The End of Neoliberalism and the Coming Storm | Viktor Shvets

26:37If you allow a long enough time, and if you get the government out of the way, it is quite conceivable that neoliberal theories would actually end up with a much better world. But we don't live in the long term. We can't sustain pain that is needed for restructuring, things like sudden collapses of wages, disappearance of jobs, deindustrialization, rising inequality, which always rise when you go through those periods, rising inequities, collapsing upward social mobility. All of that over time, I think neoliberalism would have corrected, but I said, it's just not acceptable within political and social terms in which humans reside.

27:19Demetri Kofinas:So I have so many thoughts that went through my head while you were talking. Let me make one quick comment and then highlight something you said and move to a question about the 1930s comparison that you make in your books. So first of all, while you were talking, I was thinking about how there may also be a kind of cyclicality to how human beings attempt to operate in the world, which is to say, we develop frameworks and schemas and maps that work really well, but then they degrade over time. Their use of the grades over time. And as we continue to apply them, we increasingly apply them with futility, leading to revolutions and other sort of rejections.

27:54Demetri Kofinas:Again, I highlight Ian McGilchrist's work here with Master and his Emissary in the left and right brain, because I feel like a lot of that is what we're seeing here. The neoliberal framework worked much better in the 1980s and 90s than it does today. And so we continue to use it until we get hit over the face with it. I love what you said about the inapplicability of antitrust law, not the inapplicability of antitrust law, but the universality with which we apply progressive era reforms around antitrust and monopoly and price gouging to the problems we have today, which are fundamentally different, certainly from a consumer perspective.

28:30Demetri Kofinas:And that's something that I think is not sufficiently understood and it's something that you talk about. And I love that, Victor. So let me just ask you this. In your book, you draw what is honestly a very unsettling comparison between the 1930s and today. Beyond surface level similarities, what are the fundamental structural similarities in economics, politics, and social conhesion that you make between that period and today that you think are so apt? Yeah, absolutely. Because if you remember after global financial crisis, and certainly after COVID, people start comparing things to 1970s. To me, that was a wrong comparison.

29:091930s, I think, is much more applicable. Why is that? Well, whenever we have a severe disruption, certain elements are present. First of all, you can always see significant rise of some form of technological disintermediation. So in other words, technology starts marching on, changing somewhat functioning of labor and capital. Secondly, what you see is severe financial crises of some form and a high degree of financialization. The third thing you frequently see is impact of climate or some form of climate change and how it bears down on the country. You frequently see pandemics or certain healthcare risks.

29:51And so if you think of all of those elements, all of them come together in 1930s as well as today. So if you think of 1930s, this was the era of Gilded Age inequalities. Certainly 20s and 30s had the highest inequalities, while only early 1900s had higher than that. Today, we have extremely high levels of inequalities and equities. Remember, 1970s was a period of the most egalitarian income and wealth distribution, almost in human history. So it was the opposite of that. Secondly, what we had, we had increasing technological evolution. In 1920s and 30s, that was primarily driven by manufacturing and agriculture.

30:31That's why you had such a movement of people from the south of the United States to places like Chicago and Detroit, et cetera. So there was a massive technological shift. Today, we have even bigger technological shift because, as McKinsey keeps highlighting, information age has 3 ,000 times the impact of industrial revolutions. The third thing we had in common is it was a period of climate change. In various parts of the world, climate was changing. So in the US, for example, we had a dust bowl through the 1930s. Today, we have significant climate changes. It was a period of pandemics. If you go back to 1919, 1920, 21 was the Spanish flu.

31:10We had our pandemic as well as we progressed. It was a time when people lost confidence in a system. In other words, the system no longer works for me. It doesn't work for my children. It doesn't work for my community. That's why alternatives were proliferating. There was a communism and fascism and constrained democracy and totalitarianism. In 1970s, everybody agreed. Communists was already fading away anyway by that stage. Everybody was trying to fine tune existing system. There was no alternatives that really were proliferating. As I said early on, financial and financial crisis were present.

31:46In 1970s, that was not the case. So when I look at it, I basically say, I understand because of all of these factors, because of technology, finance, crises, climate, pandemics, why people lost confidence. And today, I can see exactly the same process playing through, except to argue that the disruption is even greater, I believe, than it was in the 1930s. A lot of people say that the global financial crisis is nothing like what happened with the depression of 1930s. And I agree. But what's happening to us, we have a sequence of crises, one after another after another. Usually, we will have maybe one dislocating event every five, six, seven years.

32:34Today, we're getting them almost on an annual basis, so to speak. And so the sequence, yes, individual elements are not as extreme as they were back in the 1930s, but cumulatively, they're actually having exactly the same effect. And so the question is, what wrong decisions people made in 1930s that led you to the world on fire of 1940s. And what decisions are we making today? Are they right decisions? What policies will be right? What policies will be wrong? To me, that's the key, because that will determine how we progress beyond this period.

33:12Demetri Kofinas:What explains the frequency of crises in your view? And by the way, is this also the most significant difference between the 30s and today, the frequency of crises in your opinion? Yeah. Well, the thing is, in 1930s, you also had a lot of crises. But the point is, there was one very large crisis, which was the Great Depression, which started in 1929-30, continued to 32-33, but then it regularly reappeared again. When people say it's not as bad today, that is true, because we've never experienced something equivalent to the Great Depression of 1930s. But the reason we didn't experience it, because of the government, because what the government did.

33:55When people say, including Scott Besant, that Federal Reserve departed from their mandate, what did you want Federal Reserve to do? Whether it was 2008, 2009, whether it was during the COVID, would you have preferred a 30 % unemployment? Would you have preferred that the real estate prices will return back to the level of 1990s? Would you have preferred if 401ks and pension plans suddenly had no money to pay the pensioners?

34:25Demetri Kofinas:It's actually interesting, Victor, because in some sense, what the Federal Reserve did was it picked up the baton that the government left on the floor. The federal government did much more in the 1930s than the Federal Reserve did. And in turn, central banks picked up that baton in the post-2008 period because governments were so dysfunctional. That is true. But also in 1930s, the original liberalism, in other words, the liberalism of the earlier part of the 20th century, late 19th century, the original liberalism basically dictated that the system has to rebalance itself, that interfering with the system, it will be counterproductive.

35:02Now, it is true that prior to Franklin Delano Roosevelt, certain policies were already put in place in order to ameliorate some of the negatives. But they were very tentative because, as I said, the system didn't believe in government interference.

35:16Demetri Kofinas:You're talking about during the Hoover administration. The Hoover administration. They did begin to implement some reforms, right. And then if you think of FDR, FDR is the first one to really pick it up and say, you know what, we're going to try everything possible as a government. So the first difference between 1930s and now, we've avoided depression because Federal Reserve stepped in as quickly as it did in 2008, 2009, 2010. Secondly, we've avoided the same degree of dislocation that the world experienced during Spanish flu, because during COVID, again, Federal Reserve stepped in and reduced some of that pressure.

35:54But what you're correctly saying, that starting from Franklin Delano Roosevelt, the government had become directly much more involved. And it could be open for debate. If the Second World War did not happen, what would have occurred? Would the policies that Franklin Delano Roosevelt have put through between 1933 and sort of 1937-38, would that policy would have ensured a much more stable recovery? Or would it have fallen apart in some form? Now, we don't know the answer. I personally think that those policies were correct for the time that pursued the right objectives. Even if there was no World War II, I think those policies would have succeeded.

36:35But for us, Federal Reserve prevented us from having the same or plunging to the same depths of despair, what actually people saw in 1930s. But because we've avoided it, we also avoided recoveries. So in other words, we've settled for a circular stagnation, something that Larry Summers has been discussing since 2012, something that Paul Krugman as well has been discussing. Why we can't recover? Why we can't grow the same way? Why do we need to have constant support through the fiscal and monetary policies? Why neutral rates are lower than what they were 20 years ago? And so there is a cost, there is a price to pay for what we've done.

37:23But if you were to ask anybody on the street, would you rather have a despair of 1930s or circular stagnation? I think almost everybody will settle for circular stagnation.

37:34Demetri Kofinas:Is that because the political constituency today was more concerned with protecting what it had than it was riding the ship and rebalancing the American economy? Exactly. Exactly. That's exactly right. Because remember, if you think of baby boomer generation, the idea originally was freedom, you know, Woodstock, music, flower, free culture. Sex, drugs, and rock and roll. That's right. That's right. That was the idea in late 60s, early 70s. But then the same people who embraced music and drug and love and then the rest of it become investment bankers. They become asset flippers. They become CEOs.

38:13But the same logic of freedom continue. So I want to be free to take drugs or to travel or to do whatever I want to, to wear long hair, to wear leather jackets, whatever I do, I want that. But then when you transfer to economy, it's the same. In other words, I want to have a freedom to make my choices. I want to have a freedom to change my jobs, to divorce anybody I want, to immigrate, to change culture, to change societies. To become rich. To become rich. Absolutely. Absolutely. And you shouldn't tell me what I should do with my money or how much I'm allowed to leverage or how much I'm not allowed to leverage and what I'm allowed to do.

38:49And so it's a cumulative impact of those decisions that basically imply that whether it was Federal Reserve, whether it was the government, they had to obey because that became the dominant culture. Depending on the country, by late 70s to mid 1980s, that baby boomer culture become completely dominant. So it didn't matter whether you're a Democrat or Republican or in Australia, whether you're Labour and Liberal, whether in Britain you were Conservative or Labour Party, it didn't matter. Everybody is saying from the same team book. Private sector knows the best, public sector is inefficient, incompetent, unjust, and therefore we should allow as much freedom as possible.

39:31But as I said earlier on, freedom has its price and the check has arrived. So when we saw the problems like dot-com, or you can go in before that. Let's go to Black Monday, 1987, when Greenspan just became the head of the Federal Reserve. What did he do? He didn't allow adjustments to occur in 1987. Instead, he created something that became known as a Greenspan put. That is, you can't tolerate volatility of asset prices, because otherwise economic impact will be devastating, the Greenspan put become Bernanke put, and then it become Yellen put. And you would say, oh my goodness, that's deviation from central bank policies.

40:13No, it is not. It's societies that demand it. Irrespective of my productivity, my wealth, my earnings must continue to increase. And politics delivered exactly what people wanted. But increasingly over time, that basically meant more and more suppression of economic and capital market cycles. And as you continue to suppress economic and capital market cycles, you ended up with shallower gross rates. You ended up with accumulation of inefficiencies, lack of clearances. That's the other side of it. You end up with inequalities. You ended up with inequities. You ended up with less jobs. You accelerated technological disintermediation.

40:57You started to rely more on assets rather than earnings. And so the newer generation that didn't participate in any of that, basically saying, this system does not work. This system is corrupt. This system does not reflect our objectives. Not dissimilar what baby boomers were saying in late 1960s. Very, very similar.

41:18Demetri Kofinas:I really love this. Let me try to see if I can get this out in a coherent way. So what is that famous phrase, by the way, of Commodore Perry's, we have met the enemy and he is us? Yes, that's right. But yeah, I mean, you're channeling a lot of that in your comments, which is ultimately that we get the government we deserve. We get the policies that we want, especially in a democracy. What I like about this also is that this is especially true of young people. When you're younger, you have this belief somehow that the world is black and white and that there's an ideal system and the people in the past who messed it up are so stupid for having messed it up.

41:50Demetri Kofinas:But the older you get, the more you realize that you kind of just muddle your way through. And I like this because I think it's important to understand because we're in a phase right now in American society where a lot of folks in the media are looking for scapegoats, are looking to find people to blame for everything. And of course, and I'm certainly having... I don't excuse myself from this either. One of the people that I've consistently demonized on this program is Bush and the Bush administration for what they did to this country in the early 2000s. But I think it's important to recognize that nuance, that everyone is working with an incomplete projection of the future and doing their best.

42:26Demetri Kofinas:And somehow we always find ourselves in these cycles. And so there's got to be a reason for it. I feel like this is a really good time to introduce the Fujiyara effect, which you mentioned at the beginning of the conversation, Victor. First of all, what is this? And how do you use it as a metaphor to describe this cyclical process by which multiple forces or storm systems, as you refer to them, interact, especially technology and finance, to create this societal super storm that we're living through today? Yeah, Pujiburra, effectively, it's a meteorological concept. And that is when one or two or three sometimes hurricanes come too close to each other.

42:59And as they come too close to each other, sometimes they merge. And when they merge, they either change direction or they significantly strengthen. They're going to have a much larger impact than individual hurricanes could have had. And to me, the most disruptive periods in our history, certainly in our modern history, but it can actually go beyond that. You can go to Roman Republic. You can go to mercantile capitalism. You can go to 17th century. You can actually find all across human history that there are times when several of those hurricanes come together and reinforce each other. The way I basically describe it, information age, we can date it pretty precisely.

43:37It started in early 1970s, but it really didn't become disruptive until late 1990s. And the disruption increased as we progressed through the first, second, third stage of information revolution. At the same time, financialization started. It started with Paul Walker in 1979, 80, 81, 82. And that is what Paul Walker decided. I mean, he's best known for crushing inflation, of course, but his much greater legacy, in my view, longer term, relates to him deregulating the capital markets. And as you deregulated the capital market, you started something new, financialization. If you go back to 50s, 60s, 70s, even 80s, there used to be one piece of financial paper for every underlying asset.

44:25By the time we get to Greenspan, it was 2 to 1. By the time we went to Bernanke, it was 3 to 1. By the time we get to Yellen, it was four or five to one. Today, it's anywhere from six to 10 to one. So in other words, the cloud of finance is at least five times, possibly up to 10 times larger now than the underlying economy. Now, the two process, information age and financialization, initially started separate. But the way I describe it, it's like two children growing up, and then one day they've met, and they got married. And now they're supercharging each other. They now have many children that they have produced together.

45:02And so what happens, financialization creates excess capital. Initially, what we had is the sugar effect. So if you think of late 80s through 90s, bringing forward consumption to the present through borrowing, relying on asset classes to be charged your growth rates, even to be charged on the productivity that you have. But then over time, it becomes negative. It becomes toxic as you go forward. Why is that? Well, it does a couple of things. Number one, the closer you're to the fountain of money, the closer you're to the fountain of assets, the vaster, richer you become. Your ability to generate wealth accelerates.

45:42The more your conventional individual relying on wages and household chattels, the poorer you have become. And so one of the things it does, it massively accelerates inequalities and inequities. The other thing it does, it starts generating desinflationary pressures, not inflationary. People tend to think the more money you generate, the more inflation you get. That is only true if this money gets to the ground where real people are. If it stays in a cloud of finance, it's actually desinflationary rather than inflationary. And the other thing it does, it overcharges technology. So technology by itself is really a human spirit.

46:19Humans have always been technologically curious, going back to, you know, days when we were in Africa. So it's not anything new. But how quickly technology progresses depends on availability and the cost of capital. So one of the things financialization has done is massively increase availability and depress the cost of capital. So what you find by late 1990s, you can try almost any idea very, very quickly and you get funded.

46:46Demetri Kofinas:And then as a progressive 2000, that's got even worse. Now, the result is a tubercharged information age. The way I look at it, it's like bonfire divinities. It's like pouring kerosene on a bonfire. It's just money and that availability of abundant capital accelerates information age. Now, what does it mean for societies? Well, it means that we're starting to change functioning of capital and labor much faster than societies are capable of adjusting to within the timeframe. That is, what is the role of tangible capital? What is the role of intangible capital? How to relate? What is the role of labor?

47:26How much labor do we need? What type of labor? What do they do? What is the marginal utility of it? And as I said earlier on, I think McKinsey was absolutely correct to argue that the waterfront of assets and activities that information age impacts is at least 300 times what industrial revolutions were doing. And it's progressing at 10 times the speed. That means it's 3 ,000 times the impact. Late Kevin Drum had a terrific phrase. He said, the industrial revolution changed the world. And all it did is to reduce the importance of human muscle. This goes beyond human muscles. This goes into cognitive actions.

48:05Singularity, where we really won't be able to tell the difference between human and non-human contribution, is probably within the next 15 to 20 years. But as we progress towards it, marginal utility of labor declines. And the more marginal utility of labor declines, the more when you sit in the chair, the more you feel less useful. If other people know that you're not as good, that depresses you. That actually have mental impact and psychological impact on you. And so you have those two forces reinforcing each other, that financialization tuber charges information age and information age tuber charges financialization and on and on.

48:46Now, sometimes you have external variables coming in as well. As I said early on, climate change, demographics, if you think of changing cohorts, if you think of pandemics and healthcare, this time around, we have all of them, all of them coming together all at the same time. And that means people lose confidence in the system. And therefore, what you're seeing alternative system proliferating. China has its own system. Russia is trying to propagate its own system. United States today is trying to figure out what its system actually is going to be as we go forward. If you're saying of Europe, they are trying to figure out their own system.

49:26So instead of subscribing to some common acceptance, what is the right thing to do? What is the wrong thing to do? What are the right political, social, economic system? We now have proliferation of them, the same as in 1930s.

49:41Demetri Kofinas:So Victor, you said so much there, and I'm sure some people out there are going to be overwhelmed by the amount of information you shared. I'm going to try my best to dissect some of it in the second hour. But before I do, I want to mention a book that I think is a very useful read for people following today's conversation. It was written by the founder of the high energy physics group at Los Alamos National Laboratory, Jeffrey West. The book is called Scale. And Jeffrey essentially uses this framework to draw a comparison between natural systems, the way natural systems or physical systems scale versus socioeconomic systems, which have these embedded growth obligations that debt and unfunded liabilities create along with the debt-based monetary system.

50:26Demetri Kofinas:And they create these finite time singularities where essentially you get this kind of runaway financialization, which you were talking to. And that isn't an economic problem. It is truly a financial problem. It's a problem of claims on the assets. And that requires some kind of political solution. And so I think that's kind of where we're going to take it in the second hour, because in your book, you devote quite a bit of the conversation to how do we avoid this world on fire scenario? And we get something closer to a 1950s and 1960s style stabilization. That requires some very difficult political choices, some of which may not really be possible without further pain.

51:04Demetri Kofinas:And so I want to explore that. I want to explore some specific solutions that you propose like UBI, as well as some of my skepticism around that and the issues I think that come with universal basic income. There's something else that I don't know that you write about it in the book, or maybe you did and inspired me and I can't pin it to something, but are you familiar with Balajus Rinovashan's concept of the networked state? No, no, I don't. So this is very interesting. I was thinking about this. In the breakup of, because this is kind of, again, it's like a cyclical, it's a way of thinking about things cyclically.

51:38Demetri Kofinas:After the Treaty of Westphalia, and especially with the breakup of the Ottoman Empire and then the the Austro-Hungarian empire, you saw that the nation state model became increasingly the organizational mode through which nations would organize, all these different ethnicities within the empires. And it seems now that folks like Baladju, who's kind of the figurehead for this movement, and I have some issues with his ideas. I don't know that they're entirely intellectually coherent. I've told him this much. He's also been on the podcast. I don't know if he'll come back on because I've been rather critical, but it seems that there's an attempt by some, especially these techno elites and quote, techno billionaires, whatever, to push a new mode of international organization.

52:25Demetri Kofinas:Actually, international isn't quite right because it's built on the previous framework. It's essentially saying that the world now is a network, the internet network that is grafted on top of the physical world, and that the nodes within this network are becoming more powerful than the nation states themselves, and that the future organizational model of the world is going to be this, quote, networked state as opposed to the nation state. Since you're not familiar for this, I don't know that we'll necessarily get into - I would disagree. I would disagree with that. Okay. Well, we'll hold that for the second hour.

52:52Demetri Kofinas:I do want to ask you about that as well as some questions about the new ideological battle because in the 19th century and the 20th century, it really became about two alternative models of organization, competitors to Western democratic capitalism, which were fascism and communism. Is there something equivalent today? is a Chinese state capitalist model and example of that. And also I want to dig more into AI disruption and decentralized finance, including stable coins and CBTCs, which is something that you've written quite a bit about. For anyone who is new to the program, Hidden Forces is listener supported.

53:25Demetri Kofinas:We don't accept advertisers or commercial sponsors. The entire show is funded from top to bottom by listeners like you. If you want to access the second hour of today's conversation with Victor, head over to hiddenforces.io slash subscribe and sign up to one of our three content tiers. All subscribers gain access to our premium feed, which you can use to listen to the rest of today's conversation on your mobile device using your favorite podcast app, just like you're listening to this episode right now. Victor, stick around. We're going to move the second hour of our conversation onto the premium feed.

53:58Demetri Kofinas:If you want to listen in on the rest of today's conversation, head over to hiddenforces.io slash subscribe and join our premium feed. If you want to join in on the conversation and become a member of the Hidden Forces Genius community, you can also do that through our subscriber page. Today's episode was produced by me and edited by Stylianos Nicolaou. For more episodes, you can check out our website at hiddenforces.io. You You can follow me on Twitter at Kofinas, and you can email me at info at hiddenforces.io. As always, thanks for listening. We'll see you next time.