In short
Podcast Summary: Making Money - Episode: Is the Global Economy About to Change Forever?
Hosts
- Damien Jordan: UK’s top personal finance YouTuber
- Timeyin Akerele: Co-host and personal finance enthusiast
Episode Overview In this episode, the hosts discuss the state of the global economy, focusing particularly on the U.S. and UK. They are joined by Anatole Kaletsky, Chief Economist at Gavekal and author of *Capitalism 4.0*, who shares insights on potential economic crises, outdated economic thinking, and the evolving nature of capitalism.
Key Themes and Concepts
Economic Predictions
- U.S. Recession: Kaletsky foresees a significant likelihood of recession in the U.S. by the end of the year, noting that its effects could ripple through the UK and beyond.
- UK Economic Outlook: The UK may be particularly vulnerable, hamstrung by self-imposed fiscal rules that limit government flexibility in economic management.
Historical Context of Capitalism
- Capitalism as Evolutionary: Kaletsky argues capitalism evolves through crises approximately every 40-50 years, reshaping itself after major upheavals (e.g., the Great Depression, and the 2008 financial crisis).
- Four Phases of Capitalism:
- Capitalism 1.0: Early capitalist structures.
- Capitalism 2.0: Post-World War II mixed economies.
- Capitalism 3.0: Neoliberalism and Thatcher-Reagan era economics.
- Capitalism 4.0: The current phase, characterized by contradictions needing resolution.
Government and Market Dynamics
- Market vs. Government: Kaletsky critiques the dichotomy of "the market is always right" versus "the government is always right," suggesting both can be wrong and need to be re-evaluated.
- Austerity Measures: The discussion highlights the detrimental impact of austerity measures in the UK and the need for a shift in policy, particularly in response to economic shocks.
Fiscal Rules and Economic Management
- Self-imposed Fiscal Rules: The UK government's adherence to rigid fiscal rules has been criticized for hampering effective economic response and growth.
- Need for Investment: Kaletsky emphasizes the importance of strategic government spending on infrastructure and education to stimulate growth, rather than adhering to strict austerity measures.
Populism and Political Landscape
- Rise of Populism: The hosts discuss how the absence of a compelling alternative narrative among mainstream parties has led to the rise of populist movements.
- Political Stagnation: The current political climate is characterized by incremental change rather than transformative solutions, leaving citizens disillusioned.
Key Takeaways
- Economic Crisis Ahead: Expect significant economic downturns in the U.S. that could impact global markets, particularly the UK.
- Evolution of Capitalism: Understanding the historical phases of capitalism can help contextualize current economic challenges and future trajectories.
- Policy Shift Needed: A shift away from strict fiscal rules and a re-evaluation of government-market dynamics is vital for recovery and growth.
- Need for Compelling Narratives: Political parties must present clear, engaging alternatives to current policies to mitigate the rise of populism.
Closing Remarks The episode closes with a call for listeners to engage with their financial futures actively. The hosts stress the importance of personalized financial advice and encourage individuals to seek professional guidance tailored to their unique situations.
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For further discussions or insights, listeners are encouraged to contact the hosts via the provided email, and consider the sponsor services that support financial management and education.
Written by AI. May contain mistakes. Listen to the episode to check what was said.
Transcript
Automatic transcript. May contain errors.0:01You know what I love, Damo? Things that save me time. You don't have YouTube premium, mate, so I just don't believe that. Granted, I'll give you that one. However, I've got one for you. A great time saver in personal finance is Money Week magazine. They spend a lot of time distilling the biggest stories in personal finance down into consumable chunks, so you don't have to scroll and scroll. They give practical tips on savings, investments, pensions, the UK economy, the global economy. It's like your five a day, but for finance. If you want to give Money Week a try, you can get six issues in print and the app absolutely free by visiting moneyweek.com forward slash money.
0:34After your trial, you'll save an extra£5 a quarter on the subscription, which is exclusive to Making Money listeners. And that's moneyweek.com forward slash money. But there's a link in the description if you just want to click that.
0:49A pretty severe economic downturn is very likely in the US in the second half of this year. If you have a recession in the US, which is not accompanied by a recession in the rest of the world economy, that will be a huge event. Anatole Kolecki is the chief economist and co-chairman of Gabacol Dragonomics and author of Capitalism 4.0, which he wrote in the wake of the 2008 financial crisis. I do worry that it may affect Britain. We've been hamstrung, we've been paralysed by these numbers which don't actually really mean anything. Why are we imposing this on ourselves?
1:32I've got a quote from the book to start, if that's okay. From my book, Capitalism 4.0. Yeah, that's right. You said that capitalism is not a static set of institutions, but an evolutionary system that reinvents itself through crisis. What do you mean by that? What I mean is that every 40, 50 years or so, every generation or so for the last 150, 200 years, there's been some kind of massive global crisis in the system. And during the course of that crisis, people always say there's often even a majority or certainly a widespread view that, oh, the capitalist system has collapsed. What's going to come after it?
2:16Is it going to be communism or fascism or something completely different or, you know, we're all going to be living on cryptocurrencies, whatever. And in each of these crises, it turns out that the capitalist system, broadly defined, actually survives. Now, what do I mean by the capitalist system? I mean an economy where most of the decisions are made by buyers and sellers in the market, although there's always going to be 5 % or 10 % or 15 % that are politically motivated, where private property is a fundamental right. And thirdly, people interact with each other in the economic sphere on the basis of contracts of voluntary agreements rather than on the basis of slavery or conscription or purely hereditary rights.
3:22Now, if we were to find capitalism very broadly like that, it goes through crises. And we had one most recently. The reason we're talking about this was in 2008, there seemed to be a crisis. The banks were basically all bust. They wouldn't have survived. And therefore, we would all have lost our savings if it had not been for the intervention of governments. So, you know, there are all kinds of other senses in which the system collapsed. But actually, it reemerged. And with alterations, with evolutions, as I said, it has survived. Now, actually, over the last 15 years, and perhaps we'll come back to it, it hasn't survived as successfully and hasn't evolved as successfully as, frankly, I expected when I wrote this book 13 or 14 years ago.
4:06But what struck me as I wrote it was that 2008 was only the most recent of these crises that completely transformed the system. For those who aren't just about old enough to remember the 1970s, 1980s, that was a crisis on a scale way beyond anything that we've experienced in 2008. You know, unemployment of 3 million people, inflation running at 20 percent, you know, a sense that the world was really falling apart. And indeed, it did fall apart. And the system that had prevailed until then in the 50s, 60s, and 70s really did collapse and was replaced by something else, Thatcherism, Reaganomics, which was capitalism and another guise.
4:49If we go back another 50 years or so to the Great Depression, the First and Second World Wars, again, there was a complete collapse in the global relationships and in market relationships, and a new system evolved out of that, the so-called mixed economy with, you know, Keynesian economics and so on and so forth. So what I did in my book is I went back through the history of capitalism right to the late 18th century. 1776 was the date that I gave as the starting point. Why? Because two things happened in that year. Adam Smith published his book, The Wealth of Nations, which gave it a sort of capitalism and market economy and intellectual structure.
5:34And it was also the year of the American Declaration of Independence, which was the first nation, if you like, that was self-consciously not a monarchy, not an oligarchy, but a market capitalist economy. So I went back through that. And the reason I called my book Capitalism 4.0, is I said there were like three previous phases, three big transitions, the mid-19th century, the so-called year of revolutions when Marx published his Communist Manifesto in 1848. Then you had the collapse of capitalism again between 1914 and 1940, basically, with the First and Second World Wars and the Great Depression.
6:19Then you had the third great crisis, which was the great inflation from the late 60s to the early 80s. And now we were having the fourth great crisis. And in each one, a new version of the system evolved, which had very different political characteristics as well as economic characteristics, survived for 30, 40, 50 years. And then I'm a Marxist to the extent that I believe that systems create their own contradictions, and then these contradictions undermine the system. But where Marx was wrong was in believing that a completely new system would come along. What happened, you have contradictions merging, and then it evolves into a new quasi-stable system, which remains stable for 30, 40, 50 years, and then you get new contradictions.
7:08And that's what I think we're in now this fourth phase of trying to edge towards some kind of new relationship between markets and governments, between politics and economics, which will be different from the way it was from 1980 until 2000, you know, and under Thatcherism, all that until 2008, but we don't quite know what it is. you you said in um the book that one chapter of of capitalism was defined by the idea that government is always right the next which was like thatcherism was defined by the fact that the markets are always right and a characteristic of when you wrote the book was an acceptance that both can be wrong and both can be very damaging how do you think like modern economies have dealt with that realization, especially like the UK and then maybe in recently the Americans.
8:01Yeah. So the other aspect of the market is always right, which was the view of Margaret Thatcher and President Reagan was the market is always right and the government is always wrong. And Reagan famously said the most dangerous words in the English language are, I'm from the government and I'm here to help you. You're right. In his view and the Thatcherite view, it's almost by definition wrong. Similarly, in the previous period, understandably, after the experience of the 1930s and the Second World War, there was a view that the man from Whitehall knows best. That's how it was described in Britain.
8:40The government's right and the market is almost always wrong. Now, I think what we learned in 2008 was that the market makes very, very big mistakes and the government really screws things up as well. and that sounds like a very pessimistic view. In a sense it is but there's also a sort of glass half full way of looking at it which is that if the market makes mistakes and the government makes mistakes that means there is the capacity to improve. There's always the capacity to improve the functioning of markets and the capacity to improve the functioning of governments and in some way I think that's what the next 20 or 30 years have got to be about.
9:22Now your question sorry I give you these very long roundabout answers now your question is how are we doing in that in Britain and America and the answer is very very badly indeed because what we found in the 15 years or so 17 years now since the 2008 financial crisis, is the attempts to improve the political intervention in economics have broadly been unsuccessful and in many cases really quite damaging, with exceptions. So, I mean, when we went through the COVID experience, actually we found for about nine months that the enormous government intervention that followed what was perhaps the mistaken government intervention of locking everybody up.
10:17But once everybody had been locked down, it required an enormous government intervention, huge public spending, you know, handouts, you know, from the Treasury and so on in order to revive the economy. But actually, it did revive it very, very rapidly. So, I think that was a good decision, actually. You know, the massive public spending and borrowing that occurred from the summer of 2020 onwards. So there were certain correct government decisions. But broadly speaking, in Britain, we had the, what was it, 14 years of so-called Tory austerity, which immediately followed and sprang from the financial crisis.
10:58You know, George Osborne's cliche about, you know, So, Labour should have mended the roof while the sun was shining. Well, now the sun's not shining, so let's demolish the house, which was basically, you know, his attitude. And in America, there was a period of moderately successful economic recovery from 2008 under Obama. Then there was an excessive boom in the first few years of Trump, followed, obviously, you know, by the bust of COVID. and then you had the sort of inflation. Basically, governments did not function very well. We had Brexit as well in there somewhere. And you had Brexit. Oh, yeah, I didn't even mention that.
11:39So you had the political system, far from improving itself, has deteriorated further. Almost damaging to the system. And become more damaging to the economy. And, of course, we're seeing that in spectacular fashion in America with all the kind of craziness of Trump and the tariffs and so on. I think we're seeing it in a less spectacular, but in a way, equally serious or even more insidious way here in Britain, because what we've had is an election almost a year ago now, in which you had a new party coming in promising to change everything. You know, their manifesto, it just had one word on the cover of the Labour manifesto, which was change.
12:26change the day well actually the night of the election the day after I sent out a note to the clients of my consulting firm saying this is going to be a classic case where you have a promise of change but I started off with a quote from a famous Italian novel called The Leopard about the transformation of Italy from a feudal system to a kind of more advanced nation in the late 19th century. And it's this aristocrat who's writing from his own personal point of view. How am I going to preserve my wealth and my rights in Sicily when the whole world's safe? And he says, everything must change so that everything can stay the same.
13:17And that's what I said, basically, the Labour Party, Labour government represented. They claim everything's going to change, but actually everything's going to stay the same because, you know, the names of the ministers would change. But the key thing that they were sticking to, they were sticking to two key mistakes that the previous government had made for the previous decade. One was the break with Europe, which occurred as a result of Brexit, obviously, and which has fundamentally weakened the economy. And the second was these crazy fiscal rules, which they imposed on themselves and which they declared to be the sole guiding light or the dominant objective of all their economic policies was to stick to these fiscal rules, which meant that they were going to follow a policy exactly similar, not just analogous, but exactly similar to the austerity policy of George Osborne.
14:19Is it neoliberalism that you've stuck to? Yeah, and that's a really good key. So what it was, was a recognition, or at least a decision by the government here in Britain, that actually the fundamentals of the economy that had preceded 2008, the preoccupation with bond markets and debts and all that kind of thing, were going to remain and were in fact going to become the bedrock of their whole economic policy. So that's what we've had in Britain. In America, obviously, especially with Trump, we've had another aspect of that, which is, you know, another kind of fundamental principle of the 30 years from 2008 to 2000 and from 1980 till 2008 was the rich must get richer.
15:13We can't make the tax system more redistributive. And we've got to constantly put downward pressure on government spending as a way of trying to maintain some kind of budget balance rather than allowing the revenues in America. America has a revenue problem. Their revenues to the government are about 10 % lower relative to GDP than in any other advanced country. And they're completely committed to that. So that's another aspect in which the kind of fundamental economic assumptions that preceded 2008 have not been revised, either in America or in Britain, or for that matter, in Europe, until very recently.
16:01Very recently, I'm very encouraged by this, in March this year, the Germans abolished their so-called debt break, which was imposing on Germany and the rest of Europe. Sorry, what is a debt break? Okay, I'll come. But let me say why it's important, which imposed on the rest of Europe the same kind of fiscal rules and austerity requirements that we've had in Britain since 2010. And the debt break was simply a law, and not just a law, but a constitutional amendment that the Germans had imposed on themselves, that the government can never borrow more than a certain percentage of GDP. And regardless how much the economy weakens, if the economy weakens and the government revenues go down, the response to that is you've got to raise more taxes and therefore make the economy even weaker.
17:04So another consequence of all these fiscal rules that they had in Europe and we still have in Britain is that you have almost like a contract between the government and the voters and the population. The contract is we're going to do our best to make the economy work. But if anything goes wrong with the economy, and we find that growth is weaker, therefore we're collecting less revenue, we, the government, guarantee that if anything goes wrong, we will make it even worse for you by raising taxes, cutting your benefits, cutting spending, and therefore going into a downward spiral, instead of doing what Keynesian economics said should be done and what happened, you know, from the 1940s, certainly until the 1980s.
17:51And in America, it has still continued, which is if the economy gets weaker, the government spends a bit more money on unemployment benefits, but also on other things. The government collects less taxes because the economy is weaker. And therefore, you create what's called an automatic stabilizer, which reduces the ups and downs of the economy. That's how it's supposed to work. But in Britain and Europe over the last 20 years, we've had the opposite of an automatic stabilizer. We've had government policies, so-called demand management policies, which, as I say, guarantee that if anything goes wrong, we, the government, will make it even worse.
18:34Now, that, I think, is now reversing Europe. in Britain, we still have a chancellor who is 100 % committed to that, and a prime minister who I'd say is 90 % committed to that. That 10 % is crucial. I'm pretty sure the chancellor will be fired within the next nine to 12 months. And we will have a fiscal U-turn, similar to the one that's going on in Germany at the moment. But until we do, I'm very nervous about economic conditions. Sucking your chancellor, though, is normally not a good sign for the guy to go lay at the person in charge either, is it? Well, but not in the long run. No, no. I think changing economic policy is something, well, again, it has to happen.
19:24Changing really sort of deep down, deep root fundamental economic policy is something that's normally a bad sign because it means, you know, the government's gone wrong. But every 30 or 40 years, you have to have a massive change in economic policy of the kind that we're described. Now, in Britain, actually, you know, that happened most recently. You know, the time before was when Thatcher came in, as I said, in 1979, 80. But most recently, it happened in 1992, when we had this incident, which is so-called Black Wednesday incident, when the pound was suddenly had to devalue dramatically against the dollar, sorry, against the Deutsche Mark.
20:08Until that point, that was a Tory government at that point, that was Prime Minister John Major, his chancellor was Norman Lamont. They had built their entire economic policy, rather than the way that Rachel Reeves and Keir Starmer have around this fiscal rule, they built their entire economic policy around another arbitrary number, which was 295 exchange rate between the pound and the Deutschmark, which preceded the euro. The Deutschmark doesn't exist anymore, but it's part of the euro. And they said, we will do whatever it takes to ensure that the pound always trades within a 6 % margin of 295 against the Deutsche Mark.
20:52And that meant putting the economy through enormous ringer, raising interest rates, not to 3 % or 5%, but to 15 % to keep up with what was then a booming German economy after German unification and so on and so forth. And they basically crushed the economy. Despite that, they still won election in early 1902 because the Labour Party was disorganized for various ways. But within six months of that election, they had to abandon the policy. Because if you tie everything the government is doing to one number, which by definition the government can't control, then sooner or later you run into a brick wall.
21:35John Major fired the Chancellor who incidentally was always against this policy Norman Lamont but nevertheless you have to have a scapegoat and actually then he lost the next general election but that was four and a half years later but that so called Black Wednesday which I was writing for the Times in those days I immediately said the next day this is not Black Wednesday this is White Wednesday this is the point at which actually the British economy after a three year slump is going to enjoy a very strong revival, interest rates will come down. And actually, you had a boom in the British economy starting from early 93.
22:14I think something similar could happen if we have a U-turn in government policy in Britain on the fiscal rules, number one, but also on the relationship with Europe. And I expect something of that kind will happen next year. last time we recorded to me and you were having some real dramas with your accountant so how's that been going mate they're sacked so drama sorted um they're a big corporate firm um they didn't really reply to my emails very quickly like took a week or two at times um and they charged me way too much i mean i've got pretty simple taxes and yeah they were charging me thousands they saved me some money but yeah um i had to move on slow and expensive pretty much yeah this is one of the reasons that we're really happy to be partnering with tax app it's a tech platform that makes self-assessment simple.
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24:57That's vanta.com forward slash making money. There's a link in the description though, so you can just click that. But do you think that the modern politicians are still stuck in 3.0? Yes. And they're being dragged into 4.0 now. Exactly. Yeah, exactly. It's the modern politics, and I think economic theory is still stuck in a view that, in the neoliberal view, basically. Even the progressive alternatives to the economics that dominated from the mid-1970s until the 2008 crisis still have these, you know, certain, you know, taboos or certain totems, you know, independent central banking. I'm not saying independent central banking is a bad thing, but it's not actually a necessary or sufficient condition, in my view, for stability.
26:04You know, they have these ideas of debt to GDP ratios for the public sector of 60 % of GDP. Why is it 60 %? Because there was a study that was done, you know, about 20 years ago, which looked mostly at developing countries, not even advanced countries, and said when they get above 60%, there tends to be a crisis. But there's no real reason. So there's that. And on the other hand, there's the view that ultimately any kind of tampering with the price mechanism or intervention in the market is maybe necessary for political or social reasons, but it's going to make the system less efficient. more.
26:47And that's simply not true. There are certain interventions that may make the system more efficient. If you had a properly structured rebuilding of the energy system, particularly the electricity system, ultimately electricity should become cheaper rather than because, you know, the cost of solar and wind power is literally zero once it's actually installed. But in order to get there, you may need quite big sort of short-term market distortions to not just to encourage the investment that's required, but even to make it possible. So, this idea that the financial markets are always right, that the bond market can somehow predict whether inflation is going up or whether there's going to be a recession, it's just not the case.
27:41But that's what most economists still believe, the so-called theory of rational expectations, which is that all the knowledge that is out there is by definition somehow incorporated in what the market is doing because the market consists of millions of intelligent people who are putting their money where their mouth is. And therefore, the market always has a better and clearer view of the future than anybody else. That's right a lot of the time, but sometimes it's very seriously wrong, which is exactly what happened in 2008. Even recently, the amount of times I've heard people on CNBC going, the yield curve is inverted or whatever, and the world keeps spinning.
28:22Yeah, exactly. So you do get this kind of, they lean on, or in markets, I think the audience can understand, people lean on the Shiller-Cape ratio and say, the American market is overvalued, but they've been hammering that nail for well over a decade. And if you'd listened, you miss out on all this growth. Yeah, yeah. This might seem like a really stupid question, but why are people like Rachel Reeves holding on to these past ideologies? Well, you know, I think my short answer is I don't know. And I think, well, I know why the Tories were holding on to it, because I think they made a mistake way back in 2010 when George Osborne took over.
29:11I think he was actually wrong to panic as much as he did about the consequences of the financial crisis for government spending and borrowing and all that kind of thing. And I said it to him at the time, actually, and I think that was wrong. But having done that, you know, they were committed to a policy. And, you know, after 10 years, it made it very difficult for them to say, well, that was all wrong, you know. To some extent, that's what Brexit did. But, you know, we might go back to discuss what that was about. But for the Labour government to, you know, embrace this and you're a swallowed whole cell, I think was a mistake.
29:56I think probably the main reason they did it was simply because they thought they were going to win the election anyway on the base of polls. So actually, although they were promising change, the less they promised any specific change, the safer they felt. Because if they promised any specific policy that was different from the Tories, they could be subject to criticism. They were going to win the election anyway. So the easiest thing to do was we're actually not going to change anything dramatic. But the other reason is that, as we were saying earlier, the economics profession, both academically and in government and so on, hasn't actually come up with a new way, a constructive new way of thinking about how you run a mixed economy as opposed to a very, an excessively market-dominated economy, which failed 30 years ago.
31:06And frankly, there is a need for another Keynes or another, if you like, Milton Friedman. And nobody has come forward that I know of. And certainly I'm not claiming to be clever enough to, you know, have the new blueprint. But I think a new blueprint of some kind will be required for politics, for politicians to latch onto it. It needs to be wrapped in a way as well that's marketable. Yeah. And that's the other point that I've been making. And, you know, I'm planning to write a sort of sequel to my book of 13 years ago, which I'm working on now, except there's so many crazy things going on, constantly changing the world that it's hard to get started.
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31:56But I think you need a narrative. You need a story about, you know, which is convincing to ordinary people, which isn't some kind of academic, you know, formula about, you know, what it was that went wrong and how we are going to improve and how we change it. And, you know, in the 1980s, it was the government's got too big and the trade unions have got too powerful. And we've got to do something about inflation and so on. And, you know, obviously, in the 1930s and 40s was there was a Great Depression and there were wars and things. We need to do something about unemployment. There needs to be a narrative.
32:32And I think that's the other thing. There's been a complete lack of narrative from oppositions as well as governments. And, you know, this idea that there is no alternative. You know, that was one of Margaret Thatcher's favorite catchphrases, was so-called Tina, the Tina economy, there is no alternative. Therefore, you've got to accept what I'm doing because there's no alternative. Well, we need politicians who come along and say, well, there is an alternative and here it is. And nobody's come up with a convincing narrative alternative. You think that's why populism is rising? Yes, absolutely.
33:10Because immigration and tax the rich are narratives. Yes, exactly. And people can go, well, maybe that is why life feels crap. And so populism is arising, I think, all over the world, because there are a few simple claims that you can make about, oh, this thing will change. In the case of Brexit, we'll leave the EU and then there'll be money growing on trees to fund the health service. We'll make us richer. You can make these claims. or now if we stop immigration and suddenly everybody's wages will go up, which of course they won't, but that's also an easy story to convey. Or tax rich, you know, we will fund schools, hospitals, roads by getting rid of the non-DOM, you know, the non-DOM rules.
34:04I mean, literally, in the last election, our government spent that non-DOM money about five times over on everything, on schools, on hospitals. And now it turns out there isn't even any non-DOM money. So, yeah. And on the other side, I think part of this, there is no alternative, is that the established parties, but certainly the governments, but also the kind of respectable central oppositions have also been saying, actually, there isn't an alternative. You know, you can go from a Tory government to a Labour government, but actually the key policies will not change. You know, in Germany, the populist party is literally called the Alternative for Germany, AFD, Alternative for Deutschland, because they're saying all these other parties are saying there's no alternative.
34:56You've got to stick with us. And we at least are giving you a different story. Reform is such great. And the reform is doing the same. Everyone's like, we want something different. And we're not getting it anywhere. And I think we're really, and in Europe, they're spectacularly playing into the hands of these people, but to some extent even in Britain, because in Europe they're literally saying, and we are going to outlaw these parties. So there's a party that calls itself Alternative for Deutschland and all the other parties say, well, the one thing we can agree is that we'll never work with them on anything.
35:27And it's irresponsible to vote for them. And to some extent, I think we're doing that even here in Britain with reform. The Democrats did that with Trump. They said, this guy's a lunatic. You know, anybody who votes for him, you must be crazy. And people actually say, well, I do want an alternative and therefore I'm going to go for the. And so I think that is also part of the charm of the attraction of Nigel Farage and reform. the very fact that everybody else treats him as a pariah actually strengthens him. I watched your video with Wolfgang. Oh, yeah. One of my favourite names in the world, Wolfgang.
36:08Imagine that, Wolfgang. Great name. And you were talking about Brexit, and I don't know which of you said it, but you said that Brexit was kind of like the farce. It was kind of the test run, and now is the real deal. I think it was Wolfgang who said that when you say Brexit was a test run for Trump. Yes, the test wrong for Trump. Exactly, because Britain's not important. You do a little experiment on Britain and then you see how that goes. He introduced Farage to Cambridge Analytica, supposedly. Exactly. So I was going to say, in that sense, it was literally true that they used these online, these AI or computerized sort of voting analyses for the first time in Brexit.
36:50Cambridge Analytica was this company that did it. But they downloaded, they harvested huge amounts of information, probably or possibly illegally from Facebook, from sending out sort of various quizzes and things on Facebook to find out what people felt. And then they would target their messages. And that worked very well in Brexit. And then Trump, six months later, did the same thing. I think the dynamic of getting Trump elected the second time was actually quite different. But yes, there was definitely a link to that. And of course, Trump is much more important for the world than anything that's happening to Britain.
37:38But I would say that it's quite possible that for the country concerned, namely Britain versus America, Brexit is a bigger deal than Trump. because Brexit is not just a change of an individual which could be reversed after four years or eight years. Brexit completely reordered and to a large extent demolished the way that not just the economy, but the society, the country had worked for the previous 40 years. and it's irreversible. It can't be reversed. What Trump is doing to America that could be more fundamental even than that, but probably isn't, is he could be dismantling the whole democratic system of law and who knows whether he'll try and run for election again or just say, you know, I was elected for eight years rather than four years.
38:43But I think that's very unlikely to happen. Yeah, so in this interview that you did with Wolfgang, you could get coming back to a point saying that you think there's this long term question mark about global trade and Trump and all of this, but immediately you think there's this really pressing issue of how do we make sure that we don't slump into like a global depression off the back of the tax rises that are going to hit the American consumers and the tariffs. And do you think, because this was a month ago, and a month a lot happens nowadays, it seems, do you still think that that is the most pressing issue or?
39:15Well, the way I've come up with trying to think about what's going on, partly because there's so much new information or noise coming out from America, but also because I spend my time talking to financial institutions. So I've spent the last six weeks literally talking to hundreds of people very involved in economic management and and financial markets and so on, I think is to look at it through three different timescales. Very short term, what's happening from week to week, month to month. Medium term, what's the outlook for the next year or so? And then long term, you know, and the big long term question, which is the most interesting one, people, is what Trump doing really going to end the period of so-called American exceptionalism, where America has dominated the world, not just militarily, but in technology, in finance, in culture, in science, in everything.
40:23Could this be the end of American exceptionalism? And people are asking that. And actually, that's already been reflected to some extent in market movements. You know, the dollar's gone down against every currency in the world. The US stock market for the first time in 15 years has underperformed European markets, Chinese markets, emerging markets, and so on. And people are, to some extent, pulling their money out of America over the last three months. Now, the way I look at it is this, that in the short term, I think so much of what's coming out is just noise, because they make an announcement one day.
40:58We have no idea whether the tariffs will stay at 10 % or 20 % or 30%. And every time the White House makes an announcement, the market moves in that direction. But I don't think you can trust any of these moves. And unless you're a kind of very lucky or very skillful day trader, or you have inside information, which Trump's family do and the people around him do, I think it's very dangerous to trade on that basis. So let's leave the short-term side. Long-term, we don't know whether this will really be the end of American dominance. And actually, we won't know until the next decade. Until Trump's gone.
41:47Because these are, until Trump's gone. And even if Trump continues the way he has and damages your American science or universities or undermines the confidence of foreign holders of the dollar because of sanctions and things like that. We still don't know whether that will be a permanent effect or not for another five, 10 years. But what I think we, I feel pretty confident of is this, that the sentiment in financial markets and in the world as a whole about whether America is losing its dominance or not, will be very, very strongly influenced or determined by what happens in the next six to nine months.
42:30So if you have in the next six to 12 months a recession in the US, which means not just two quarters of negative GDP, which is one definition, but a big increase in unemployment in the sense that the American economy is really in a bad state. If you have that, then that will definitely intensify the questioning of long-term American dominance and whether people should have as much of their money in dollars and so on. On top of that, if you have a recession in the US, which is not accompanied by a recession in the rest of the world economy, that will be a huge event, because this will be the first time in 30 years, arguably even in 50 years, that you have a reversal of the old cliche.
43:21The cliche was always, when America sneezes, the rest of the world gets pneumonia. And that's been basically true for the last 30 years. It was spectacularly true in 2008 with a big financial crisis, which started in America, but it ended up doing much more damage to Europe and to most emerging markets than it did to the US. It was true even with 2020 and COVID, everybody locked down, but America recovered very quickly, whereas Britain still hasn't fully recovered. So the cliche has been every time there's a downturn in the world economy, it's always much worse in Europe and usually worse in emerging economies and in China.
44:08This time around, I think there's a pretty high probability that there will be a downturn in the US, and it won't be even accompanied by a downturn in the rest of the world. And if that happened, it will have a big effect on the sentiment about the long-term outlook as well. Now, the reason I think that will happen is pretty simple, because the tariffs are attacks on American consumers. They're not attacks on British or European or Chinese consumers. And the uncertainty about, you know, are the tariffs going up? Are they going down? Where are they? Again, it affects American business, American employment much more than employment anywhere else.
44:50So I think for those two reasons, a recession or at least a pretty severe economic downturn is very likely in the US in the second half of this year. But it doesn't need to afflict the rest of the world. And this is where we come back to, you know, the policies in the rest of the world. I don't think it will affect Europe because Europe is already switching to a more proactive, you know, government spending tax cut kind of approach. I don't think it will affect China because China is doing that. I do worry that it may affect Britain because Britain is the one country where, as I said, there's still this contract with the voters saying, well, you know, if we're hit by a shock for America, we'll have to tighten the belts even further.
45:39And that will make things worse. And that's why I think that's where we're going for the next six months. But I think in nine months' time, there'll have to be a U-turn. You said earlier that you think the Chancellor will be fired in the next nine to 12 months. Could you explain a bit why? Well, because I think that the next year or so will be a period in the world economy, which will be quite unusual. The American economy is weakening. Maybe the world as a whole is weakening. But meanwhile, Europe will actually do better than expected as a result of the changes they've made. People in Britain will say, well, Europe's doing better.
46:21Germany's doing better. but Britain is actually doing worse. Now Britain will do worse because it is the one country that is now left, that sort of last man standing, that still believes in this sort of austerity oriented, when there's a shock, we will make it worse kind of policy. And in six or nine months time, if I turn out to be right, that the UK economy ends up being the weakest economy, not in the world, but in Europe, being dragged down by the potential recession, I think, in the US, people really start asking, including in the government, what is it that we should have done differently?
47:05And one way or another, all these answers will converge on we've been hamstrung, we've been paralyzed by these numbers, which don't actually really mean anything, and which are completely outside our control about, you know, the forecasts that the Treasury and the OBR are making about what the borrowing level will be four years from now. And incidentally, all the people who make these forecasts, they agree and they say this publicly, we have no idea whether these forecasts are actually right. And there is no way of knowing, but we just have to come up with a number because that's what the government says.
47:45They change them all the time. They change them all the time but they change them for the worse if the economy is getting weaker. So I think we'll have a kind of convergence of opinion from the media. The media already constantly whenever they talk about these fiscal rules they always add the adjective self-imposed fiscal rules. Ah, fiscal rules. Herf, self-imposed. And people will say why are we imposing this on ourselves? in order to get rid of them they will have to change the personalities and i think that's why i'm convinced that in the same way that in 1992 norman lamont had to resign in order to ensure the survival of john major's conservative government uh they will need a scapegoat and will be the chancellor i was just thinking do you think austerity is like a british thing like do you think we just we're like very comfortable with austerity just like from our general culture probably like you know a bit more refined a bit more like you know yeah sorry americans but like yeah do you think it's just a bit more natural for us oh it's getting a bit risky let's just tighten our doge felt a bit like that and i was like this sounds like austerity they're like we're gonna elon's gonna cut it's gonna be great and i was like this feels a bit like yeah but look at doge and it lasted for about three weeks you know as opposed to three No, no, I think that's a very good point because it's, yeah, there is a sense that somehow it's popular, or at least it's easy to convince the voters that they really need to take some nasty medicine in Britain.
49:16I think it's easier to do that in Britain than it is in America or in France, where they all go on strike and riot, or in Italy. I think the other countries that are like that are Germany, after the war at least, and Japan. So, yes, I think there are certain countries which have this self-denial kind of instinct that you make yourself stronger by going on a diet and belt tightening. And America is clearly in the opposite camp. And I think that's, at the moment, I think that's a mistake for Britain to be in that camp. But if we look at government spending as a percentage of GDP, we feel like we've been through these dramatic cuts, but then government spending is 45 % of GDP, I believe.
50:12One of the highest rates since, I don't know the actual figures, but it feels like we've been through austerity and the government's bigger than it's ever really been. So what is going on there? Yeah. Well, so the part of the story, I think, and this goes back to kind of perhaps needing why I think you need to rethink the whole relationship between how economies work and government and so on. I think part of the story is that as countries get richer and more economically advanced, it's almost inevitable that the services that governments provide become a larger and larger share of all the economic activity.
51:04At least if we stick to a model, and I think this may be a question, where health services, education services, pensions are largely provided by government. Because if you think about, you know, as an economy advances and society, the amount of money that people have to spend on the basics of survival, on food, on clothes, on, you know, material equipment goes down. And there is more and more available for services and, in a sense, for kind of luxuries. Because even health care is a luxury. I mean, we think about it as a necessity. But, you know, keeping people alive like me who are over 70 for another 20 or 30 years is an unprecedented luxury in human history, right?
52:03So if we have a social structure which says, and healthcare is actually the biggest, fastest growing part of government spending all over the world, that healthcare is going to be provided by the government through the NHS or in Europe through some kind of government-backed insurance system, then it's inevitable that government spending will go up for that reason. And the other reason, of course, is because of demographics. You know, we've got a higher and higher share of the population who are old. And unfortunately, people like you seem to be having fewer and fewer kids. So we have... It's so expensive.
52:43Yeah, well, yes. This guy's pumping around. No, sir. To some extent, it is a vicious circle. It's a self-fulfilling prophecy. So we do have higher government spending than ever before, but that's not surprising. And in order to have, and this goes back to the point I was making earlier, that if you want to have those government services, your healthcare, your education, to the extent that you do have young people, it's appropriate that as a society gets richer, they should spend more time at school and more at university. We now have an assumption that at least half or probably more than half of the population goes on to higher education of some kind.
53:25When I was young, it was as little as 15%. I mean, this has tripled or quadrupled. Now, therefore, if government's providing that, it's going to mean more and more spending. You've got to raise the money for that. And therefore, you have to think again about the tax system. Should it be raising more money? Now, in Britain, there's a very widely quoted statistic, which is that the level of taxes, of government revenues relative to GDP is also at its highest since the late 1940s or the immediate post-war period. That's also true. But as you said, actually, government spending is even more at its highest.
54:07So there is a gap. A point that is very, very rarely mentioned, but there was an excellent piece in the Sunday Times about this about a month ago, just going through the numbers, is that while the level of overall taxes relative to GDP is higher than it's been for 50 or 60 years in Britain, the amount of income tax the national insurers paid by the average worker, a worker on average wages, either mean wages or median wages, is actually at its lowest level for about 20 years. So actually what's happened is that the overall tax take has gone up, but the amount that is paid by the average worker because the standard rate of tax has gone down.
54:50I mean, you know, back in the 90s, even, I think the standard rate of tax was over 30%. It's now down to 20%. Standard rate of tax has gone down. The VAT has not gone up for whatever it is, 20 years. So the amount of tax actually paid by the general public is not at a record by any means. Is that nominal terms? Does that account for fiscal drag? You know, like the prison of the tax funds, even accounting for fiscal drag? Yeah. I mean, this is – see, what fiscal drag does – why didn't you ring this thing? I was going to – you guys just kept on saying it, so I didn't want to interrupt the flow of the fiscal drag.
55:31What fiscal drag is, it's the way that inflation, because it raises people's wages as well as prices, so in real terms, they may not be better off, they get into a higher tax bracket. So fiscal drag is exactly what has caused the tax system to become much more progressive, as it's called, or redistributive in the sense that there are now far more people paying the high rate of tax of 40 % and even 45 % than there ever were before. But that's still well above what the average worker is getting on either mean or - 37K is the median. Exactly. But I also know that there's a lot of jobs out there that in the past, so I'm not here to call you old, but when you were younger, how many nurses would have been higher rate taxpayers?
56:26Probably none. Exactly none. And now there's a lot. And that's the fiscal drag. Yeah. And the fiscal drag has pushed those people up. And what used to be working class jobs are now higher rate tax positions. And I don't know if those people are better off. No, no, no, no, no, no, they're not. So they're paying higher taxes. So exactly. And they're normal people. They're normal people. When we go to the average, you think, oh, the average person. But doctors, nurses, you know, binmen, I don't know that. There's people in higher rate tax positions that in the past it would have been like, that's not a higher rate job.
56:58Yes, so they're normal people, and the structure of the way the tax system was gradually transformed, mostly actually bizarrely under the Tories in the last 15 years, but then has been very much retained in the last year by the Labour government, is that the additional taxes that are going to be raised over the next four or five years in order to meet or supposedly to meet these so-called fiscal rules, the system will raise more and more money from exactly those people you're talking about. Through the process of fiscal drag, there'll be more and more people moving from a 20 % income tax rate to a 40%, in some cases even to a 45 % tax rate, and that's going to raise more taxes.
57:54But another point that I think is worth considering about how you basically, as it's called, broaden the tax. Should you raise more taxes by increasing the tax rates or by broadening the tax base, as it's called, the base of people. Now, another advantage of applying taxes to the broadest possible tax base is that then you only have to have a small increase in the rate, in the amount. So just increasing the standard rate of income tax by 1 % or 2 % would raise more money than increasing the upper rate by 5%. And many people, and I think this is where I think there's a real you're a failure of imagination and coming up with a narrative, you know, especially for a left of center, progressive government.
58:50I think many people, if you had a new government say to them, look, we really want to have a much better health system. We want to increase our health spending substantially, not just to pay doctors a decent wage, but to buy more machines and so on. In order for that to happen, we're going to ask everybody to pay 1 % more in income tax, or maybe 2 % more in income tax, or maybe that will be specifically allocated to health spending. I think that would be actually a very popular policy because for most people, an extra one or two. If you, on the other hand, you say to the rich people, we're going to get you to pay an extra 10%, then that'll be popular with the voters who don't pay it.
59:33But they'll reorganize their affairs in such a way that you won't really raise a lot of money. I think what people will say is, show me where you're spending the money that you already get. You know, where's that going? Because it feels to me like the messaging has always been the NHS needs more money and it seems to get worse. You know, the quality of the service has dropped. The total spend has gone up. Now, maybe in inflation adjusted terms, not so much. And I know COVID put a lot of pressure. But I think there's very little accountability on where the money's going. Actually, that is a great point.
1:00:04And that is, I think, a chicken neck problem which you've pinpointed and which relates to what I was talking about earlier about fiscal rules, which sounds sort of very abstract and theoretical and so on, but actually is a good way of thinking about it. I think possibly the worst defect of having these fiscal rules which say we have a very strict limit on the borrowing that we can do in the short term in the next few years is that it makes it impossible to answer the question. Because the way, in my view, the sensible way to answer that question would be to say, OK, yes, right. We will spend the next two years or three years really improving the health service by spending more money.
1:00:53If we improve it and by borrowing more money, if we improve it sufficiently, we'll then turn around to you as a taxpayer and say, hey, look, now we've improved it. We've eliminated the waiting lists and so on. this is what we're asking you to pay one or two percent no way no fee and i think people would people like build it first like if they put improve the train if they put the internet on the train that's right and then they said you've got to pay an extra 10p to get on the train i'll pay it yeah so i sit on those trains with no internet or do you know i mean like that's a good thing i do think yeah look what we've done yeah it's cost money and you know we've borrowed to do it but this is the fiscal rule thing and this is where i want to end yep your your whole take is really that we're stuck politically in the system of old.
1:01:38We need to evolve. And the one thing that the UK should do is abandon its fiscal rules and probably borrow some money and invest in infrastructure and investment. Well, so they should invest in infrastructure, but again, of a kind that will start delivering results immediately or soon, not pie in the sky about we're going to build an airport in 10 years' time. Good internet. Give good internet connection to the whole country. You make the railways run better. Sheep run faster. There are some road-building programs, and they were actually all ready to go. They were about to be built. But the first thing the Labour government did, you may remember, was they announced in the first week there were about 350 million, that's not a huge amount, of various programs, road building, the extension of Northern Rail and so on, which the Tories said were ready to go.
1:02:42And they said, we're going to stop that. Now, these are all things that would have happened. They would already be under construction now. And they would be delivering results in three years' time. Instead, they've stopped all the short-term investment and said, we'll do it. So investment is one thing. But I think also the concept of investment is, in a sense, overrated in this respect. And that there are a lot of things that you can spend money on which are not investment, which actually are more important for improving the productivity and the long-term potential of the economy. And so, for example, education, you know, education is clearly an investment and is clearly an investment that will ultimately generate both economic growth and government revenues in the future in a way that actually building hospitals doesn't.
1:03:41Building hospitals generates costs. I mean, it may improve health. So they should be spending more money even on current spending, so-called day-to-day spending. The distinction between investment and day-to-day spending is drawn in the wrong place. What it should be is a distinction between spending that will actually make the economy more efficient in an identifiable way and create more revenues and spending that is sort of nice to have. So yes, they should be spending more on that. They should be doing more to make, and this goes back to you earlier, doing more to basically make life in the country tangibly and evidently better.
1:04:29And then I think they could come back and say, and we need to pay money for that. We can't just put it on the never, never, forever. We can do it for a few years. Now we've delivered some results and we need to raise some money from taxpayers. And I think that would be a deal that the nation could buy into.
1:04:54Do you know what the most common email I get is? Where should I put my money? What should I invest in? Basically, what I get is, I love all your content. I know it's amazing. I don't want advice, but... And then they basically ask for, what they want me to do is just to look at their portfolio and go, yeah, that's okay, or you're doing the right thing. You're doing the right, yeah. I can't do that because it would be construed as advice or guidance. And I don't think it's right for me to do that. But I appreciate that there's lots of people out there that really just want a sense check. You just want some reassurance.
1:05:28Exactly. They just want someone to look over it and go, yeah, you're doing the right thing. Yeah. And I don't think, no matter how many times they watch a video that says exactly what they're doing is probably the right thing, it's not good enough. Yeah. So we do offer a service where we give you the ability to speak to a qualified financial advisor and get some guidance. Just get that sense check and have a look over your portfolio or whatever other questions you have about your personal finances and just say, yes, that's right. Or no, you really got the wrong idea there, mate. You should start again.
1:06:00You've got Mr. Personal Finance 2.0 basically just helping you, holding your hand, giving you some reassurance. I mean, if people email me saying, do you want to hold my hand, they'll get a reply then. I'm quick on those ones, mate. That's how you want to say it. Send a picture. Yeah, yeah. The link is below in the description. Please remember, this is not financial advice. Like we say a lot on the podcast, investments can fall and rise. In fact, it's pretty much a guarantee. Past performance is no guarantee of future results. So your money is at risk with investing and other fees may apply. As with everything financial, please do your own research.
1:06:34We really encourage that because no one cares more about your money than you. I'm Damo I'm T This was an episode of Making Money from Our Company Most It was filmed and edited by the team at Flowspire, Jack and Ben It was produced by Ruth Edwards And brought together by Will Stollerman What about Ruth and Toothless a Dog? Yeah, shout out them too
From the publisher
What’s really going on with the global economy? Is the U.S. heading for a recession — and could the UK be among the worst hit? Anatole Kaletsky, Chief Economist at Gavekal and author of Capitalism 4.0, argues that both the U.S. and UK are stuck in outdated, pre-2008 economic thinking. He warns of a U.S. recession before year-end, a potential fiscal crisis in the UK, and a major shift in global economic power.
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