Systemic Reckoning Ahead: William White on the Coming Economic Shock | Global Macro | Ep.93
Summary
Macro Regime Shift: The guest argues inflation is now driven by reversing supply-side forces—demographics, deglobalization, energy costs, and resilience over efficiency—keeping rates structurally higher.
AI Investment Cycle: Massive US spending on AI data centers and chips could boost productivity but risks malinvestment if returns disappoint, especially if debt-financed.
Debt Dynamics: Elevated public and private debt raises sustainability concerns, with potential for a shift to financial repression (pegged low rates amid higher inflation) reminiscent of the 1940s.
De-dollarization: Sanctions use, reserve diversification, and China’s alternatives (e.g., mBridge, local-currency invoicing, possible gold linkage) could split the system into dollar- and renminbi-centric blocs.
Inflation Expectations: If expectations unanchor, wages and rates could rise quickly; long rates staying firm despite short-rate cuts hint at deeper concerns.
Europe and the ECB: EU-level debt issuance is growing to build a safe-asset pool, but stress in France could test the ECB’s capacity to “do whatever it takes.”
Energy Transition Pressures: Climate adaptation/mitigation, defense outlays, and supply chain reconfiguration are capital-intensive and inflationary, with metals and mining facing long lead times.
Transcript
[music] We're we're just on the verge of that more dangerous state of affairs. [music] And one might say, as I can remember, we said at the BIS in 2008, it would be a good idea to have a housing crisis [music] to to stop this whole thing out because if it doesn't get stopped out, it'll be even worse 3 years down the line. [music] That certainly would be the same thing with the AI thing if it goes on for another 2 or 3 years and then proves to be a false start. [music] You know, that would be a I think that would be a huge problem. [music] Imagine spending an hour with the world's greatest traders. Imagine learning from their experiences, their successes, and their [music] failures. Imagine no more. Welcome to Top Traders Unplugged, the place where you can [music] learn from the best hedge fund managers in the world, so you can take your manager due diligence or investment career to the next level. Before we begin [music] today's conversation, remember to keep two things in mind. All the discussion we will have about investment performance is about [music] the past and past performance does not guarantee or even infer anything about future performance. Also understand that [music] there's a significant risk of financial loss with all investment strategies and you need to request and understand the specific risks from the investment manager about their product before you make investment [music] decisions. Here's your host, veteran hedge fund manager Neils Krop Len. Welcome or welcome back to another conversation in our series of episodes that focuses on markets and investing from a global macro perspective. [music] This is a series that I not only find incredibly interesting as well as intellectually challenging, but also very important given where we are in the global economy and the geopolitical [music] cycle. We want to dig deep into the minds of some of the most prominent experts to help us better understand what this new global macrodriven world may look [music] like. We want to explore their perspectives on a host of game-changing issues and hopefully dig out nuances [music] in their work through meaningful conversations. Please enjoy today's episode hosted by Alan Dunn. Thanks [music] for the introduction, Neils. Today I'm delighted to be joined by Bill White. Bill is senior fellow at the CD How Institute in Toronto. He has worked as an economist and an adviser to central bankers for many decades. He was previously chairman of the economic and development review committee at the OECD in Paris and also was previously economic adviser and head of the monetary and economic department at the bank for international settlements. He's worked at the bank of England and he's been an adviser to the governor of the bank of Canada and has won numerous awards in um economic academic circles. So, Bill, great to have you on with us again. How are you doing? Oh, I'm I'm doing just fine and it's a pleasure to be here, Alan. It was fun the last time and I hope it'll prove to be the same this time. >> Good stuff. Yeah, as you mentioned, you were on uh I don't know, it might have been nearly 3 years ago now. It feels like uh time's moving on. So, if people want to go back and listen to that episode um to get more context on your background and your experience, that's a good starting point. Um but maybe to to to get right into it. I mean since we last spoke I suppose three years ago it's been pretty clear that a new macro regime has taken place. We've seen quite a different set of circumstances evolve in the last few years um from from I guess the secular stagnation of the 2010s. I mean to your mind how would you characterize the the the regime the the macro environment now? Now, um well, as you as you know, um during the pandemic, well, let's go back to before the pandemic. I mean, we had a >> a very long period of central bankers consistently falling below their inflation targets. Yeah. >> So the big worry was excessive disinflation and of course driven by the American phobia about the 1930s. Um a huge concern that the disinflation would turn into active deflation. So that was that was really the backdrop for the 20 years preceding the the pandemic. And um I think the big thing that changed was that during the pandemic of course we had this big burst of inflation. >> Yeah. And the interest rates went up very sharply, delayed, but very sharply. And it surprised a lot of people because they were so used to an easy money environment. >> Um, and then the interest rates stayed really relatively high relative to the previous couple of decades and then started coming back down again. But really since that time inflation has always been in the major countries at least somewhat above um the inflation targets which is a big change from what was happening before. And so interest rates have come down but you can see that there's a kind of growing concern that maybe from the inflation perspective that we're we're into a new regime. And my own personal view and I've written quite a bit about this is that um I think the sort of the supply side of things uh has been important both in the disinflationary period and since the pandemic and I think supply side issues are going to become even more important going forward. M >> but here's the big difference is that prior to really the pandemic the supply side shocks were all positive and disinflationary. So and there's just a huge list of these things you know we had globalization really starting in the the 1990s um which had an enormous impact in my judgment on on on prices. Uh we had the demographics you know which are very positive for a long period of time. Um concerns about energy supply were sort of minimal you know big increase in demand but it was easily met by increase in supplies of fossil fuels. Um companies focused like razor sharp on uh efficiency. Okay. and and supply chain improvements and cutting uh costs. And so all of these things were were were disinflationary. That's supply side. And on the demand side, with all of the stuff that was going all of the stuff that was coming out of China, people didn't companies didn't feel the need to have much investment in the in the um advanced market economies. So that was sort of weak. And then there was the defense dividend. So, you know, you cut defense spending. So, all of those things were moving in the direction of increased supply, lower demand, disinflation. This is all going into reverse. And I don't think that there's been anywhere near as much attention paid to these these factors, these sort of secular factors. What worries me when I hear people talk about the inflation outlook is their horizon seems to be about 18 months. Okay, which is sort of peanuts in the big scheme of things. The risen's about 18 months and they focus on things like tariffs as opposed to the broader question of total rearrangement of supply lines and scarcity. And so when you run through that list that I ran through before, it's the same list but all in reverse. Well, the globalization is turning into del globalization and we have no idea how far that's going to go. There's been a very worrisome increase in tariffs, not just in the United States, but really retaliatory around the world. This has been going on really since since the great financial crisis. Um the demographics have gone into reverse. um you know in some of the some of the countries uh China, Korea, Japan, uh Germany, Poland, I mean so many of these places where the the the number of workers is actually going down now, not up as was before. Part rates are going down in many places. Young people seem to be rethinking their attachment to the workforce for all sorts of different reasons. um the energy side. Whereas before we should have been worried about it but we weren't. Now of course people do see the writing or at least most people do see the writing on the wall. And whether you're talking in terms of adaptation or mitigation. Um it's going to be very costly. You know sunk assets and things of that nature. And um well that's and then you've got the what I talked about before you know the the razor sharp sort of uh concern for efficient for efficiency >> now that's giving away to resilience you know it's not just China and and the geopolitical stuff it's the wakeup call from the pandemic >> that these supply chains are really fragile and they've got to be sort of reorganized so that you've got some resilience if some country decides that they're not going to ship to you anymore. Um, and then you get into all this other stuff, you know, the investment demands. So, if there's no workers, you need more capital. Um, globalization needs um more investment in different supply lines. Um, energy, I mean, whether it's adaptation or mitigation, it was adaptation, you know, you got to rebuild all of those ports that got wiped out. Um you have to build stuff now with much stricter building codes so that they can resist warmer climates. Um the mitigation side is is um when you start thinking about what you need like you need a whole new supply chain, you know, based not on fossil fuels but based on metals and it takes you it takes 20 years to build to build a mine, you know. So you can see there's no easy way out of these supply side shortages and then you get into all the other stuff, defense, okay, all this national security stuff which is going to be very expensive. Um so to me I see the secular forces really just sort of reversing from what they were sort of 10 20 years ago. The environment is going to be much more inflationary and that's going to create a lot of problems for a lot of people who are heavily indebted because of the incentives that they were given through very low interest rates to increase their debts both private and public. So, well, there's nothing new in this. I mean, when I was at the BIS, we were constantly saying, "You're on a bad path," you know, >> and so it came to pass with the great financial crisis. >> And I guess I've been sort of saying ever since that, um, >> the situation is getting worse. And indeed um I think the last few years have really uh s cemented that judgment in my mind >> you know in the minds of others that um we've been on a bad path here and you wrote a paper um well it's over a decade ago now about ultra easy monetary policy and the law of unintended consequences and I mean a lot of what you write about is about the the nature of the economy being the complex adaptive system and that we can have um corridors of stability I think you've used that term and then nonlinearity at at thresholds and tipping points etc >> which all makes sense I mean >> now we did have the rate cycle uh the rate rising uh cycle in 2022 and >> there was no major accident obviously there was SVB Silicon Valley bank uh which got was contained and it was kind of a localized issue there But were you surprised in that period at the resilience of the economy that something didn't crack with the rise in rates then? Um and what I mean what was your interpretation of that? >> Well, yeah, I I was surprised um at the way in which the the the the cracks didn't turn into real sort of fissures. But I have to tell you that my first and biggest mistake was probably around 1997 when we first observed the Asian crisis >> and I said, "Oh, all that hot money and all that speculation, it's all come unstuck and that's the end of that kind of behavior." >> Yes. >> Well, the hot money just went to Brazil and Russia and it's been going on ever since. you know, like each each each time there's a crisis in the financial markets, the astonishing thing about it has been the capacity of the central banks to get us to to pull the iron out of the fire. And they managed to do that what in ' 87 in 2000 87 1990 1997 1998 with LTCM 2007 with housing. Okay. And here we go again in the pandemic. The only thing about the pandemic that really sort of makes it different is that whereas previously the monetary easing had been enough to sort of pull the iron out of the fire, this time it was much more um extended fiscal easing to go along with the monetary easing. And to my mind, what that sort of indicates is that the the the the underlying problem has now grown great enough that recourse to just one solution is not good enough. We need both of them. But the difficulty with all of this stuff, you know, and as I've been sort of saying for years and years, is that if if the answer is print the money, which creates more private sector debt, okay, and encourages more public sector debt, if we then add to it an explicit expansion of government debt, okay, fiscal easing to deal with the problems that emerged around the time of the pandemic, you can see that we've now got ourselves into a situation where globally, but particularly I would say in the in the advanced market economies where you've got record high levels of private sector debt to go along with record high levels of public sector debt. And you can see this is not a very good position to be in. um particularly because any setback the way I've described it in the past is the thing about debt is that it is dangerous in all states of nature. So that in good times if you got really big debts the interest rates go up and the debt service goes up and you say Houston we have a problem. Conversely, if you're in bad times, okay, the interest rates may go down, but your revenues go down, too. Okay, whether it's public or private, your revenues go down, too. And Houston, we have a problem. So, I've always worried about debt. And some increases in debt are obviously totally not just acceptable, but but desirable. Okay, you need the you you need to sort of borrow the money to invest productively in things that are going to be so profitable you can service the debt and everybody else benefits. But that's not what's been going on for the last number of years. You know, the debts have been used to basically finance on the private sector side, you know, stock buybacks, dividend payments, refinancing of various sorts. And in the public sector side, the big increase everywhere has not been in public sector investment. Okay? It's been in social security payments of one sort or another. You know, whether it's unemployment insurance, whether it's old age pensions, whether it's entitlements to health care, that's where the big increases have come. And I'm not denying that these things are important to do, but the point is the people doing the people providing the services are rapidly running out of fiscal room. So we now have a situation where I think we're very exposed on both the public side and the private side to higher interest rates. But the problem with all of this stuff that I was talking about earlier on, whether it's reduced supply side potential or whether it's increased in investment requirements, all of that is is crying out for more inflation and higher interest rates to resist it. >> So this is a dilemma that sort of has been coming down the road road. Some of us have been saying we're on a bad path for a long period of time, but I think now increasingly people are are recognizing the fact that we have a problem. Point is that we're so far down the path. Our exit path is not so clear anymore. Well, even people talk about, you know, government should be more prudent and they should cut the fiscal deficit. And he'd say, well, that's really something that they should do in good times. >> Yes. >> You know, that there should be a kind of rebalancing that deficits that went before in bad times should be be replaced with surpluses in good times. That's what you should have done, but nobody ever did. And now we are where we are. >> I mean, absolutely. And I guess the question is is you know coming back to the point about nonlinearity and thresholds and tipping points is where where is the tipping point? Obviously we're seeing higher yields around the world now in Japan trending higher even in Germany. Obviously they they've released the debt break and now we're seeing Germany yields the highest in probably over a decade. The US to date has still been fairly contained. the you know 10 year bond yields are still around 410 or so you know it's been around 4 and a quarter% for a few years now um as you say that the debt GDP is is has been rising um I mean what do you think is the thing that that really what's the straw that breaks the camel's back do you think >> well the honest truth is you you can never know as I said to you before I thought I thought things would people would start to behave themselves back in 1997. What's going to be the what's going to be the trigger? Um, I do think I mean you're you're you're you're right in suggesting, you know, the bond rates have been particularly in the states reasonably well behaved, >> but it's still been very unusual the last couple of years because the short rates have been going down >> and, you know, it just went down again in in the US. Uh, they're on hold in Europe for the moment. Yeah. Um but it's very unusual to have a period of time and I think we've had two years of it now at least where the short rates have gone down quite significantly and the long rates have if anything gone up okay in the face of that short term and that's very unusual and I guess as I say I think the re the reason why you can't sort of say what the typ tipping point will be is that for me the tipping point is purely psychological. That everybody sort of ignores the problem until all of a sudden they look at something that's been hidden in plain sight and at last they see. You know, as it says in the Bible, for those who have eyes to see, let them see and ears, ears to hear, let them hear. there comes a point in time where you can no longer um avoid looking at the the hidden reality in the middle of the room. And to to me with the long the long rates having been sort of, you know, reasonably well behaved but still unusual to be higher when the short rates are are down. On the one hand, it could be just the fear of higher inflation and you can make arguments for that. you know, inflation has been higher than forecast. Some people sort of see the secular stuff coming down the road. Another thing um that could be important is fears about the independence of central banks. you know, the increasingly with Trump and the kind of, you know, the the vibes that are going on in the United States and um perhaps elsewhere, um treasuries are about to take over the the central banks again and that worries some people. But my my fear is deeper than that and it it is all of a sudden people starting to grasp the nature of debt dynamics. which is that if your debt levels are high enough um and short enough that interest rates only need to go up a little relative to the nominal rate of growth of the economy. >> Yeah. >> To require to ensure debt sustainability the this you know that the leveling out of the debt to G& ratio. >> Yeah. You need primary surpluses as a proportion of GDP that are so great that you look at them and you say this is not going to happen. in which case you're into a a situation where every year you know the debt to GNA ratio is getting higher and higher and the ultimate end of that is governments find that they can't finance themselves at a reasonable rate in the market and so they turn to the central bank and at a certain point the market psychology changes and it says that really means rampant inflation. and I am out of here. Okay. So that's the sort of point where you sort of say they know that the physical thing is out of control. >> Yeah. >> First they grasp back. >> Yeah. >> And then they as they say in French and you you move from the the understanding to the reaction >> and I'm out of here. Now there is a big complication at the moment and I have no answer to this. When you look at the literature about debt dynamics and sovereign crisis um it is mostly a story of individual countries having problems. what I think is unprecedented although I'm not a sort of great what's the word student of of I'm not an academic student of of economic history but I dare say that we live in really unprecedented times so you sort of say you look at the the French fiscal situation for example you know a lot of people are worried about together with the political unwillingness of the governments to to do anything about it >> you look at the French situation and say, "I'm out of here." Well, where are you going to go? Going to go into the US dollar. >> Got exactly the same situation. Very, very high debt levels. No political will to deal with it. Underlying problems getting worse, not better. political division um the UK, Japan, you know, there's um so this is another element and I have no idea how that that will play out. I I suspect that some country will somehow attract the eye of the financial markets and the bond vigilantes absent for some decades will reemerge and attack that one country and then like Southeast Asia during the Asian crisis, [clears throat] >> you know, the markets will then sort of look at one country and say, "Wait a minute, it's not just this one country that's got a problem. They've all got a problem." Yeah, >> you can see the capacity for these underlying problems to uh mstasticize and regenerate themselves in different places because the underlying as it were underbrush in the forest underbrush of debt is now so great that we really are sort of we've set ourselves up for a big problem. [music] I mean I mentioned at that like your career has spanned many [music] decades. So I mean I think you started >> well many [laughter] I want to [gasps] I want to go back to I mean we've had the era of central bank independence and inflation targeting but I mean I think your experience goes back even before then or at least to the start of that period. So you can kind of vividly recall what things were like before that. So I mean what does a world where people lose confidence in central banks and inflation expectations become deankored to use the central banks bankers terminology I mean how does how does that play out obviously much greater volatility as you say bond yields much higher currency instability I guess is that what we're facing >> I would think that would be the underlying tendency um one of the things that's sort of interesting is the um the the belief that central bankers seem to have and I [clears throat] guess others too that inflation expectations are somehow anchored in the central bank's target. There's a guy at the at the Fed, the International Financial Group. Anyway, it was one of the Fed's published papers, Jeremy Rudd. >> Yes. And he asks the question of why do we believe that inflation is anchored in inflationary expectations. And he then goes on to demonstrate that there's in fact no theoretical ground for believing this to be true. No empirical ground for believing this to be true and that um inflation in fact is anchored in past inflation. and it's been low for a long period of time. And my ex-colague at the BIS, Clauddio Borealo, um presented a paper not so long ago, which is up on the BIS website that talks about the corridor of stability for expectations. And his contention is that the world for a long period of time was in that state of affairs that chairman Greenspan once described as desirable i.e. nobody cared. You know, inflation was sort of so low focused on it at all. Okay. But Clauddio's point and in a way Greenspan's point is that once it goes beyond a certain level on the upside and I don't buy the story so much on the on the downside but on the upside um but people do start to focus and when they do start to focus like I was talking before about the bond market when they do start to focus it doesn't take very long before they start to do something about it and recognizing that inflation is higher than the wage demands start to be higher, etc., etc. And so the potential for an upside move in the in inflation and in interest rates to react against that inflation is is pretty substantial. So um that is something that um I guess my feeling I mean as you look as you look at all of these problems you know what what what is the what is the answer and it's not so easy to find in fact it's impossible for me at least to find an easy exit ramp from the current problems. So when you talk about sort of public sector debt, you know, the standard economic response or the economist response would be well, you need supply side reforms to um increase supply potential in the face of all of those negative supply shocks that are coming down the road. You know, maybe there's positives positive things you can do to reinvigorate growth. Um and you need fiscal um fiscal tightening. M >> and say, "Well, yeah, you could do that and you probably should do that, but uh on the supply side, you know, ever since the great financial crisis, the the the OECD keeps track of this stuff." You know, they've got this document called going for growth. >> Structural reforms have been sort of basically sliding in number and and and importance ever since the great financial crisis. I mean the the the countries are becoming more and more sort of um incapable of deregulation in a in a really positive way. And on the fiscal side as I said to you earlier on um it's all very well to say let's have fiscal uh restraint surpluses when the economy is growing and generating those surpluses. It's a very different thing when you're facing a situation of chronic government underfunding, you know, where you got a big defic, you know, the economy is slow and you've got a big deficit and now you're going to cut you're going to cut the deficit. But the crucial thing is it's the debt to G& ratio that needs to be stabilized. Okay? So if you cut the debt, you know, fiscal surpluses, but at the same time it leads to to G& falling even more, you know, like Greece for example during the Euro crisis. >> Yeah. This it's sort of the the paradox of thrift I think as Kane called it >> is that you everybody tries to save more the government tries to save more and at the end they wind up saving less >> because their savings are a cut in somebody else's revenue and their savings you know so this this you know these paradoxes of macro you know have been around for a long time so that's the recommended way to get out of it and then you look at it and you say but it's not going to work. >> Um, then you can have explicit debt reduction. >> Yeah. >> But the thing to remember about explicit debt reduction is one, it's going to come as a hell of a shock if one of the big countries defaults on its debt. Okay. >> Yes. >> I think that's going to put the the cat among the pigeons. >> And um then you have to think who's on the other side of that. So people keep talking about debt jubilees, right? But in the Bible, there was the king [laughter] and a few hangers on, okay, who were wealthy beyond anybody's dreams relative to everybody else. So they could cut the debt that was owed to them by the wage slaves. And it didn't change their behavior one iota. >> But today, if you start cutting debt, whether it's private debt or public debt, sort of saying these debts will not be repaid, write them off. You know who's on the other side of it? It's you and me and all the other poor schmucks that are in pension that that are living off pensions, you know. So, this is not exactly recommended behavior either. >> So, that's when you that's when you start thinking, well, maybe the inflationary outturn is not so bad, but the debt dynamic thing means it could easily get out of control. Oh, I I think there will be a lot of thinking about financial repression that you find ways to force people to hold government debt and in a certain way, you know, low interest rates, forced, you know, liquidity requirements, credential requirements. There's all sorts of ways in which you can move into that sort of realm. And it was it was tried in the late 19 in the 1940s after the war, >> you know, financial repression. And it worked um it worked quite well. >> Yeah. >> Um wiped out um the wealth of the middle classes, I guess, and you know, the upper classes. But uh in terms of dealing with the overhang of government debt uh after about five or 6 years of relatively high inflation and pegged low interest rates >> the problem was gone. I mean we also had strong economic growth in the post-war [clears throat] period and for many people market participants economists I don't know who but um AI is now the the great hope I mean productivity has improved a bit I think pal even referenced it uh at the most recent press conference productivity had been quite weak you know um prior to co and immediately after so this is just a bit of a bounce back but I mean there is hope that Maybe this could be part of the solution. Are you a believer or a skeptic on the potential benefits from AI? >> I certainly hope it will live up to its potential, but again, you know, I've been around long enough and I've been through enough of these uh these um moments of enormous enthusiasm about particular technological developments. And uh in the end it seems to me the recurrent theme is um the idea is is is is actually a good one but to get the full benefits takes decades what railways electrification you know in the end these were wonderful things but they took [clears throat] decades >> and the people that originally sort of led the way and were totally enthusiastic they wound up losing their shirts. >> And um I I think when you look at AI um there has been a huge bet put on it in the United States in particular, you know, I think AI spending this this you know sort of these you know big data centers I think last year was something like 6% of GDP. there's basically nothing else going on in terms of investment in the US >> except these data centers >> and um if it works out and all of the people involved are making money which is what is required for this thing to be sustainable um that would be terrific. But if it doesn't work out, then you've got huge amounts of investment in data centers that are likely unlike the cable that was laid during the, you know, the fiber that was laid during the um the um the internet boom in 2000, around 2000. You know, this stuff with all these chips is going to deteriorate. It depreciate pretty quickly. So there could be a huge amount of um well this is mal what Hayek would call mal you know just lost >> lost capital >> it's it's and um and that would have huge macro implications >> the in a sense the the the worst case scenario is that all of this investment continues for an extended period of time using borrowed money. Okay. Up until now, it's been it's been mostly the the the cash flow that people have had, but increasingly people are turning to borrowing. And of course, it's it's borrow when when you get a crash after a long period of borrowed money, it's much more significant than what happens after a long period of let's say equity financed investment. Yeah, >> though we're not we're we're just on the verge of that more dangerous state of affairs. And one might say, as I can remember, we said at the BIS in 2008, it would be a good idea to have a housing crisis to to stop this whole thing out because if it doesn't get stopped out, it'll be even worse three years down the line. That certainly would do the same thing with the AI thing. if it goes on for another two or three years and then proves to be a false start, >> you know, that would be I think that would be a huge problem. But we're well short of that yet. >> We're well short of that yet. >> But I'm Yeah, I'm by nature, I guess, a bit sort of skeptical. I'm not saying it can't work out, >> but I'm thinking about uh remember that famous book 2009 from Ken Rogoff and Carmen Reinhardt. >> Yes. you know which is called this time is different >> 800 years of financial fully >> yes >> so this is their book was really about public sector stuff this is >> the worry we have here now with AI is is private sector stuff but I think the same logic applies that >> well it's interesting I mean I sometimes think that the Rogoff and Ronard book came out maybe a decade too early because I mean austerity was kind of somewhat uh inspired by their writing at the time and you know a certain was then embraced in 2010 in that period whereas now the the learnings of Rogoff and Reinhardt seem to have been forgotten but more generally I'm just curious I mean we're in this era with um the affordability crisis in the US and you know we call it the cost of living crisis over here you've got the K-shaped economy you know this backlash against neoliberalism backlash against global ization. Um, you know, up until if we went back five years ago, economists might have felt they were doing a pretty good job. You know, unemployment is low, inflation was low, >> the great moderation, >> different now. The great moderation. I mean, >> where did the economists, what was wrong with the whole model? I mean, have you have you, as you step back now, having been involved in policy circles for 50, 60 years, where did it all go wrong? Well, I think the fundamental problem I've described as an epistemological problem >> and um you get back to the question of what do you know and how do you know? What's the difference between opinion and what they call justified belief? And I think the models that people have been working off of for the last 20 or 30 years have been simplified in order to make them tractable. You know, mathematically solvable. M >> um but they've basically been simplified to a point whereas Charles Goodhart once put it in a seminar at the Bank of England. There's abs quote unquote there is absolutely nothing in any of these models that is of significant interest to a central banker. So it's the simplification and I've the the most of the models that you you you see that are being used by central banks and by and by many others as well. I mean the IMF and the OECD and whatever you know they're linear they're deterministic. They're based on the idea that the economy is is simple understandable and therefore controllable. And all of this stuff is false. >> And that's the fundamental problem. And a good example of it, I think, is um as you mentioned before, I mean, I'm a big believer in the economy is a complex adaptive system. And there's huge studies that have been done into systems of that sort in both nature and society. And the odd thing is when you read many of these books about complexity, the the thing that they put at the top of their list as a complex adaptive system is the economy. But the economists are the only ones that don't get it. >> Well, they're still working on the assumption that it isn't. >> And um and so they've made a lot of mistakes. And I just two of them. I mean, one of them is the whole of the supply side, you know, the the in the leadup to the great moderation and and and and even beyond um the importance of globalization, keeping in keeping inflation down, the stuff we talked about a little bit earlier on, they totally missed it. that if you've got a positive supply side shock, the appropriate answer is not to lean into it with lower interest rates. The appropriate answer is to react to the higher growth potential with higher interest rates. And they did the very opposite because their sort of simple linear linear deterministic one period model said we've got excess capacity now so the answer is you have to lower interest rates. And that led to the increases in debt that have plagued us ever since. Okay? >> And they missed the supply side change, you know, the supply side problems during the the pandemic. >> And as I suggested to you before, [clears throat] I think they're missing the the perspective supply side shocks that are coming down the line. They just don't think enough about the other side of the economy. Okay. M >> supply side and you know the focus on demand side is almost totally driven out attention to the supply side. >> It's more complex than they think. >> The second thing is that these models don't include a financial sector. The these models sign into something that I thought canes put to bed how many years ago? Gee was 65 85 years ago. You know it's not a loanable funds world. where people save money and put it in the bank and the banks lend it out. Okay? It's a liquidity preference world in which banks create money. Okay? Um when you go in and get a loan, they basically just write up both sides of the balance sheet. Well, your capacity and desire to do that is a very important component of how the economy subsequently behaves and functions, >> but it's not there in any of the models. And so when the debt levels go up and financial markets start to, you know, get a bit shaky, all of that stuff is not there. >> Yeah. >> So you you don't need to worry about stuff that isn't there. Another thing, [clears throat] income inequality, which is what you're referring to, the kind of case situation, this has been getting worse and worse for years. >> Yeah. >> And in large part, I I personally put it down to monetary policy. >> You know, the systematically keeping interest rates very low has resulted in a big buildup of asset prices, but it's the people that are already well off that own all of these things. So they're getting relatively speaking wealthier and wealthier >> and not surprisingly >> okay the people who are sitting there >> what was the line um Kindleberger used there's nothing so infur there's nothing so infuriating as as watching your neighbor get rich okay so you look at the underlying political discontent and the roots the roots are very widespread but surely this has got to be one one part of it >> and of course it has induced a lot of people um to sort of go for it. >> You know in my own country Canada for example um been an awful lot of um speculative buying in advance of condominium units. >> Okay, >> you're looked into you're locked into the price that you're going to pay and this is before the condo is even built. Then the condo is built and now the in Toronto at least you know the market has just basically disappeared. There's going to be a lot of people who trying to emulate their neighbors who have grown rich. They've engaged in a form of spec financial speculation without knowing it. And they're now sitting on properties that you know they paid $600 a square foot for that's now worth $400 a square foot. M >> and somebody's got to eat that eat that loss. So um on all of those fronts, one shouldn't be surprised that there are problems arising from didn't see the supply side stuff, uh didn't see the financial sector stuff, didn't see the income inequal, income and wealth inequality stuff. >> Yeah. So with all of those things having been ignored for such a long period of time, is it surprising that we we might be heading into a period of both economic and political difficulties? >> So that's sort of where I I see things at the moment. It doesn't really make me a happy camper. [music] >> Maybe just moving into the international domain. Um, and it's I know it's been a focus of your work as well. And [music] you know, we've had I suppose Breton Woods uh you know then what was called Bretonwoods 2 and then you know I suppose a bit of a question mark as to what what where we're heading now in in in the new environment. Is it a Brettonwoods three or is it more fragmentation? Um obviously around the world you know amongst some emerging markets in China there's a disquite about the ongoing role of the dollar but equally the US administration seems keen to continue to pro promote the dollar as a global reserve currency. >> Um how do you see that evolving? Is that a a stress point in the system? >> Well I I think so. Um, I mean it's hard to know what the Trump administration wants to do with the dollar >> because on the one hand they're sort of, you know, talking up the dollar and it's got to continue. >> Uh, you know, the hu dollar heimon kind of stuff, >> but on the other hand, uh, they're they're basically saying we need a significantly lower dollar. you know that uh every time we sort of try to you know every time that the trade deficit or the net investment position of the United States cries out for lower dollar um everybody else shouts currency wars and they refuse to allow the dollar to go up. You know it's the N minus N minus one problem. >> So I'm not quite sure um what it is that the administration wants. >> Yeah. Um, I think I mean this is something else I didn't mention earlier on about isn't it sort of odd when the short rates go down and the long rates go up um and gold goes up um so that I think sort of what's coming down the road is probably going to be a kind of fracturing >> and I suspect it'll be not a total fracture in a sense of utarchy, you know, like the inter war period or something like that. But I think there's likely to be a kind of grouping into two camps. One around the US dollar and one around the Chinese raimi. Um, from what I can tell, the Chinese are not working in the direction of or actively supporting replacing the dollar with the remimi. you know that there doesn't be seem to be that kind of imperialist tinge to them but they have I mean ever since Governor Joel made his speech I think in 2008 about the dollar dominated system and that it somehow wasn't right. China has been sort of pushing that idea >> and I suspect that as the dollar starts to weaken for various reasons not least of which is fiscal fiscal might seem out of control. Debt levels are too high. you know, we've been talking about that they will certainly seek to capitalize on the weakness of the dollar by pursuing their own objectives. And I think they're already, as far as one can tell, uh already sort of well advanced in a way. I mean they've been working on they were we're working with the BIS on the so-called Embridge uh platform which is basically a blockchain payment settlement pay payment pay payment system uh that appears to be extremely efficient, cost-effective, fast. Um you know you hear people talking about the advantages of stable coin. Well you can do the same kind of stuff >> with [clears throat] against you know the blockchain background. uh in the public domain and so >> and and this this will be a a replacement or competitor to Swift is that it or >> Yeah. And it's a >> let's say 5% of the cost >> and uh exchanges are made almost instantaneously. >> So you can see the you know the attraction of this over time >> and that will certainly sort of be of help to the raimi. Um but there are other things that are going on there too. I mean, the way they've been co cozying up to people in the Gulf and um you know, because oil is still a really big thing to them, the Gulf people, I think, are looking at American what's the word? American uh fossil fuel independence, okay? And basically saying, well, yeah, that's good for America, but in the old days, America had to support us because they needed our oil. But now they don't need to anymore. So, are they as reliable a partner as they used to be? And behind it all too, and I think this is actually a I thought at the time a a really sort of important event was when the when the US and the G7 coalition basically put all those sanctions on the Bank of Russia, Central Bank of Russia. >> Yeah. >> They froze their assets and now it's gone even further than that. But they froze their assets and then they they they basically refused access to Swift to the Russian banks, many of the Russian banks. And I have friends who are sort of quite involved with reserve management for emerging markets. And that really put the wind up people because I think they, you know, they'd seen this sort of the use of the the dollar as a geopolitical weapon in the past. But somehow this was a renewed example of it and it was sort of so scary to people that I think you know what we've seen is that um a lot of people have been moving to to change the the ownership of their reserves. >> You know the percentage of dollar holdings has been going down. uh the Japanese well the ch the Chinese are have been basically moving out of treasuries and into gold. Um, and you hear some people speculating, I mean, I don't know enough about it myself, but speculating that, you know, what you wind up with is Chinese sort of, as it were, cozying up more to the Gulf people and getting oil and perhaps other commodities increasingly invoiced in uh in local currency, you know, whoever is doing the buying, India, China, but no longer going through the dollar. >> Yep. Um people then having a demand to hold more Rimbei, maybe more rupees, whatever. Um them saying at the same time, well, of course, you can hold the remi because it's it's actually backed by gold. Uh you can see the Chinese um setting up governance >> procedures for Embridge that basically prevent any country from using that as a geopolitical weapon >> which again would totally distinguish it from the use of the dollar. >> You know it's not is not impossible to do that. It's all a question of you how you write the articles of governance >> for that whole outfit. So you can see a lot of pieces coming together whereby the Chinese would not seek to sort of replace the dollar but would seek to provide an alternative way of doing things. Mhm. >> And you could see a lot of people who for all sorts of reasons, either because they're autocracies themselves or because they see themselves so what's the word? Embedded in the Chinese supply chain structure. You could see a lot of countries might sort of say, "Yeah, I think I'll I'll go with those folk." I can imagine that um there would be a lot of pressure of both sorts both carrots and sticks uh by individual countries like China or the US then to sort of step in and sort of induce people to to choose sides. And I mean you're talking about this polarity between the US and China, but in the middle is obviously Europe and the euro uh which at one point was seen as one of the possible challenggers to the US dollar. Um I mean Europe has its own problems. You mentioned France already debt levels there but equally you know increasingly increasingly you hear from the likes of Macron about you know the need from Europe as well to bring its capital back to Europe. >> Yeah. Um, yeah. How do you is that do you see an opportunity for the euro to take on a bigger role now or not? >> I certainly think it could. How dangerous that might be, I haven't really thought about, but certainly um certainly it could do. I mean there's been a big movement um I mean as you know expansion of >> um euro denominated debt >> by Brussels. >> Okay. >> Yeah. >> Um the the question of who provides the guarantee for that stuff is uh is another question. You know whether the nations are prepared to uh go into what is it what is it called? Um, oh, come on. You know, we're joined in several >> arrangements to be responsible for that debt, >> but certainly moving more in that direction. I think I read a study just the other day that indicated that um the differentials between that centrally issued debt which traded above bunds for a s you know really for a significant period of time >> still trading above but the the premium has been going down as the liquidity in the market has gone up >> and uh so you could see you know some people are pushing pushing that as as being very helpful and of course it would also increase capital market integration which the Europeans have been desperate to provide really now for decades. Right? >> There's been lots of talk but not much action. >> It'd be consistent with Draghi's contention about some of the stuff that needs to be done to get Europe going again. And uh so I think yeah there's um there's there's room if people are prepared to take the risks that are associated with that there being as it were no single government in Europe. I mean that's the biggest biggest single issue >> is how do you how do you spread the risks? >> Um and I I'm not an expert so I wouldn't profess to to know how to do that >> but you can see an opportunity. I mean was >> the big thing people have always said is that there's not a big enough liquid capital market in Europe >> and this is a means of trying to provide such a beast. >> Yeah. Well, that was always the argument that there, you know, there's not enough supply of European safe assets for the euro to grow, but you know, there's certainly enough capital required now. Um, if the political will will there obviously at the same time in Europe, we've had >> the draggy report, but and a lot of talk about it, but not much action. And at the same time as you say you've got the the the fiscal stresses you know and that difference say between the outlook in France and Germany and that's that's just taking a current day perspective that ignores how how that will evolve over time as entitlement spending. Do you still do you see you know we haven't had a Eurozone crisis for a while or strains for a while but now French bond yields did go up for a while you know amid the most recent political turmoil I mean is that a theme that can come back do you think >> well it could do and I mean then then then what you're back to is Mario Draggy ECB do within the law will do whatever it takes And let me assure you it will be enough. Uh well then the question becomes I mean if you get um it was one thing to have a run on you know on Irish bonds and Italian bonds and Greek bonds etc. But now a run on French bonds. Um the question is would the ECB be in a position to do whatever it takes? And in the past, I mean, I'm told I'm certainly not privy to their conversations, but that before Mario Draggy made his comment, uh, he had been in close contact with Angela Merkel and with the German authorities and the other sort of, you know, prudent countries to ensure that he could get away with it. And he was assured that he could. Well, now we're back into, you know, the political the political will, I think, particularly of the the creditor countries, you know, like Germany and Holland and, you know, and and what what they're prepared to do to keep the whole thing together. Um, I guess from what I've seen, the the political will in Europe has been um pretty strong right up to the present time that this Euro thing has been um a huge experiment that is worth doing and sustaining >> for all sorts of reasons. And um I don't see that uh really that that that that willingness to to do whatever it takes I think is still is still there. Whether that might change in the future I don't know in complex adaptive systems you say this is the ultimate out in complex adaptive systems forecasting is essentially impossible. impossible. Okay. >> When you add it when you add in all the political stuff, you know. >> Yeah. >> And and that's that that makes the problem in a way even more intractable because you really got these two systems, the political system and the economic system, each of which is complex and adaptive and fragile. And you got to keep both of these shows running at the same time. And that says nothing about the environment which is the third system into which both of the above are nested. So um it's complicated. >> Yeah, it's complicated. [laughter] >> Very good. Well, that's I think a good point to to conclude. Um we're over the hour, but uh thanks very much for coming on again, Bill. Always a pleasure to hear your latest thoughts and and people can um follow your work. You have your own uh website, William White. Um if people search for that, they'll they'll get >> William White.ca. >> William Whiteh.ca. Very good. Um but yeah, very much appreciate you coming on. Um so from all of us here at Top Traders Unplugged, stay tuned. We'll be back soon with more content. >> Thanks for listening to Top Traders Unplugged. [music] If you feel you learned something of value from today's episode, the best way to stay updated is to go on over to iTunes and subscribe [music] to the show so that you'll be sure to get all the new episodes as they're released. We have some [music] amazing guests lined up for you. And to ensure our show continues to grow, please leave us an honest rating and review in iTunes. It only takes [music] a minute and it's the best way to show us you love the podcast. We'll see you next time on Top Traders Unplugged.
Systemic Reckoning Ahead: William White on the Coming Economic Shock | Global Macro | Ep.93
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[music] We're we're just on the verge of that more dangerous state of affairs. [music] And one might say, as I can remember, we said at the BIS in 2008, it would be a good idea to have a housing crisis [music] to to stop this whole thing out because if it doesn't get stopped out, it'll be even worse 3 years down the line. [music] That certainly would be the same thing with the AI thing if it goes on for another 2 or 3 years and then proves to be a false start. [music] You know, that would be a I think that would be a huge problem. [music] Imagine spending an hour with the world's greatest traders. Imagine learning from their experiences, their successes, and their [music] failures. Imagine no more. Welcome to Top Traders Unplugged, the place where you can [music] learn from the best hedge fund managers in the world, so you can take your manager due diligence or investment career to the next level. Before we begin [music] today's conversation, remember to keep two things in mind. All the discussion we will have about investment performance is about [music] the past and past performance does not guarantee or even infer anything about future performance. Also understand that [music] there's a significant risk of financial loss with all investment strategies and you need to request and understand the specific risks from the investment manager about their product before you make investment [music] decisions. Here's your host, veteran hedge fund manager Neils Krop Len. Welcome or welcome back to another conversation in our series of episodes that focuses on markets and investing from a global macro perspective. [music] This is a series that I not only find incredibly interesting as well as intellectually challenging, but also very important given where we are in the global economy and the geopolitical [music] cycle. We want to dig deep into the minds of some of the most prominent experts to help us better understand what this new global macrodriven world may look [music] like. We want to explore their perspectives on a host of game-changing issues and hopefully dig out nuances [music] in their work through meaningful conversations. Please enjoy today's episode hosted by Alan Dunn. Thanks [music] for the introduction, Neils. Today I'm delighted to be joined by Bill White. Bill is senior fellow at the CD How Institute in Toronto. He has worked as an economist and an adviser to central bankers for many decades. He was previously chairman of the economic and development review committee at the OECD in Paris and also was previously economic adviser and head of the monetary and economic department at the bank for international settlements. He's worked at the bank of England and he's been an adviser to the governor of the bank of Canada and has won numerous awards in um economic academic circles. So, Bill, great to have you on with us again. How are you doing? Oh, I'm I'm doing just fine and it's a pleasure to be here, Alan. It was fun the last time and I hope it'll prove to be the same this time. >> Good stuff. Yeah, as you mentioned, you were on uh I don't know, it might have been nearly 3 years ago now. It feels like uh time's moving on. So, if people want to go back and listen to that episode um to get more context on your background and your experience, that's a good starting point. Um but maybe to to to get right into it. I mean since we last spoke I suppose three years ago it's been pretty clear that a new macro regime has taken place. We've seen quite a different set of circumstances evolve in the last few years um from from I guess the secular stagnation of the 2010s. I mean to your mind how would you characterize the the the regime the the macro environment now? Now, um well, as you as you know, um during the pandemic, well, let's go back to before the pandemic. I mean, we had a >> a very long period of central bankers consistently falling below their inflation targets. Yeah. >> So the big worry was excessive disinflation and of course driven by the American phobia about the 1930s. Um a huge concern that the disinflation would turn into active deflation. So that was that was really the backdrop for the 20 years preceding the the pandemic. And um I think the big thing that changed was that during the pandemic of course we had this big burst of inflation. >> Yeah. And the interest rates went up very sharply, delayed, but very sharply. And it surprised a lot of people because they were so used to an easy money environment. >> Um, and then the interest rates stayed really relatively high relative to the previous couple of decades and then started coming back down again. But really since that time inflation has always been in the major countries at least somewhat above um the inflation targets which is a big change from what was happening before. And so interest rates have come down but you can see that there's a kind of growing concern that maybe from the inflation perspective that we're we're into a new regime. And my own personal view and I've written quite a bit about this is that um I think the sort of the supply side of things uh has been important both in the disinflationary period and since the pandemic and I think supply side issues are going to become even more important going forward. M >> but here's the big difference is that prior to really the pandemic the supply side shocks were all positive and disinflationary. So and there's just a huge list of these things you know we had globalization really starting in the the 1990s um which had an enormous impact in my judgment on on on prices. Uh we had the demographics you know which are very positive for a long period of time. Um concerns about energy supply were sort of minimal you know big increase in demand but it was easily met by increase in supplies of fossil fuels. Um companies focused like razor sharp on uh efficiency. Okay. and and supply chain improvements and cutting uh costs. And so all of these things were were were disinflationary. That's supply side. And on the demand side, with all of the stuff that was going all of the stuff that was coming out of China, people didn't companies didn't feel the need to have much investment in the in the um advanced market economies. So that was sort of weak. And then there was the defense dividend. So, you know, you cut defense spending. So, all of those things were moving in the direction of increased supply, lower demand, disinflation. This is all going into reverse. And I don't think that there's been anywhere near as much attention paid to these these factors, these sort of secular factors. What worries me when I hear people talk about the inflation outlook is their horizon seems to be about 18 months. Okay, which is sort of peanuts in the big scheme of things. The risen's about 18 months and they focus on things like tariffs as opposed to the broader question of total rearrangement of supply lines and scarcity. And so when you run through that list that I ran through before, it's the same list but all in reverse. Well, the globalization is turning into del globalization and we have no idea how far that's going to go. There's been a very worrisome increase in tariffs, not just in the United States, but really retaliatory around the world. This has been going on really since since the great financial crisis. Um the demographics have gone into reverse. um you know in some of the some of the countries uh China, Korea, Japan, uh Germany, Poland, I mean so many of these places where the the the number of workers is actually going down now, not up as was before. Part rates are going down in many places. Young people seem to be rethinking their attachment to the workforce for all sorts of different reasons. um the energy side. Whereas before we should have been worried about it but we weren't. Now of course people do see the writing or at least most people do see the writing on the wall. And whether you're talking in terms of adaptation or mitigation. Um it's going to be very costly. You know sunk assets and things of that nature. And um well that's and then you've got the what I talked about before you know the the razor sharp sort of uh concern for efficient for efficiency >> now that's giving away to resilience you know it's not just China and and the geopolitical stuff it's the wakeup call from the pandemic >> that these supply chains are really fragile and they've got to be sort of reorganized so that you've got some resilience if some country decides that they're not going to ship to you anymore. Um, and then you get into all this other stuff, you know, the investment demands. So, if there's no workers, you need more capital. Um, globalization needs um more investment in different supply lines. Um, energy, I mean, whether it's adaptation or mitigation, it was adaptation, you know, you got to rebuild all of those ports that got wiped out. Um you have to build stuff now with much stricter building codes so that they can resist warmer climates. Um the mitigation side is is um when you start thinking about what you need like you need a whole new supply chain, you know, based not on fossil fuels but based on metals and it takes you it takes 20 years to build to build a mine, you know. So you can see there's no easy way out of these supply side shortages and then you get into all the other stuff, defense, okay, all this national security stuff which is going to be very expensive. Um so to me I see the secular forces really just sort of reversing from what they were sort of 10 20 years ago. The environment is going to be much more inflationary and that's going to create a lot of problems for a lot of people who are heavily indebted because of the incentives that they were given through very low interest rates to increase their debts both private and public. So, well, there's nothing new in this. I mean, when I was at the BIS, we were constantly saying, "You're on a bad path," you know, >> and so it came to pass with the great financial crisis. >> And I guess I've been sort of saying ever since that, um, >> the situation is getting worse. And indeed um I think the last few years have really uh s cemented that judgment in my mind >> you know in the minds of others that um we've been on a bad path here and you wrote a paper um well it's over a decade ago now about ultra easy monetary policy and the law of unintended consequences and I mean a lot of what you write about is about the the nature of the economy being the complex adaptive system and that we can have um corridors of stability I think you've used that term and then nonlinearity at at thresholds and tipping points etc >> which all makes sense I mean >> now we did have the rate cycle uh the rate rising uh cycle in 2022 and >> there was no major accident obviously there was SVB Silicon Valley bank uh which got was contained and it was kind of a localized issue there But were you surprised in that period at the resilience of the economy that something didn't crack with the rise in rates then? Um and what I mean what was your interpretation of that? >> Well, yeah, I I was surprised um at the way in which the the the the cracks didn't turn into real sort of fissures. But I have to tell you that my first and biggest mistake was probably around 1997 when we first observed the Asian crisis >> and I said, "Oh, all that hot money and all that speculation, it's all come unstuck and that's the end of that kind of behavior." >> Yes. >> Well, the hot money just went to Brazil and Russia and it's been going on ever since. you know, like each each each time there's a crisis in the financial markets, the astonishing thing about it has been the capacity of the central banks to get us to to pull the iron out of the fire. And they managed to do that what in ' 87 in 2000 87 1990 1997 1998 with LTCM 2007 with housing. Okay. And here we go again in the pandemic. The only thing about the pandemic that really sort of makes it different is that whereas previously the monetary easing had been enough to sort of pull the iron out of the fire, this time it was much more um extended fiscal easing to go along with the monetary easing. And to my mind, what that sort of indicates is that the the the the underlying problem has now grown great enough that recourse to just one solution is not good enough. We need both of them. But the difficulty with all of this stuff, you know, and as I've been sort of saying for years and years, is that if if the answer is print the money, which creates more private sector debt, okay, and encourages more public sector debt, if we then add to it an explicit expansion of government debt, okay, fiscal easing to deal with the problems that emerged around the time of the pandemic, you can see that we've now got ourselves into a situation where globally, but particularly I would say in the in the advanced market economies where you've got record high levels of private sector debt to go along with record high levels of public sector debt. And you can see this is not a very good position to be in. um particularly because any setback the way I've described it in the past is the thing about debt is that it is dangerous in all states of nature. So that in good times if you got really big debts the interest rates go up and the debt service goes up and you say Houston we have a problem. Conversely, if you're in bad times, okay, the interest rates may go down, but your revenues go down, too. Okay, whether it's public or private, your revenues go down, too. And Houston, we have a problem. So, I've always worried about debt. And some increases in debt are obviously totally not just acceptable, but but desirable. Okay, you need the you you need to sort of borrow the money to invest productively in things that are going to be so profitable you can service the debt and everybody else benefits. But that's not what's been going on for the last number of years. You know, the debts have been used to basically finance on the private sector side, you know, stock buybacks, dividend payments, refinancing of various sorts. And in the public sector side, the big increase everywhere has not been in public sector investment. Okay? It's been in social security payments of one sort or another. You know, whether it's unemployment insurance, whether it's old age pensions, whether it's entitlements to health care, that's where the big increases have come. And I'm not denying that these things are important to do, but the point is the people doing the people providing the services are rapidly running out of fiscal room. So we now have a situation where I think we're very exposed on both the public side and the private side to higher interest rates. But the problem with all of this stuff that I was talking about earlier on, whether it's reduced supply side potential or whether it's increased in investment requirements, all of that is is crying out for more inflation and higher interest rates to resist it. >> So this is a dilemma that sort of has been coming down the road road. Some of us have been saying we're on a bad path for a long period of time, but I think now increasingly people are are recognizing the fact that we have a problem. Point is that we're so far down the path. Our exit path is not so clear anymore. Well, even people talk about, you know, government should be more prudent and they should cut the fiscal deficit. And he'd say, well, that's really something that they should do in good times. >> Yes. >> You know, that there should be a kind of rebalancing that deficits that went before in bad times should be be replaced with surpluses in good times. That's what you should have done, but nobody ever did. And now we are where we are. >> I mean, absolutely. And I guess the question is is you know coming back to the point about nonlinearity and thresholds and tipping points is where where is the tipping point? Obviously we're seeing higher yields around the world now in Japan trending higher even in Germany. Obviously they they've released the debt break and now we're seeing Germany yields the highest in probably over a decade. The US to date has still been fairly contained. the you know 10 year bond yields are still around 410 or so you know it's been around 4 and a quarter% for a few years now um as you say that the debt GDP is is has been rising um I mean what do you think is the thing that that really what's the straw that breaks the camel's back do you think >> well the honest truth is you you can never know as I said to you before I thought I thought things would people would start to behave themselves back in 1997. What's going to be the what's going to be the trigger? Um, I do think I mean you're you're you're you're right in suggesting, you know, the bond rates have been particularly in the states reasonably well behaved, >> but it's still been very unusual the last couple of years because the short rates have been going down >> and, you know, it just went down again in in the US. Uh, they're on hold in Europe for the moment. Yeah. Um but it's very unusual to have a period of time and I think we've had two years of it now at least where the short rates have gone down quite significantly and the long rates have if anything gone up okay in the face of that short term and that's very unusual and I guess as I say I think the re the reason why you can't sort of say what the typ tipping point will be is that for me the tipping point is purely psychological. That everybody sort of ignores the problem until all of a sudden they look at something that's been hidden in plain sight and at last they see. You know, as it says in the Bible, for those who have eyes to see, let them see and ears, ears to hear, let them hear. there comes a point in time where you can no longer um avoid looking at the the hidden reality in the middle of the room. And to to me with the long the long rates having been sort of, you know, reasonably well behaved but still unusual to be higher when the short rates are are down. On the one hand, it could be just the fear of higher inflation and you can make arguments for that. you know, inflation has been higher than forecast. Some people sort of see the secular stuff coming down the road. Another thing um that could be important is fears about the independence of central banks. you know, the increasingly with Trump and the kind of, you know, the the vibes that are going on in the United States and um perhaps elsewhere, um treasuries are about to take over the the central banks again and that worries some people. But my my fear is deeper than that and it it is all of a sudden people starting to grasp the nature of debt dynamics. which is that if your debt levels are high enough um and short enough that interest rates only need to go up a little relative to the nominal rate of growth of the economy. >> Yeah. >> To require to ensure debt sustainability the this you know that the leveling out of the debt to G& ratio. >> Yeah. You need primary surpluses as a proportion of GDP that are so great that you look at them and you say this is not going to happen. in which case you're into a a situation where every year you know the debt to GNA ratio is getting higher and higher and the ultimate end of that is governments find that they can't finance themselves at a reasonable rate in the market and so they turn to the central bank and at a certain point the market psychology changes and it says that really means rampant inflation. and I am out of here. Okay. So that's the sort of point where you sort of say they know that the physical thing is out of control. >> Yeah. >> First they grasp back. >> Yeah. >> And then they as they say in French and you you move from the the understanding to the reaction >> and I'm out of here. Now there is a big complication at the moment and I have no answer to this. When you look at the literature about debt dynamics and sovereign crisis um it is mostly a story of individual countries having problems. what I think is unprecedented although I'm not a sort of great what's the word student of of I'm not an academic student of of economic history but I dare say that we live in really unprecedented times so you sort of say you look at the the French fiscal situation for example you know a lot of people are worried about together with the political unwillingness of the governments to to do anything about it >> you look at the French situation and say, "I'm out of here." Well, where are you going to go? Going to go into the US dollar. >> Got exactly the same situation. Very, very high debt levels. No political will to deal with it. Underlying problems getting worse, not better. political division um the UK, Japan, you know, there's um so this is another element and I have no idea how that that will play out. I I suspect that some country will somehow attract the eye of the financial markets and the bond vigilantes absent for some decades will reemerge and attack that one country and then like Southeast Asia during the Asian crisis, [clears throat] >> you know, the markets will then sort of look at one country and say, "Wait a minute, it's not just this one country that's got a problem. They've all got a problem." Yeah, >> you can see the capacity for these underlying problems to uh mstasticize and regenerate themselves in different places because the underlying as it were underbrush in the forest underbrush of debt is now so great that we really are sort of we've set ourselves up for a big problem. [music] I mean I mentioned at that like your career has spanned many [music] decades. So I mean I think you started >> well many [laughter] I want to [gasps] I want to go back to I mean we've had the era of central bank independence and inflation targeting but I mean I think your experience goes back even before then or at least to the start of that period. So you can kind of vividly recall what things were like before that. So I mean what does a world where people lose confidence in central banks and inflation expectations become deankored to use the central banks bankers terminology I mean how does how does that play out obviously much greater volatility as you say bond yields much higher currency instability I guess is that what we're facing >> I would think that would be the underlying tendency um one of the things that's sort of interesting is the um the the belief that central bankers seem to have and I [clears throat] guess others too that inflation expectations are somehow anchored in the central bank's target. There's a guy at the at the Fed, the International Financial Group. Anyway, it was one of the Fed's published papers, Jeremy Rudd. >> Yes. And he asks the question of why do we believe that inflation is anchored in inflationary expectations. And he then goes on to demonstrate that there's in fact no theoretical ground for believing this to be true. No empirical ground for believing this to be true and that um inflation in fact is anchored in past inflation. and it's been low for a long period of time. And my ex-colague at the BIS, Clauddio Borealo, um presented a paper not so long ago, which is up on the BIS website that talks about the corridor of stability for expectations. And his contention is that the world for a long period of time was in that state of affairs that chairman Greenspan once described as desirable i.e. nobody cared. You know, inflation was sort of so low focused on it at all. Okay. But Clauddio's point and in a way Greenspan's point is that once it goes beyond a certain level on the upside and I don't buy the story so much on the on the downside but on the upside um but people do start to focus and when they do start to focus like I was talking before about the bond market when they do start to focus it doesn't take very long before they start to do something about it and recognizing that inflation is higher than the wage demands start to be higher, etc., etc. And so the potential for an upside move in the in inflation and in interest rates to react against that inflation is is pretty substantial. So um that is something that um I guess my feeling I mean as you look as you look at all of these problems you know what what what is the what is the answer and it's not so easy to find in fact it's impossible for me at least to find an easy exit ramp from the current problems. So when you talk about sort of public sector debt, you know, the standard economic response or the economist response would be well, you need supply side reforms to um increase supply potential in the face of all of those negative supply shocks that are coming down the road. You know, maybe there's positives positive things you can do to reinvigorate growth. Um and you need fiscal um fiscal tightening. M >> and say, "Well, yeah, you could do that and you probably should do that, but uh on the supply side, you know, ever since the great financial crisis, the the the OECD keeps track of this stuff." You know, they've got this document called going for growth. >> Structural reforms have been sort of basically sliding in number and and and importance ever since the great financial crisis. I mean the the the countries are becoming more and more sort of um incapable of deregulation in a in a really positive way. And on the fiscal side as I said to you earlier on um it's all very well to say let's have fiscal uh restraint surpluses when the economy is growing and generating those surpluses. It's a very different thing when you're facing a situation of chronic government underfunding, you know, where you got a big defic, you know, the economy is slow and you've got a big deficit and now you're going to cut you're going to cut the deficit. But the crucial thing is it's the debt to G& ratio that needs to be stabilized. Okay? So if you cut the debt, you know, fiscal surpluses, but at the same time it leads to to G& falling even more, you know, like Greece for example during the Euro crisis. >> Yeah. This it's sort of the the paradox of thrift I think as Kane called it >> is that you everybody tries to save more the government tries to save more and at the end they wind up saving less >> because their savings are a cut in somebody else's revenue and their savings you know so this this you know these paradoxes of macro you know have been around for a long time so that's the recommended way to get out of it and then you look at it and you say but it's not going to work. >> Um, then you can have explicit debt reduction. >> Yeah. >> But the thing to remember about explicit debt reduction is one, it's going to come as a hell of a shock if one of the big countries defaults on its debt. Okay. >> Yes. >> I think that's going to put the the cat among the pigeons. >> And um then you have to think who's on the other side of that. So people keep talking about debt jubilees, right? But in the Bible, there was the king [laughter] and a few hangers on, okay, who were wealthy beyond anybody's dreams relative to everybody else. So they could cut the debt that was owed to them by the wage slaves. And it didn't change their behavior one iota. >> But today, if you start cutting debt, whether it's private debt or public debt, sort of saying these debts will not be repaid, write them off. You know who's on the other side of it? It's you and me and all the other poor schmucks that are in pension that that are living off pensions, you know. So, this is not exactly recommended behavior either. >> So, that's when you that's when you start thinking, well, maybe the inflationary outturn is not so bad, but the debt dynamic thing means it could easily get out of control. Oh, I I think there will be a lot of thinking about financial repression that you find ways to force people to hold government debt and in a certain way, you know, low interest rates, forced, you know, liquidity requirements, credential requirements. There's all sorts of ways in which you can move into that sort of realm. And it was it was tried in the late 19 in the 1940s after the war, >> you know, financial repression. And it worked um it worked quite well. >> Yeah. >> Um wiped out um the wealth of the middle classes, I guess, and you know, the upper classes. But uh in terms of dealing with the overhang of government debt uh after about five or 6 years of relatively high inflation and pegged low interest rates >> the problem was gone. I mean we also had strong economic growth in the post-war [clears throat] period and for many people market participants economists I don't know who but um AI is now the the great hope I mean productivity has improved a bit I think pal even referenced it uh at the most recent press conference productivity had been quite weak you know um prior to co and immediately after so this is just a bit of a bounce back but I mean there is hope that Maybe this could be part of the solution. Are you a believer or a skeptic on the potential benefits from AI? >> I certainly hope it will live up to its potential, but again, you know, I've been around long enough and I've been through enough of these uh these um moments of enormous enthusiasm about particular technological developments. And uh in the end it seems to me the recurrent theme is um the idea is is is is actually a good one but to get the full benefits takes decades what railways electrification you know in the end these were wonderful things but they took [clears throat] decades >> and the people that originally sort of led the way and were totally enthusiastic they wound up losing their shirts. >> And um I I think when you look at AI um there has been a huge bet put on it in the United States in particular, you know, I think AI spending this this you know sort of these you know big data centers I think last year was something like 6% of GDP. there's basically nothing else going on in terms of investment in the US >> except these data centers >> and um if it works out and all of the people involved are making money which is what is required for this thing to be sustainable um that would be terrific. But if it doesn't work out, then you've got huge amounts of investment in data centers that are likely unlike the cable that was laid during the, you know, the fiber that was laid during the um the um the internet boom in 2000, around 2000. You know, this stuff with all these chips is going to deteriorate. It depreciate pretty quickly. So there could be a huge amount of um well this is mal what Hayek would call mal you know just lost >> lost capital >> it's it's and um and that would have huge macro implications >> the in a sense the the the worst case scenario is that all of this investment continues for an extended period of time using borrowed money. Okay. Up until now, it's been it's been mostly the the the cash flow that people have had, but increasingly people are turning to borrowing. And of course, it's it's borrow when when you get a crash after a long period of borrowed money, it's much more significant than what happens after a long period of let's say equity financed investment. Yeah, >> though we're not we're we're just on the verge of that more dangerous state of affairs. And one might say, as I can remember, we said at the BIS in 2008, it would be a good idea to have a housing crisis to to stop this whole thing out because if it doesn't get stopped out, it'll be even worse three years down the line. That certainly would do the same thing with the AI thing. if it goes on for another two or three years and then proves to be a false start, >> you know, that would be I think that would be a huge problem. But we're well short of that yet. >> We're well short of that yet. >> But I'm Yeah, I'm by nature, I guess, a bit sort of skeptical. I'm not saying it can't work out, >> but I'm thinking about uh remember that famous book 2009 from Ken Rogoff and Carmen Reinhardt. >> Yes. you know which is called this time is different >> 800 years of financial fully >> yes >> so this is their book was really about public sector stuff this is >> the worry we have here now with AI is is private sector stuff but I think the same logic applies that >> well it's interesting I mean I sometimes think that the Rogoff and Ronard book came out maybe a decade too early because I mean austerity was kind of somewhat uh inspired by their writing at the time and you know a certain was then embraced in 2010 in that period whereas now the the learnings of Rogoff and Reinhardt seem to have been forgotten but more generally I'm just curious I mean we're in this era with um the affordability crisis in the US and you know we call it the cost of living crisis over here you've got the K-shaped economy you know this backlash against neoliberalism backlash against global ization. Um, you know, up until if we went back five years ago, economists might have felt they were doing a pretty good job. You know, unemployment is low, inflation was low, >> the great moderation, >> different now. The great moderation. I mean, >> where did the economists, what was wrong with the whole model? I mean, have you have you, as you step back now, having been involved in policy circles for 50, 60 years, where did it all go wrong? Well, I think the fundamental problem I've described as an epistemological problem >> and um you get back to the question of what do you know and how do you know? What's the difference between opinion and what they call justified belief? And I think the models that people have been working off of for the last 20 or 30 years have been simplified in order to make them tractable. You know, mathematically solvable. M >> um but they've basically been simplified to a point whereas Charles Goodhart once put it in a seminar at the Bank of England. There's abs quote unquote there is absolutely nothing in any of these models that is of significant interest to a central banker. So it's the simplification and I've the the most of the models that you you you see that are being used by central banks and by and by many others as well. I mean the IMF and the OECD and whatever you know they're linear they're deterministic. They're based on the idea that the economy is is simple understandable and therefore controllable. And all of this stuff is false. >> And that's the fundamental problem. And a good example of it, I think, is um as you mentioned before, I mean, I'm a big believer in the economy is a complex adaptive system. And there's huge studies that have been done into systems of that sort in both nature and society. And the odd thing is when you read many of these books about complexity, the the thing that they put at the top of their list as a complex adaptive system is the economy. But the economists are the only ones that don't get it. >> Well, they're still working on the assumption that it isn't. >> And um and so they've made a lot of mistakes. And I just two of them. I mean, one of them is the whole of the supply side, you know, the the in the leadup to the great moderation and and and and even beyond um the importance of globalization, keeping in keeping inflation down, the stuff we talked about a little bit earlier on, they totally missed it. that if you've got a positive supply side shock, the appropriate answer is not to lean into it with lower interest rates. The appropriate answer is to react to the higher growth potential with higher interest rates. And they did the very opposite because their sort of simple linear linear deterministic one period model said we've got excess capacity now so the answer is you have to lower interest rates. And that led to the increases in debt that have plagued us ever since. Okay? >> And they missed the supply side change, you know, the supply side problems during the the pandemic. >> And as I suggested to you before, [clears throat] I think they're missing the the perspective supply side shocks that are coming down the line. They just don't think enough about the other side of the economy. Okay. M >> supply side and you know the focus on demand side is almost totally driven out attention to the supply side. >> It's more complex than they think. >> The second thing is that these models don't include a financial sector. The these models sign into something that I thought canes put to bed how many years ago? Gee was 65 85 years ago. You know it's not a loanable funds world. where people save money and put it in the bank and the banks lend it out. Okay? It's a liquidity preference world in which banks create money. Okay? Um when you go in and get a loan, they basically just write up both sides of the balance sheet. Well, your capacity and desire to do that is a very important component of how the economy subsequently behaves and functions, >> but it's not there in any of the models. And so when the debt levels go up and financial markets start to, you know, get a bit shaky, all of that stuff is not there. >> Yeah. >> So you you don't need to worry about stuff that isn't there. Another thing, [clears throat] income inequality, which is what you're referring to, the kind of case situation, this has been getting worse and worse for years. >> Yeah. >> And in large part, I I personally put it down to monetary policy. >> You know, the systematically keeping interest rates very low has resulted in a big buildup of asset prices, but it's the people that are already well off that own all of these things. So they're getting relatively speaking wealthier and wealthier >> and not surprisingly >> okay the people who are sitting there >> what was the line um Kindleberger used there's nothing so infur there's nothing so infuriating as as watching your neighbor get rich okay so you look at the underlying political discontent and the roots the roots are very widespread but surely this has got to be one one part of it >> and of course it has induced a lot of people um to sort of go for it. >> You know in my own country Canada for example um been an awful lot of um speculative buying in advance of condominium units. >> Okay, >> you're looked into you're locked into the price that you're going to pay and this is before the condo is even built. Then the condo is built and now the in Toronto at least you know the market has just basically disappeared. There's going to be a lot of people who trying to emulate their neighbors who have grown rich. They've engaged in a form of spec financial speculation without knowing it. And they're now sitting on properties that you know they paid $600 a square foot for that's now worth $400 a square foot. M >> and somebody's got to eat that eat that loss. So um on all of those fronts, one shouldn't be surprised that there are problems arising from didn't see the supply side stuff, uh didn't see the financial sector stuff, didn't see the income inequal, income and wealth inequality stuff. >> Yeah. So with all of those things having been ignored for such a long period of time, is it surprising that we we might be heading into a period of both economic and political difficulties? >> So that's sort of where I I see things at the moment. It doesn't really make me a happy camper. [music] >> Maybe just moving into the international domain. Um, and it's I know it's been a focus of your work as well. And [music] you know, we've had I suppose Breton Woods uh you know then what was called Bretonwoods 2 and then you know I suppose a bit of a question mark as to what what where we're heading now in in in the new environment. Is it a Brettonwoods three or is it more fragmentation? Um obviously around the world you know amongst some emerging markets in China there's a disquite about the ongoing role of the dollar but equally the US administration seems keen to continue to pro promote the dollar as a global reserve currency. >> Um how do you see that evolving? Is that a a stress point in the system? >> Well I I think so. Um, I mean it's hard to know what the Trump administration wants to do with the dollar >> because on the one hand they're sort of, you know, talking up the dollar and it's got to continue. >> Uh, you know, the hu dollar heimon kind of stuff, >> but on the other hand, uh, they're they're basically saying we need a significantly lower dollar. you know that uh every time we sort of try to you know every time that the trade deficit or the net investment position of the United States cries out for lower dollar um everybody else shouts currency wars and they refuse to allow the dollar to go up. You know it's the N minus N minus one problem. >> So I'm not quite sure um what it is that the administration wants. >> Yeah. Um, I think I mean this is something else I didn't mention earlier on about isn't it sort of odd when the short rates go down and the long rates go up um and gold goes up um so that I think sort of what's coming down the road is probably going to be a kind of fracturing >> and I suspect it'll be not a total fracture in a sense of utarchy, you know, like the inter war period or something like that. But I think there's likely to be a kind of grouping into two camps. One around the US dollar and one around the Chinese raimi. Um, from what I can tell, the Chinese are not working in the direction of or actively supporting replacing the dollar with the remimi. you know that there doesn't be seem to be that kind of imperialist tinge to them but they have I mean ever since Governor Joel made his speech I think in 2008 about the dollar dominated system and that it somehow wasn't right. China has been sort of pushing that idea >> and I suspect that as the dollar starts to weaken for various reasons not least of which is fiscal fiscal might seem out of control. Debt levels are too high. you know, we've been talking about that they will certainly seek to capitalize on the weakness of the dollar by pursuing their own objectives. And I think they're already, as far as one can tell, uh already sort of well advanced in a way. I mean they've been working on they were we're working with the BIS on the so-called Embridge uh platform which is basically a blockchain payment settlement pay payment pay payment system uh that appears to be extremely efficient, cost-effective, fast. Um you know you hear people talking about the advantages of stable coin. Well you can do the same kind of stuff >> with [clears throat] against you know the blockchain background. uh in the public domain and so >> and and this this will be a a replacement or competitor to Swift is that it or >> Yeah. And it's a >> let's say 5% of the cost >> and uh exchanges are made almost instantaneously. >> So you can see the you know the attraction of this over time >> and that will certainly sort of be of help to the raimi. Um but there are other things that are going on there too. I mean, the way they've been co cozying up to people in the Gulf and um you know, because oil is still a really big thing to them, the Gulf people, I think, are looking at American what's the word? American uh fossil fuel independence, okay? And basically saying, well, yeah, that's good for America, but in the old days, America had to support us because they needed our oil. But now they don't need to anymore. So, are they as reliable a partner as they used to be? And behind it all too, and I think this is actually a I thought at the time a a really sort of important event was when the when the US and the G7 coalition basically put all those sanctions on the Bank of Russia, Central Bank of Russia. >> Yeah. >> They froze their assets and now it's gone even further than that. But they froze their assets and then they they they basically refused access to Swift to the Russian banks, many of the Russian banks. And I have friends who are sort of quite involved with reserve management for emerging markets. And that really put the wind up people because I think they, you know, they'd seen this sort of the use of the the dollar as a geopolitical weapon in the past. But somehow this was a renewed example of it and it was sort of so scary to people that I think you know what we've seen is that um a lot of people have been moving to to change the the ownership of their reserves. >> You know the percentage of dollar holdings has been going down. uh the Japanese well the ch the Chinese are have been basically moving out of treasuries and into gold. Um, and you hear some people speculating, I mean, I don't know enough about it myself, but speculating that, you know, what you wind up with is Chinese sort of, as it were, cozying up more to the Gulf people and getting oil and perhaps other commodities increasingly invoiced in uh in local currency, you know, whoever is doing the buying, India, China, but no longer going through the dollar. >> Yep. Um people then having a demand to hold more Rimbei, maybe more rupees, whatever. Um them saying at the same time, well, of course, you can hold the remi because it's it's actually backed by gold. Uh you can see the Chinese um setting up governance >> procedures for Embridge that basically prevent any country from using that as a geopolitical weapon >> which again would totally distinguish it from the use of the dollar. >> You know it's not is not impossible to do that. It's all a question of you how you write the articles of governance >> for that whole outfit. So you can see a lot of pieces coming together whereby the Chinese would not seek to sort of replace the dollar but would seek to provide an alternative way of doing things. Mhm. >> And you could see a lot of people who for all sorts of reasons, either because they're autocracies themselves or because they see themselves so what's the word? Embedded in the Chinese supply chain structure. You could see a lot of countries might sort of say, "Yeah, I think I'll I'll go with those folk." I can imagine that um there would be a lot of pressure of both sorts both carrots and sticks uh by individual countries like China or the US then to sort of step in and sort of induce people to to choose sides. And I mean you're talking about this polarity between the US and China, but in the middle is obviously Europe and the euro uh which at one point was seen as one of the possible challenggers to the US dollar. Um I mean Europe has its own problems. You mentioned France already debt levels there but equally you know increasingly increasingly you hear from the likes of Macron about you know the need from Europe as well to bring its capital back to Europe. >> Yeah. Um, yeah. How do you is that do you see an opportunity for the euro to take on a bigger role now or not? >> I certainly think it could. How dangerous that might be, I haven't really thought about, but certainly um certainly it could do. I mean there's been a big movement um I mean as you know expansion of >> um euro denominated debt >> by Brussels. >> Okay. >> Yeah. >> Um the the question of who provides the guarantee for that stuff is uh is another question. You know whether the nations are prepared to uh go into what is it what is it called? Um, oh, come on. You know, we're joined in several >> arrangements to be responsible for that debt, >> but certainly moving more in that direction. I think I read a study just the other day that indicated that um the differentials between that centrally issued debt which traded above bunds for a s you know really for a significant period of time >> still trading above but the the premium has been going down as the liquidity in the market has gone up >> and uh so you could see you know some people are pushing pushing that as as being very helpful and of course it would also increase capital market integration which the Europeans have been desperate to provide really now for decades. Right? >> There's been lots of talk but not much action. >> It'd be consistent with Draghi's contention about some of the stuff that needs to be done to get Europe going again. And uh so I think yeah there's um there's there's room if people are prepared to take the risks that are associated with that there being as it were no single government in Europe. I mean that's the biggest biggest single issue >> is how do you how do you spread the risks? >> Um and I I'm not an expert so I wouldn't profess to to know how to do that >> but you can see an opportunity. I mean was >> the big thing people have always said is that there's not a big enough liquid capital market in Europe >> and this is a means of trying to provide such a beast. >> Yeah. Well, that was always the argument that there, you know, there's not enough supply of European safe assets for the euro to grow, but you know, there's certainly enough capital required now. Um, if the political will will there obviously at the same time in Europe, we've had >> the draggy report, but and a lot of talk about it, but not much action. And at the same time as you say you've got the the the fiscal stresses you know and that difference say between the outlook in France and Germany and that's that's just taking a current day perspective that ignores how how that will evolve over time as entitlement spending. Do you still do you see you know we haven't had a Eurozone crisis for a while or strains for a while but now French bond yields did go up for a while you know amid the most recent political turmoil I mean is that a theme that can come back do you think >> well it could do and I mean then then then what you're back to is Mario Draggy ECB do within the law will do whatever it takes And let me assure you it will be enough. Uh well then the question becomes I mean if you get um it was one thing to have a run on you know on Irish bonds and Italian bonds and Greek bonds etc. But now a run on French bonds. Um the question is would the ECB be in a position to do whatever it takes? And in the past, I mean, I'm told I'm certainly not privy to their conversations, but that before Mario Draggy made his comment, uh, he had been in close contact with Angela Merkel and with the German authorities and the other sort of, you know, prudent countries to ensure that he could get away with it. And he was assured that he could. Well, now we're back into, you know, the political the political will, I think, particularly of the the creditor countries, you know, like Germany and Holland and, you know, and and what what they're prepared to do to keep the whole thing together. Um, I guess from what I've seen, the the political will in Europe has been um pretty strong right up to the present time that this Euro thing has been um a huge experiment that is worth doing and sustaining >> for all sorts of reasons. And um I don't see that uh really that that that that willingness to to do whatever it takes I think is still is still there. Whether that might change in the future I don't know in complex adaptive systems you say this is the ultimate out in complex adaptive systems forecasting is essentially impossible. impossible. Okay. >> When you add it when you add in all the political stuff, you know. >> Yeah. >> And and that's that that makes the problem in a way even more intractable because you really got these two systems, the political system and the economic system, each of which is complex and adaptive and fragile. And you got to keep both of these shows running at the same time. And that says nothing about the environment which is the third system into which both of the above are nested. So um it's complicated. >> Yeah, it's complicated. [laughter] >> Very good. Well, that's I think a good point to to conclude. Um we're over the hour, but uh thanks very much for coming on again, Bill. Always a pleasure to hear your latest thoughts and and people can um follow your work. You have your own uh website, William White. Um if people search for that, they'll they'll get >> William White.ca. >> William Whiteh.ca. Very good. Um but yeah, very much appreciate you coming on. Um so from all of us here at Top Traders Unplugged, stay tuned. We'll be back soon with more content. >> Thanks for listening to Top Traders Unplugged. [music] If you feel you learned something of value from today's episode, the best way to stay updated is to go on over to iTunes and subscribe [music] to the show so that you'll be sure to get all the new episodes as they're released. We have some [music] amazing guests lined up for you. And to ensure our show continues to grow, please leave us an honest rating and review in iTunes. It only takes [music] a minute and it's the best way to show us you love the podcast. We'll see you next time on Top Traders Unplugged.