Transcription
For any single pension fund, they probably should be shorting bonds and shorting French bonds in particular. But if everybody does it, then you're actually precipitating the crisis that you're trying to avoid. That is the definition of boom and bust.
You know, that's the definition of it. It is I thought everything was great. Oh, it isn't. Every time the answer to the problem is exactly the same, which is print the money. But in printing the money, all you're doing basically is encouraging people to take out more debt, which then becomes the basis for the next crisis. There are no good alternatives. There are only bad alternatives. And the question is which one is the least bad.
I think in the end, the um, what's the French phrase? Skeeper. If you can save yourself, you should.
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Welcome back, everybody, to the Reinvent Money podcast. My name is Paul Botink, and today I'm going to talk to Canadian economist William White, who has spent decades working respectively at the Bank of England, the Bank of Canada, the Bank of International Settlements, and lastly, between 2009 and 2018, he was the chairman at the OECD, the Organization for Economic Cooperation and Development. William was one of the few economists warning for the 2008 Great Financial Crisis because he understood the role of central banks in creating asset bubbles. We're going to discuss the current state of the world financial system and economy and whether he sees asset bubbles right now. I also would like to get his view on France's finances and whether it needs assistance from Brussels or Frankfurt. Also, are we going to see a new Bretton Woods emerging anytime soon to replace the dollar with? Before we start, please don't forget to like the video and subscribe to this channel. Welcome, Bill.
>> Well, it's great to be here, Paul. Thank you.
>> Yeah. Uh, amazing to uh to have this chance to talk to you because you've been an insider for for so many decades and and you've been warning about a lot of problems uh we've we've seen and and we're currently seeing. Um, the first thing I wanted to ask you, uh, because your last position was at the OECD, which of course focuses on economic cooperation. How do you look at the increasing divide between the West and East or or global South in which economic cooperation seems to become more difficult by the day?
>> Well, it's um, it is a growing, growing problem. The um, the the issue is just exactly what sort of set of blocks might might actually emerge from all of this. I mean, on the one hand, you've got um this deep-seated concern about China inside Congress, the US Congress, but at the same time, and there was a great article about this this morning in the FT, at the same time, the Trump administration seems to be trying to wreak havoc on its best friends. So, everywhere you look, uh, you you see the ties being cut and America increasingly wanting to do it our way. But of course, we have no real idea, given the the the variability of the Trump administration's uh objectives and um procedures. We've we've no idea what their objective today is going to be, their objective tomorrow. So, um, frankly, it's it's a total mess in terms of international cooperation. I don't think I've, in my 50 years in this business, I don't think I've ever seen it worse.
>> Yeah. Because you're 82 already and you've seen a lot. Uh, but I I guess you're you're glad not to be the chair of the OECD at the moment because what can the OECD still do?
>> Not the chair of the OECD, I was the chair of the Economic Development and Review Committee, >> which is the the committee that does all the country surveys. Um, I think most people would suggest that it's probably one of the most important committees at the OECD. But the OECD does an awful lot more than what my committee did. Um,
>> and what can the OECD uh do at this point in order to perhaps uh restart or reboot economic cooperation amongst countries?
>> Well, I mean, the OECD has been making big, big efforts um in in this area for well, really ever since they were were started. And they started a relatively small sort of group of countries in Western Europe and the United States and then gradually sort of spread out now so that uh, you know, you've got all sorts of people, all sorts of countries now associated with the OECD that wouldn't have been associated with them earlier. Uh, I think the OECD has been very helpful. They're very clever in a way in the sense that they they really try to convince the countries being surveyed that the OECD is not doing it for any ulterior purpose. They're doing it because they truly do want the economic prospects of the country being surveyed to improve. And as long as you can get that trust, uh, then you you can really start to make some progress. But in a fundamental way, what's breaking down at the moment is trust. And this is a hard thing to program into an economic model. But it it is absolutely crucial that if you don't have trust, um, you don't have cooperation. And if you don't have cooperation, uh, which some people would say is the the the basis for growth and for prosperity, uh, then you're obviously in a pretty dark place. And it has been getting, it has been getting definitely worse over the course of the last number of years. And sadly, I mean, we see this absence of trust at the national level as well. So, um, in an increasing number of countries, when they do surveys about, do you trust government, do you trust the police, do you trust the media, do you trust politicians, um, government is uh, trust in government has gone down and down. I think in the United States, I think the last survey was something like 19% of the people said they trusted the federal government to do the right thing when the right thing was required.
>> Yeah, I the trust is even lower here in Europe because I think only 15% trust Macron at the moment and in Holland only 4% uh trust the the current uh coalition. So yeah, it's across the world it's eroding. But at the same time, we can conclude that amongst, for example, BRICS nations or global South nations, there seems to be more cooperation going on lately. When there was the SCO uh meeting and the Shanghai Cooperation Organization, there were, there's also now a warming of relationships between India and China. So what is what Trump is achieving at least is that there's more cooperation taking place outside of the G7, outside of OECD also.
>> Yeah, there's grow, there's a growing sentiment, I guess, that uh, America has chosen to withdraw not just from leadership but from participation. And then you get an increasing number of people who are saying, well, let's start thinking seriously about what the alternatives are. I mean, in the limit, although this is not going to happen, in the limit, one might have envisaged that all of the countries confronted with the Trump threats about tariffs might have said, if you want to play the game, play that game, you can take your ball and go home, and the rest of us will find ways to cooperate without you. And I think we are seeing some some meaningful moves in that direction.
>> But I'm not sure that all of this stuff is as permanent as one might wish. Uh, the Asians have a, I remember being in a, once, a meeting once with a Korean chap who said, the problem with the Western countries is that they don't know you can say no in 37 ways in Korean. So it's all, everything is very, very subtle. And so you have appearances, apparent progress, but whether underneath it all, there's any sort of major changes is another question. And China and India, um, you can see at the moment why there would be a kind of urge for them to cooperate more, but they still have these ongoing border conflicts uh and the antipathy has been there for a long period of time. Uh, these things are not going to be overcome overnight. Even when you think about Russia and China, you know, you can see they're sort of obviously in close cooperation at the moment. But um, in some longer run sense, you know, the Russians have always been concerned about the Chinese. You know, the Chinese are right on the border. There's billions of, you know, billions, not billions, but you know, many, many millions of them. So yeah, cooperation, like I say, is based on trust, and there's lots of grounds to believe that the trust is not there, even amongst that small group of countries that you talked about.
>> Well, at least the West is doing its utmost to to drive uh the Asian nations into each other's arms. So I guess uh if they keep on doing that, it will only cement the ties between those nations.
>> Yeah. But trying to, how can I say, trying to um, the the g getting getting a block of China plus all the other countries in Southeast Asia. Okay. When you, you know, at the moment that there's uh um a a great deal of concern about what China's greater motives are. We've had all these difficulties in the the South China Sea. We've had, you know, boat uh um boat bashing by the Chinese Coast Guard of boats from the Philippines. There's a there's a lot of bad will still there and a lot of concern. So I think what the Trump administration has been doing, you're quite right in suggesting it's it's encouraging these people to look towards closer cooperation amongst themselves, but there's still lots of impediment to the kind of deep cooperation that I think we we might be looking forward to.
>> Yeah. Yeah. And in any event, without the United States, you know, which is still a quarter of global GDP, without the United States, um, the degree of global cooperation has got to be significantly reduced, and there will be big costs involved in moving to that kind of bipolar or tripolar world. The supply chains, for example, you know, all have to be sort of redone, and this is all very expensive stuff.
>> Yeah. Yeah. That's something we can discuss later also. Uh, why you believe we're going from an age of of abundancy to an age of scarcity. Um, let let's focus a bit on Europe because I'm based here. So on the one end, we see the friendship between the US and and and Europe um eroding. At the same time, within Europe, there's also a lot of pressure and and unresolved issues, especially when it comes to our monetary union, which um I believe um is is has been a very vulnerable construction from the start, because basically we forgot to first create a political union before creating monetary union. And every time we see problems come to the surface, and then we or they try to solve the problems by by money printing or support programs. But I wonder if there's still support for that within the northern nations, especially for example, my country, the Netherlands. Now, if you look at France, their finances are of course awful. They've been awful for for many years, but now it has come to service again. They got a downgrade. Um, the the previous prime minister even talked about, together with the finance minister, about a potential IMF bailout. Well, I believe if it is a if a bailout is needed, probably they first have to go to the ESM, the um European Stability Mechanism, and perhaps they can get some help from the ECB. How do you look at France's finances? And do you see like a a sustainable solution um for this problem?
>> Well, I mean, the French have obviously got um big difficulties at the moment. I mean, the bond rates, bond rates everywhere are trending up, but it's particularly sort of noticeable in France and that the bonds are now, I think, trading sort of at a, at a, not a premium, but a a discount to Italian and Greek bonds, which is sort of extraordinary. Um, they've just had a couple of credit downgrades. Um, Fitch was the the latest one, I think, just yesterday. Um, the debt service ratio, the debt ratio is almost double what it is in Germany. Uh, debt service is now um takes a bigger part of of government expenditures than than defense. Although that may change pretty quickly. Um, so they've got a lot of economic problems here. And the real difficulty, I mean, to which you and everybody else alludes, is that the the country is so divided now, internally between the parties, that they've gone through two prime ministers and I'm not sure how many more they'll have to go through to get some kind of agreement about what to do. And um, not unlike the first credit downgrade of the United States, I think, by Moody's a number of years ago, um, what the what the downgrade, the US downgrade cited then, and could easily be cited today, is that they don't see a political solution to an economic problem that desperately requires a solution. So, um, yeah, that um, it doesn't, it doesn't look very positive to me either at the moment.
>> And if there's no political solution, then I mean, at some point the bond vigilantes will will push up interest uh rates and then the bond yields will >> go to like like difficult territory and maybe six, 7% at some point. I remember during the c the Great Financial Crisis, I think the 10-year went above 5% and now it's, or close to five, and now it's let's say three and a half to four. But if that would happen um and there's still of course the ECB program available, TPI, Transmission Protection Instrument, and we don't know whether it's being used at the moment, which I find highly undemocratic, but okay. But would you expect that to be the first thing to happen, that the ECB will start um buying up uh French bonds in the market to to suppress yields?
>> Yeah. I um, I went back and I was looking at this just the other day actually, and uh, your your view about what's going to happen to the long bond rates is is quite right. I mean, to me, I think about it in terms of it's going to be like the European crisis, but at the core now, with with France being the the object of uh of concern as opposed to much smaller peripheral countries, which makes it inherently just that much more dangerous. Um, if you go back and you look at the the the the TPI thing, I mean, what it what it says is that um, just see, I've pulled this thing out here. It's really to do with they talk about sort of unfavorable debt dynamics and um, that sort of opens the door to just about anything. You know, the the thing about it is that whereas the original OMT thing was conditional. Okay. There's certain conditions that had to be met, set by the EMS, as I recall.
>> This is unconditional. And this is your your your reference to the undemocratic. You know, it's the central bank who's going to make the call. And I I guess my feeling, I mean, I'm thinking about sort of Arthur Burns, you know, and Arthur Burns gave a a lecture, I think it was in 1979, and he'd sort of been accused of accommodating inflation. And his basic message, and I think he was right, his basic message was, if democratically elected governments want you to do something, uh, then as a central bank, in the end, you have no choice but to do it. And uh, that was how he felt the situation was in the 1970s. The US wanted both a Great Society and to further the war against uh against in Vietnam, and they had a mandate, and the central bank had to go along with it. And when I sort of think about it from that perspective, it seems to me that if the ECB gets in a way, permission, either implicit or preferably explicit, for intervention unconditionally, um, they will probably do so. Um, now, I remind you that the last time, you know, when the ECB went in and when Mario Draghi said, "Within the law, we will do whatever it takes," and they added with that kind of Sicilian touch, "And trust me, it will be enough." Well, I I think, um, that sort of, if the, and I'll turn to the if here in a second. If the political will says you have to do whatever it takes, uh, they will do it. And I think people will be inclined, the politicians will be inclined to do that because they know that as as grave as the danger was from Greece, let's say, leaving the leaving the Eurozone, with France, France is at the core, and the French-German sort of bilateral has always, in a certain way, been core to the core. And if that starts to break down, the damage will be very great. And I think that will be still another reason for governments to say, um, you know, I really don't want to do this, but I think this is this is the least, this is the least unpleasant of the unpleasant pleasant alternatives that present themselves. And, um, I mean, that that gets us onto another topic that perhaps we can come back to, which is this whole question of, you know, in the light of a new era of shortages and inflationary and whatever, into the whole question of how governments, how governments more broadly try to get out of that. But in the European case, I mean, I do remind you that um, Mario Draghi, before he said what he said, it's sort of well-documented now, he had meetings go ahead on that. And there was close political collaboration before he said what he said, and he knew that he had to have that political support to do what he did.
>> And so the question becomes,
>> Yeah, I mean, I mean, I might almost ask you because you're certainly closer to it than I am. Um,
>> Well, Lagarde is even more political. Like, Lagarde is already more political anyway than than Draghi ever was, I think. Um, so I I think you're totally right. They will do what they will need to do. Also because no central banker and and no politician either would like to be remembered as the person who ushered in the end of the euro with with everything that comes after. Because if I, I truly believe that in the end, we would need to end the euro, we need to go back to other currency arrangements, but it will indeed also involve pain, short-term pain, and then long-term gain will follow. But I think that will probably kick the can down the road because like like Juncker once said, Jean Juncker, I um, he said once that we know which measures to take, but we we just don't know how to get reelected afterwards. And so they will they will have to do what they need to do. But I think um, and and also ECB will have to become transparent about what they've bled. So at some point it will become clear to the public at large that the ECB has been intervening again instead of using the ESM, because the ESM was built to bail out, to help uh European countries, and that would also entail then France reforming. But France don't want, the French don't want reform. So they will try then probably use the the other program, the TPI program. But I think it will lead to a lot of uh, a lot of resentment uh in in other countries, especially also the Netherlands, because people already struggle here with with their own finances, of course, and if they again we have to bail out another country, there will that will lead to the rise of the populist parties even more. So I think it's not sustainable to keep keep on kicking the can down the road.
>> Yeah. Well, one hopes um that the politicians in particular can make the economic arguments for doing so. So, you had a situation for example, where let's say it's it's not always the debtors that leave currency unions. I mean, it's the creditors that can decide to go. And there's been, you know, historical studies on on that as well. So the the point is that whether these other countries leave the euro, including France, or Germany and the Netherlands uh leaves the euro, your currency, the German Dutch currency, will be a lot stronger. Okay. So in any event, okay, you sort of say, well, we've avoided paying the subsidy to these other folk and we don't like to do it. But what you've avoided in doing that is an appreciation of your currency, which is going to bring into question the viability of many of the highly export-oriented industries that exist in Germany and I think in the Netherlands as well. So you know, there's there's no easy choices here, but you've got to get across the message to the public that you are choosing between undesirable alternatives. There is no easy way out.
>> Exactly. Yeah. But it would be nice if if at least the voters could um have an a fair choice because right now the politicians decide for us that this is it's the best to keep to kick the can down the road. But I think at least we need to have an honest debate uh within the different the member states what the alternatives are, what the costs or the expected costs and benefits are of those alternatives, how the migration path could look like. But none of that is being discussed with the people because I I guess that they don't want to discuss it because once you start talking about the elephant in the room, it it becomes manifest and it could also become a self-fulfilling prophecy. So the truth is just too too dangerous to handle, I guess.
>> Well, there's there's an element of that. I mean, I remember when the Eurozone was first set up, um, I've got friends who were journalists who tell me at the time that um, there was the the journalists were basically warned not to raise the question of the merits of doing this. Okay. The the story was this was going, the story from the politicians was this is going to happen. Now, it's just a question of the technicalities of how best to do it. So, I've often thought about this, you know, that um, you know, the longer run cure for the ills of the Eurozone is to have more Europe. And I think um, wrote a piece about this, talking about the sort of the democratic deficit in the EU. The problem is, you say to people, ordinary people, you need more Europe, and they say, but I never voted for Europe in the first place. You know, because there wasn't much of a debate about the merits of this. Um, so I think
>> you were at the you were at BIS in the '90s when when the euro took shape. Uh, so what was the BIS's advis or role in this whole process, purely from a monetary academic point of view?
>> The the odd thing about it was that um, all basically all of the negotiations took place at the BIS. Uh, the European Monetary Institute, okay, did most of its meetings at the BIS, but they were all totally separate. Um, now, having said that, the guy who'd been the previous general manager, Alexander Lampalooi, okay, played a played a pretty big role in in all of this stuff. And um, so maybe in a certain way, if there is a BIS view, it might have been imparted. Um, I know my predecessor, who was the economic adviser, um, got into a lot of trouble back in the early 1990s, just before I I came in 1994. And, uh, he got into a lot of trouble by pointing out the potholes along the way to the Euro, to the Euro project. And again, there was kind of this sentiment, you're talking about potholes in the road, but it's the real truth is you don't want this to happen. And of course, he was he was German, my predecessor, um, and there might have been an element of that. But I think honestly, what I remember of of Boris Bleman, there was just an honest assessment that in order to make this thing work, you're going to have to do the following things, and you know, they're all well-known. We need more banking union. We need more economic union. We need more political union. We need, you know, etc., etc. And all of these things are hard to do. And I think um, it might also have been the case for for many of the people who wanted to pursue the project that it's better not to talk about these potholes at all, because people will will realize that short-run sacrifices have to be made for long-run benefits, and they won't, they won't vote for that.
>> No, I I I totally agree with you. And also I I I've talked to many central bankers, especially also the Dutch Central Bank, and they basically all all tell me the same thing. So I think we can conclude that from an academic point of view, but and also from a central bank point of view, the euro was was bound to fail if it would not also be combined with some of the other things you just mentioned, and that the people haven't been uh properly informed about that. Or or of course, in Denmark, there was a referendum, but in Holland, there was no referendum. So to me, it feels like we've been fooled in a way, or we have have been misled, to be honest.
>> Well, um, I guess the job of the politician is um, well, John Kennedy, I think in Profiles in Courage, talked about a statesman as somebody who um, um, who sort of really steps in when the public is in, when the public is on the on the point of doing something called dangerously foolish. And um, I think with respect to the Euro project, two guys that I, you know, I had enormous respect for is Otmar Issing and Tommaso Padoa-Schioppa. And these guys, I remember had um op-eds in the FT on successive days. And basically, both of them were sort of quite compelling and and very different. And it goes back really to the origins of of of the Euro project with people like Otmar saying, um, we need to have these unions, particularly political union beforehand, if you're going to make sure that it works. And Tommaso, maybe that was sort of the Italian speaking, I don't know, you, let's get our decks in order here. And Tommaso uh was much more sort of the Italian, his view was, yeah, there will be crises along the way because we haven't done all the stuff ex ante that we should have done. But each crisis, we'll use to to make progress with respect to those longer-term objectives, and at the end, everything will converge. We'll have, we've gone through the various crises, as unpleasant as they are, but at the end, we'll have a a euro that will truly be stable and will operate in everybody's benefit, and the underlying conditions will have been um, the desirable conditions will have been established. But it was kind of this ex ante view versus the ex post view. And you can see the attractions of both. Well, I certainly see the attractions of the, let's get it right before we start. But if that's impossible, and I think the changes that were required were impossible, politically impossible, then you have to go the alternative route, which is, no, we'll we'll get there. We'll get there in the end.
>> Yeah. And do you think we'll get there in the end, or you think along the way those potholes uh will will uh prove to be too too um too big and too deep and and the car will crash or the train will crash?
>> Well, that's getting us back uh in a way to, you know, the the European crisis before, and the problems that are building up now in France. You know, do do I think we'll get out of this? Um, I I guess in the end, I I think that the authorities will have to step in and and do uh what needs to be done to stabilize uh France's finances. Uh, one hopes that um, as the difficulties emerge, that the people in France will start to see that um, that they really have gone to be a a kind of fiscal outlier and an unsustainable outlier, and the changes have to be made. And um, it's that old line of Churchill's where he said, the Americans, in the end, the Americans always do the right thing after they've tried all the alternatives.
>> It may well be that in France, which is um, again, a a difficult country to run, um, that in France, that in the end, the people will will realize that um, what they're doing is unsustainable, >> and um, they have to adjust, or else it's going to be a a far worse outcome. And you're also a specialist in in studying complex systems, and and clearly we live in a very uh complex system, financial system, economic system. Um, would it be also smart for, let's say, pension funds, banks, given all the different uh potential outcomes, including also a a a breakup of the euro, would it be wise for those institutions to start diversifying? Because what I notice is that our pension funds, and of course Holland is a a huge pension industry with 1,600 billion euros outstanding for uh invested for our people in Holland, a lot of it is also exposed to France, for example. We're talking about tens of billions of of um of euros of exposure. Should those pension funds already start like selling off some of these assets?
>> You know, we're back to um Keynes's the paradox of thrift again, which is um, for any single pension fund, um, they probably should be shorting bonds and shorting French bonds in particular. But if everybody does it, then you're actually precipitating the crisis that you're trying to avoid, and the end end result will be much worse than if you didn't do it in the first place. So, um,
>> yeah, but that makes any argument for someone to to take care of his own pension instead of relying on a big player who cannot move because of the dynamics you just described. Um, I I think in the end, the the um, what's the word? What's the French phrase? Selfkeeper. You know, um, if you can save yourself, you you should. But um, I just say that the, but this of course is the danger in all of these markets is that the the minute people begin to appreciate the dangers that they have unwittingly exposed themselves to, and then they start to do something about it. That's an that that is the definition of boom and bust.
>> You know, that's the definition of it. It is I thought everything was great. Oh, it isn't. And away we go.
>> Yeah. And then it can be >> the people's consciousness about um, what to do.
>> Yeah.
>> Because in the end, it could be a house of cards where one one card pulled could uh could bring down the whole complex. But let's talk about bubbles because you are a bubble expert, I would say, because you've studied a lot of asset bubbles. You were one of the, one of the few who saw the Great Financial Crisis uh coming. Um, what do you look at? What are the kind of metrics that you follow in order to assess whether uh we are in bubble territory?
>> Well, I guess the way that we looked at it was really at the BIS when I was there in those early days and then really leading up to the the Great Financial Crisis of 2008. It wasn't sort of an asset bubble as such. We sort of looked upon that as a kind of symptom of an underlying credit bubble, >> right? But the re the real problem was a financial system that had basically got too much, what they call in the jargon, elasticity. You know, it was too responsive to increases in demand for credit. And um, in in a way, again, going back to complexity, um, you you had a buildup to the Great Financial Crisis which was made up of three good things, which is one, um, wages and prices were under downward pressure because of increases in competition coming from Southeast Asia and and Eastern Europe and all that stuff. And then two, you had a central bank that was keeping interest rates um at whatever level was required in order to ensure price stability, and that was a good thing. And then you had a very elastic banking system that was capable, or financial system that was capable of meeting demand for credit at whatever interest rate the central bank set. So all of those things were three good things, but you put them all together and it was a disaster. So you had these very low interest, you had this disinflationary forces coming in from China and elsewhere, and the central bank saying, "Oh, disinflation is a terrible thing. Deflation's even worse. Have to lean against that as strongly as we can." And then you had at that very low interest rate, enormous demands for credit and a capacity of the financial system to provide it. And then you had everything you needed for a big boom bust cycle. But one of them, the the asset price bubble thing, was just like one manifestation of the credit, credit bubble, and um, and of course, when when the whole thing went, it went pretty spectacularly, but we had been, we'd been talking about this for years.
>> When was the moment where you saw, okay, this is going the wrong way then with the previous uh crisis?
>> Oh, shucks. I think from the time that I arrived at the BIS, I was I was worried about this stuff. And when I was at the Bank of Canada, I had a big thick file on Japan, and the one particular thing you remember about Japan was a huge boom and bust, right? But there was uh no inflation at all. So all these people who were saying, "Well, inflation, you know, keep inflation under control and everything will be fine." We had a very good example of that not being true, staring us in the face, and we chose to ignore it. And I I wrote a piece about this, I think in 2005, now this isn't much later, of course, which is called "Is Price Stability Enough?" And I wish I'd had the courage at the time to say price stability is not enough, because that's really what I was trying to say. But of course, all my clients, okay, when I was sort of there as the chief economist at the BIS, all my clients were basically saying price stability is enough. And so I did feel myself constrained in sort of saying what I thought was the truth. So I had to sort of pull your punches a bit.
>> And and that was unfortunate. But we saw, you know, my my sense of it really was that really from the the late 1980s when Chairman Greenspan leaned against the stock market crash and then kept the easing on for quite some period of time. And that led, I thought, to the the big crisis of the 19 the early 1990s, you know, the S&Ls and all that stuff. And then all the way through the 1990s, we had what did we have? We had the the the Asian crisis in '97. We had the LTCM in 1998. And then in 2000, we had the TMT crisis in the stock market. You remember, just, you know, another. And then and then we had the mortgage crash in 2008, which was the Great Financial Crisis. But the thing about every one of those things is that every time the answer to the problem is exactly the same, which is print the money. But in printing the money, all you're doing basically is encouraging people to take out more debt, which then becomes the basis for the next crisis. So, as we've described it then, I mean, even in the late 1990s, we're on a bad path. It's not that we're doing bad things. So we're doing good things for to for tomorrow, but it's not a good thing for five years down the line. So there's an inherent sort of intertemporal contradiction in what the central banks have been doing right from the start. And again, it goes back to complexity. You know, that in most people would like to think about the system as being linear and understandable and controllable, and therefore if you do the right thing today, you know that's that's all there is. But people like Hayek and the Austrians and these folk have been saying for almost a century now, it's not as simple as that. It is more complex. And it's complex in two ways. One, you can do something that's right for today, but make things far worse tomorrow. Okay, that's a problem. And that's what I think the central banks have done. But the second problem is, you can do stuff to stabilize your system, but if it winds up destabilizing some related system. Okay, so we've got the economic financial system, we've got the political system, we've got the environmental system, we've got the, you know, the public health pandemic, etc., systems. And they're all interconnected. And if any one of them goes under, they can quite easily take the other ones down with them. And of course, that's what I worry about at the moment, as we talk about all this fiscal stuff and in particular defense spending, okay, which is um, sadly, a kind of shoot yourself in the foot at a time when all of that money is desperately needed to deal with the era of scarcity that you talked about before. There are real things that need to be done with real investments, like dealing with climate adaptation, dealing with climate mitigation, dealing with the demographics, etc., etc., etc. And now all the money is going to get siphoned away onto defense. And I don't say we shouldn't do it. The first job of a government is to secure the the well-being of its own people. But you can see that this is rocking a hard place time. We got all these other things we really need to do.
>> Yeah. No, I I totally um agree with your with your point there. And and then looking at the credit markets at the moment, uh, given your your analysis uh before, do you think we are in a credit bubble? And and as a result, do we have asset bubbles um too?
>> Well, one of the one of the problems I think I I think the answer is yes. Um, as as far as I can tell, although I've not been following the numbers closely recently, the the difficulty this time is not so much with an expansion of bank credit, but uh market credit and bond issues and non-bank financial institutions. And so there's been a a in response again, now we talk about longer-run consequences of what seem to be sensible policies for today, because of all of the bank regulation. You know, the banks have been much constrained, but with very low interest rates up until, you know, after the pandemic, with very low interest rates, the demand for credit was very great, but it was now being provided by the by the dark financial system, by the an unregulated system. And everybody has has been for ages, really, sort of calling for, we need much more information about what's going on in the banking, you know, transmission mechanism and all this stuff. But uh, I don't think that we know a very great deal more now than we did five or six years ago. And so you just have this sense out there that there's been this big increase in in borrowing, but we don't really know who's been doing the lending and we don't really know who's been doing the borrowing. So it's very hard to get a sense of where the weak spots are and what you might do about it. So um, so I think, I mean, as we as we look at what's going on in the stock market, for example, I mean, the US stock market, um, that's probably why I'm not a rich man and other people are. But um, to me, when you start looking at um, you know, the the multiples and uh the absolute level of prices as opposed to expected future earnings and all these things, and the concentration. What what are the numbers? Something like 55% of all of the increase in market valuation over the last five years has been in 10 stocks, you know. So, and what worries me about Europe in in a way is that um, there have been very, very heavy European investments right in uh in the American stock market and in American treasuries, for that matter. And if everything goes into reverse, you know, if the stock market, if we do have a serious recession in the States, or maybe even a collapse in the stock market that sparks a recession in the United States, um, the Europeans will pay a big price for this. Well, indeed, so will so will all foreigners, you know, who have invested in America.
>> And um, but again, this is characteristic of a sort of boom bust kind of situation. And everything looks fine, your earnings are great, why wouldn't you do it? And it's fine until it stops. And really rich people are the ones that can not only see the stop coming, but can say, I'm going to profit from what comes after >> and have the courage to go for it.
>> And how could we make the system more more sustainable then? Because uh after we'll probably see another crash at some point, and and every time, of course, also the the crisis seems to be bigger than the previous ones, because every time they're uh using the same medicine, which is more debt, lower interest rates, until a point where the crisis becomes so big that you need a a reset. So I would like to get your view on how that uh reset uh would look like potentially, and what kind of reforms you would um advise. I know you wrote about near money, perhaps you could also elaborate on that. So how can we make the system more sustainable after the next crash? Because I think we cannot avoid that anymore. But perhaps we can on the ashes of of that crash, that bust, we can build something that's more.
>> There's two, there's two things that I think have to be separated. One is what would a better monetary system look like? And there, I think, and I've been thinking seriously about this for years, I must say, without sort of coming to a very firm conclusion, because the technology is changing so fast, it's it's very difficult to sort of say, well, this is what you should do. But um, I certainly would be thinking in terms of sort of a narrow, a more narrow money kind of system, which had far fewer safety nets, and where people had to basically judge their own risks and and go under if they made a mistake. But that's sort of for the almost the distant future. But what would you replace the current system with? Because the point is that the current system has led us to where we are. And another element of complex systems, right? You can only start from where you are. You can't start from someplace else. Hypothetically, start from where you are. And the big problem that we have where we are is this overhang of debt. And so the question then becomes, uh, not just in France, but I mean, globally. You know, I was just looking here at the latest OECD survey um on um on debt issues and um, what's the number here? The sovereign debt to GDP ratio in 2007, just before the crisis, okay, was 43%. Now it's 85%. And deficits of six or 7% in the US, in in France, and no indications of a willingness to sort of turn this thing around. So, you know, it got almost a doubling here in the space of um, what's that, 10, 10, 15, 18 years. Um, okay, how you going to deal, how you going to deal with a debt overhang? Well, there's been a lot written about this stuff, and we're back, in my judgment, we're back to, there are no good alternatives, you know, um, there are only bad alternatives. And the question is which one is the least, which one is the least bad? Um, the first alternative, I mean, as an economist, I mean, if you're an economist looking at this, you'd say, what's the what's the best thing to do? And the answer would be um, you got to have a significant degree of fiscal restraint, uh, in spite of the fact that government spending has got to go up. So what that what that comes down to, okay, if you got an era of shortages, or aggregate supply is growing weakly, and you know, you got to spend a lot more money on investment, the the only thing that's left is consumption. There's there's got to be a material reduction in in consumption for a period of time to get the investments that will put us on a better path going forward. Um, we need structural reforms. Again, talking as an economist, we need structural reforms to getting rid of regulation, unneeded regulation. Um, they refer to it here in the UK, the blob. You know, you can't get anything done because there's always a lobby against everything for for good reason.
>> For good reason. You know, we're back again to this micro-macro. For good reason, I'm against it. But
If there's always a good reason to be against everything, then nothing happens, you know. So, the, the, so, you, you've got the, so the economist answer is, we've got to selectively cut demand. Um, and that means slower growth in consumption. Okay. And that is a totally unpopular, you know, so you, you said it yourself, that line from John Cler Junker, uh, of course we know what to do. What we don't know is how to get reelected after we do it. So, that, that sort of sensible solution is, is, is probably not going to happen.
Uh, then you say, well, what about debt repudiation? You know, when people talk about sort of the biblical uh debt jubilee.
>> Yeah. Like Greece, for example. Greek, Greece got rid of 100 billion in 2012 when they did the private sector involvement.
>> Well, they f- Yeah. Well, I'm not denying that. I'm not denying that it can be done. Um, but the point that I guess I want to make is that in biblical days, it was the king, right? And the king had all the wealth. And then he very graciously sort of said to the people, "Well, you don't need to be a wage slave this year. You can wait until next year to become a wage slave. I'll write it all off." But he didn't change his consumption, right? Because he was totally, he was totally rich. It was not going to affect him. But when you start writing off debt, you know who's on the other side of it? It's the pension funds.
>> Exactly.
>> And the insurance companies. And everybody's going to scream about that. So relying on that as a solution, I think, is not going to happen. And there's all sorts of reasons. I, I wrote a paper about this a while back. Um, and the IMF, the OECD, the G30, the BIS, they've all sort of pointed out there's huge administrative problems, as it were, to doing debt reduction in a serious way. Um, but the most important one, as far as I'm concerned, is that it, it, it's the people taking the hit of the pension funds and the insurance companies. That's you and me. And that's not going to be popular either.
Uh, the next thing you can do is you can say, "Well, let's just let inflation rip and that'll get it down." Well, if the interest rates are allowed to go up the same amount as as inflation goes up, then you've got a, you've got a problem in the sense that you're not making any progress. Uh, now, some people would say, like during the pandemic, the inflation was unexpected and the interest rates didn't go up and so the upshot was you got a significant reduction in the debt to G& ratio, but it was because the inflation was unexpected. There have been people in the past, particularly in Latin America, who have said things like, "Well, that's good enough. We'll fool them the first time around, and then we'll fool them a second time around, but by the time you get to the third time around, with inflation always coming in to higher than expectations, and expectations themselves are ratcheting up, okay, it's hyperinflation. So, we don't want to go down that route either.
So, what's, what's the fourth route? And I think the fourth route is one of what, what the, the jargon phrase for it is, is financial repression, which is the really underlying problem here is that, um, is the debt dynamic, you know, with the, the, the higher inflation, higher interest rates, higher debt service, blah, blah, blah. How you deal with that is you keep the inflation rate down. So, I'm sorry, you let the inflation rate go up, but you keep the interest rates down. And, um, you do that through administrative means. And that's what they did at the end of World War II. You know, you had the Treasury Accord and the UK, can't remember what it was called in the in the UK, but the basic message was one of, you keep, keep the, keep the interest rates down and you force people, insurance companies, pension funds, banks, whatever, under the guise of macro credential, call it what you will, okay? You have to hold this government debt. Okay? And at the same time, the inflation is going up four, five, 6%. Not so bad that it really gets the public's um total um opposition, but just, just high enough to be manageable and keep the interest rates down below that. So each year the real value of the debt is going down and at the end of it you have a situation like at the end of World War II through into the early 1950s where you can go back to normal and start thinking about an alternative way of running the system so that we don't get into this problem again. Okay.
But so probably it'll, it'll be a combination of all four of those. You know, some sensible things will be done. Some debts will be written off, uh, to the great sort of um, what's the word? Um, despair of many of the creditors. Um, inflation will be allowed to rise. Um, interest rates will be sort of artificially held down with regulation, capital controls. Um, but the, the next question that arises from that, of course, is, um, if that's the kind of world that we're going into, is it compatible with the Eurozone?
>> And what's the answer to that question?
>> Um, I hope so, but, uh, it's going to be a big challenge. Um, 'cause France has got so much higher debt levels than, um, than, uh, Germany and the Netherlands. Um, so it's a question of how much of this stuff would you need in France to sort of inflate it away? And if you needed that much inflation to, you know, a longer period of financial repression to sort of get rid of French debts, what, what, what happens to the popular mood in places like Germany and Germany and the Netherlands?
>> Yeah, it's, it's a very delicate game they would need to play, but and also it would go against the ECB's mandate. So if the inflation goes up, then the ECB would change the mandate in order to accommodate financial repression. Right? I think, um, I mentioned before Arthur Burns, um, you know, we talked about that, uh, if, um, in the end, uh, central banks are part of a democratic process and they will do what the politicians in the end say they must. And I point out there's, there's another aspect of it that is in a way even more frightening, which is that if you get to a point where governments, and this is not Europe so much as the United States or Japan, because in Europe the central bank is independent in a way that none of these other central banks are. But if you get into a world in the US or in Japan, let's say, where the interest rates go up, I mean, this is a, okay, where you inflation is rising, all right? And central banks are supposed to lean against it, right? And that's what you expect them to do. It's not hard to imagine, however, a world in which as the interest rates go up, the impact on government debt servicing is so great that people's worries about the future inflation associated with that government debt service basically make them ratchet up their inflationary expectations. So now we got a world where the central bank decides not to fight inflation. Okay? It leaves interest rates down and everybody says, "Well, then inflation will go up." The other world is one in which the central bank says, "I'm going to raise infl-, I'm going to raise interest rates to fight inflation." But instead of that being disinflationary, it's actually inflationary because people expect the government increasingly to go back into the central bank to get financing that nobody else will provide at a reasonable interest rate. And we, we've seen all this in theory. Sergeant Wallace wrote a very famous paper in the early 80s, I think, called, uh, some unpleasant monistic, and it was leaning against the idea that if monetary policy just did the right thing, that everything would be under control. And the unpleasant monitorrist arithmetic is basically, um, theoretical presentation, an arithmetical presentation, if you want to put it that way, of how government debt, if it's big enough and short-term enough, will eventually blow you out of the water or blow the monetary authority out of the water. And the worry, in a way, is that that's where we're getting to. And I'm not saying we're there yet. I mean, all hope is not lost, but we're, we're, this, this concern about the government debt is really a concern, in the end, about inflation. And John Cochran, I think, has just written a 600-page book, I haven't had a chance to read it yet, called on the fiscal theory of the price level. And, um, in the end, I mean, it's, it doesn't seem to me that it's a short-run phenomenon, but in the end, fiscal policy dominates monetary policy.
>> Yeah. It's unavoidable. And, and, um, final question then, uh, not an easy one, but after the monetary endgame has been played and, and we head towards a, a new system, um, would you expect it to be like Bretton Woods too, where, uh, also gold could play a role again, or would you perhaps also advocate, apart from your narrow money concept, perhaps advocate for more market-based solutions? Of course, there's all these crypto assets. What kind of, what kind of new system, uh, would you expect to arise after the endgame has been played?
>> Well, going back to complex adaptive systems, item number one is forecasting is impossible. And, uh, I was just reading, um, yesterday, uh, Barry Iiken Green, you know, who's, um, great expert in this area, has written, um, a quite significant paper for CG, which is a Canadian think tank, and, uh, basically Barry looks at all of the things that are going on, you know, the geopolitical stuff, um, the economic stuff, who's more or less vulnerable, the technological stuff, in particular, sort of cyber, stablecoin, in particular, and the conclusion that he comes to is the one that I've just stated, um, almost impossible to, to know. Um, I, I think the geopolitical thing will become more important, and if there's, um, if there's a shift into sort of competing geopolitical blocks, I, I find it hard to imagine that that won't be reflected in reserve holdings and which currency uses payment purposes and, and the rest of it, and that, um, I, that's sort of the way that it, I think that's sort of the way that it will go. Um, I can't imagine, maybe just a failure of my imagination, a new Bretton Woods where the Chinese and the Russians and the Americans and the Europeans, and are the Europeans speaking with one voice or many voices, sitting around the table, um, drumming up a new Bretton Woods agreement. Um, not least because, um, and I have no answer for this, every major country has got a big debt overhang problem, and every major country, in that sense, wants more inflation, which implies, in a certain sense, more depreciation. So, the cure is all the major currency should depreciate, and then you sort of say, wait a minute, that's not, that's not possible. So, we're into a, a funny old world here, in in terms of what choices people make as they try to deal with this debt problem, and how you decide to sort your currency out is going to be a big factor. So, Russell Naper, who's, um, runs the library of, teaches at Edinburgh and runs a library of mistakes, I think, looking into sort of financial mistakes, crises, and etcetera, etcetera. Um, he thinks that one of the big things coming forward is that China is going to try desperately to get out of its deflation problem, and they'll wind up with a big, bigger inflation problem. But the depreciation of their currency will be a big part of what happens. Well, we can't have both the Chinese depreciating for, what's the word? Near-term, uh, competitive advantage, and at the same time, having the American dollar depreciate to deal with their long-standing structural deficit. So, there's some real puzzles in here about how this will all play out. But in the background of it all is this, is this debt problem that really is, um, I think, focusing people's minds more and more.
>> Yeah.
>> Yeah. Well, thanks so much, uh, Bill, for your insights. It was a pleasure to, uh, to pick your brain, uh, for the past hour. Um, you have a lot of interesting articles and speeches on, on your own website. People should definitely check that out. It's williamianwhite.ca, right?
>> Yep, that's it.
>> And I thank you for the free publicity.
>> Yeah, sure. And thank you for, for joining the show and, and helping my viewers understand the system better. Uh, would love to do it again in the future. Um, for now, uh, thanks so much and, uh, stick around a little bit longer to, uh, to finish the upload. But thanks so much for your time, uh, Bill. It's been a pleasure.
>> Been a pleasure, Paul. Thank you.
>> Thanks.