Transcription
[Music] Hello and welcome to PFI Talks, brought to you by the Prague Finance Institute. I'm Yizlo, and today we'll be discussing one of the most fascinating topics in economics: financial crisis. Our special guest is historian and investment strategist Edward Chancellor, who is uniquely qualified to speak on this subject. Edward is the author of *The Price of Time: The Real Story of Interest* and *Devil Take the Hindmost: A History of Financial Speculation*. Edward, welcome to the show.
Thank you for having me.
In 2022, you published *The Price of Time*, a sweeping history of interest rates. Three years on, is there something you would add or revise, uh, in the book in light of, uh, recent developments, quite dramatic developments, let's say?
Um, yes. When one, when one writes a book, every book is really, um, a work in progress. So, as you say, it's sweeping. It's really, I should, I might correct you, tiny. It's, it's a history of interest, of what interest is. It's not specifically a history of interest rates. Um, and it was, it was written by, it was written, um, you know, because in the last, up until three years ago, interest rates, as you know, were at the lowest level in history. And I was interested in, um, in understanding what interest rates did. And, and I, whereas the modern central banker or economist only sees interest as a lever to control inflation, I looked at all these other functions of interest. So, for instance, the, the role that interest plays in putting a value on assets, or the role interest plays in, in, in determining capital flows, or the role of interest as a measure of risk, and so on.
Now, what I didn't really write about in the book, was really, at great length, um, was the history, the story of, um, you know, of interest, the interest rate being a lever to control inflation. And I think I've actually, the conventional view, as you know, is that interest rate, that that interest rates control inflation. You, if you have inflation, you put interest rates up. And the, you know, the most famous example of that was in the early 1980s, when the president of the, the chairman of the Fed, Federal Reserve, Paul Volcker, pushed up the Fed funds rate, the US central bank interest rate, to, I think, around 18%. And, um, you had a huge recession, and inflation came down. So that seems to, um, validate the view that interest is a, uh, a lever to control inflation. I've, I've rather, I'm now coming round to the opposite view, which is that interest rates, interest rates, uh, rising interest rates actually are a spur to inflation.
And, um, that idea came to me from reading this Stanford economist, you may have come across, called John Cochrane. Does that name, yeah, mean, mean anything else? So Cochrane, he was at Chicago, and he's now at Stanford. And he wrote a book called *The Fiscal Theory of the Price Level* that came out after my book. And what Cochrane says is that in a modern world where governments print money to, and governments print money, uh, which is this, which is a currency in which their debt is mostly denominated in, think, you know, the Fed controls, ultimately controls the issuance of US dollars, and the US Treasury issues bonds in dollars. So the US doesn't have to default. So what happens in Cochrane's world when interest rates rise? Well, when interest rates rise, in Cochrane's world, uh, the government debt, which, in, in the US at the moment is, you know, let's say roughly 120% of GDP, uh, the debt becomes harder to sustain. Uh, and assuming that, um, assuming that the, that there is no change to the government's expected tax revenues and receipts, then as interest rates rise, the debt is less sustainable. And in, what that means is that because there's not going to be default, you're more likely to have inflation as a result.
So, does that, am I explaining myself reasonably clearly?
Yeah. Yeah. So, think of it this way: as interest rates rise, the debt becomes less sustainable, and the incentive for the central bank to inflate away the debt, or what we call financial repression, becomes stronger. And that, I think, I think that makes sense. And, um, and then I think back to what I was, I was writing in my book, that when interest rates were very low, there were rather sort of deflationary effects of very low interest rates. So, you know, people took on more debt, for instance, or, you know, and once you have too much debt in the system, you get a deflationary force. And deflation, it comes, you know, debt deflation comes from excess, excess debt. But then I also think now, when I look back at what governments did, I'm thinking particularly of the US government, because it's a good example, but you can also say Japan, and, you know, from the early 1990s, or Britain, less so, not so Germany, but most, most developed countries. They, when the cost of borrowing was very low, they took on more debt. Now interest rates have risen, they now face huge burdens in paying back their debt. Now, the US, for instance, is spending more on debt service now than it is on, um, on the US military. So, that's, it's a huge burden. So that, that, I think, I would put it.
Maybe, maybe the inflation was just not visible. Let me, let me, uh, like former Bank of England Governor Mervyn King recently criticized a widespread belief that within central banks that money creation has no direct link to inflation. He said, I quote, "The idea that you could suddenly print vast amounts of money and ignore its impact on inflation was just foolish." What's your perspective on this?
I agree with Mervyn King. I mean, it, I think one has to, um, one has to distinguish, one has to analyze what actually happens to the money that is, so to speak, printed. Um, when, and I, again, I don't know if I put this in the book, and I certainly didn't analyze it correctly, when this issue first started with the quantitative easing that started in the US, uh, during the financial crisis in 2008, I think was the beginning of quantitative easing. And then we had these successive periods of, of what the Federal Reserve called, uh, they called them long-term security asset purchases. Um, but we call it QE, or quantitative easing. And what was happening then, and by and large, is the central bank was going out and buying government bonds and issuing, in inverted commas, paper money, but really reserves that went into the banking system. But those reserves weren't used. They were just kept at the Federal Reserve, and the Fed started paying interest rates on them. So, admittedly, there was, there was no interest, uh, being paid because the Fed funds rate was zero. But in principle, the Fed was. So, what you can see what's happening there is that this is really what QE is, initially. It's a debt swap. The government is, government is calling in its long-term bonds and issuing, uh, overnight loans in exchange. Now, that is not inflationary if that money, if the overnight loans, or the overnight credit, is not spent. It's crazy. It's a stupid thing to do, because at the time, US long-term bond yields were extremely, um, low, and it would be a good idea to have, what we call in finance terms, to hedge your borrowing. You should, some, some countries were doing it. I think France was doing it. I mean, Argentina did it, I think, issued 100-year bonds. Yeah. That's what you wanted to be doing when interest rates are low. You don't want to buy in your bonds and replace them with this, um, with this overnight, um, lending. Not in the short run, that might make sense. You make money because you pay, you know, the, the central bank then gets a, you know, the coupon from the bonds that it holds. But in the long run, when interest rates start to rise, as they've done over the last three years, you then, um, then it ends up costing a lot more. So the Fed, you know, it will be losing money from its QE operations. Bank of England is losing vast sums of money.
So, but, but go back to it. This may have been crazy, but it wasn't inflationary. If you, once you get into 2020, something different is happening, which is that the central banks are in effect monetizing the government borrowing that is used to combat the pandemic, you know, the lockdowns. And, um, and, and that is, and in, you know, in the US, for instance, you know, all these households got, you know, stimulus checks, and people were put on what they call furlough. People were paid to sit at home, you know, watching Netflix. And so that, so that you have a large increase in the money supply, but it is also matched by a large transfer from the government to the household sector and to businesses. And that, that is, that is and was inflationary. And it is remarkable that the central bankers and most economists paid no attention to it. I think what you'll find, I mean, I was writing about it in my column at the time, thinking, you know, this is pretty inflationary. And I think, really, so to speak, the man on the street thought this was inflation. It was only the, it was really only the, uh, the experts who, uh, who didn't really understand what was going on. And they, what had happened is that they, they had, they had lost the expert knowledge had lost connection, as Mervyn King mentions, between changes in the money supply and inflation. And that, that is, it's remarkable because the one thing we know about inflation is that it has, particularly with large inflation, always coincided with, uh, increases in money supply, or in the old days, you know, debasement of the coinage. And the original theory of inflation, expressed by Copernicus, a friend, a French lawyer of the 16th century, Jean Bodin, they, they, early on observed, you know, a connection between changes in money supply and inflation. And of course, you know, you, you fast forward through, you know, thousands of cases of inflation, and you get to, you know, Milton Friedman's, "inflation is always and everywhere a monetary phenomenon."
So you've written extensively about financial crisis. Do you see any major distortions or speculative excesses in today's markets?
Yeah, I have written a lot about financial crisis. There, well, you didn't mention, I wrote a report that was published in 2005, that's called *Crunch Time for Credit*, which only went out to the investment community. Um, and what that book, or report, identified was, you know, some fairly simple metrics for to understand the dynamics of credit booms and banking crises. Um, and one, you know, and typically, what you see is when you're preparing for a great financial crisis, you see strong growth in real estate prices. So, a real estate bubble, and you see rapid, um, you see rapid, uh, credit growth. And, um, we saw that, you know, clearly in the early 2000s, in the early 2000s, in in both Europe and in, um, in the States. Um, what we've seen, um, you know, again, since the book was published, we saw the, uh, blow-up of this bank called Silicon Valley Bank in, uh, in, in, in California, in, in, in February 2023. And, and if you remember, roughly at the same time, a few weeks later, Credit Suisse blew up and had to be taken over by UBS. So, what we saw there, and the, and the failure of, of Silicon Valley Bank, was because they had, not because they'd been making risky loans. They put all their money into US Treasuries, or most of their money, most of their assets were held in US Treasuries. But what happened is, you will see that the US Treasuries yielded, had very little yield, because they were bought at the time when the Fed funds rate was zero, and, and 10, you know, 10-year US Treasury yields were at their lowest point in history. And then interest rates rose, and those Treasuries became less valuable, and the bank had to pay more money on its deposits. So there you have this classic sort of, what we call, you know, asset-liability mismatch, or duration mismatch. And that blew up Silicon Valley Bank and a couple of other banks in the States. So, and then with Credit Suisse, more complicated, because Credit Suisse had made, you know, a huge number of errors, and mistakes. But part of the problem with Credit Suisse was that it was, I think, it was trying to maintain its profitability by taking on more riskier activities. For instance, it lost about $8 billion in a, in a loan to a speculative hedge fund called Archegos.
Let me, let me ask this. You, among the evils, among evils, you name in the book, are also inflated asset prices. Okay. Nowadays, the rates have normalized, but we still have inflated stock prices and, and housing prices. How come? Just does it take longer to normalize?
Yeah, I mean, that's a good question. I have been thinking about it. First of all, I, one has to qualify what you say is that you have, we have had very inflated asset prices in the US, I, stock prices in the US, not so much elsewhere. Um, the stock markets in Europe, in, um, in the UK, in, in Japan, across the emerging markets, are not, um, expensive relative to their historic valuations. So the US is a bit of an anomaly. And the US, as you know, stock market has been driven by a handful of mega-cap, um, Magnificent Seven companies, so-called Magnificent Seven. And that, so what happened in 2022, the year my book came out, was interest rates rose, and we had a big sell-off in the bond market, and the bond market in 2022, the bond market fell. Um, bond markets fell. They had the steepest sell-off in history since the creation of the modern bond markets in the 1750s. So, a pretty big sell-off in the bond market. And we had the, um, we had a bear market opened up. You know, US stock market fell 20%. And then what happened is towards the end of 2022, as you remember, um, OpenAI launched its ChatGPT3, you know, artificial intelligence chatbot, and everyone got, you know, um, AI mania. And that, and given that all of the Magnificent Seven stocks had some AI story to tell and started investing very heavily in AI, I think that, um, really propelled, you know, pushed the market forward. US stock market, if you exclude the Magnificent Seven, really didn't do very much. Uh, it sort of gradually picked up, but nothing to write home about. And to me, that, the AI bubble, and I think you can call it a bubble, um, is slightly anomalous to my whole interest rate story. You see, normally, you see these, as I say in the book, normally you see these bubbles, you know, technology bubbles tend to coincide with periods of low interest rates. If you remember, I write about the British railway mania of the 1840s, that started when British interest rates had fallen to 2%. And, and you get other examples afterwards. But the, if you will, the AI bubble seems to me to be slightly swimming against the tide, the financial tide of conditions becoming more restrictive as interest rates rise.
As for real estate, um, well, first of all, I'd say there's been a huge, um, sell-off of commercial real estate around the world. And, you know, not far from you, based what the Austrian group, it's called Signa Group, which was a big, very speculatively leveraged, large commercial real estate company, they, they've blown up. And you've had, and this is partly, and this is partly to do with, you know, more people working from home after the lockdown, but definitely a story of over-leverage at very cheap interest rates. Then, but then I think with the, um, residential real estate, and I don't know, you know, what's happening so much from continental Europe, but in the US, as you're probably aware, people take residential mortgages on, they, on fixed-rate long-term mortgages. So when the interest rates were very low, people tended to borrow at longer rates and, and, and fixed. So when the interest rates rise, it takes a while to, it, you know, it doesn't feed through at all. What it means is that, you know, it becomes more expensive if you buy, take out a new mortgage. So what we've seen in the States is the prices remain relatively elevated for real estate, the residential real estate, but the turnover in these markets has declined very sharply. And in countries like Britain, where we do borrow, mortgage rates are at shorter, you know, at shorter duration, and largely floating rate again, people take a three or four-year fix. The same as to go back to your original point, uh, I think definitely, uh, there is a lag. And that same can be true as the impact of higher interest rates on corporate borrowing, because, you know, in 2020 or '21, when interest rates were very low, the finance directors would go out and, you know, borrow, lock in their borrowing for five years. So it's only when the, when the debt matures and needs to be rolled over after five years that you start feeling the impact of the rising rates. So, and go back to, you know, to Milton Friedman, as he says, he's talking about inflation and interest rates, but it still holds true for everything else, is that monetary policy works with long and variable lags. And the variable lags reflect the nature, the constantly changing nature of the financial system. So, um, yeah, I'm a long, and I've become a long and variable lag man.
It seems to me that investors today are overly optimistic. They, they disregard bad news, like the US debt problem. What's your perspective on this? Because every, every single news is taken as good news, and the bad news are kind of small news and are disregarded.
Um, again, I think it slightly depends on where you are. The, as I said, the foreign stock markets aren't, I mean, the US market, the US stock, but look, yeah, you, I mean, you could say the US stock, US stock market on a, you, it's been trading at, you know, across a variety of different valuation measures, at close to its all-time high. And so, you know, there's one measure you'll be aware of, the cyclically adjusted price earnings ratio, sometimes named after the, uh, Nobel prize-winning economist Robert Shiller, as Schiller's PE, we call it now, Schiller's PE. At the beginning of this year, it was trading at 38 times, 10-year inflation-adjusted earnings, very high valuation, as three standard deviations from the mean, you know, something that should only happen, I don't know, once every hundred years. And higher, higher than at any time except briefly, you know, during the peak of the dot-com bubble, '99, 2000. So, yeah, you could say, and, you know, US investors were pretty optimistic at the start of the year. And, I mean, think what's happened since then. You know, Trump came in and threatened to put tariffs on everyone, market went down 20%. Trump had second thoughts, market rebounded. And so, um, yeah, I think there is definitely an optimism in the States. Baked in. There isn't, well, there isn't a huge uncertainty pre-discount. And, and I think, yeah, I can, one can understand why that's come about, because, you know, go back to these Magnificent Seven. You've got these, you know, these, these companies, great companies in terms of profitability, and they've been very, very good earners. They've been, they're the world's, you know, most profitable companies ever seen in history, and they have the highest valuations of any companies ever seen in history. And they've, you know, they have, um, confounded their doubters. My view is that, you know, the AI actually does change things, and not necessarily for the better for, um, for the, um, for the Magnificent Seven, in two ways, really. One is, I think, um, AI, you quite conceivably, undermines the competitive advantage that some of these Magnificent Seven companies have enjoyed. Now, take, for instance, Google. You know, they, Google has had, you know, a lock on the search world with, I don't know what, let's say 90% market share in, in, in, in search, hugely profitable business. Now, it's conceivable, probably quite likely, that that, you know, what Warren Buffett called a moat, that Google's moat will be drained by these AI technologies that can perform search very well, and actually search more thoughtfully. I know Google's doing it itself, but there are other competitors at the corner. Now, the other thing I think is very important for the Magnificent Seven is that they're all spending, you know, they're spending hundreds of billions of dollars on data centers, on new research, and, you know, on, on, on chips. And what we see historically is that, um, that that speculative, most specs, not all of them, but most specs come to an end in a splurge of capital spending. And that, and historically, that capital spending has tended not to deliver, uh, good returns, even if the technology turns out to be robust. Now, you know, go back to what I was talking to you earlier about the railway mania. You know, in the 1840s, railways were, you know, a great life-changing, civilization-changing, um, technology. Fair enough. People understood it. Yeah. And but, but, you know, if you invested in British railways in the 1840s, you lost a lot of money because they overbuilt. And, you know, go right up to the, you know, to the internet mania of the late 1990s. Now, you, of course, you know, the internet was sort of bigger than people were establishing, you know, people were thinking back in '99, 2000. We are talking over the internet. We do everything over the internet. Yeah, they weren't exaggerating the life-changing possibilities of the internet, but they were spending a lot of money, and in particular, telecoms companies that, um, that, and their investments exceeded at least the medium-term demand, which led to huge overbuild in fiber optic cables and so on, and a subsequent collapse. So, I look, you can't see the past as prologue to the future, as it, but you have to inform your, well, you should inform your understanding of the present from what's happened in the past. So, go back to your original question, do, do I think the, you know, the US, in America, investors are, are, you know, if you will, overconfident and not reflecting risks? I'd say yes. And I also think that, I mean, this is a very conventional view, but, you know, the Trump, that Trump, um, policies of slapping tariffs on and taking tariffs off and so forth are going to, you know, make, they're going to upset globalization. Fair enough. Uh, but there is a cost to upsetting globalization, is that globalization allows, has allowed companies to, um, to manufacture in places that have the lowest cost. And, and that, you know, and that, and and at the same time, for America, globalization has meant that, you know, huge amount of capital has flowed to America. And, and I think that, if companies can't, can't produce in the lowest cost regions any longer because of tariffs, and if capital no longer flows to the US, then I think that, you know, US interest rates probably push upwards, and US profit margins probably come down. And, and, yeah, I mean, what would happen under those circumstances is that, um, the stock market would come down. So, you know, the US is, and I've been saying this for a while, but it's quite clearly priced for perfection and it's quite vulnerable in the context of market optimism.
I really liked your story about the US Forest Service, which offers like a powerful metaphor like the Fed comes and like saves the market. Could you describe it briefly, and do you think this applies to the current situation?
So, what you said, that what was the US, the US Forest Service? You, that's that's a nice, that's a nice story. You describe it in the book. That story, um, relates to the fact that the Forest Service was created in the early 20th century when, when the US created national parks under Teddy Roosevelt. And American, the American forests have always had these periods of, of, um, of natural fires. And it's part of their system. You know, that the fires come about from time to time, the forest burns down, and then a new, new, new forest comes up. And so that's fine. That's the way nature arranged things. It, it arranged things that way. The, the trees, some trees like the Sequoia tree, uh, and I think another tree called a Jack Pine, uh, they, they actually only, um, their seeds only propagate under extreme heat, the heat from fires. But then what happened is, once the American government had taken responsibility for the forests, they then, they then became shocked by these forest fires, and they got involved in, in suppressing the fires. And that happened, started in the 1920s, um, and it continued on and off. And the argument that I, and I'm not being original, is that actually the suppression of forest fires, it meant they, they, the Fed, the Forest Service was so effective that they controlled fires. And the more you suppress fires, the more the undergrowth in the woods, you know, the dead wood and, and build-up of, you know, shrubs and so on, would would thicken up in the woods because there had been no fires to clear them out. And what that meant when you've got a drought and so on is that you had, um, much more inflammable material and a potential for much more serious fire, and a fire that takes place, uh, at much higher temperatures than used to in the past, and therefore is genuinely destructive. And what I argued is that the Federal Reserve, by constantly using interest rates to, to stave off one financial crisis after another, was building up more and more debt and allowing companies to stay alive, the so-called zombie companies that would normally not have stayed alive, but were kept alive on very low, on the sort of drip feed at very low interest rates. And that sets you up potentially for a much more serious, uh, crisis at some stage. Now, you know, we've also been, another way of seeing this is, I don't know, you had, I probably must have mentioned it in the book, but you've heard of this thing called the debt supercycle, where debt continues rising. You look at aggregate debt, US aggregate in the US, aggregate debt, including non-financial debt, is roughly three times GDP, at the highest level ever. And what we've done, Federal Reserve, the governments, by borrowing and spending during economic downturns, is you've prevented that debt from ever, um, stabilizing, but you push it on to a higher and higher ratio relative to the underlying income. And that, that has to be, that has to be, uh, unstable in the long run. Trouble is, you know, everyone in the investment world operates for pretty short time horizons, regardless of what they say. So, you know, it hasn't paid to, um, to bet against, you know, to bet on an imminent crisis. One, one thing I would say is, you know, you said, I mean, are all, you, are the American investors overconfident? You say, well, if you look at the stock market, yes. But you look at the gold market, which has been going up very, very strongly, you'd say no. You'd say, you look at the gold market, which, you know, presumably people are buying gold because they think the financial system is going to collapse and so on. Um, you know, gold is an Armageddon bet, and, you know, there's people are making money out of Armageddon this year. So, so yeah, if you will, the market might be, and this does happen from time to time, the market instead of operating with one brain, sort of splits and operates with two brains, and those two brains have very different outlooks. Which one's going to win?
Okay. No, let me turn to, to globalization. Actually, you, you've argued that rising interest rates will inevitably lead to a reversal of globalization. That was actually kind of, that trend does seem to be underway, actually accelerated maybe by President Donald Trump's policies. Do you think this is right, or is the de-globalization underway?
Yeah, I mean, there's no doubt that de-globalization is underway, and it has been underway, you know, for a while. I mean, really since the Global Financial Crisis. So the, interest rates are not the only story. I, when I read that book, I'm writing about interest, but, you know, so I obviously emphasize, you might say I overemphasize the story, the role that interest and interest rates play. Um, de-globalization started to unravel with the Global Financial Crisis, and you could see that with a lot more protectionism coming in. There's a guy, um, you, you might want to have him on your podcast one day. There's a guy called Simon Evenett, who's a British academic in Switzerland. I think he used to work out from the University of St. Gallen, and he, you should look up his stuff. He does something called the Global Trade Alert, and he's, you know, he's on top of that story. Um, and I've, you know, looked at his stuff from time to time. So yes, so there has been a, um, gradual unwinding of globalization since the financial crisis. Um, but, um, my argument in the book is that, um, globalization has a sort of feedback loop with interest rates. So, namely, is this: as you have more trade with the rest of the world, and particularly trading with countries where labor costs are lower, you're going to have, uh, a disinflationary impact on, or a deflationary impact on traded goods prices. So, you know, the cost of, you know, shipping, I don't know, widgets of some sort around the world, the cost of those widgets is going to come down. And as you have a, and as you, the more trade you have, or the more globalization you have, therefore the lower the inflationary pressures you have. And then the central banks will lower interest rates because they see less inflation. That's the really the story of what happened from the, let's say, the mid-90s, uh, into the last decade. Uh, but, but also as interest rates come down, bearing in, you have to remember that globalization involves big supply chains, and those supply chains happen over many countries and several continents. I think I mentioned in the book, you know, I sit an example of, of, um, you know, of cars, where, you know, the parts, parts of the cars are made in Japan, part, then more, more parts are made in, in Canada, and then they're finally finished off in Mexico. And, and that, you know, these long, these globalized supply chains, they, um, they're financed in US dollars, as you probably know. Most, I think, sort of 90% of of trade is financed in US dollar denominated. And therefore, we know, at the time when the Fed funds rate is zero, those supply chains are very cheap to operate. So you can tie up goods in a supply chain for a long period of time, it doesn't cost you anything. Now, you put up interest rates, and hey, hang on a sec, you know, you don't want to have such a long supply chain. And bear in mind, go back to what I was saying earlier, you know, to our friend Cochrane and inflation, and interest rates being inflation. Well, of course, look, put up the cost of your global supply chain with interest rates, you're going to have, someone's going to have to pass on those costs, and so it's inflationary, too. So, and that, so you can see that this, you know, this is, you know, if you look historically to the 19th century, you had globalization from roughly, let's say, roughly 1850s, 1860s through to the end of the century, and this is a period of falling interest rates. And then you actually have an, in the US, you have an populist backlash, for Christ's sake, you know, so you say, we don't want so much, you know, so much immigration, we don't, and, you know, they impose tariffs and this and that. Then you, and but then, and interest rates fall during periods of globalization. And they rise, they don't always rise in periods of de-globalization, because the 1930s are a period of massive, obviously de-globalization, but also during the Great Depression, period of low rates. But that, you can see it makes sense that there should be a connection between globalization and falling interest rates, and de-globalization and rising interest rates. The world being what it is, you know, um, these connections, you know, aren't always observed historically, but I think it's an underlying, um, connection.
Perhaps, perhaps the last one. Historian Barry Eichengreen has drawn parallels between the US today and Britain in the 1920s. Churchill, like US policymakers now, were torn between preserving the country's financial dominance, like Britain's financial dominance, and supporting domestic industry through currency depreciation, devaluation. As Britain, do you see these historical similarities? Because that's a quite interesting comparison.
Yeah, I'm, I'm sort of surprised that Barry Eichengreen made that parallel. Any, I mean, I'm, you know, I know, I know this is, Barry Eichengreen, he wrote a book about the gold standard. Yeah. *Golden Fetters*. Golden, golden fetters. Um, the reason I, and I've been thinking, I've been thinking a bit about this period, um, because I've just been reviewing, um, some books on the, on the international monetary system. Ken Rogoff, you know, the Harvard economist, has got a new book out called *Our Dollar, Your Problem*. *Our Dollar, Your Problem*. Uh, and there is this, um, financial journalist called Paul Blustein, who's written a book called *King Dollar*. And so they, and they both cover much the same ground about the sort of what we call the dollar standard, and what the, you know, what is the global reserve currency and so on. Now, you go back to the 1920s, Britain had, had gone off, you know, had, Britain, you know, issued sterling until the First World War was the global reserve currency, and the British Empire, uh, was dotted with, you know, British banks and, and, and same as the US today. The Americans were doing trade finance prior to the First World War in sterling. Exactly. So that's quite similar to the dollar today. I mean, like someone like me, I live in England, but three-quarters of my invoices are in dollars because, you know, I'm part of the damn global financial system. Anyhow, the, um, but then what happens? So Britain goes off the gold standard during the Second World War. It suspends convertibility of sterling into gold. Britain has then some inflation, and but they, they get it into their minds, and this is Churchill, but Churchill, not really Churchill, this, you know, Churchill was just doing the bidding of his advisors, um, they, they feel that sterling has to, uh, become convertible into, into gold, not, but at the pre-war level. And what that entails is, um, bringing a great deflation across the British economy. And that deflation lasts, you know, well, I can't remember whether Britain went back onto gold in '25. Yeah, it's '25. So we went back onto gold, '25, '26, we had a general strike because unemployment was always very high in that period. And, and really, Britain remained the economy remained depressed until Britain left the gold standard in 1931, in late 1931. Now, so you could say that the British made huge sacrifices in order to maintain, uh, the position of sterling as the dominant global currency and to maintain the position of the Bank of, of, of the City of London. Now, look what, look what's happening today. I mean, what's happening today is the Americans are saying, hey, well, some Americans in the Trump administration, I'm thinking Steven Mnuchin, who's the chairman of the Council of Economic Advisors, who wrote this very well-known paper that came out last November. And, what this paper says is that actually, you know, America has been suffering a great deal from these, um, from being the global reserve currency because what that means is people, um, you know, bid, you know, come over here, they, they buy the dollar, and the dollar becomes overvalued, and that means we can't export. And these capital flows come into the US, and they create booms and, you know, real estate booms and, and asset price bubbles. So, and we don't want to have anything more, more to do with it. Now, actually, what, you know, what Mnuchin suggests is, you know, that the foreign official holders of US Treasuries, their bonds should be taken away, and they should be given zero-coupon perpetual bonds. In other words, worthless pieces of paper. Well, that, I mean, that is, that is what the Americans were doing, at least, you know, the new, these advisors to the Trump administration. What Trump appeared to be doing with his, with his tariffs in the first couple of months was to, was to destroy America's position in the international monetary system. So, if you, do you see now, I don't know the exact context in which Barry Eichengreen wrote the comparison between, you know, the, Britain in the 1920s and the US today. To me, they seem, they seem diametrically opposite. The, the British sacrificing themselves in order to maintain their position as the issuer of the dominant currency, and the US, almost in a fit of, sort of, peak, is saying, hey, we don't want this, we don't, you know, the French president, later President Valéry Giscard d'Estaing, called the US dollar having its so-called exorbitant privilege. And the Americans have been saying, hey, look, we're fed up with this exorbitant privilege. It's not a crazy, I mean, they're not, it's not crazy. I can understand where they're coming from. To be the exor, I think of being the exorbitant privilege is like inheriting a massive trust fund. You know, you end up, you never bother to go to work, you end up taking drugs, you get married several times. It's not good. It's not good for the character, and it's not great. So I, um, so I, I can understand it, but I think it's very different from what the British did. Yeah.
Okay, Edward, thank you so much for joining us in Prague. It's been a great conversation.
Good. I enjoyed it.
Uh, thank you for listening to PFI Talks. See you next time.
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