Top economist: The next global crash is inevitable

28:47And also to support people as well. We all know how it feels like when, you know, your mortgage is coming up and, you know, if you're unable to borrow because of a credit crunch, that obviously impacts, you know, people's wealth. And so those are the things to really focus on, supporting viable businesses and households. The challenge is working out who's viable. So you probably see, you know, lots of companies get supported, which maybe shouldn't happen. In Japan, zombie firms resulted. And so there's always going to be imperfect application, I think, on that. A zombie firm is that? Cool name.

29:27Hit the button. Oh, yeah. What is a zombie firm? A firm ran by the undead? Or is it like a ghost company? Like, how does a zombie firm work? Yeah, so you mentioned ghost companies. So actually, we call them zombie firms. In the literature, because, you know, they're short of undead. They keep going because you just give them cheap money, but they're actually not viable businesses. They shouldn't be alive, but they're still limping along kind of thing. Yeah, kind of like zombies. They should be dead, but they're somehow alive. Somehow they're still there. And that is a massive issue for, that was a massive issue for Japan, because if you had all the support of zombie firms, how would the banking sector ever really recover?

30:14Because now they're lending to companies which - They stay afloat, but they're not really generating a lot of revenue. Exactly, exactly. Then you become stagnant, which is actually the last decades of growth. I think I gathered that like there's a, I'm just going to guess, like there's a crash every eight to 10 years or something like that. Like every decade. Probably more common than that. I mean, a big one. A crash in the stock market. No, no, no. like a major, like a great crush. Yeah, because there's a big difference between the stock market taking a day and the economy. No, I'm talking like big, big, big crushes like every 10 years.

30:45Why do, like we talk a lot about policies and why are the banks, I'm just thinking like a normal person, why do the banks get to get away with this like every time, like they get bailed out this time, they screw the world, global economy another time, they mess up a country another time. How come there isn't just a lot? I heard about, you said about like leaning into the wind, but why isn't there stronger policies to say, okay, let's not let this happen again and if it does it won't be nearly as bad why is the policy why the policy is not a bit stronger on them yeah i mean it's um so i was just thinking your point about frequency so of the 10 great crashes i write about half of them happened in the century i mean now that's depressing so um crashier yeah and um you know and um it's in fact um you know people tell me they feel like they're the crisis generation because they've only ever known crisis crises so you know gen zed you start with uh the dot-com bubble you probably don't remember that if you're gen zed but you know what you don't want getting the millennials do exactly i know nothing but crashes exactly right and then you have you know so then uh so that's the recession in 2001 graduated at the global financial crisis yeah and then i graduated again in COVID, my second graduation in COVID.

32:02And then there's a cost of living crisis, which is what I write about in the book as well. So it does seem like we have a lot of crashes, unfortunately. And interestingly, we've had a lot of crashes since about the early 1980s, not really before. The 50s and 60s were known as the golden era of growth because you didn't actually have great crashes. So why is that? So in the book, I write about the fact that financial markets were not international. They weren't as developed. And then the 21st century, the transmission of loss of confidence is just faster. And also, it's not been a good century in terms of crashes anyways, like we've been saying, just lots of different factors.

32:46So sometimes it's banks, sometimes it's financial markets. So the stock exchange, we talked about the dot-com bubble. Sometimes it's currencies. So this is the exchange rate crashes in emerging markets, in Europe. And so there's a lot of different kinds of causes of crashes. So, you know, we said at the very beginning, you can try and regulate. You can try and lean against the wind. You can try and deflate bubbles. You can try and put in more regulatory requirements. But let's just take it to today. So what is the biggest risk now? Well, a lot of central bankers say it's shadow banks. So we're essentially right back to, well, hang on, now that you've put more.

33:36Sorry, I've got to ask, what's a shadow bank? Yeah, so I was just about to define it. Before you get to the definition, I just like to hit the button whenever I can. So I was like, let me not miss this moment. So shadow banks, you know, we started to hear about them after 2008 because it's like, wait, hang on. You know, private equity. So these are firms that are lending money using private money. So in other words, pension funds give them money they invested. They branched out into lending. So it's called private credit. So now you've got lending from banks without a banking license, in a sense.

34:18Or you borrow money, it's your lender, your bank. but you don't have a banking license. So if you don't have a banking license, who regulates you? Generally, you're regulated generally, but not specifically. And so this is a great example of how, this is why I sort of did a little history. Until you had this growth of the financial sector, you just didn't have this many crashes. Now, a lot of, you know, the debates here are always very interesting, especially now where the UK is talking about increasing competitiveness, Because if you have lots of startups that need cash, if you want to be in the technology sector, which requires a lot of, I mean, if you want to build a battery for electric vehicles, we're talking billions.

35:06We're not talking millions. We're talking billions. So where does this money come from? And so one argument is if you do not have a transparent way of looking at all the different bits of lending in the financial sector, you could actually dampen growth by, for instance, this is the UK debate. Why is it that we don't seem to be able to produce any major tech companies the way the US does? We're just as prone to crises, by the way. You know, so there is, I think there is, you know, but I think to me, the main thing is we always regulate for the last crisis. And so when you look at the next one, the shadow banks, half of the lending in the world right now comes from shadow banks.

35:56Wow. So we'll use China as an example because the crash is happening now. So a lot of people look at China's property crash and it is very worrying, obviously. You know, biggest property companies in China are among the biggest companies in the world, which are leveraged. So as property prices crash, Chinese people don't borrow a lot to buy their homes. Actually, their mortgages are pretty small. They save money. But the property developers borrow a lot of money. But they don't borrow it from the state-owned banks because the state-owned banks are state-owned and pretty cautious, actually. They have lots of other problems.

36:38But, you know, so where do they borrow it from? They borrow from the shadow banking sector. So they just borrow it from other sources of money. Could be, you know, any source of private credit outside of the banking sector. It's not all loan sharks. It always sounds of a shady shadow banks. Sounds like something out of Harry Potter or something like out of a mob film. Yeah, shadow banks. So because we have so little information, you don't actually really know, which is actually the problem. And so therefore, you know you have these big indebted property companies, Evergrande, greatly in the news, pretty much defaulted on people who lend money to it.

37:20It's borrowing from somebody within China, and it's the shadow bank. So if the property sector continues to struggle, then the shadow banks could fail in the same way that a regular bank could fail. You lend too much money, you're not getting paid back, you could fail. Who else have they lent to? Well, one example is one province in China on the East Coast, very entrepreneurial. Half the companies there borrow from shadow banks. So if the shadow banks go under, those companies can't operate because they've now lost their access to credit. And then these are the people who would be losing money and therefore could crash the economy.

38:01so I think there is quite a big risk that is actually what's happening in China it's just that you know we never hear about it so but it's an example 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 whether you're self-employed like me a freelancer or a director like demo big dog instead of sending endless emails bills and spreadsheets to your accountant you just connect your bank answer a few questions that are only relevant to you and your tax return can be ready in as little as 15 minutes.

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41:00So the first thing is to work out, well, taking China as the example again. They've been trying to deal with the shadow banks now for years. You need to know, you just need data. And a lot of lending is digital, as we all know. If it's digital, it's actually pretty traceable. So they have dealt with this quite slowly because, you know, it takes a while to publish a book, right? You finish the manuscript, it gets sent in, and then it gets turned around. And so I was trying to write the book pretty quickly because there were so many crashes. And I was like, oh, I'm never going to finish this book.

41:33But I also wanted to do it before the Chinese system really imploded because I was like, oh, no, this chapter is never going to get finished. You could not call it. But I think I was quite concerned that, you know, obviously for China, I wanted them to sort it quickly. But for myself, I was like, oh, no, when that goes to print, how am I going to update this? But my point is they've now taken so long that they're still slowly gathering the information because it's really hard to get information from, you know, shadow banks. And so if you don't have information, how can you really credibly deal with it quickly?

42:12In other words, if you knew who the lenders were, those are the ones that you would go check the books, make sure they had, you know, stop overextending themselves. Can they manage the loans that they currently have? Are there ways that, you know, but that's the quickly sorting, the bank's point, which is just this is what, this is the lesson of history they should have learned. And I'm just not sure that it's, what, one, feasible, but two, I do worry that they haven't done so already, that we know of. You also talk about lack of credibility in China itself, though, and the financial reporting that comes out of there.

42:46There's another layer, isn't there, that China are not, like their GDP figures are often questioned and stuff. So how does that go into the mix of this? Yeah. So I think if you look at how China's weathered a few crashes, this point about credibility, I think is a real challenge for them. So China had a stock market crash in 2015. They did have a local shuttle banking crash before as well, but they haven't displayed the kinds of policies that give confidence. And so I think that is something that we should worry about. But the thing I would also say is Mark Twain had this great saying, which is, history doesn't repeat itself, but it does rhyme.

43:36So what I just said is part of the story because China is different, but every crash is different. But by the way, when people in financial markets say this time is different, what they're implying is this time, don't worry, it's not a bubble, it'll be fine. When I say this time is different, And I actually just mean you should never wholesale apply anything from one country or one time to another. And China kind of fits that. So why hasn't China's crash been worse? Well, they own all the banks. They have capital controls, which means money doesn't really leave the country. People have confidence in the banking sector because I think they don't have much of a choice.

44:16Everything is state-owned. So there's so many reasons why they don't fit the model. So for instance, banks, they should do what's called mark to market, right? So your balance sheet should reflect the value of your mortgages, of your business loans. They don't really mark to market because China's market is a bit imperfect. So you don't actually know whether their balance sheets are sound or not. And then I made a couple of references to the fact that it's hard to know what's really happening in China. So they might have massive crashes in different bits, or they could be doing a brilliant job sorting it.

44:58We're only getting glimpses of it. However, if China were to have a great crash because of the shadow banks and this ongoing property problem, it would have global consequences. They couldn't hide it. No. You say that there's a lot of fragile economies that are reliant on credit from China. Yeah, that's actually one of my biggest worries, because we do have this unusual, very unusual, where China actually lends more overseas than the World Bank, whose job it is to lend to countries to alleviate poverty. International Monetary Fund, its sister institution. China is the biggest lender in the world, but mostly to developing countries.

45:49So some developing countries, the biggest portion of their debt is owed to China. And therefore, if China were to have a crash and it started to pull back its loans or just cease its loans, then you could see countries struggling, developing countries struggling. And given that China doesn't cooperate with other countries in terms of how it does its lending, I worry that all the tensions you see with China and other countries means there won't be a quick enough response to help those countries if China were to pull back their lending. And that could cause a emerging market crisis. We've had a lot of these with regularity and that would cause misery for millions of people because we talked about banking crashes being miserable.

46:39Being rescued as a country is absolutely miserable. And so, you know, so that's my, that's one of my worries about China's crash. Could that be a global meltdown or do you think it wouldn't affect Western civilization as much because, you know, America and China aren't exactly best friends? Do you think it would be more like Africa and other countries that will be affected? Or do you think it would have knock-on effects for us in America as well? Well, it's a great question because it also reminds me of another lesson from history. So the biggest hedge fund in the United States was brought down by an emerging markets crisis.

47:14So this is the 1990s Asian financial crisis, which then spread to Russia, Turkey, Latin America. and it brought down LTCM, Long-Term Capital Management, which was at the time the biggest hedge fund in the US, which made it the biggest hedge fund in the world. So I write about this because LTCM had on its books not one, but two Nobel laureates in economics, you know, economists that won the top prize in the subject. They had a vice chairman of the US Federal Reserve, top central banker who quit the Fed to actually join LTCM. So despite their incredible pedigree, they were rescued by the US government because of their bets on emerging markets that went wrong.

48:06And the US government rescued them because they were concerned about the size and the reach of this hedge fund. And so they're worried about, you know, domino effect that we've described. And so do I think today an emerging markets crisis could affect the West? Yes, for the same reason. And this is actually, you know, a lesson that I felt is always worth emphasizing, because I think it's, you think you know linkages in the financial markets, but it's worth taking another look. So you mentioned just there that half of all of the crashes that we've seen have been in the last 25 years. So they're becoming more frequent.

48:48So should we expect major crashes more often nowadays? Yeah, I do worry that is the case because the speed of information is just so much faster. However, remember, history doesn't repeat itself. So it's really difficult when you've had different kinds of crashes, especially, and I'll kind of go through these in a sec, whether or not there's any real pattern. So in other words, late 1990s, 2000, dot-com bubble happened, and then interest rates were cut really low to support that. And people were like, oh, I'm not putting my money in stocks. Oh, I'll just put it into housing as my other asset. Then the housing bubble, which then started to crash in 2007.

49:34So that's only about seven years, six, seven years. And then 2008, it's implosed, right? Global financial crisis. And then the euro crisis happens two years after that in 2010. And that is in what I describe as the slipstream of the global financial crisis, because European banks were already struggling. And now they've got a loss of confidence in terms of sovereigns, you know, countries, countries like Ireland. And now we have another crisis. And that's just a couple of years since the start of the 2008 banking crashes. So then you have sort of a number of crashes. And this is something that happens quite a lot.

50:10They're not great crashes, but they're still pretty big crashes. I don't write about them because, you know, you've got to draw your line somewhere. But I do write about the fact in, you know, 2013, emerging markets had suffered what financial analysts called a taper tantrum. So, you know, the Fed was going to taper, cut back its money printing and then emerging markets were really struggling. 2015, China has a major currency crash and stock market crash. Companies on the FTSE 100 here had their biggest one day loss because of that crash since 2008. So that was consequential, but it didn't lead to a recession.

50:47So I don't write about that. So now you know where I'm going, right? We're in 2015. So now you're beginning to see the recovery of the NASDAQ. You're beginning to see the tech sector really grow. And then all these highs that were hit in 2019, in the end of the year, COVID hits. So then after that, you're like, this is absolutely global pandemic. This is causing tons of misery beyond financial stuff. February 2022, Russia invades Ukraine. Now we have a cost of living crisis. And so then October 2023, Israel Hamas. So we have had a lot of shocks that have contributed to cost the living crisis, various things.

51:30But I think I'm kind of drawing out this timeline because I do think lots of people feel they're the crisis generation. But because these crises all come from different drivers, still really important, I think, to learn from history and to say, well, okay, the financial consequences of this is I can see this pattern in every crash. But what can be quite interesting and very frustrating is that we'll take the COVID-19 crash. By the end of the year, so lockdowns happened in 2020. By the end of 2020 or 2021, vaccines were coming on stream, which is incredible, by the way. Financial markets hit record highs in January 2021.

52:15So I write about in the book, the average person, people, the rest of us, were suffering from all the economic consequences of that. But financial markets were hitting record highs. We saw this after 2008 as well. In America, they describe it as the difference between Wall Street and Main Street. Here, I guess it would be the high street and the city. It doesn't rhyme. Financial markets recover, but the economy does not. And this dichotomy, I think, is very, very concerning for a lot of people who think, well, hang on, all the policies that have helped have helped the rich get richer. And the rest of us are still suffering from the crash or the austerity.

52:58If someone is participating in the markets, hearing about all these crashes is pretty worrying, but an inconsistent investment approach in a broad index over that time would have produced excellent returns, even with all those crashes, which is kind of amazing, isn't it, really. Yeah, that's a really, so absolutely for the, what we just said about the pandemic, the S &P 500, Dow Jones, multiple highs, world MSCI or world index record high. But what's fascinating is the NASDAQ after the dot-com bubble took 15 years to recover. So you would have had to be an active stock picker to pick the Amazons.

53:36So if you look at Microsoft, Cisco, they struggled throughout that entire period to restore, to go back to the valuations they had at the peak of the end of the 1990s. So again, Mark Twain clearly is brilliant. History doesn't repeat itself. So different crashes generate different dynamics. I don't know if it was in your book, but there was a quote somewhere that said, there were some decades when nothing happens. And then there were weeks when it feels like decades have happened in terms of technology advancement. with like the whole AI thing. And it seems like one of those things like in the last year or so, everyone's gone AI crazy and it's like 10 years of growth in AI in like just the last year.

54:14Do you think this is like an AI bubble? I mean, obviously you're putting on the spot, but like, do you think AI is a bubble or do you think it's like the dot-com thing where it could be like, we're not seeing the huge effects of it, but it probably will change our lives in like five years, but people think it's now. How do you feel? Yeah, so I think it has a lot of parallels to the dot-com era because, I mean, not all the dot-coms are transformative and not all AI will be transformative. But there is something about this technology which can change the way that we live. So just like in the dot-com era, not every company failed.

54:54There were some outstanding winners. Amazon is the example I write about. But here, I told you, we were talking earlier about Pets.com. So who was the 50 % owner of Pets.com? Was it Bezos? Yes, Jeff Bezos. Really? So he wanted to sell you everything, not just books. But then he invested in Pets.com. But for Amazon itself, he was very focused on the bottom line. He was very focused on grabbing market share when other firms failed. So I feel like today it's a similar kind of era. So AI seems like it's the kind of technology that could be transformative in the same way the dot-coms did. Is it too soon?

55:38Is it too early? Very hard to say. But I think what is clear is there'll be some winners from AI, some which are, just like in the dot-com era, potentially winners, but it's the wrong business model, as with everything. You know, it's the specific companies that I think would be really, you know, really interesting to follow. But as a sector, yeah, it feels, you know, I mean, look at some of the valuations around some of the AI companies. I was in Silicon Valley recently and a VC said to me, a venture capitalist said to me, we won't look at a proposal unless there's AI in the title. And I was like, oh, that's not a good sign.

56:17Sounds pretty crashy to me. Sounds pretty mad. I was like, did I tell you wrote a book called The Great Crash? Yeah, time to sell. That's like the shoeshine boy story, isn't it? It's time to get out. Yeah. I mean, it's that saying of we overestimate what tech can do in a year, underestimate what it can do in 10. And I think that's probably how I look at it and think, you know, who knows, like ChatGPT is burning cash. It might not be the thing. That's the thing that sparked people's interest, isn't it? But the AI, it's been in financial markets for years, quant funds, things like this. People are using it in lots of different ways.

56:50And I don't think the chatbots, they might not be the thing that delivers all the value. Yeah, it's a good way of thinking about it. I think Bill Gates did say that he thinks AI is the most transformative technology he's seen in his lifetime. And, you know, that's a big statement. He was bullish on the internet and people were laughing at him. He said the same thing about the internet. And I've seen him, they were like, why just send a letter? Why would you send an email? He was like, this is a big deal. But there's a famous call he got wrong. I'm going to get this probably slightly wrong, but I think he says something like, who'd ever need more than 64 kilobytes?

57:25Oh, wow. Yeah. Yeah. So, but I mean, but that's, I think part of the joy of writing this book is I got to write stories about companies and startups, entrepreneurs, you know, financing, and they all have, they make mistakes. You know, we talked momentarily about Gates, we talked about bezels. And I think that is part of when a market gets frothy, you just, you cannot separate the winners from the losers. And I think that is actually one of the lessons to not actually, as a company, to not actually see a market downturn as, you know, complete disaster, because some of the strongest companies come out of crashes are the ones that, you know, run them.

58:12It sounds so obvious, but it's actually really difficult. Run yourself well. So in the 2008 crash, I write about some of the companies which emerged are the startups that have changed today. So Airbnb, for instance. These are companies that start during a crash. And this actually has a long history. Hewlett Packard started in a recession. Lots of companies start in a recession and actually turn out to be, if you can do well in a downturn, imagine how well you're doing in an upturn. And they say more millionaires have made in recession at any other time. Probably because everybody else's wealth has collapsed.

58:46Yeah, and they're absorbing it all. This is like the story of how Amazon started to grab, you know, other market share. But it makes perfect sense. Or in COVID, how everyone's like, Amazon's done so well. It's like, well, yeah, because no one can leave the house. Yeah. You've mentioned something there around figureheads being wrong. And I wonder, have you noticed, you also talked about how spread of information leads to things being potentially more crashy. Do you see big personalities and their ability to reach broad audiences as like a threat or something that can lead to crashes? Cults of personality like Elon, these kind of people.

59:20Yeah. So I'm pretty sure that social media and the fast transmission of information has certainly accelerated the bank crash that we discussed earlier, Silicon Valley Bank. I'm sure in terms of financial markets, it's added volatility. You know, so I think about, so China's stock market is dominated by retail investors. They tend to be swayed by, you know, well-known figures, sentiment, you know, and so you do, and it's more volatile as a result. And so I do think there is, you know, there is an element of that. I think the, what I find absolutely, you know, because this book is about crashes, but obviously I read about companies and people as well.

1:00:08What I actually find quite interesting are the, is the ability to fail and get up again. So you talked about companies that, you know, actually do well in a crash. There's also the entrepreneurs who reinvent themselves. So, for instance, the CEO of Pets.com, which is the most famous failure in the dot-com era, again, she then founded a company called The RealReal, which is a luxury secondhand sales website and with stores. So I think there's a lot of great stories about reinvention. And I mean, it's a not great story. So I also write about, you know, the movie Wall Street, 1980s movie with, you know.

1:00:54Michael Douglas. Michael Douglas. Great is good. Gordon Gekko. Yeah, Gordon Gekko, you know. And so Gordon Gekko, his fictional characters modeled on some of the people from the savings and loan crisis. You know, one of them is Michael Milken, the junk bond king who invented junk bonds, you know. hey, you know, these are fallen angels, companies that used to be investment grade. And now they're in the junk bond, you know, era. And all of that contributed to the SNL crisis, you know. But anyways, Michael Milken was pardoned by President Trump. And now he runs one of the biggest gatherings of investors in Beverly Hills every year in this big conference.

1:01:32So I ended that chapter by saying, hmm, S. Garfield might have been wrong because he famously said, there are no second acts in American lives. It seems pretty clear to me we're in an era where there certainly are. Second acts, third acts and fourth acts, yeah. You can do whatever you want and come back from it. Yeah, which is fascinating. At the same time, you can be cancelled in an instant and never be seen again. So this point around good things coming out of bad, in the epilogue of your book, you talk about a great reset. And I think one fascinating example, or one thing that you made me think about was that COVID might be something that actually drives forward productivity because working from home expands the, say the UK economy, Leeds has become a massive hub for finance jobs because you can stretch out from say London.

1:02:22Can we talk about this great reset and the elements of that and how you think the crashes can lead to more good things basically? Yeah. So, yeah, so I write about the COVID-19 crash and then when I was trying to draw the lessons, it's really challenging because It's not a normal crash, obviously. I mean, a pandemic, a global pandemic, that's pretty scary. And so it just had the different lessons that it held. And working from home, technology is one of them. And so I write about it as a great reset because I do feel like we are lots of people reset themselves during this period. Sometimes because you were forced to.

1:02:59But sometimes I think it just opened up a different way of thinking about life, right? And so technology does play a pretty big role in it. So I write about the fact that you can only really do working from home, remote working, because the technology and the business practice change. So in other words, this is one of the lessons from my other book, The Great Economist, which is how we surround about this technology. And then everyone tells us we have slow growth. So Zoom IPO'd before the pandemic, but it wasn't used. People didn't think it was acceptable to use it to meet colleagues, to meet clients.

1:03:37It's the use of technology that has enabled working from home. It's made things more efficient. You still get Zoom fatigue, of course. But the larger point is technology has become an enabler and changed the culture and expectations of work. That is a great reset for people who used to go to the office five days a week to have that flexibility because technology has enabled it. And I think the other components of the Great Reset, which I was fascinated by, is I think there was a lot of concern that the environment would be less important because people were focused on global health. But actually, it just made, I think, a reset where we sat back and said, yes, global health is hugely important.

1:04:21And so is the environment. This is a global public good. And so efforts around the environment did not really diminish. In fact, I would say they are strengthening in terms of, you know, wanting companies to do better in terms of what we do ourselves. And so, and then the final bit of it is a fair society. So my previous book, I write about how, you know, there's a lot of backlash against the existing system around globalization, lots and lots of unhappiness with the status quo. But what we saw in the pandemic was that you could use government support to help viable businesses, to support people through the furlough scheme so they don't lose their jobs because of a big shock.

1:05:04It creates a fairer world. And the use of, I think, I would say public funds in a different way, I think has changed the way we think about, for instance, universal basic income, UBI, this concept that could we have a standard of living in a country? you know, which is, you know, which is a conversation that builds on what we saw in COVID. So by keeping viable businesses afloat and people, even though, you know, their companies didn't really need them full time, but keeping them employed, it strengthens not just these people's economic positions, but us as a society to not have had a big spike in, you know, unemployment because people leave the labor market or they become discouraged or lose good companies.

1:06:02You speak about environment and the risks it poses. We always go backwards in terms of reforming the regulations, but what happens if the environment falls apart? So the next great crash, well, I write about China as the next great crash in my book, but I should be very clear. I was given advice that you should either predict the event or the timing, but never both. So... We're all friends here. So China on like July 14th, what day is it? But I also, you know, I say any number of things could actually be the next great crash. The reason I worry about China is for the reasons we've already discussed, which is I think it'd have a significant global impact as well as on the country itself.

1:06:50But lots of things could be the next great crash. And, you know, those who specialize in the environment tell me the environment could be the next great crash. We talked about shadow banking. But, you know, those who look at insurance companies that have insured in, say, flood prone areas or, you know, others who have supported, you know, properties that haven't adequately taken into account the potential of environmental shocks. Those are the kinds of balance sheets that could cause the next crisis. Whether it becomes a great crash depends on all the things that we've discussed before. But, you know, there's a reason, I think, why companies now are reporting on climate risk as a risk in their annual reports.

1:07:43So financial companies report on it. Normal companies as an operational company report on it. Because there is this, I think, concern that, you know, we have environmental disasters on a pretty regular basis. So it could trigger. I hadn't even thought of that. Like if London flooded, the insurance risk there is huge. There were some islands and small countries that like they said they're going to be underwater in like 10 inches. Yeah, the atolls and that. Yeah. And then other places where they're going to flood more, have tsunamis or like, yeah, have like earthquakes. You think that something like an earthquake or flood would have happened, like a big one that would have caused some drama like in California or London.

1:08:25If the Thames floods, we're all in trouble. We're all in trouble. Well, the San Andreas Fault is like a ticking time bomb, right? They think. So that would be a big payout. Yeah, and America's what, California's like the eighth biggest economy in the world or something. So if they have a really bad one in California, it could. But then the reaction would need to be, it's okay, we're going to pay for that. we're going to come in and we're going to honor the insurance claims if a whole city went out that was a trillion pounds worth of insurance claims. That would be the decisive action. Yeah. So that would, and then the consequence of that, and this is, I think, something worth thinking.

1:09:03So if these insurance companies are too big to fail, then they get rescued. Then if you think about what happened after the banking crash in 2008, the consequences on the government's you know, budget and balance sheet means they start cutting back on other things. Austerity and things like this. Yeah. And so when they do that, then you have, you know, now you have a potential great crash because now you have intended governments and you have, you know, taxpayers' money being used. And unlike, for instance, banks, which have bail-in, in other words, the changes since 2008 mean that shareholders and bondholders lose, not just taxpayers, you don't have that outside the banking sector.

1:09:53So you don't have that for shuttle banks. You don't have that for insurance. You don't have that for private credit, which means more taxpayer money. And this is, I think, this is a worrying sequence because you're right, a whole city flooded or worse, of course you would step in. So the question is not to get there. There needs to be closer regulation of whether risk is appropriately priced in, environmental risk. And that's exactly what you're beginning to see in company reporting, insurance company reporting. Yeah. Because I mean, in a way with the reaction to COVID, we saw people's incomes just guaranteed and a lot of money entering the system in ways.

1:10:33And then we see a massive spike in inflation afterwards, which I know has to do with Russia and other external factors, but money printing must factor into the inflation. And it's like the knock on consequences of that support can be just as devastating, you know, for people's lives. Yeah, I think, so I ended the book, The Last Crash. Oh my God, I can't, I just could not finish this book because it was just coming. It was like, then Russia invades Ukraine. I was like, oh, that's another crush. I need to write about it. And then I had to kind of draw the line. I generally group these as cost of living crisis.

1:11:09And yes, I write about different factors. And cost of living crisis, the most miserable part, I mean, there's something called a misery index because economists are such cheery people, which is it's a combination of inflation and unemployment. So if inflation is high, the economy is probably not doing well. So unemployment is probably going to go up. So you have both going up is pretty miserable. So again, remember, history doesn't repeat itself, but it rhymes. So what we had in the cost of living crisis, thankfully, is that unemployment didn't really go up, but inflation went up to double digits in this country over 11%.

1:11:42That absolutely is miserable. And there's lots of different factors that I write about. And I think the, you know, but I think what, as we're sitting here now, the global shocks that have contributed to it have begun to fade. I don't want to knock on wood because this is a podcast and it will affect the microphone. But the reason I was worried about what's happening now in the Middle East, you talked about this US canal, you can see how a blockage could generate a price inflation shock. And so I think that adds on to all the challenges. You mentioned there money printing, lots of fiscal borrowing.

1:12:20All of these things are inherently quite, you know, could be quite inflationary. But the big driver of this stagflation we've been living through, where the economy is stagnant and inflation is high, is another lesson from history, which is what I write about, the 1970s. I mean, that is just miserable. So I've just, I'm, you know, fingers crossed that what's currently happening in the Middle East doesn't generate another massive shock because we have seen that happen in history. So I mentioned the 1970s. In 1973 was the first global supply shock driven by oil prices due to the Yom Kippur War. And the Israel-Hamas war that we currently see is almost 50 years to the day of the 1973 Yom Kippur War so far, because history, remember, it doesn't repeat itself.

1:13:17It hasn't had that impact. But if you look at the knock-on effects in the Middle East, so the Iranian-backed Houthis who are lobbing missiles into ships that are going by, that kind of spread makes me quite worried about another shock causing the cost of living crisis to worsen again, because people are still working that through. Interest rates are still high. There's a lot of consequences from these things. So anyways, that's why I just penned down on the book and was like, okay, yeah, I know there's going to be more, but this is it. I've got to send this one off. It must have sent you under studying all these crashes.

1:13:56Did you come out a bit the other side optimistic about the world or were you thinking? I actually, I find learning from history to be, well, fascinating. I mean, I find myself reading more and more and thinking, yeah, I've got to write something down. But I think one of the things that I took away, in addition to thinking about the epilogue in a slightly different way around the Great Reset, is that I do think about how people before us have come through some pretty horrendous times and they got through it. And I always hope that we can learn the lessons and place things into context so that we can learn from history and not repeat those mistakes and we will come through it.

1:14:41So that's actually what I took away. And actually, one other lesson I took away is I mentioned that the 50s and 60s were the golden age of growth. That was the height of the Cold War. So when you look at tensions in the world today, you know, the 50s and 60s had like, you know, the Cuban Missile Crisis. I mean, nuclear weapons, poison. And yet that was the strongest period of income growth for average people and no major crashes. And so I sort of sit back and sometimes think, yes, our challenges today are formidable. However, if you look back at history, you can see what's possible.

1:15:36In 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. We really encourage that because no one cares more about your money than you. I'm Damo. Banti. 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 Stallerman. What about Ruth and Toothless a dog? Yeah, shout out them too.

1:16:34you Thank you.

1:17:07Thank you.