Transcription
In the middle of a financial crisis, everyone tries to hoard precious metals and get out of paper money. You draw any chart of default rates on US corporate investment and it is the highest in our history. It wouldn't surprise me if we got a series of mini booms and busts on in the AI boom. Every private sector infrastructure boom faces these issues where the collective consequences of of these competitive attempts to become number one lead to poor returns for everyone and at some point that's going to kick in.
I am so glad today we have a very special guest, one of my favorite authors of all time, Lea Ahmed, who's the author of the new book 1873, the Rothschilds, the first great depression and the making of the modern world. Leaquat, welcome to Monetary Matters.
>> Thank you, Jack, and thank you for having me.
>> I want to ask you about 1873, why it's so important, what drew you to this year?
I had written a book about the leadup to 1929 and the Great Depression and that focused very much on the conduct of monetary policy by the four central bankers. And I was looking around for another financial crisis. I'm I'm actually not a misanthrope, but I do I do like writing about financial crisis because as an economic historian, they're really quite dramatic and history speeds up and lots of things happen. And 1873 really piqued my interest because it was both a giant financial crisis or sequence of financial crisis in three different financial centers but superimposed upon it was a crazy reordering of the monetary system and a totally unnecessary reordering of the monetary system that very few people seek to know about. I thought that makes a fantastic story of, you know, both what a boom bust cycle looks like and then throw in a sequence of major monetary missteps. And since 19 since my original book, the Lords of Finance argued that the central mistake in in the 20s was a series of monetary policy mistakes. I thought this this sounds just perfect material for me.
>> Yeah. Your book Lords of Finance 19 about the 1920s and 1930s in my opinion the greatest financial history history book in in in my opinion.
>> Tell us what was the monetary misstep coming up into 1873.
Okay. For 50 years, the world had relied on a combination of gold and silver as the foundation for the monetary system. And we'd had periods of major gold discoveries and we'd had periods of major silver discoveries. And it had proved the system had proved to be really quite resilient. uh that when uh when there was a lot of silver the that was absorbed by central banker banks and when there was a lot of gold that was also absorbed by central banks. So the monetary base if you like which depended on precious metals was really quite stable and grew quite quite systematically. And at the heart of this were two countries somewhat surprisingly the US which depended which relied both on silver and gold and France which also had a bimetallic system relying on gold and silver. Now half the or or I don't know a third of the world a third of the financial world the Britain was on gold the other third was on silver so Germany China India Turkey Mexico you know were all based on silver and the the swing factor and and that acted as a sort of balancing uh balancing item uh was was France and and the US and it had worked brilliantly. We'd had stable prices throughout the 19th century and in 1873 and this is not a well-known story. Bismark had defeated France on the battlefield and decided to double down by trying to attack France using his uh his reserves, his his precious metal reserves by dumping all his silver and moving to gold in the period of 1 to two years, thinking that that way because the French held the most amount of silver in the world that they he would be damaging France and and he did but he damaged himself. It was actually a self-inflicted wound because every country in Europe at that point panicked and started dumping their silver and that caused a giant sort of move from silver to gold and people started trying to hoard central banks started trying to there was a scramble for gold and under any sort of precious metal standard whenever everyone tries to scramble for a particular precious metal. It causes a contraction in in liquidity and money supply.
>> So Bismark, the head of Germany, won a war against France and wanted to penalize France. So moved off of silver. Why did that cause a contraction in liquidity? And also what years is it? This is before 1873 or exactly 1873.
It actually exactly in 1873.
And the world could have coped with it if you know under normal circumstances but to do this in the middle of a financial crisis. Now, anyone who knows about financial crisis crisis knows that in the middle of a financial crisis, everyone tries to hoard precious metals and get out of paper money. And so the role of the central banker banks is to expand their money supply and accommodate that demand. And uh to have that occur, to have Bismark try to damage France and cause it to contract its money supply right in the middle of the financial crisis was a step too far. And the most visible sign obviously was what happened to wholesale prices. So if you track silver prices versus gold and they exactly match year by year what happened to commodity prices and that is the single most important determinant of what caused the deflation from 1873 to the 1890s.
>> And all of the countries kind of decided to go off silver and gold together. So they just go to to gold or was it kind of piecemeal and you know first it was France then it was the other ones as well.
Okay. There was a conference in 1867 where there was a pie in the sky plan with the idea that everyone should move from silver and gold to gold. Now this was 1867. The world was experiencing a major expansion in gold supply after the gold discoveries of the 1840s and 50s. The world was booming. So it it was a perfect environment. The only people who refused to sign up for this were Britain and France. So it was a plan that never went anywhere.
>> Okay. And essentially was a non-plan and maybe it would have been a good idea if there hadn't been an intervening financial crisis in 1873. All showed complicating the fact the the the situation was that gold discoveries slowed down dramatically. So the you know the hope had been we'll all move to gold because there'll be enough gold in the world to sustain all of us. But you know gold discoveries are a random affair. And you know unluckily this the new discoveries slowed down dramatically and only revived in the 1890s.
So, we're hinting at the bust, the collapse of the financial system, the the retrenchment. Let's talk about the boom, though. Did the boom begin in the late 1860s or what what caused this the huge surge in investment and and growth and and the bull market of the late 60s early 70s.
Okay. The bull market had started in in 1850 and it had been fueled by a massive expansion in the bond market and the architects of that expansion in the bond market were the Rothschilds. Hence that's why they appear in the title. It was actually a totally rational boom there. You know there were new opportunities. The supply of savings from the two major savers in the world which is Britain and France was steadily expanding and the expansion in the bond market essentially channeled those savings into massive infrastructure projects around the world. So the railroads, ports, you know, the laying of the undersea cable, communications. Um, and it was a it was actually a really quite benign boom, uh, with, you know, no excesses. In 1870, as the boom was sort of breaching its 20 year mark, France and Germany went to war. I mean France was the second largest capital market in the world, the third largest economy. Paris was surrounded by Prussian troops, was starved into submission at the Paris Stock Exchange was closed for months and everyone thought, God this, you know, assumed this would be the end of the boom. Instead, the disruptions to capital flows fueled in the perverse way that financial markets always disabuse of everyone of their expectation fueled a series of bubbles and the bubbles were three-fold. One, the money that Germany got from France fueled a stock market bubble in Berlin and Vienna. Secondly, a lot of capital went into the US which was immune from European wars and gave an extra boost to the railroad construction boom which had been going very steadily but suddenly in 1870 took a giant leap forward. And thirdly, the it converted the UK the the London stock exchange into a giant casino where all sorts of small companies and new borrowers from sovereign countries were able to float bonds and were able to float stocks and bonds and there was a speculative bubble on the London Stock Exchange. So you got three simultaneous bubbles and totally unforseeable in in the space of the three years from 1870 to 73. And so those three bubbles were the stock exchange in London, the real estate and stock market in Berlin and Austria and then the US railway boom. The the railway boom was a lot bond funded, debt funded, not equity funded.
So, Leaqua, what was was there a cause or a series of causes that propelled these three bubbles at the same time or did they have different causes?
France having to pay a billion dollars to Germany. And by the way, a billion dollars converted today to today's money adjusted for the size of economies would be about 1.2 1.3 trillion.
>> Wow. And you'd assume that, you know, $1.3 trillion going from the hands of savers in France into Germany where the money gets spent. You can understand why it caused a bubble in Germany. Why it caused these other little bubbles which were just as significant. And suddenly you know railroad bonds which had been running at you know I don't know 2 3% of GDP boo suddenly boosted to f four five 6% of GDP in the US and foreign sovereign debt issued on the London stock exchange which had also been running at $200 $300 million a year suddenly jumped to $500 million. I don't think anyone fully understands that sometimes, you know, you can get these situations where you get when sources of savings suddenly get unleashed, everyone looks around and says, "Who knew there was so much money sitting on the sidelines?"
>> Yeah.
>> And I think that's what happened with the Franco-Russian War.
>> Okay. So when So let's say so when did things really start to get hot? 1870 1871.
>> Yeah. 7172. I mean truly hot and and you know everyone was predicting by by by the end of 1872 people were predicting disaster certainly in in Berlin and Vienna but they were also predicting you know people were complaining about how many railroads were trying to raise capital in the US and you know the economist was railing on about all of these all of these countries coming to borrow on the London Stock Exchange and people buying their bonds who knew nothing about these countries. And I in my book I focus on two in particular Egypt and Turkey which borrowed the equivalent of $1.5 billion which was is was actually I mean just to give you an example if $3 billion went into the US railroad boom about a billion came from Europe. The idea that savers in Europe should devote $1.5 billion dollars, 50% more than they devoted to to American railroads to financing Turkey and Egypt is just sort of mindboggling.
>> Yes, and the the the return of investment on these bonds doesn't seem to me to be a particularly good investment. Then we you know as as we said before that a lot of this money was invested with what we call what's called retail investors in fixed income and bonds rather than equities. Like today people may be buying stocks but back in the day they would be buying bonds. And it just seems to me like if you invested in the equity of a railway company, you know, you're probably going to lose all your money, but if you don't lose your money, it could 5x, it could 10x, but it seems like because when you're lending to a railroad at 10%, your upside is capped and you you have all these risks. It doesn't seem to me to be a particularly good investment, nor does it seem to me to be a particularly good investment to lend it to these bankrupt monarchs of of Egypt and Turkey. Did that occur to investors at the time? Did it occur to them later?
Well, I think it occurred to them later that at the time people had uh certainly in um stock investments, so equity investments had developed a very bad name in 18 the mid the late 1840s and 50s.
>> Why?
>> Uh because uh of two main factors. One was there was a railroad mania in Britain uh where railroad stocks went up 3x 4x on average and then collapsed and people got themselves very badly burnt. So so that was that was the first factor. The second was that the largest bear market of the 19th century occurred from 1848 onwards. 18 maybe 1847 and it was essentially because you had revolutions throughout Europe and they you know people had seen that they thought the you know the French government was going to fall. There were revolutions in every country and it caused a you know total disruption in capital markets and people expected to lose all their money. Superimposed upon this a book had been written by Charles Mackay, the famous book about manias and bubbles and it sort of reminded everyone that periodically investors totally lose lose their minds and invest in crazy things. So the combination of these three things led people to say you know we should just we you know we led the middle class and there weren't institutional investors at the time. that this was fueled by a rising middle class, two three 400,000 people spread across Britain, France, Germany, and the US who were just getting to the stage where they could start accumulating significant amounts of money and they thought we're going to put it all into bonds. The dilemma was that as they started putting it into government bonds, government bond yields went down to two 3%. Uh you could get 3% in the UK, you could get 4% in the US and suddenly the railroads appeared and were offering 8 9%. and fly by night borrowers from Turkey and Egypt were offering 9 10%. And people were not experienced enough to realize that these guys these gains are totally illusory or the these returns are potentially totally illusory. So people put vast amounts of their net worth into into these bonds. You know, just uh to give you an example the the British prime minister Gladstone put a 40% of his net worth into Egyptian bonds. Now you know luckily for him he was governing British policy towards Egypt so he could determine the outcome but for most people they weren't in that situation. So, so equities had a bad reputation, people were plowing money into bonds and I also think that because inflation was low and we'll see later negative like earning 8% in nominal terms and then getting 10% in real terms because deflation it's not it's you know not a not a horrible prospect and then also did you have this thing of kind of like private credit of you go to the bond market and and you buy from the Rothschilds or someone who bought from the Rothschilds and then you park it away you tuck it in your drawer and you feel good about it, you're not, you know, if you're a a middle-class saver, you're going to work, you're not like checking, you're not going to the exchange every day to see the price.
>> No. Yeah. Exactly. This, you know, this was supposed to be giving you a coupon every year and, you know, was going to sustain put your kids through school and, you know, sustain your middle class life.
Tell me about the railway boom. When was it rational? When did it be become excessive?
I think it was rational until 1870. You know, it was running at about in both the US and and Europe, it was running at 4 5,000 miles of construction a year. The returns were reasonable. The transcontinental the first transcontinental railroad was completed in 1869. in 1870 a series of or in it's actually in 1872 but sort of between 1870 and 1872 it be it began to be apparent that many railroads had been constructed way in advance of demand. So returns on on railroad bonds, returns on railroad investments had gone down. Now they were meeting their their dividends by continuing to borrow. But there were clearly signs of excess investment in in US railroads. In the 18 in 1872, a series of scandals roughed the railroad business and in particular was revealed that the first transcontinental railroad which had cost $70 million. Of that, $30 million had come from government subsidies in the form of land grants and cheap lending through the state. On top of which costs have been giant inflated because the railroad companies had discovered this where the sponsors of the railroad companies would create created a private company which would do the construction and the railroad would subcontract to the to the private construction company to actually construct the railroads. And the most famous was a company called Credit Mobilier, which all sounds very sophisticated and they borrowed the the French name from a French bank, but it was just a device for siphoning excess profits from railroad shareholders to this group of insiders. And the people who were who who ran the insiders, one was a congressman Oakes Ames and he started giving out shares in or giving out equity in this in this construction in Credit Mobilier to favored congressmen. It was the biggest corruption scandal until then of the 19th century that essentially congressmen and politicians who were responsible for licensing and allowing the railroads to to expand were getting were making themselves rich. When this got revealed in 1872, there was a wave of disgust and the funding from Congress dried up. So the second transcontinental railroad which was which was a company called Northern Pacific which was built which was trying to construct a northern route across the country and had hoped to be able to get sub the similar subsidies from Congress suddenly found its sources of money drying up and in 1873 it ran out of funds. And at that that's what precipitated the collapse of the railroad the first railroad bubble.
How many people lost a lot of money in this? And can you give us a sense of the scale of the losses that investors experienced perhaps in in the United States and also the we can compare the railroad investment capex from railroads as a percentage of GDP. you know in 1850s it was like 3% then it it dipped down and then as you said in 1870 it exploded higher to 4% 5% of GDP later we can compare this to the data center boom we have now I think data center as a investment as a percentage of GDP in the US is around 2% so it's below the excess's peak of of railroad so it it could get if it you know could get as crazy as 1870 could get even crazier but just I want to get a sense of the the losses and and precisely, you know, do do you think that it's almost guaranteed anytime you have a capital expenditure boom that they're going to be excesses that lead to losses?
Well, let me describe the numbers first. So, the 1870 boom by 1873 the outstanding stock of Oh, great great graph. By by 1873 the outstanding stock of railroad bonds was two to two and a half billion issued in the US. Over the when when after the crash came half the railroad companies in the country went under and stopped paying interest. So over a period of 3 four years the the volume of of defaults was roughly 50%.
>> Volume of default of 50%. That is so high.
>> I mean it's the it's you know you draw any chart of default rates on on you know US corporate investment and it is the highest in our history. uh now not you know that that doesn't mean you you got zero dollars back so 50% and let's say you got 30 40 cents of your money back so the total losses were somewhere between 500 million and a billion dollars so in a country where the GDP was running at $8 billion dollars you know That's 10% of GDP over a you know so let's say 2 3% of GDP over a period of four years. So that gives you the scale of the magnitude of the losses. So what were we? Yeah. So that was that and that I think what what people were re somewhat reassured was that this was essentially the equivalent of high net worth individuals. I mean this was not you know your average person your average man in the street. This was, you know, people who bought railroad bonds had money to invest and they and they had the ability to sit through losses. I suppose a bit like private credit today. So, so it didn't it didn't translate into a giant collapse in spending to give you an idea of the other bubbles in the world. So the the European stock the central European stock market bubble essentially caused equities to go up about a billion dollars went into equities and the stock market collapsed by 70%. So we got and these were these were actually not high net worth individuals. So they were, you know, they were the man in the street who got caught up in in the mania. Well, not only the man in the street, princes and duchesses and everyone got caught up. So this total losses in central Europe were a few hundred million dollars. And then if you take the emerging market debt boom, if you count how much went into emerging market debt, about $2 billion went into emerging market debt. And let's say half of that went uh was never paid back. I mean, Turkey, a billion dollars went into Turkey and essentially they were forgiven half of that. and then you know rescheduled the other half. So you essentially got 25 cents on on the dollar of your money back. So that gives you an all sort of sense of magnitude of of all of the losses around the world.
What were the lessons learned from 1873? What did what did you learn? What what can you draw from this?
Okay. Well, I mean I I make a big deal, I suppose, because of my own interest. of you know this crazy remaking of the monetary system. The boom bust cycle was not great and it you know it caused a recession. Compounding the losses was the deflation that followed where prices fell over the first five years by 25% and then over the 20 years by a total of 40%. Now there is nothing worse than having a you know as we found out in Japan there is nothing worse than this sort of insidious deflation where prices keep falling and it causes massive uh redistribution of income from debtors. So debtors found themselves beleaguered for 20 years. Now some of these were farmers in the in in the west or they were Junkers, you know, the Prussian aristocrats, but some of them were just businessmen and you got got a reaction where everyone tried to get the government to to help them out. So you got a wave of protectionism. uh you got you know Europe had been moving towards free trade and you suddenly got uh a jump in protectionism in Europe. Germany. Bismark who had sided with the liberals in favor of free trade changed changed the party he supported to the conservatives and supported the the right-wing party which was in favor of agricultural protection. So we got a jump a jump in agricultural protection essentially designed to save Prussian aristocrats and across Europe the the move towards free trade uh docked. So not very different from the sort of wave of protectionism that we've had in the world the last few years. The US was already highly protectionist but even it raised tariffs on manufacturing. So and it caused more than the economic consequences was the political fracturing. You know, it it pitted people who earned their money from the land against everyone else and was the single most important factor in the wave of populism in the in the US. uh was uh created giant problems across Europe including for you know British aristocrats who had to get rid of their estates wholesale. I think there was a I I cite a statistic where of a hundred British aristocrats some astounding number married off their daughters to American millionaires. So it, you know, it caused a major social disruption.
Because agricultural prices went down and and part of this was monetary as you said. I think a part of it was the rise of the steamship. So actually I think in in Downton Abbey I think the uh you know Robert the the Lord Lord Grantham is he's married to an American woman who's like an American millionaire a heiress and as people who have seen the show know that you know he's having some financial troubles. because it's, you know, running an estate is not a great business from the years 1870 to 1920 in part because of the the demonetization of silver as well as the steamship. And I think literally I think actually Cora's dad was a a steamship guy, unless I'm confusing with someone else from from your book.
I could get >> No, you you know he by the way Downton everyone's seen the house from Downton Abbey. I'm assuming that belonged to the do a Rothschild daughter >> really. >> So and by the way the Rothschilds had 41 such estates across France and Britain. So you know it gives you a scale an insight into the scale of the Rothschild wealth. She was the daughter. She was her father was actually gay and but had a mistress.
>> Is this Adulus? Adulus or Nathaniel?
>> No. God, you're confusing me now.
>> Oh, sorry. Don't worry. But his daughter married the Earl of Carnarvon and she and the Earl of Carnarvon first of all financed the the attempt to find two >> Alfred. Alfred >> Alfred. Yes, >> I told you I read the book. >> Right. So Al Alfred was a real character because he was gay and very flamboyant and was known throughout London, but he did have this mistress and he did have this illegitimate daughter and she was a you know she was a sort of nasty piece of work because she milked him from all for all the money and the rest of his family were very upset that she ended up inheriting all of his Rothschild's millions. But it did go into into good causes, I suppose. And that that house just stands as this total symbol of the Rothschild wealth.
>> Wow. I I know that house was from the Rothschild. So Leo, I just want to say the book is fantastic. 1873. People should buy it. I think they people who follow my work and are a regular listener who are interested in this financial crisis, monetary policy, booms and busts, they they definitely will be entertained, find a lot of value as I did and they also check check out your original book Lords of Finance which I as I said is a truly exceptional book. Leo Lewat, what do you think after having written this book and preparing for this book for many years focusing on the railway boom when in capital expenditure as a percent of GDP reached as high as five five a.5%. What do you see think now as you watch the global data center AI boom where literally I mean just I think in the US a trillion dollars this year is going to be spent on on AI data centers certainly that much if you count other countries as well what are your thoughts how much of a comparison are can we draw
Okay. So look it a trillion dollars is probably you know 3% of GDP it is a global boost So it's not just in the US that you know it's being financed and underlying it are all sorts of electrical and infrastructure companies based in Europe based uh chip companies based in Taiwan and um and Korea. So the world is a very large place. Global GDP is whatever a hundred trillion dollars. uh US is $30 trillion. So we could we can finance several years of a trillion dollar investment boom. So I don't think the problem is going to be a supply constraint on finance. The only problem will be a that they are all competing with each other. All of these companies building and they all want to be number one and the returns for being number two or number three may fall dramatically short of expected returns and it's not clear that the AI companies have developed a business model for generating revenues on the trillions of dollars they're going to invest. So it's just every private sector infrastructure boom faces these issues where the collective uh consequences of of these competitive attempts to become number one lead to poor returns for everyone and at some point that's going to kick in. Now the lesson from the railroad boom was we got a bust in 73 which lasted for 5 years. We then got another boom in the early 1880s. More equity financed, less debt. So they they'd learned one lesson. And then we got another bust and we got a third mini boom in the 1890s. So the railroads transformed this country, but they didn't do it in one fell swoop. And there were several booms and busts along the way. And it wouldn't surprise me if we got a series of many booms and busts on the in the AI boom.
It did strike me reading the book that throughout the late 19th century the bust the the recessions depressions lasted so long three years five years as you said it almost feels like policy makers now particularly in the US consider it illegal to have a recession and if there's a you know a market panic and a bear market and financial conditions tighten they're not doing their job if they don't aggressively try and mitigate those conditions unlike you know we had the so-called free market in in in the late 19th century. Your thoughts there here?
So the I I think it was product of two things. One is governments did not think it was their responsibility to smooth out the business cycle. But secondly, and then I go keep going back to my whole thing of the monetary environment. There was just not enough money around. And I I I liken the economy of the late 19th century to trying to drive a a car with your foot on the brake and your foot on the accelerator and the other foot on the brake at the same time that it was a series of stop-go cycles and we got you know we we it was I mean it it was 2 and a half% growth for that 20 year period. So that's great, but it occurred in in fits and starts. And if you have a monetary environment that is way too tight, that's what you're going to get. Now, we're about, you know, we learned that lesson. Maybe we're gonna make a totally separate mistake, which is we're gonna be too loose going forward and we are we're going to have to live with as opposed to the deflation of the late 19th century, we're going to end up with systematic inflation of the 2020s onwards. and the, you know, being a bond investor is not going to be a good place to be uh because interest rates are going to constantly be spiking up. So, you know, I can envisage all sorts of scenarios. I history is not going to repeat itself. In in in a piece where you were interviewing in Fortune, you you cited the quote, "Things take much longer to happen than you imagine, and once they happen, they happen much quicker." As an observer of financial history, tell us how you've seen that throughout history.
That adage was was coined by Rudy Dornbusch, who's a famous MIT economist. I think he drew it from a quote from Hemingway where someone asked someone, "How did you go bankrupt?" And he said, "Slowly at first and then very quickly." So, so look that's if you draw business cycles, if you draw a chart of business cycles, they are not they don't look like cycles. They don't look like sine curves. If you draw a chart of of the stock market, bull markets last a long time and climb a wall of worry. Bear markets occur in 18 months, two years, max three years. So you've got you get 10 years of a bull market and then three years of a bear market. So I think that is in a chart just just that chart would summarize would summarize the the Rudy Dornbusch adage very well.
I wonder you you have a piece out in the in the Times about the AI boom and how it's global, not just in the US. What motivated you to write that piece?
I mean, one of the characteristics of both my books and all of my thinking is that in the US, we have a tendency to be somewhat parochial about markets. what's happening in the world and we exaggerate you know our own influence and we don't pay enough attention to the fact that we are just one element of the global economy. So Lords of Finance you know essentially argued that you couldn't understand the Great Depression if you just focused on the US. You had to see it in the full context of what was going on in Europe. This book 1873 sort of argues that point in spades because the US at that point was only one among four roughly equal economic powers. Now we are now, you know, a $30 trillion economy and it, you know, we're able, we have a $60 trillion plus equity market which accounts for 65% of the global equity market. So we're able to carry the illusion that we we are the only act in town and I'm just trying to argue the case that there's a whole big world out there and that you know we we have made maybe we've become a little bit too seduced by you know we've drunk our own Kool-Aid and believe that uh the US is the only place to invest and the last 18 months is a reflection of that that we've had a a a mini boom going on in the rest of the world all driven by AI and AI may be American in conception although even there I would argue that many of the people who came up with AI were British but but the execution and the implementation of the AI boom is a global phenomenon and is going to tap into a full range of global companies.
>> Yes, you've got some companies like ASML in the Netherlands, in Japan, you've got a lot of semiconductor giants. In Taiwan, you have Taiwan Semiconductor. In Korea, you have the memory players. All of those companies are in the MSCI World Index or the MSCI ex-US Global Index. So you're absolutely right as you point out that since the beginning of 2025 emerging markets generated returns of 53% Europe 44% Japan 40% while the US equity market is up considerably less. I might just add that it is very concentrated in global. It's like Netherlands, Korea, Taiwan and Japan. Other than and the US and then China. But other than that, it seems like the US the AI boom is
>> I don't know. French French construction companies and German energy and you know I think there's you know uh yeah I mean I you probably know know these numbers much better than I do but I I just get a sense that we I this was actually almost just a plea for a certain amount of national modesty.
I well I certainly endorse that hardly. Yakquat, what terrifies you about financial markets now and what gives you hope?
Well, what terrifies me is some of the crazy stuff that you see, you know, when a sneaker company um I'm blanking on the name, the >> Yeah. can convert itself to an AI company and see its stock go up, you know, threefold. the fact that over the last three two and a half years, you know, we we've had these mini speculative bubbles in crypto, in gold, and silver. There's something a little bit overbought about financial markets that is that can, you know, I I just don't believe is healthy. and combine that with a hands-off central bank that is clearly going to be under political pressure to keep interest rates low is makes me nervous and you know reminds me of the late 60s early 1960s early 1970s. So that particularly uh makes me nervous. Now what gives me hope is the sheer innovative capability of you know we we've had these modest productivity boomlets. We had one in the late 1990s and we look and you know you never know but we look as if we're beginning to get one now and there's every reason to hope that we could be in for a a nice productivity jump associated with all of these new innovations.
Tell us, you said a bubble in crypto, a little bubble in gold and silver. Wouldn't what what do you make of the argument that gold and silver is primarily rising because you you know investors in China and India as well as governments around the world are buying it because they don't like the US Treasury's debt position and they don't like the US government kind of bullying countries around such as what the the US Treasury did to Russia. I'm not saying Russia didn't deserve it. we kind of canled like billions of of their money of their money
>> that you know uh that's one more reason to be scared.
>> Yeah. the geopolitics, the geopolitics. And you know, look, you would be worried if you had a central bank, the the US central bank is not, you know, is not essentially conveying a message that don't worry, we've got it under control. you know, we've exceeded our inflation targets for, you know, the the last five years, and it doesn't seem as if we're in a hurry to try to reassure everyone that that we are we are going to meet meet those inflation targets. So, you know, that's another reason to to be worried.
Tell us your thoughts about incoming Fed Chair Kevin Worsh. He is likely to be a little bit dovish. So lower interest rates on interest rate policy, but a little bit hawkish on balance sheet policy. So he's stated his desire to reduce the Federal Reserve's balance sheet and role in the market. I've actually got some exciting interviews coming up on that topic with some of the like best informed people on in the world on that topic. But I wonder, Leo, you've studied central banks policies and policymakers actions towards gold, towards silver, the demonetization of silver in the 1870s, the move of central banks back onto the gold standard during the 1920s after the World War I. We moved off of it and both those extremely painful transitions forced on the monetary system by the central bankers, a tightening. I wonder are we at perhaps a same juncture where the balance sheet is going to be significantly reduced and and do you view that as as comparable or even similar at all?
You know, not really because I, you know, I think >> the central objective I I mean I I think there probably ways to get the balance sheet down without putting pressure on interest rates, but and it'll probably put pressure on a little pressure on long-term rates and compared to short-term rates, but I find it very difficult to see how he achieves leaves I mean a certain amount of deregulation uh will will clearly reduce the the bank's needs for banks need for reserves and therefore that they may be able to get the balance sheet down but I find it very difficult to see how he's going to be able to reconcile his interest rate objectives with his balance sheet objectives.
The book is 1873 The Rothschilds, The First Great Depression and the Making of the Modern World. People should go out and buy it as soon as they're done finishing this interview. Leaquat, thank you so much.
>> Thank God.
>> Thank you. Just close the door.