaker 2: solidarity despite the problems I've mentioned just now. I I 646 00:35:18,989 --> 00:35:22,160 Speaker 2: very much hope that that will continue. And again, I 647 00:35:22,170 --> 00:35:24,640 Speaker 2: I do think that the sorry state that Britain is 648 00:35:24,640 --> 00:35:27,740 Speaker 2: in showing what happens if you go on a go 649 00:35:27,739 --> 00:35:30,870 Speaker 2: it alone? Rather arrogant path. I would very much hope 650 00:35:30,870 --> 00:35:33,040 Speaker 2: that that could have some positive impact on the rest 651 00:35:33,040 --> 00:35:35,509 Speaker 2: of europe and maybe over a longer period of time 652 00:35:35,700 --> 00:35:39,900 Speaker 2: will have some positive impact on Britain at all Britain 653 00:35:39,900 --> 00:35:42,950 Speaker 2: as well. I'm not talking about Britain rejoining the european union, 654 00:35:42,950 --> 00:35:44,799 Speaker 2: but I'm very much hoping that there'll be more of 655 00:35:44,800 --> 00:35:47,550 Speaker 2: an effort by the U. K. To go into lockstep 656 00:35:47,560 --> 00:35:51,150 Speaker 2: with France, Germany Italy and spain 657 00:35:51,580 --> 00:35:52,900 Speaker 2: in coming years, 658 00:35:54,200 --> 00:35:57,220 Speaker 1: right, We can keep our fingers crossed for that. David, 659 00:35:57,219 --> 00:36:01,529 Speaker 1: let's zoom away from europe UK and just go above 660 00:36:01,530 --> 00:36:03,590 Speaker 1: the earth and take a look at the whole world. 661 00:36:03,600 --> 00:36:06,630 Speaker 1: How is the outlook looking for next year? Is it 662 00:36:06,640 --> 00:36:07,480 Speaker 1: pretty dark? 663 00:36:08,790 --> 00:36:15,420 Speaker 2: The american economy is one source of greater confidence. I 664 00:36:15,430 --> 00:36:20,500 Speaker 2: do believe that America despite all its many political problems, 665 00:36:20,510 --> 00:36:24,819 Speaker 2: is proving itself to be the number one. Therefore, I've 666 00:36:24,820 --> 00:36:28,830 Speaker 2: got some hope that the locomotive function of America despite 667 00:36:28,830 --> 00:36:34,130 Speaker 2: the problems it's causing for emerging markets will continue to 668 00:36:34,130 --> 00:36:36,420 Speaker 2: being a relatively stabilizing factor. 669 00:36:36,670 --> 00:36:39,000 Speaker 2: I would like to think that the european recession will 670 00:36:39,000 --> 00:36:41,210 Speaker 2: not be as severe as many people think it will 671 00:36:41,210 --> 00:36:46,730 Speaker 2: be more of a blip. I'm obviously not expecting and 672 00:36:46,730 --> 00:36:51,590 Speaker 2: certainly not hoping for an escalation further escalation in Ukraine. 673 00:36:51,600 --> 00:36:54,149 Speaker 2: So a lot of these hopes for next year are 674 00:36:54,150 --> 00:36:55,570 Speaker 2: predicated on 675 00:36:56,140 --> 00:37:00,630 Speaker 2: a relatively orderly path of the war if you can 676 00:37:00,640 --> 00:37:03,020 Speaker 2: use those terms. Because I know a lot of the 677 00:37:03,020 --> 00:37:06,390 Speaker 2: war is absolutely horrible. So we shouldn't start thinking of 678 00:37:06,390 --> 00:37:07,060 Speaker 2: this like a 679 00:37:07,320 --> 00:37:11,250 Speaker 2: like an economic operation. I'm thinking the war will will 680 00:37:11,260 --> 00:37:14,980 Speaker 2: carry on for at least another year. But I'm very 681 00:37:14,980 --> 00:37:19,420 Speaker 2: much hoping it would lead to a continued escalation which 682 00:37:19,420 --> 00:37:22,790 Speaker 2: will mean that nuclear weapons get called in in some way, 683 00:37:22,800 --> 00:37:25,660 Speaker 2: which clearly would put an end to all our hopes 684 00:37:25,660 --> 00:37:29,360 Speaker 2: in in very many ways. So I'm relatively hopeful there 685 00:37:29,360 --> 00:37:31,950 Speaker 2: will be more international cooperation a lot depends on the 686 00:37:31,950 --> 00:37:35,469 Speaker 2: midterm elections of course in the United States and whether 687 00:37:35,469 --> 00:37:36,410 Speaker 2: or not we 688 00:37:36,719 --> 00:37:40,989 Speaker 2: see further polarization and a return to trumpism. So I'm 689 00:37:40,989 --> 00:37:44,660 Speaker 2: not catastrophically gloomy about the world economy, but there are 690 00:37:44,660 --> 00:37:46,440 Speaker 2: a lot of caveats in what I've just said, 691 00:37:47,420 --> 00:37:52,100 Speaker 1: Assuming that the war does not exacerbate to the direction 692 00:37:52,100 --> 00:37:55,580 Speaker 1: of creating renewed bouts of panic about food and energy supply, 693 00:37:55,580 --> 00:37:59,980 Speaker 1: assuming that doesn't happen. Would inflation globally come down substantially 694 00:37:59,980 --> 00:38:00,920 Speaker 1: in 2023? 695 00:38:01,410 --> 00:38:05,040 Speaker 2: I think in the United States there's greater feeling that 696 00:38:05,050 --> 00:38:09,290 Speaker 2: it will simply because we do have a lot of 697 00:38:09,300 --> 00:38:14,840 Speaker 2: monetary aggression in the United States belatedly. So they are 698 00:38:14,840 --> 00:38:19,910 Speaker 2: thinking of putting up the Fed funds rate to above 45% 699 00:38:19,950 --> 00:38:23,450 Speaker 2: I think if we have that and assuming the american 700 00:38:23,450 --> 00:38:25,100 Speaker 2: economy can stand up to that 701 00:38:25,350 --> 00:38:30,810 Speaker 2: And also assuming that the energy supply doesn't become too 702 00:38:30,810 --> 00:38:33,990 Speaker 2: tight for the rest of the world. And assuming the, 703 00:38:34,000 --> 00:38:36,690 Speaker 2: the American ideas of some kind of oil price cap 704 00:38:36,700 --> 00:38:40,070 Speaker 2: to work, then I could see that we could have 705 00:38:40,070 --> 00:38:42,910 Speaker 2: a positive inflation shock in the United States towards the 706 00:38:42,910 --> 00:38:46,460 Speaker 2: end of next year. I think that European inflation will 707 00:38:46,460 --> 00:38:48,870 Speaker 2: be 6% next year. So we will not see 708 00:38:49,230 --> 00:38:53,630 Speaker 2: Any very rapid fall in the inflation rate in Europe, 709 00:38:53,640 --> 00:38:56,900 Speaker 2: but it will not continue at the figures difficult in 710 00:38:56,900 --> 00:38:59,540 Speaker 2: some parts of the European Union, in the Baltic states, 711 00:38:59,540 --> 00:39:01,310 Speaker 2: we do have not just double figures, but we have 712 00:39:01,310 --> 00:39:02,420 Speaker 2: above 20%. 713 00:39:02,670 --> 00:39:05,910 Speaker 2: So based on a feeling that there will be a 714 00:39:05,910 --> 00:39:09,000 Speaker 2: greater degree of orderliness in the energy markets and some 715 00:39:09,000 --> 00:39:11,530 Speaker 2: of the commodity prices have anyway been starting to fall 716 00:39:11,530 --> 00:39:13,770 Speaker 2: for several months and then we will see some fall 717 00:39:13,770 --> 00:39:15,950 Speaker 2: in inflation but there's no way that the C. B. 718 00:39:15,950 --> 00:39:20,450 Speaker 2: Can get back to its target of 2% by 2024 719 00:39:20,460 --> 00:39:23,799 Speaker 2: I think we'll be talking about 6% next year. And 720 00:39:23,800 --> 00:39:27,719 Speaker 2: maybe if we're lucky 3 to 4% in 2024 721 00:39:27,910 --> 00:39:32,219 Speaker 2: For Europe and a bigger decline in inflation in the 722 00:39:32,219 --> 00:39:37,520 Speaker 2: United States. And the continued high inflation rates in Europe 723 00:39:37,530 --> 00:39:40,759 Speaker 2: could have some mitigating effects on Italian debt because there 724 00:39:40,770 --> 00:39:44,160 Speaker 2: is one classic way of inflating away the debt, if 725 00:39:44,160 --> 00:39:49,960 Speaker 2: Italy can manage to grow at 2-3% over two years 726 00:39:50,260 --> 00:39:53,080 Speaker 2: and therefore they continue to have an inflation rate of 727 00:39:53,080 --> 00:39:54,040 Speaker 2: say 6% 728 00:39:54,370 --> 00:39:57,470 Speaker 2: then they will have a G. D. P a nominal 729 00:39:57,469 --> 00:40:01,440 Speaker 2: GDP rise let's say something like 15% over the next 730 00:40:01,440 --> 00:40:04,140 Speaker 2: two years. That's quite a good way of inflating away 731 00:40:04,310 --> 00:40:07,230 Speaker 2: some of the excessive debts that they have. This is 732 00:40:07,230 --> 00:40:09,640 Speaker 2: not something that european central bankers like to talk about 733 00:40:09,640 --> 00:40:12,109 Speaker 2: in public because of course it goes against the grain 734 00:40:12,290 --> 00:40:15,890 Speaker 2: to say you're using inflation to lower the debt problem. 735 00:40:15,890 --> 00:40:18,950 Speaker 2: But behind the scenes european central bankers are saying sort 736 00:40:18,950 --> 00:40:23,260 Speaker 2: of that that could be a positive side effect of 737 00:40:23,270 --> 00:40:26,700 Speaker 2: high inflation. It might make the debt position of some 738 00:40:26,700 --> 00:40:31,500 Speaker 2: of the over indebted states principally. Italy a bit less parlous. 739 00:40:32,570 --> 00:40:35,149 Speaker 1: Absolutely, David. I mean, this is one issue where it 740 00:40:35,150 --> 00:40:36,730 Speaker 1: is very close to my heart that I believe that 741 00:40:36,730 --> 00:40:39,950 Speaker 1: from a policy makers perspective, given the mountain of debt 742 00:40:39,950 --> 00:40:42,970 Speaker 1: we have in the world that the risk of substantially 743 00:40:42,969 --> 00:40:46,470 Speaker 1: lower nominal expansion is far greater than you know, substantially 744 00:40:46,469 --> 00:40:48,319 Speaker 1: higher nominal expansion, 745 00:40:48,360 --> 00:40:51,850 Speaker 1: be it through stagflation or just through robust growth. I 746 00:40:51,850 --> 00:40:54,970 Speaker 1: think the denominator fact is very important. It's very important 747 00:40:54,969 --> 00:40:58,350 Speaker 1: to sort of keep the debt deflation risk away. And 748 00:40:58,350 --> 00:41:00,400 Speaker 1: so I think if I, for me, you know, I 749 00:41:00,400 --> 00:41:02,900 Speaker 1: would err on the side of inflation as opposed to 750 00:41:02,900 --> 00:41:08,670 Speaker 1: the side of deflation. Um David, you end your book, 751 00:41:08,670 --> 00:41:11,239 Speaker 1: six days in september which I highly recommend to the 752 00:41:11,239 --> 00:41:13,919 Speaker 1: listeners of Kobe time. Uh and you have this 753 00:41:14,160 --> 00:41:18,870 Speaker 1: rather meta observation at the end, the tangled and tragicomic 754 00:41:18,870 --> 00:41:21,930 Speaker 1: tale of black Wednesday provides a warning of how great 755 00:41:21,930 --> 00:41:23,189 Speaker 1: plans can go awry. 756 00:41:23,770 --> 00:41:27,240 Speaker 1: So here we are in 2022, which great plans are 757 00:41:27,239 --> 00:41:28,990 Speaker 1: at risk of going to rise today? 758 00:41:29,680 --> 00:41:32,470 Speaker 2: Well, well, first of all, just to clarify what I 759 00:41:32,469 --> 00:41:37,170 Speaker 2: meant by that, the problem about the british membership of 760 00:41:37,170 --> 00:41:39,760 Speaker 2: the er M was that it did it for totally 761 00:41:39,760 --> 00:41:43,670 Speaker 2: different reasons compared with those that were there under the continent. 762 00:41:43,670 --> 00:41:46,590 Speaker 2: So Britain entered the er m simply to get inflation 763 00:41:46,590 --> 00:41:48,790 Speaker 2: down and also to get interest rates down. 764 00:41:48,810 --> 00:41:52,950 Speaker 2: That's why mrs thatcher rather grudgingly agreed with john major 765 00:41:52,960 --> 00:41:55,830 Speaker 2: to do that on the continent. They saw it totally differently. 766 00:41:55,830 --> 00:41:57,840 Speaker 2: They saw the er m as being, if you like 767 00:41:57,840 --> 00:42:02,000 Speaker 2: the front window or the waiting room for monetary union. 768 00:42:02,000 --> 00:42:04,580 Speaker 2: So you had these two countries or two sets of 769 00:42:04,580 --> 00:42:09,180 Speaker 2: countries doing the same thing for totally different reasons and 770 00:42:09,180 --> 00:42:11,580 Speaker 2: that's what caused it all to come unstuck 771 00:42:11,739 --> 00:42:14,150 Speaker 2: in the end and that is a danger. I think 772 00:42:14,150 --> 00:42:17,029 Speaker 2: that people, for all kinds of political and economic reasons 773 00:42:17,030 --> 00:42:21,500 Speaker 2: carry out a certain policy but for reasons of principle 774 00:42:21,500 --> 00:42:26,279 Speaker 2: or philosophy which are entirely divergent and that is the 775 00:42:26,280 --> 00:42:29,410 Speaker 2: tangle that you get yourself into. Now I think if 776 00:42:29,410 --> 00:42:33,719 Speaker 2: you take today's situation and say take global warming, there 777 00:42:33,719 --> 00:42:34,630 Speaker 2: is a consent 778 00:42:34,960 --> 00:42:38,029 Speaker 2: consensus that global warming is on the whole man made 779 00:42:38,030 --> 00:42:39,750 Speaker 2: and there's a consensus that we should be doing all 780 00:42:39,750 --> 00:42:44,120 Speaker 2: kinds of things to try to mitigate the rise in 781 00:42:44,120 --> 00:42:47,790 Speaker 2: temperatures and that's why we have all these summits and 782 00:42:47,790 --> 00:42:49,609 Speaker 2: so on. But people are actually doing all this for 783 00:42:49,610 --> 00:42:53,120 Speaker 2: totally different reasons. And of course they're reversing this. Now, 784 00:42:53,120 --> 00:42:55,080 Speaker 2: look at the amount of money going into coal mining 785 00:42:55,090 --> 00:42:59,480 Speaker 2: these days. So that's how these great plans can go 786 00:42:59,480 --> 00:43:02,650 Speaker 2: awry firstly, different countries doing 787 00:43:03,060 --> 00:43:05,720 Speaker 2: what seems to be the same policy for a whole 788 00:43:05,719 --> 00:43:09,419 Speaker 2: set of different political and economic reasons, some of which 789 00:43:09,420 --> 00:43:13,530 Speaker 2: is very domestically driven and then plans getting upset by 790 00:43:13,540 --> 00:43:18,700 Speaker 2: what Harold Macmillan, the former british prime Minister calls events events, 791 00:43:18,700 --> 00:43:22,820 Speaker 2: dear boy events, events, getting in the way of grand plans, 792 00:43:23,010 --> 00:43:26,490 Speaker 2: german unification got in the way of the plan to 793 00:43:26,500 --> 00:43:29,640 Speaker 2: keep interest rates low, for example, in in 794 00:43:30,239 --> 00:43:33,069 Speaker 2: europe, and in the same way you have a war 795 00:43:33,080 --> 00:43:37,589 Speaker 2: in Ukraine getting in the way of global warming efforts 796 00:43:37,590 --> 00:43:40,580 Speaker 2: to counter climate change because people have been going back 797 00:43:40,580 --> 00:43:45,580 Speaker 2: along the coal route now very extensively. So that's the danger. 798 00:43:45,580 --> 00:43:47,740 Speaker 2: I think that these plans do get derailed and I 799 00:43:47,739 --> 00:43:48,540 Speaker 2: think the 800 00:43:48,550 --> 00:43:51,060 Speaker 2: the fight against climate change is a good case in 801 00:43:51,060 --> 00:43:55,440 Speaker 2: point that has been derailed by the efforts to get 802 00:43:55,440 --> 00:43:59,180 Speaker 2: back into coal mining, not just in europe, but much 803 00:43:59,180 --> 00:44:01,860 Speaker 2: greater extent in India and in china, that is going 804 00:44:01,860 --> 00:44:04,170 Speaker 2: to be a real setback, I have to say, you 805 00:44:04,170 --> 00:44:06,870 Speaker 2: could say over time, renewable energy will come 806 00:44:07,210 --> 00:44:10,400 Speaker 2: and rescue us all. It's a relatively small part of 807 00:44:10,400 --> 00:44:13,100 Speaker 2: the world, i. E, europe is making efforts on that, 808 00:44:13,110 --> 00:44:15,110 Speaker 2: but look at India and china. So that's what I 809 00:44:15,110 --> 00:44:19,660 Speaker 2: mean about grand plans going awry. And it's I think 810 00:44:19,660 --> 00:44:23,080 Speaker 2: goes much deeper than the relatively small issue about Britain 811 00:44:23,080 --> 00:44:25,960 Speaker 2: and the er m 30 years ago, there's a much 812 00:44:25,969 --> 00:44:27,609 Speaker 2: greater global 813 00:44:28,330 --> 00:44:31,930 Speaker 2: action over climate change which is now being seriously put 814 00:44:31,940 --> 00:44:35,490 Speaker 2: at risk by the perturbations we saw in the world economy. 815 00:44:35,500 --> 00:44:38,670 Speaker 2: So Britain and the er m that clearly is a 816 00:44:38,670 --> 00:44:43,160 Speaker 2: sideshow is intellectually and politically and economically interesting, but it's 817 00:44:43,160 --> 00:44:47,450 Speaker 2: a it's a footnote in history compared with the much 818 00:44:47,450 --> 00:44:51,719 Speaker 2: more massive actions and the much more massive campaign 819 00:44:51,890 --> 00:44:54,460 Speaker 2: to try to counter climate change and that is the 820 00:44:54,460 --> 00:44:56,700 Speaker 2: big worry, I think that that that's going to be 821 00:44:56,790 --> 00:45:03,200 Speaker 2: substantially undermined and diverted by the aftermath of the war 822 00:45:03,210 --> 00:45:05,480 Speaker 2: in Ukraine. So I just hope we can find a 823 00:45:05,480 --> 00:45:08,400 Speaker 2: way of getting back on track on that question without 824 00:45:08,400 --> 00:45:11,880 Speaker 2: losing too much time which would be causing the world 825 00:45:11,890 --> 00:45:13,280 Speaker 2: irreparable damage. 826 00:45:14,170 --> 00:45:17,380 Speaker 1: Very critical piece of insight, David, I mean, thank you 827 00:45:17,380 --> 00:45:19,880 Speaker 1: very much and I really appreciate because it is a 828 00:45:19,880 --> 00:45:23,600 Speaker 1: cautionary tale for the various grand plans that we have, 829 00:45:23,610 --> 00:45:25,359 Speaker 1: which we believe that you know, there is a global 830 00:45:25,360 --> 00:45:30,049 Speaker 1: consensus to implement but events shocks they get in the 831 00:45:30,050 --> 00:45:33,160 Speaker 1: way and I think that's where the importance of planning 832 00:45:33,160 --> 00:45:36,190 Speaker 1: with shocks in mind. Come in. Uh David Marsh, this 833 00:45:36,190 --> 00:45:38,190 Speaker 1: has been fantastic. Thank you very much for your time 834 00:45:38,190 --> 00:45:38,950 Speaker 1: and insights. 835 00:45:39,900 --> 00:45:42,710 Speaker 2: Thank you. Timer. All the best to you. Goodbye. 836 00:45:42,719 --> 00:45:46,069 Speaker 1: Thank you and thanks to our listeners Kobe time was 837 00:45:46,070 --> 00:45:49,300 Speaker 1: produced by ken Del Bridge from Spy Studios daisy Sharma 838 00:45:49,300 --> 00:45:52,820 Speaker 1: and violently provided additional production assistance Kobe time is for 839 00:45:52,830 --> 00:45:56,540 Speaker 1: information only and does not represent any trade recommendations. All 840 00:45:56,550 --> 00:45:59,260 Speaker 1: 86 of the podcasts are available on Youtube and on 841 00:45:59,270 --> 00:46:03,430 Speaker 1: all major podcast platforms including apple google and Spotify as 842 00:46:03,430 --> 00:46:05,940 Speaker 1: for our research publications, webinars and live streams. You can 843 00:46:05,940 --> 00:46:09,140 Speaker 1: find them all by googling dBS research library. Have a 844 00:46:09,150 --> 00:46:09,830 Speaker 1: great day