The Final Phase of the Debt Supercycle | Edward Chancellor

28:385 % to 6 % in the UK and France, 7 % roughly in the States. So there's almost a societal imperative to move inexorably towards the bust. I mean, for instance, the Office for Budget Responsibility, which is the UK's sort of fiscal watchdog, they commented, I think, in a report out a couple of months ago, they said, there seems to be the public's expectation of what the government can do for them, and how it can bail them out, you know, or face existing and new risk appears to be growing. And to go back, obviously, that was the case during lockdown. In my view, all along, was that this lockdown just would not, could not have happened because it was so staggeringly expensive and so staggeringly disproportionate to the actual risks that could be analysed.

29:37It could only have happened with this very cheap government funding. So, for instance, British government was, in effect, borrowing from the Bank of England with the Bank of England, roughly a sort of pound for pound, the Bank of England buying gilts equivalent to the British government's deficit. The British government was, in effect, paying 10 basis points on its list. Well, if you borrow 10 basis points and you have a political class whose time horizon is extremely limited and is fixated on its opinion polling, well, of course, they're going to borrow a lot. Again, what I found weird, and I don't really understand, is why, since interest rates have reset or normalized, why this binge continues.

30:28Because, as I say, it accelerates. It brings you closer and closer to the end of the cycle. And what I was thinking about when I was writing my piece is that this is not really just purely a financial issue. This is actually also cultural in the sense that our society is, as everyone says, very polarized. You have, and this again, partly it's a consequence of our incredibly financialized system as you've had incredible growing inequality. And so what I think is happening really is that you've got a mass of people out there with no real stake in the system who haven't actually got a huge amount of assets, got rubbishy jobs.

31:11Of course, they want the government to finance them. And then, frankly, I don't suppose they give a damn. Quite rightly, they give a damn if the bond markets blow up or if the government finances blow up, which, as I said, I think they must be on course to do. I mean, it's pretty negative. But when one thinks about it, that looks to be where we're going.

31:34Demetri Kofinas:So, Eddie, I have a lot of questions that derive from what you said. But just to clarify something, what does it look like? I was going to ask you, what does Ray Dalio suggest it looks like when a country goes broke, but maybe it would just be better to ask you. I mean, what is your conception of what that means? Well, I mean, again, the three countries I mentioned, Britain, France, and America, they all have negative net international investment positions. They all run current account deficits, pretty likely savings rates, and foreigners have a big position in their bond markets. and what happens is the foreigners give up.

32:14And then the foreigners give up and then you get into... It's obviously different. The euro crisis is obviously different in the sense that countries like Greece had given up their control over their currencies. But what you saw playing out in Greece was, again, a reversal of foreign capital flows. And in the case of Greece, had it had a currency, an independent currency obviously the currency would have collapsed and you would have got high inflation but stuck in the euro zone it had a sort of deflationary bust i mean i think probably these countries that issue their own currencies and control their own central banks uh will um you know will will have these you know that their currencies will be chronically weak they'll be run you know their bonds will sell off the currencies will sell off and then you know and And then you have to see what happens, whether you get then the central bank, as I say, almost certainly comes in, buys bonds, carries on funding the government.

33:14As you know, inflation, it's as much psychological as anything else. I mean, that's, again, what's quite interesting in the history of the German hyperinflation. You know, so you can see that when they changed the monetary system in when it was sort of November or October 23, the inflation came to a halt overnight, even though the money supply was technically increasing. So in other words, it is to some extent, you know, all in the mind. So it really depends on how people respond to it. But then you have to sort of anticipate what the government's going to do. And one point that Dalio does make, which I think people, you know, have to probably have to wake up to, is that up until the 1980s, capital controls were a very common feature of big government bus.

34:06And in fact, you know, as you know, in the euro crisis, you had, well, you had capital controls prior to the euro crisis in Iceland. Then you had it in Greece and in Cyprus. See, I would have thought, and that's going to be pretty hellish for people's asset allocation and investment if they impose capital controls. But it may be that you can, that may be the only way forward. I mean, I don't know whether you've had Russell Napier on your program. I'm sure you've spoken to him. Well, Dmitry, you and I did a thing with Russell, didn't we? It took three years.

34:42Demetri Kofinas:We've all done it. Yes, we did one with Russell and Helen Thompson, but we did one with Grant recently as well. Yeah. So Russell is the standard carrier for financial repression, but financial repression normally requires capital controls. Because otherwise, we've all got these FinTech apps on our thing. I can move money into any currency I want to the drop of a hat and um you you know using i got wise or whatever and um so you you you can't financially repress me unless you some or other um stop me you know force me to keep my deposits in your country so i i think when the the upshot happens then then um yeah that you know that's one probably quite likely outcome oh can i just say one other thing this this is a point that dalio makes, and I think it is, again, fair enough, is that as you move through the cycles, the course of the cycle is from, of the long cycle, is from sound money and relatively low debt and relatively moderate interest rates, by definition, higher levels of debt, but also to easier money, to weaker forms of money.

36:05And as the system resets afterwards, you get a return to sound money. I mean, anyhow, that's your little sort of template of how it might happen. And in which case, Grant, get back to your earlier point, do you stick with this fiat currency, this paper currency that has been useful for smoothing business cycles, for sure, but at the cost of huge economic and social and financial distortions. And my view is one shouldn't. And the question then would be, would there be a consensus when you go past the end of this current big cycle and with the sort of denouement, would there be a consensus for a new monetary order with a sounder backing?

37:03And one can only hope when we just have to observe and if we're still alive at the time to chip in our pennies worth. It feels like that it almost has to go that way ultimately, because at the end of the cycle, the impetus is not provided necessarily by this idea of gains anymore. It's a fear of losing. It's a fear of losing the purchasing power of what you have. You're losing your savings. And it's interesting, you know, Eddie, because your book, The Price of Time, and we've lived through this era of artificially very low interest rates. And what low interest rates do is they give you the opportunity to have a very low time preference.

37:44You are able to buy assets and fund them for a long, long time. and take very long views and build capital the old-fashioned way. But what we've seen here with these very low rates has been exactly the opposite. It's been this prioritization of a very high time preference. And people have tried... Can I just say one thing? Yes, please. Is that if those rates were set, so to speak, by the market, reflected the collective time preference of a society, in other words, a low rate being an indication of a very patient, thrifty, capital-accumulating people, such as the Dutch in the 17th or 18th century.

38:26That was a time when people thought that the low interest rate reflected the strength of a civilization, that the lower your rate was, the stronger your civilization was. And that's a comment by this fellow Eugen von Bermbavik, one of the luminaries of the Austrian school. Anyhow, go forward into our current era, and actually the ultra low rates, as you're suggesting, they don't reflect. You have ultra low rates that look as if people are patient. And then you look out and you've got people trading meme stocks or cryptos or the like. In other words, with very short time preferences. And you have a political class with incredibly short time preferences, too.

39:13So, just for me, it's another side. The interest rates really didn't reflect actually what was going on. Well, we're completely corrupted or distorted.

39:25Demetri Kofinas:I just want to propose that we might be thinking about this in a paradigm that may no longer hold in the future. So, I don't expect, for example, the People's Bank of China and the Chinese Communist Party in the Chinese government to ever necessarily fall back on a hard money standard. I think that that is obviously not a preferred way for a command and control state capitalist society to operate. And I just wonder whether or not we may be moving in a similar direction here in the US. And part of that, I think, could be driven by innovations happening in technology that allow governments to exercise more control over their populations.

40:09Also, I think to me, the really

40:11Demetri Kofinas:interesting and concerning scenario involves the political repercussions of the things that we're describing today. And people, certainly debasement of the US dollar would benefit, would help reduce the real value of the outstanding US government debt, but it would do little, if nothing at all, to alleviate the challenges facing the bottom 90 % or 80 % or whatever the percentages of the country that's been struggling, especially because we no longer live in this industrial economy where labor is a large input. And so the production of the value of a country's currency makes them more competitive in the race to build up market share in the export-driven economy.

40:58Demetri Kofinas:So I guess my question is, first to you, Eddie, and Grant, feel free to respond. What is the risk that maybe we could see a rise of left-wing populism in the US? And we don't necessarily fall back to a place where we have a revaluation of money, but rather we just go deeper into the vortex of a more socialist, command and control driven US economy, and that this also is the case for other developed countries that are facing similar challenges. Yeah, I mean, I think that's a reasonable scenario. I think it would be blithe to assume that you're suddenly going to move from this distorted world to a sort of libertarian paradise, you know, sort of a million millies will bloom.

41:41I mean, it'd be a nice idea as far as I'm concerned, but I don't think it's in the bag. You know, you can see, well, you see what's happening in, you know, the New York Mets race. Yeah, so it could easily shift to a system in which it's very punitive against those, you know, who've accumulated anything, or those who I can see that happening. and you're particularly clear in Europe, but it's pretty clear in the States of the polarization, you know, of populists on both the left and the right attracting, you know, followings. I think in terms of, I mean, my hunch is that, you know, America is a bit closer to its, you know, it really, you know, there are more people who love freedom in the States and there are fewer people who love freedom genuinely in Europe, which is a whole, you know, one of the arguments, you know, for those of us who voted to lead the European Union was it was a bureaucratic super state.

42:42And we didn't particularly like that. But, you know, Europe has a strong bureaucratic side to it. You know, Europe also has a strong tradition, the bureaucratic side of it, the academic side of it, of being very, you know, giving China a very easy ride. The natural bureaucrats love China because they just see it as a Mandarin state in which you have a small number of officials who have complete control. So, yeah, I could see one moving to, you know, Europe in particular. I could see getting sort of, funny enough, getting closer to China and adopting more of this, you know, Chinese type controls, you know, and that would go into the, you know, the currency.

43:23You know, I don't think the Europeans are getting anywhere, as far as I know, with their own central bank digital currency. But as you know, in the case of China, and I think it's really, you know, it really comes from Xi Jinping seeing what, you know, what Alibaba and Tencent have been able to do with their own, you know, their own sort of monetary systems, their own private monetary systems. since Xi realized that you could have a system in which you observe people and control the flow of money. And I think that, to my mind, somewhat dystopian outcome is a possibility, I'd say.

44:04Demetri Kofinas:So one of the features of the Cold War was the ideological competition between the Soviet Union and the United States based around the economic models. The Americans were promoters of free market capitalism, and the Soviets were promoters of state-driven communism. It seems that there is something going on today that is somewhat similar, though it's not acknowledged, which is the competition between the Chinese state capitalist model, which is not the same. It is sufficiently different from the Soviet model. And then what we used to think of as American free market capitalism, but which has, I think, become a more corrupt form of capitalism today.

44:43Demetri Kofinas:So we don't quite know what we stand for and what is the alternative. And I wonder if we're also doing ourselves a disservice by not actually being more forceful and explicit about what we stand for. But to your point, I do think, to your point about Americans loving freedom, I think it is encouraging to see the current treasury department and Scott Besant and the Trump administration throwing their weight behind stable coins because stable coins are a furtherance of the decentralized dollar. They're a furtherance of private sector issuance of dollars, and they're certainly not an endorsement of central bank digital currency.

45:18Demetri Kofinas:So my question is, is something similar happening today? Should we be more forceful in staking a claim in what we stand for? And do you see evidence actually in the policies of this administration that we may in fact be moving more towards a free market, an explicit embrace of the free market model within the new digital paradigm? Yes, a complicated question. I want to just get back to this question of state control of economic activity. And you say China's state-directed capitalism is one model. Then you say that what we have had, and I would say this is partly furthered by these distorted, corrupted interest rates, is you might call it, we have a sort of rent-seeker's capitalism fostered by the ultra-low rates, which I'd say private equity was part of.

46:09And that shift, you know, and a move towards monopolies. You know that my friend Jonathan Tepper wrote a good book called The Myth of Capitalism, which is an analysis of how capitalism had been undermined by the shift towards oligopolies and monopolies. And then, of course, you've got the tech monopolies. So that's not the capitalism of Adam Smith. And then, you know, the other thing I find very interesting and read quite a lot about, occasionally write about, is the whole net zero thing. Because the forced energy transition is really the most ambitious type of state direction and control that one could envisage, at least that I can envisage.

46:53because all activity, all life requires, you know, the expenditure of energy, the use of energy. And I do think when you look at, I don't know, I mean, in Britain, for instance, we have something called a climate change committee. And they, you know, do these scenarios and make these suggestions that sort of seem to have almost semi, almost sort of semi-legal statutory authority saying this is what people must do. This is what people should do. and those of us who looked upon it a bit as scant and say, well, actually, we live in a hydrocarbon civilization in which everything is based on it. And if you pull the rug out under people very quickly, then the civilization collapses.

47:38And the reason I mention that is that clearly under the new administration in the US, they have clearly defined themselves against this encroachment of the state into forcing people off hydrocarbon energies, of selecting and subsidising particular types of their favoured energies, whether it's so-called renewables or whether it's providing subsidies for electric vehicles and the like. So I think in that sense, and I think that is something clearly separating what the US is trying to do now to what is happening in Europe, for instance. And in Europe, I mean, you must be awake. What is it? A month or two ago, the entire Spanish electricity grid went down and taking down bits of Portugal and bits of France too because of over-dependence on unreliable renewables.

48:41The reason I'm mentioning this It's just that, you know, that whole net zero area or the forced energy transition gave, to my mind, the greatest scope for the bureaucrats to envisage and dictate what people would do. Now, I mean, the fact that it couldn't conceivably have worked with the current technology and that individuals, countries attempting it achieved absolute nothing on their own, people have sort of ignored. But I do think in that case, there is, you know, America is trying to do something different. I don't quite know the current state of antitrust in America. Obviously, things did seem to have changed under Lina Khan at the FTC, if you were more robust antitrust policy.

49:37I don't know where things go from that. But I would say that America is changing, whatever you think of President Trump. He is elected because a lot of people were dissatisfied with the system. And a lot of changes are being put in place. you know I'd say particularly in on the energy front and you know Scott Besant is the full intelligent guy you know I've met him a few times before his treasury secretary and these he these conversations that we're having exactly sort of conversations you'd have with Scott who'd be engaged with he he knows none of the stuff we're talking about is at all foreign to Scott let's say he knows exactly I mean from what I gather you know he would seem to he talked to same sort of people as we talk to and reads the same sort of books as we read.

50:26It's interesting, Eddie, you know, because this podcast, we call it The 100-Year Pivot, because it feels like there's something very big happening. And Dimitri's talked about America moving more towards a socialist model. And you've mentioned the word civilization collapses at the end of this thing. And that fits very much in with this feeling that Dimitri and I both had, that there's something big moving. And I look at Scott Bessent and the Treasury role, and I've not met him. I have very good friends that know him quite well, and they've all said great things about him. And to your point, they've echoed those sentiments about he understands all this, he's listening, and he's asking the right questions, and he's talking to the right people, which is encouraging.

51:10However, it feels to me as though the coincidence of this period of change, change this shift this this reversal of a lot of things that have been going on over a long period of time it's not coincidental that it's happened at the time the cost of money has gone up and I feel like people reverse this they they think that oh the price of money's gone up because things are getting weirder personally I think it's the other way around I think the trigger for a lot of this is exactly what you've written about in your books the fact that the cost of money is going up and I look at Scott Besson and I look at what people say about him and what you've just said about him and yet what I see is someone who seems largely trapped and isn't able to do the right thing based on everything he understands to be true but is forced to do either the expedient thing or more possibly the least damaging thing and just try and keep this thing together whether he believes it's right or wrong whether he believes it's the proper a long-term thing to do we're past that now it feels as though we are in the triage stage and the triage is going to go on until the patient dies i don't know that the patient can be saved at this point but it's i mean perhaps palliative care is a better analogy than triage i'm not sure so i'm yeah i mean i look i wouldn't personally want to be u.s treasuries actually the i mean look you know it'd be it'd be nice it'd be nice on one's cv but you know yeah i think brilliant, impossible job.

52:41And in particular, given that Trump has big spending proclivities and Besson has taught, I think he says, one of the reasons he took the job is he doesn't want America to go bust. But whether he's actually succeeding in preventing America from going bust, it's hard to say. And clearly, you read the newspapers and they say, well, on issues such as Tarius and this and that, Besant would appear to be, so to speak, the reality principle, whispering in Trump's ear, saying, would you really want to do that? So at least I would guess that he's doing more good than half, even if he's not doing a huge amount of good.

53:28By the way, on the subject of your hundred years, When I was reading, I read the Ray Dalio book alongside a book which I'd say was sort of good in parts. You probably come across Neil, is he called Neil Howe, who does this? Neil Howe, yeah. Yeah. And he has this idea of four generation cycles. And so they last sort of roughly, I think, roughly 88 years or 90 years. And Dalio's cycles, which don't have any sort of theory towards them, I just think he just measured the historical debt cycles. He talks about an 80-year cycle. So in a way, these long cycles and your 100-year flood, they're not so far off.

54:15And I do think when I say, you know, you said, well, you can't explain this apart from the interest rate, you know, creates some of this, you know, these distortions that bring us to the end point. Sure, yeah, you know, the interest, you know, the very low, you know, if interest is the cost of leverage or the cost of borrowing. Well, yeah, once they bought it down, you were going to get more of it. But also, we live in a world that actually wanted the lower, you know, that there was a demand for it. There was a demand for something out of nothing. And now, you know, look, you know, we obviously understand, you know, the demand for easy money on Wall Street, because, you know, if you have access to cheap funding, you can do things, you can make money, private equity and so on, or, you know, leverage buybacks, you name it.

55:07But there seems to be more broadly a demand for government borrowing to fund welfare spending and transfer. So you could say that actually the, because everything is, you know, is complex and interactive, that the interest rates, the ultra low interest rates both distorted the society and the economy and the finance system. But they also, the fact that they were brought so low also sort of reflected some demands within the society. And look, I mean, the easiest way of saying it, you know, we used to talk, you know, about kicking the cat, didn't we? or they used to talk about, I mean, you're talking about earlier of people with very short time preferences or time horizons.

55:49Well, you know, and so in these ways, the ultra low rates allowed, you know, consumption to be brought forward. Now, I mean, what I liked about, I mean, I found the this book on the so called fourth turning, it gets, there's a lot of, to my mind, a bit of, you know, mumbo jumbo in it about, you know, different generations having different characteristics. and those reflecting archetypes, blah, blah, blah. But just take your 90 to 100-year cycle and say, yes, society moves from a position of cohesion and responsibility, we might even call it rationality, to eventually sort of breaking down. and I don't quite know why you have these 80 to 100 year cycles.

56:44But one of the things that at least I feel so strongly about when we see things particularly over the last five years is the incessant madness of the modern world. Whether it's in the, I mentioned earlier, the sort of absurd idea that you're going to give up hydrocarbon energy overnight or the gender stuff or the lockdown excesses, this and that. We live in a world that almost is striving to break itself down or a society that is striving to break itself up. And I think that probably explains why the debt growth is so strong because no one really wants to put a brake on it. And so from an investment perspective, one analyzes it.

57:34And I like, all of us like to analyze these things and then think, what does this mean from an investment perspective? And it means that people's wealth, what they think of as their wealth, a lot of it is not backed by anything. That a debt, that we call government debt, a risk-free asset. But if you look a different way, it's a pure risk asset. It's the riskiest asset you can have because it's something backed by absolute nothing, given that the governments can't produce fiscal services and that therefore is entirely dependent on people retaining confidence in it. And I think go back, you know, I watched your programme on gold, which is interesting.

58:21I think that is very bullish from a gold perspective. I think that the, and one of the points Dalio has, it wouldn't surprise you, is that on average, during these, you know, the end of the debt super cycles, on average, gold outperforms bonds by 71%. And, you know, obviously, in the case of, well, you take the, I mean, the German hyperinflation might be an outlier, but I think the entire national debt of Germany that, let's say, had been, you know, two or three times GDP, by the end of the hyperinflation, all those issued bonds, you know, wouldn't have bought you a single gold, you know, gold coin.

59:01So in that sense, you know, I think we moved into a world of fantasy, in which a lot of our wealth is fantastical. And we will sooner or later, and we have, we were already somewhere along the lines, but we are moving gradually to a world in which, you know, wealth will be more closely attached to things of, so to speak, real value. And that's something I've been sort of hammering on for about three or four years. And again, go back to the hyperinflation in Germany. They had this thing called the flight into things of real value, the flukting to Zach Verton. And I think we are in the process of a flight, a very slow one, of a flight into real value.

59:49And I think, you know, if you try and explain why has gold done so well over the last, you know, when it's probably been running for about 15 months or something like that, that it would seem, one gets these things wrong and gold can move to any number of different things. I know central banks are buying it. You know this better than I do. But I sort of guess that the strength of gold is telling you that it's a sort of harbinger of breakdown. But, you know, one could be wrong because, you know, as you know the the gold bugs will own gold through you know through they'll hold it when it's going up for completely the wrong reasons you know and then and then they'll take a hit when it goes down but to now like i don't know what you feel but now it feels in my bones like the the movement in gold is relatively solid i mean i'm not that you know other other metals might not be more attractive and i'm also thinking from just an asset allocation perspective that clearly, if you look at the end of your 100-year cycles, if they end in crisis, you really, you probably want to have an asset allocation, which is roughly 50 % gold, 50 % equities.

1:00:57You don't want nominal assets, paper assets or nominal assets at such times. That's my thinking anyhow.

1:01:07Demetri Kofinas:I don't know if this will be a popular question with the audience, because I feel like maybe people will want to hear more about gold. world. But your comments about this longing for destruction, you didn't use the word longing, but earlier in your response setting, you talked about how there seems to be this urge to tear things down. It reminded me of this conversation I had with Joshua Shrai, who is the host of this really beautiful podcast called The Emerald, where he goes on these very long poetic monologues. And he had one called, I think the title was, So You Want to Be a Sorcerer in the Age of Mythic powers.

1:01:43Demetri Kofinas:And it was about artificial intelligence. And there was this point in the monologue where he said that we long for annihilation. He actually had this interesting audio that he extracted from a panel of tech luminaries where Elon Musk has also made comments in this effect that maybe the purpose of human beings was to bootstrap AI. And in a lot of these conferences, I don't know that this is going on anymore, but it was certainly going on for many years where there was these conversations about existential risk. And in the case of this particular example, these luminaires were sort of laughing, kind of giddily.

1:02:14Demetri Kofinas:And he said, what are they laughing about? And I think Joshua was trying to suggest that maybe the reason that we long for annihilation is that we feel overwhelmed. Again, I apologize for going in this direction. I know it's very different from finance, but that we feel overwhelmed by the responsibilities that we carry and by the sort of godlessness with which we live, that we have surrendered the idea of there being a power greater than us and we are ourselves, see ourselves in many ways as gods of this earth and that there's a desire to experience awe and that there is something kind of psycho-spiritual going on here, that we are on a sort of almost like an uninterruptible course towards trying to cause a reset of some sort.

1:03:01Demetri Kofinas:And I'm throwing that out there just to, I'm curious to hear what each of you thinks about that. What you're saying would fit with the, you know, the theory around, you know, the so-called turnings and getting to the fourth turning. And I think this whole idea, it goes back to this 15th century Arab historian called Ibn Khaldun, who was talking, I think, again, roughly 100 or 120 year dynastic cycles when a dynasty establishes itself and grows stronger and then over several generations become weak and corrupt. And in the end, what he calls the destroyers, he says it ends with complex laws, evasion of laws and people seeking to destroy the dynasty.

1:03:47And then, I don't know, ending in civil war or domestic or external civil war. And then the regeneration of society where we stop having all these luxury beliefs, if you want to call them that. And also we stop conflicting with each other over things, frankly, issues such as gender stuff, which is frankly completely irrelevant. I mean, it's neither here nor there. And it's a sign of huge, to my mind, sort of extreme decadence in society, that it gets its knickers in a twist over these things. And it may be that this is a natural progression within civil life. The mankind is a sort of restless creature, unfortunately.

1:04:38And so even when he has things good, they're not good enough. And he seeks to then overturn or to reimpose new values, to change, whether it's religion or whether it's now just ideology of imposing new ones and then turning against each other in this sort of most dismaying way. I mean, take, for instance, this whole issue of racism. Everyone sort of accepted anti-racism and suddenly it was weaponized against it. Actually, the anti-racism, there's so much madness in this world. And again, I would have thought, you know, you look back, you know, America in the 30s, very divided society. Obviously, you know, Germany in the 20s and 30s, or particularly in the 20s, extremely divided society.

1:05:27And so those divisions, how do they end? It can be the case within a democracy that an individual can come and lead and bring people to their, you know, bring the nation together. Now, I'm not a huge fan of Roosevelt for his economic policies in the 30s, but clearly as a war leader, at least, the war brought Americans together and their divisions from the 1930s were overcome. America was a more united, more consensual place after the war. I mean, even, I mean, look, blasted Germany. Germany just committed the most heinous acts in history. It was completely leveled as a country and yet re-emerged out of it, you know, in a way conformist, boring, bourgeois society.

1:06:28Same with Japan, yeah? So what can one say? The future is we can, I'm not very keen on putting decades to cycles and being prescriptive, saying it is inevitable what the outcome is going to be. But it would seem as if some rather, you know, the divisions in our societies, and they're not very different in Europe to the United States, that some conflagration at the end of it will maybe what is necessary to bring people together to, I don't know. But as you say, within our field, it would seem to me that the issue is, to speak quite narrowly, the issue is one of debt and how that debt gets purged out of the system.

1:07:18And that, the financial crisis can be the catalyst for a societal class, but it can also actually be the catalyst for the reformation of society. So actually, it could be a good thing. And I actually think, you know, going back to my work on interest rates, that, of course, one understands why the central banks kept interest rates, you know, low after the financial crisis. But what it meant was that things didn't really change that much. I mean, look, So get back to private equity. Private equity was going sort of gangbusters in 2006, 2007 into the GFC. And then, you know, they came back. Those guys should have lost a lot of money and their portfolio companies should have gone bust.

1:08:04But actually, they were able to borrow, as you know, the lowest, easiest financing ever by, you know, by late 2009. So it all continued. So the financialization of the economy continued and so on. And so we've avoided our bus at the expense, potentially, of making the final conflagration or bigger. But also, I think, perhaps of these societal rifts, like Greece, for instance. I don't follow it particularly closely, but Greece now would seem to more or less got its act together. So you're growing faster than the rest of Europe, apparently. Whereas these other countries expect to add 10 or 20 points to their debt to GDP over the next few years, Greece is bringing its debt down.

1:08:53It runs the fiscal surplus. And this is why I suppose at heart I'm an Austrian in the sense that I'm a liquidationist. And my view is, yeah, when you're in a bad position financially or even the government position, yeah, you need to liquidate structures and rebuild them. and that's what Greece went through. Not very pleasant, but probably came out... I would say Greece, I think, is probably in a stronger place today than, say, France.

1:09:24Demetri Kofinas:It absolutely is. I can tell you that. Culturally, especially. I mean, Greece is a different country than it was before the financial crisis. And quite frankly, it's a different country than it was during the course of my entire lifetime. And Dimitri, can I just say, so anything, wasn't beforehand the idea that the government could bail thing out, the people, the Greece could continually borrow from within the EU. So in a way, if you will, it's like sort of rent seeking mentality and that has been purged by the system. Well, one of the biggest reforms that I've seen in Greece, besides the fact that it's become more entrepreneurial, actually, you know what?

1:10:01Demetri Kofinas:I take that back. It hasn't become more entrepreneurial. More of Greece's entrepreneurial spirit has been channeled into the private sector and out of the illicit economy. I think this is what the demand side Keynesians like Paul Krugman, who were advocating for stimulus during Greece's financial crisis, didn't quite appreciate, which is that the state and the bureaucracy in Greece had become such an operational burden on the economy that Greeks were habitually pouring so much of their entrepreneurial energy into figuring out ever more clever ways to game the system or to locate the right connection to help them land a cushy job or a lucrative contract.

1:10:44Demetri Kofinas:And so you had this at once both adversarial and patronizing political economy that was suffocating innovation and generating a whole lot of misery and complaining among the populace. And so I think what you've seen in the last 10 years is that a lot of young Greek emigres who were educated abroad in elite universities in England and the United States have moved back to Greece to start companies. And while there are many factors to explain this, I think the economic depression that the country went through brought people together in ways that I had never experienced in my entire lifetime. And it also made them much more grateful for what they had in a way that transformed the country, not only economically, but also on a spiritual level.

1:11:30You know, I listened to the two of you there. It's again, Again, I keep coming back to the importance of what you've written about because, Dimitri, you talked about this wish for annihilation that you were talking about. And Eddie, you talk about some of the divisions in society. And it strikes me that to get to where you are, Dimitri, for people to want the system to be torn down is a point of hopelessness, essentially. And Eddie, the divisions you spoke about, whether it's politically left or right, whether it's racism. I mean, you know, human beings, there is always racism because every human being mistrusts people that don't look like them or talk like them or believe in the same things.

1:12:11And those are things that are always there under the surface for many, many people. But it's only when the divisions become rich and poor that these things tend to blow up, you know, because suddenly there's this feeling that other people are doing much better than me. And whether it's your financial nihilism, Demetri, this kind of hopelessness that I'm so far behind now, I can't catch up. Grant, can I start with you? Yeah, please, please, please. What's interesting is that you get, I mean, look at the States, and again, it's very similar to happening in Europe. The people who are most nihilistic actually come from the richest families, don't they?

1:12:52It's the crazy extremists at Columbia or Harvard all the rich kids supporting what's it called? Mondam. How do I pronounce his name? The mayoral.

1:13:05Demetri Kofinas:Zoran Mondami, I think. Mondami, yeah. And go back to the potentially economic catastrophe, civilizational catastrophe of the accelerated energy transition. That tends by and large to have been supported by very well-off people, educated people. and in that sense you know actually so yeah you there is you know a class divide but in some ways the you know the people with fewer assets often well they're much more conservative and that that that is again that it's a bit abnormal it's a bit you know Alice in Wonderland that the people who have everything you know want to embark upon actions that would blow everything up and also So the people who benefited most from their society having the strongest visceral feelings against the society.

1:14:00You know, these are all Alice in Wonderland character, where everything turned upside down. It's not quite normal. It's not completely abnormal because you've always had a large number of communists or this and that from privileged backgrounds. But it seems more pervasive today. It's a sort of quirk, the thing, we have this inequality, and yet, some rather, it's all, you know, the people who are angriest are also actually those who seem to have, you know, been born with, you know, several silver spoons in their mouths. Just bizarre. Yeah, I'm not sure about that. I understand why you're saying it, where that comes from.

1:14:41But I just think a lot of these uber rich guys that, like Peter Thiel's of the world, who was saying some of these outrageous things about the end of society, the end of mankind, and all this kind of - You saw that interview that he did with Ross Douthat,

1:14:53Demetri Kofinas:where he asked them about the Antichrist? Remarkable. Remarkable. But I think those people are just given such a platform now that they become representative of a small but important class of people. And I'm not sure that's necessarily the case. But I think if you divide vertically, if you go left and right, if you go along race grounds, if you go along religious grounds, once you draw the line horizontally and you go up and down, rich and poor, all the racists, all the left wing, all the right wing, every race and religion, every creed, they're all below that lines you grab everybody below that line and you're not just looking for the racist and the non-racist you get all of them and i think that's the problem with this horizontal line is that the target the people who are the focus of people's ire are the rich and the rich have done themselves no favors by making themselves incredibly prominent more and more so in fact and you know there's a certain amount of lightning rod behavior going on and that's why i keep coming back, at least what you wrote about.

1:15:58I think money facilitates them getting rich in the first place. Low interest rates facilitate the borrowing of money to gather assets and all the things that have helped a lot of these rich guys, these super rich guys become rich. It's all been financialization and share price improvements and all the things that financialization bestows upon them. And now there's this sense that we're never going to catch up with these people. and guess what? The cost of money is going up and that hurts the wrong people. And these super rich guys who seemed aspirational now just seem incredibly out of touch, not because they're saying anything different, but because the people who are now below that line are outraged by it rather than saying, oh, well, look at what Peter Thiel's saying, because I was doing pretty well until now.

1:16:47And now the cost of money's gone up, inflation's gone up, my bills have gone up. how dare he say that? How can he be so out of touch with poor people like me who are struggling to make ends meet? And I just keep coming back to this idea of how important money is in society. And by extension, the price of that money is arguably the most important price on the planet. I'd be curious to hear your thoughts on that. I attended one of Jim Grant's conferences about, I don't know, seven or eight years ago. And there was a Swiss guy whose name I can't remember talking about inflation. And he was citing a short story by Thomas Mann, the German novelist, describing the hyperinflation.

1:17:31And the guy's reading of this Thomas Mann story was that money is the medium through which we transmit our values. And it becomes a stable currency in ways associated with stable values in a society. And that once you inflate everything away, then actually society itself becomes disordered and values become disordered. And the reason I mentioned that is that, you know, we were talking earlier about interest being, you know, time preference and how all our decisions involve time, our financial and economic decisions and how the price of things, you know, the price of capital assets is determined to a large extent by the discount rate or the interest rate.

1:18:22And it seems to me that it's possible that that distortion of the interest rate, and I think I try and describe this in my It has so many ramifications that it upsets both, if you will, the real economy and the financial economy. And it upsets the real economy in a number of different ways. But I'd argue just by sort of, in effect, by encouraging misallocation of capital and slowing. This is a Jim Grant point. It slows the pace at which things turn over, you know, because you don't have an impetus to be more efficient. And yet you have also this hyper-financialized economy. So it may be that to some extent that, you know, the dislocations of the society have been fed by this manipulation of rates.

1:19:16and that, I mean, we would accept that in any other field. We think if the government went in to maintain the price of something and distort the price of something, we would see how the consumption and investment and so forth around that, whatever it was, you know, sort of widget, whatever, would be distorted. But the interest rate people, they hadn't thought that deeply enough about it. But having said all that, you know, we are moving. you know we have moved back to more normal era of interest rates i would have expected by now you know society's wealth to have started to move decisively downwards was actually you know u.s stock market highest ever level valuation levels highest ever probably i don't haven't checked it recently but you know the fed's household net wealth you know i guess it's probably must be again at the highest level ever.

1:20:13So we have a sort of weird, interesting disconnect now. And you're bound to see this because it's written about from time to time between what the interest rates are telling you and the valuation of all assets. For instance, I think I'm right in saying that the Shiller, well, that there is no equity risk premium anymore on the US stock market, for instance. So the cyclically adjusted price earnings ratio is trading will be at a lower yield than the 10-year Treasury. And I mean, I don't know, 10-year tips around, well, about 2.3%, 2.5%, I haven't looked at them. But again, there would be very little, even if you take an inflation-protected bond, very little leeway.

1:20:57So it may be that we're in an era which everything hasn't quite, you know, that things don't quite make sense, that you'd have all these high asset prices as you move back to the normalization of rates. You'd expect, I mean, I think I mentioned it in the past, US residential real estate in aggregate is sort of weirdly, I know people lock in long rates, you know, on their mortgages and states. It's sort of weirdly high relative to other places. So it may be that the states catch up some or other and that this disconnect between the interest rates and the valuation is no longer holds. We'll see.

1:21:41Well, Andy, look, I've just seen the time and I know you have to walk your dogs before you go out for dinner. And Dimitri and I have kept you for far longer than we planned to. So listen, thank you so much for doing this. It's been equal parts fascinating and thought provoking. And I know I'm going to go away and think more about this because you've set another load of wheels spinning in my head. So I thank you for that. And I look forward to your editorial coming out in the next couple of days and digging into whatever it was you had to say. So thank you. Okay. Well, very nice to speak to you again, Grant.

1:22:07Very nice to speak to you again, Dimitri. It's great to see you again, Eddie. My pleasure. Well, it's just fascinating. You know, Eddie's work has been extraordinarily important, I think. And, you know, having the chance to talk to him about the importance of money and the cost of that money, it's interesting. You know, some of the places you took us and some of the places he took us, I keep coming back to this idea that money plays a far more important role in all this than most people are seeing.

1:22:34Demetri Kofinas:Yeah. I mean, the other thing that I didn't bring up, because it's always challenging these conversations, you want to try to keep some kind of coherent storyline in place. But one of the things I wanted to ask Eddie that I didn't was how his concept of the price of time as being the interest rate comports with a world where maybe our concepts of moral hazard driven by the bailouts that occurred over several decades. I mean, he mentioned not just the 2008 financial crisis, but also LTCM, that this created a sense of moral hazard and that that may be a bigger source of distortion on the price of time than the actual interbank lending market and the lower Fed funds.

1:23:17Demetri Kofinas:That's something that, again, I didn't have a chance to ask him. Because I think that, But back to this thing about financial nihilism, I think the thing that's really been detrimental, in my view, that's been most detrimental, has been people's loss of respect for money. It's not just that the price of money is cheaper. It's that people have lost respect for it. We've gone through various stages where people, lots of people, younger people in particular, have viewed it like toilet paper. And I don't know if we talked about it on this series, but I've certainly talked about it on my podcast in the past, especially during that sort of 2020, 2021 period where you had those memes of Jay Powell holding onto the podium and money's flying out of it and it's like money printer go burr.

1:24:07Demetri Kofinas:And I think that, again, that's where a lot of my thoughts around nihilism came from. So I think it goes much deeper than just the lowering of interest rates. It is all the things we've done to distort the market's pricing of money and the pricing of time. Yeah. Yeah. And once money's mispriced, everything's mispriced because that money's a common denominator. And that includes values like, you know, morals and principles and all those things. Everything becomes mispriced. I think it's, there's a fascinating thread to pick on. And I have a funny feeling we'll be back to it again at some point in this journey because it's not getting any less complicated with each episode, is it?

1:24:44It is not. But that's the fun. We knew this when we set out. And I, for one, just revel in this idea that I don't know what we're going to talk about, where we're going to go with it all, but it all feeds back in somewhere. And at some point, we may feel like we have a clearer sense of this. But in the meantime, it's fascinating to get all these different angles.

1:25:01Demetri Kofinas:Yeah, I'm looking forward to the next episodes that we have planned, Grant. And I'm sure our listeners are too. Well, all that remains, I guess, is to thank our guest, Eddie Chancellor, for the time he gave us. As I say, do check out those two books, The Price of Time and Devil Take the Highmost, are extraordinary reads. And as Eddie said, he writes for Reuters and the FT, and you'll find Eddie's work everywhere. And I would encourage you to seek him out wherever you can find him. We will be back with another conversation in this series. In the meantime, thanks to you for listening. Dee, let's do this again soon.

1:25:31Looking forward to it, Grant.

1:25:34Demetri 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 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.