Is America Losing Control?

0:00David McWilliams: How are you doing there? Just a quick heads up on what is coming up on today's podcast. We are going global. We're talking about the dollar. We're talking about swaps, American swaps of dollars. We're talking about the insatiable demand for American dollars. And we're talking about the over concentration of money in the United States. All of that is a risk factor. And the question is, will the war in Iran be seen like the Suez crisis in the 1950s for Britain, where Britain's credibility plummeted after that? Will America's credibility plummet after Iran? That is all coming up in a couple of minutes.

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2:00David McWilliams: How are you doing there? It is time for the podcast. The podcast is going to be all about international economics. The reason being, I was in London the last couple of days speaking to a whole bunch of Irish professionals involved, John, in the world of private equity. Okay. And that is always important to actually go to the belly of the beast, so to speak, and actually talk to the people who are laying the bets, who are actually looking at companies all around the world. Are they a bit nervy at the moment? Well, one or two fascinating aspects comes out of it. I think they are nervy because the world of finance has shifted dramatically since I was in it.

2:42David McWilliams: So when I was in it, basically you had central banks and banks, and banks were the main, what they call intermediaries. The banks were the people who lent money, right? Since the global financial crisis, a significant proportion of international finance has moved away from the banks because banks were regulated after the crash because they made a bollocks of things, right? But money has gone into what's called private equity. It's called shadow banking. In fact, the person who came up with that expression, shadow banking, was our own friend, Paul McCulley, who actually coined the phrase shadow banking to describe...

3:19David McWilliams: Preacher Paul. Yeah, he's a great man. And actually, we should get Paul back on the show. Yeah, he hasn't been on the wall. To describe a thing that looks and feels and smells like a bank, but actually isn't a bank, isn't regulated by the central banks. Yeah. doesn't take in deposits of punters and lend that money out. And as a result of that, it's regarded as not systemically important for a system. Now, I think that's a big assumption. Because what is now happening is what's called private equity. So what you have is you have private institutions, usually small, very, very tight teams, very well paid, who borrow enormous amounts of money from investors.

4:00Yeah.

4:01David McWilliams: And then they place bets on companies. And this is like a big casino. Precisely. This is like peak financialization. Right. Okay. And this has taken over. So what you find now in international finance is the footprint of private equity, what are called family offices, and all sorts of private capital. What do you mean family offices? So family offices are this big new thing of very, very rich families. Right. Have these things called family offices. and those family offices run the business of big families. And so what you find is that a huge amount of finance is now concentrated in some very small amount of hands.

4:43Yeah. Now what that does is it makes those people exceptionally rich

4:46David McWilliams: if the bets go well. And powerful. But the sense, and absolutely powerful, right? So you've got the black rocks of this world. I mean, these are companies that didn't exist 20 years ago or didn't seem to exist 20 years ago. And they're now buying up enormous parts of the economy and as a result of the society. I believe that this is probably a bad thing for democracy. I would say so too. It's a bad thing. I think that what you will have is when you have a concentration of assets in too small a coterie of individuals, number one is you get super normal profits from those people. They become incredibly rich.

5:25David McWilliams: The upside is if they collapse, there's no obligation of the state to bail them out. Okay? Whereas when there's a bank involved, because banks have depositors, and because depositors are savers, and savers are average people, there is a sort of a systemic crisis. So the one way of looking at this, you know what, you want to get rich, get rich, but if you screw up, it's on your own. Right? Which is one way. But the problem is that it means that a significant amount of the opportunity to participate in the global economy which used to be open to more people is now open to less people. Because they're taking money off the table.

6:01David McWilliams: Because they're taking money off the table and also because it is much, much easier for a company. So if you think about a company that wants to raise capital, right? A company wants to raise capital can go to the stock market and can deal with many, many hundreds of investors, small investors, right? Yeah. It's not easy to deal with one person. Yeah, of course. Right? So there is on the selling side, the companies that are selling themselves, there is an incentive to do one deal, not thousands of deals. Right. That's the first thing. And then on the demand side, there's an incentive also to just deal with one person.

6:39So what I'm saying is this is an interesting insight into the way the world is working. When did this all change? Like when was the big emergence of private equity? I think you're probably, it started in the early 90s with hedge funds, right? Yeah. So you might remember George Soros' hedge fund and Stanley Druckenmeyer and all these places. And actually, a man we're going to talk about was involved in this business, Scott Besant, who was working for Soros. Mr. Smug. Well, I know you don't like him. No, I don't. But there's nobody in that administration you like. Oh, not really. So it's a matter of who is the least ugly, not the most ugly in your view.

7:19There's no pretty boys in that one. But there are some intelligent people. I know you don't see that, but there are some. No, I'm sure they're super intelligent. They're just not particularly nice people. It's me, myself, I. They're all self-serving. Well, they are self-serving.

7:34David McWilliams: So our podcast today is going to be on that coterie, what is happening in financial markets, what is happening to the United States, and will the peace that they're trying to cobble together in Iran make America look stronger or weaker? And the reason this is important is because a huge amount of finance, despite the fact that America is no longer the dominant, dominant country in the world, a huge amount of finance and economics still flows through the United States. So that's what we're going to look at. You were worried about lots of things this morning. As always, Mike, as always. And maybe you could put my mind at ease.

8:13But let me just ask you, let's start in the Straits of Hormuz.

8:17David McWilliams: Yes. So we now have, this is going on now. 28th of February it started. Yes. Yeah. So it's longer than what Trump had predicted, but who cares? So we've had a few different peace talks in Pakistan. We've had Rubio going over initially. We had JD Vance flying in to smooth everything out. And that hasn't made a damn difference. And now they were going to send in the big guns, the Wyckoff and Kushner team. That's what I was saying. They've got rid of the Catholics. They're sending the Jews now to do the deal, right? Yeah, yeah. That's it. Catholics messed up. Bring in the Jews. They'll do the deal.

8:55But they decided against that. Yeah. But let me ask you this then. All the kind of geopolitics and geo-economics has changed because of the war.

9:04David McWilliams: Yeah. With this peace deal or peace talks, if they get anywhere, what kind of, like it's changed forever. So what kind of legacy are we going to be looking at? I think that's where we're going to start. So we're going to start, there's a lot of talk, we touched on it about two or three weeks ago, about a crisis in the distant past, which people had kind of forgotten about, called the Suez Crisis in 1957. Very, very briefly, Suez Crisis was a monumental cock-up on the part of both Britain and France. Britain and France wanted to control the revenues from the Suez Canal. Britain and France had financed and built the Suez Canal in 1870.

9:46David McWilliams: And miraculously, despite the fall of the Ottoman Empire, despite the Second World War, despite the First World War, they managed to keep control of the revenues of the Suez Canal. So imagine the Suez Canal being like the Straits of Hormuz. It is a choke point through which a huge amount of European trade goes. So the person who owns Suez, like the person who owns the Straits of Hormuz, basically owns the global economy or a part of it. Yeah. What I would call the marginal part of it, which is the extra cost that transporting goods around the world incurs. Yeah, yeah. So a nationalist leader called Gamal Nasser emerges in Egypt.

10:28David McWilliams: And he says, look, hold on a second. The Suez Canal is Egyptian. And he works on the basis of... Because it's in Egypt. Precisely. He's just saying, this is ours. It's not yours. Exactly. You know, possession being nine-eighths of the law. Yeah. Right? He's basically saying... Nine-eighths. Possession being nine-tenths of the law. Mass genius, this guy. Exactly, exactly. Possession is bigger than the thing you possess. No, so... So possession being nine-tenths of the law. He said, look, we're in possession of this, it's ours. So what the Brits and the French, who were set to lose not just money, but control over Suez, geo-strategic, geo-economic control.

11:14David McWilliams: They had a whispering campaign with the Israelis, and the gig was the following, that the Israelis would attack the Egyptians. And while the Israelis, and the Israelis would be quite successful, this was the plan, and then the Brits and the French would come in and pretend to stop the Israelis, have peace talks, and part of that peace talks was that Britain and France, because of the aggressive Israelis and the vulnerable Egyptians, Britain and France would be, in effect, the peacekeepers. Right. And part of being the peacekeepers, you kept control of the term. Right, who came up with this plan?

11:50Some boffin in Whitehall, okay? Yeah, yeah, yeah. Now, what happened was... He was assuming an awful lot. Assuming an awful lot. One, the Israelis weren't quick enough. Two, the Egyptians fought back quicker. And Nassar basically said, come and have a go if you think you're hard enough.

12:04David McWilliams: Geography is on my side. Yeah. I'm here. Yeah. So the whole plan is botched. It's a disaster from start to finish. The Americans come in and clean up the mess and actually admonish both the Brits and the French. The end is Nassar gets control over Suez. Britain and France realise that their 200-year period of being rule makers comes to an end very quickly. And they're rule takers. And the Israelis retreat and lick their wounds and begin the process of planning for the next war against the Egyptians, which comes in 1967. Yeah. But that's out there. So that was the final nail in the coffin. For Britain.

12:49For Britain, yeah. And colonialism in general. You're absolutely right.

12:53David McWilliams: So basically, Nassar framed it rightly as a battle between the colonized and the colonizer. And he basically said Egypt was taken over in 1798 by Napoleon, 1799, and we haven't been independent since. Now we're independent and screw you, right? But the point was everything associated with Britain suddenly became much more risky after that. There was an understanding that, okay, now Britain is a second-rate power or a first-rate power but going into decline. If they can't even beat these bunch in Egypt, who can they beat? My question is, will something like this happen to America? If they can't even beat the Iranians, who can they beat?

13:39David McWilliams: You know, this is the whole idea, is that credibility, international credibility is something you build up very slowly over time. But you can blow it very quickly. Of course. So the Brits in... It's like for any reputation. Any reputation. So the Brits in 1957, think about it. they still had huge parts of the empire. They were the victors in the Second World War. They were at the top table in the Yalta. They had a security council street in the United Nations. They were still a huge power. But gradually, both economics and politics, people thought, I'm not so sure about these. And of course, what happened in finance is very important.

14:14So up until the Second World War, certainly up until the 1920s, the United Kingdom was the reserve currency. Sterling was the reserve currency, like the dollar today.

14:27David McWilliams: The interest rate on British guilts was regarded as the global risk-free rate, which basically meant that no matter what happens in the world, the British government will always pay its debts and Sterling will always be strong. And as a result of that, you as an investor can deposit money in London and go on holidays and not worry that the risk-free rate of return will be UK gilts. So unbelievably... Bonds, in other words. Bonds, yeah. So the instrument that the government of Britain borrows in, called the gilts, bonds, anywhere else, right? Yeah, yeah. They sound better, though. They do. A gilt.

15:07It's gilt-edged, right? But after that, gradually long-term interest rates in England start to rise. Why? Because people are beginning to think, you know what, maybe England isn't good for the money. Maybe Britain isn't as good as we thought. And the defeat in Suez was part of that realisation that Britain is now a country that is on the wane,

15:30David McWilliams: that made in Britain isn't the sort of brand that used to be. And of course, this all culminated 20 years later with the IMF coming in to bail out the British economy, where they actually ran out of money in 1977. Sorry, we're still on the gold standard here, though, as well. We're still on a quasi-gold standard. Okay. What does that mean? That basically the Americans... It was just brass. No, no, no. It's copper. Exactly. So come back to the point, right? So what we're talking about was, and it's a good question because we're going to get to swaps in a moment, which is something that has been all over the papers today and lots of people don't understand it.

16:06David McWilliams: Yeah, I don't. I understand that, right? Yeah, yeah. And this is the American, how the Americans are using the dollar as a weapon, okay? So there wasn't a goal. There was a thing called the Bretton Woods system. The Bretton Woods system was basically the Americans tied the dollar to gold and the rest of the world tied their currency to America. So it was, in effect, a gold standard system. But the demand for gold, as in physical gold, was limited by the fact that, in effect, the Americans said, look, we will run this system. Part of that system was a system of swaps, John. Right. Just before you go on to the swaps.

16:42So I'm just wondering how much of an impact that system and being pegged to the dollar put pressure on sterling. Huge.

16:52David McWilliams: I mean, basically the Americans after the Second World War realized that we won the war here. Yeah. We've got to win the peace. How you win the peace is you make sure that there are no competitors to you in the world of politics. Right. In the world of military and in the world of finance. Yeah. So there was an element of strategy. Completely. American post-war strategy was unbelievably clever and unbelievably self-regarding. But anti-British and anti-European in that way. One of the things that has always intrigued me, John, is the way in which... So America's two greatest enemies in the Second World War were Japan and Germany.

17:33David McWilliams: And America's two greatest friends were Britain and, at the end of the day, France. America treated Japan and Germany much better after the war than they treated, particularly Britain. I feel very sorry for the Brits, right? The Brits actually held out on their own. Okay. Did the Americans give them debt forgiveness? No. The Americans gave the Germans complete debt forgiveness and much more than that. The Americans required, think about this, American corporations in Europe to buy German manufacturing goods, a component of. Right. in order to build the Germans up. They treated the Germans brilliantly.

18:09They treated the Brits terribly. They treated the Japanese brilliantly. The Japanese tried to attack, invade America. The Japanese killed thousands of American soldiers, thousands in the Pacific. And the minute the Japanese surrendered, the Americans treated them like allies. The Brits, on the other hand, and the French, who were actually allies, but particularly the Brits, never got a look in. Never got a look in. Yeah. And of course... It's bizarre, isn't it? Well, that was the American strategy. They called it adult supervision. So the Americans regard it... And now they're giving out about it.

18:43Now they're giving out. Now they're destroying all this. This is the worst thing.

18:47David McWilliams: Yeah. So that structure, that system that the Americans built up in the 1950s, 1960s, 1970s, was of enormous benefit to the United States. Mm. Right. Now they're saying, Hexed is saying, we don't want NATO. Yeah. Get in the boat. Bessence is saying we're going to undermine you by maybe using the swaps arrangement as a weapon. Right. Swaps. So here we are. There's that word again. And I don't know what it is. I'm hearing a lot over the last while. Explain to me what is a swap line. What's the swap shop? It's like a zipline, John. A zipline for economists. You can imagine all these economists holding on.

19:28David McWilliams: Okay, so dear listener, you might have been aware over the last couple of weeks, this word called swap line seems to be mentioned in financial press quite a lot. So the question is, what is it? And why is it important now? So a swap line is an arrangement between two central banks. Let's say the Federal Reserve and let's say the central bank. In this case, actually, the central bank of the UAE is in the spotlight, right? Right. So what a swap line is, it's basically just a mechanism whereby the central bank of a country, let's say the UAE, can ring up the Fed and say, we need dollars. Can you supply us with dollars?

20:11David McWilliams: And the Fed says, yes, we will swap these dollars for something on your balance sheet. So imagine it's just a swap, right? Right. That's what it is, right? So it's the Keith Chegg one kind of. The Keith Chegg one. It's the Noel Edmonds, Keith Chegg one of economics. This is particularly for the Irish and British listeners. This will all of a certain generation. And they can only do it on Saturday mornings. They don't do it on Saturday mornings. So take it. The swap shop is exactly the thing. Stuff you have that you don't particularly want. So this is off-market stuff. So this is off. This is between the central banks.

20:41David McWilliams: Why would this be the case? Why would this morning the Central Bank of UAE, the United Arab Emirates, one of the richest countries in the world, be talking to the Federal Reserve in America about opening a swap line. What it means is that the UAE can't get their hands on enough dollars. Now, why might that be? Because the petrodollar. Because their exports have collapsed, right? So their exports of oil have collapsed, and their tourism. Think about Dubai as a tourism place has collapsed. Also, traffic in and out of there has collapsed. So they have a much smaller footprint of people going in and out.

21:22David McWilliams: And of course, what people bring is foreign currency. We forget that. When people travel to Dubai, they bring foreign currency. Number one. Number two, the UAE has a fixed exchange rate with the dollar. So the UAE operates a system a bit like the Bretton Woods system. The UAE, the dirham in the UAE is fixed to the dollar. Now, what does that mean? It means that the UAE need to have a huge amount of dollars in their reserves to be able to spend and to maintain the exchange rate if the amount of dollars in the system begins to deteriorate. Why are they pegged to the dollar? For two or three reasons.

22:04David McWilliams: The one is that once they're pegged to the dollar, it kind of outsources responsibility. So what they can say is, you know what, we are in effect in the dollar zone, in the American zone. So the UAE have been in the American zone militarily, politically, and culturally for a long, long time. So in the same way as we were pegged to the Germans before the Euro, because we took the view that we're Europeans, we're going to outsource our economic policy to the Americans, or to the Germans, in our case, to the Americans in the UAE. And in effect, it just keeps things stable. Now, the alternative to that is you let your currency float up and down, right?

22:40David McWilliams: And as imports rise and exports rise, you let your currency float up and down. The reason I asked that question is because I would have thought up until now, their income would have been pretty steady because of the fixed amount of oil and gas that they're exporting. Exactly. So why would you fix the dollar in that thing? The reason is you don't want your exchange rate to rise too much. So basically what happens is if left to its own devices over the last 20 years, the exchange rate of oil-producing Arab countries would have risen so high to reflect exactly as you said, this income coming from oil.

23:16David McWilliams: So what they do is they peg to the dollar and then they do what's called sterilization, which is called open market operations, right? So the central bank goes in and continues to buy currency in the open market all the time. So too many dollars come in. what they will do is they will buy up those dollars and they will sell other stuff to the people who own the dollars, right? To maintain the value of the currency. But what has happened in the last few weeks is, and it's quite complicated stuff. It is. Managing an exchange rate isn't easy. That's what you learn as a central banker. I know there's always people who say, oh my God, he's a central banker.

23:53What do they know? They actually know quite a lot. I thought it was just print that money, get it out in the street and go for lunch. No, go for lunch.

24:00David McWilliams: Exactly, exactly. No, there's a lot of day-to-day technical managing of the money market, the exchange rate market, and it's called open market operations. Central banks have a whole variety of instruments that allow them to do this. But the key thing is if you have a fixed exchange rate is to maintain parity. And it simplifies everything. Simplifies everyone. Everyone knows what the rate of inflation is going to be. Everyone knows what the rate of interest is going to be. Everybody knows what the rate of exchange is going to be. It works very, very well. And for small open economies, it works even better because it's actually difficult to maintain a floating currency for a small open economy.

24:37David McWilliams: Because you get shocked from the outside. So what is happening this morning and this week is that swap facility that the Federal Reserve keeps for its allies. Europe, Japan, the UAE, which basically says, don't worry, we will always and everywhere, if you get into trouble, supply you with free dollars, which allows you to maintain a stable system because your system is based on the dollar. Besant is suggesting that maybe we won't do that. Maybe we won't supply you with free dollars. Maybe we will deploy the dollar as a weapon against our enemies who are not doing what we want. Now, the people they really have in their sights are the Europeans, because the Europeans are an equal part of the Americans in their heads.

25:33Yeah.

25:34David McWilliams: And they are a power that has gone offside because Europeans not only didn't support America in Iran, but have actually actively condemned America and said, it's your war. And then Trump is going mad and Besson said, well, we do have one very interesting and nasty little weapon against these peace-loving Europeans. And it's not missiles and it's not bombs and it's not politics and it's not Ukraine, it's not Russia. It is the swap lines that we have with the European Central Bank. Wow. So Besson, they're just hinting at us. So what they're saying is, look, your banking system. in Europe operates on the basis that all your banks have all the dollars they need when they need them in order to trade with us, in order to buy American assets.

26:28David McWilliams: Now, why is all this important? It is because over the last 40 years, the Americans have discovered one bizarre thing, which is that yes, they do not manufacture so many goods anymore. And this is, of course, what the trade war is, but they manufacture one thing that the rest of the world really wants. And that one thing is their currency, the dollar. They export dollars. It's an extraordinary thing. It's called this universal privilege that the Americans have. But the rest of the world wants dollars. Now, why is that? Actually, just before you go there, so the reason we want dollars was mainly to buy oil because it was always the exchange was done in petrodollars.

27:13David McWilliams: to buy oil, to buy commodities, buy everything. That's number one. But number two, over the last 30 or 40 years, Europeans and the rest of the world in general, but Europeans in particular, have bought an enormous amount of American assets, right? Yeah. Stocks, bonds, real estate companies in the United States. So, John, so the Americans realized that the rest of the world wants to buy American assets, right? And the Americans also realize that in order to buy American assets, what do you need? You need dollars. Because they don't sell their assets in yen. They sell their assets in dollars. So their assets are stocks, bonds, real estate, etc.

27:56So I'll give you a couple of figures, right? Total American debt is about 31 trillion, American government debt. Okay. 10 trillion of that, more or less, is owned by foreigners, right? So one third of all American debt. The United States accounts for 60 % of all global listed equities. About half of all the private capital, remember the private equity in the world, is in America, right? And about 40 % of all the money invested in all bond markets anywhere is invested in America. Okay. So. So what's the implication of that? So you have 60 % of stocks, about 50 % of private equity, about 40%. America is only 2 % of the world's population under the age of 18.

28:40It's only 4 % of the world's total population. And what difference does that make? So it means that there's a huge amount of foreign investment in the United States. Yeah. Now, the flip side of that is there's a huge amount of dollars that foreigners have had to get their hands on to buy that. The flip side of that is the Americans, therefore, have both a weakness and a strength. The strength is the rest of the world requires American dollars, which is why 57 % of all the reserves in the world are in dollars, right? So we need dollars handy. The Americans also know that they're the only people who can supply those dollars.

29:23Yeah. Nobody else can print them. Only the United States can print them. Yeah. So the Americans, in effect, manufacture dollars. I know it sounds weird because you're manufacturing cars, right? But imagine they manufacture dollars and they sell these dollars to the rest of the world. The rest of the world buys the dollars, not because they want to have dollars in their back pocket, but because they want to have dollars to buy American bonds and stocks. So what you have is a system that's highly leveraged to the United States. Now, this has had two bizarre effects on American economics and politics and one huge effect on the global economy.

30:02Hold that thought there, Mike. Let's do a bit of this and earn some dollars. Yes. And we'll come back to this. Grant.

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31:50So we're talking about the dollar and America manufacturing the dollar. That's their biggest export. Their biggest export is their own currency. Yeah. I know it sounds weird, but it is. Yeah, it is weird, yeah. So explain to me a bit more, what are the implications of all this?

32:05David McWilliams: I think the implications are, the reason we start with Sue, a lot of this is coming to a head now. Because what you find in times of complacency and calmness, people don't think about what's going on under the hood. as the Americans would say, we're in the bonnet of the global economy. So swaps and interest rates and the dollar and investment and it all kind of goes along, right? Yeah. Don't want to think about it, to be honest. Yeah, exactly. But once you believe lots more, more important things. But when you, John, when you get a crisis like this, like in the case of Suez, what happened in Suez, people said, is Britain that strong?

32:40Yeah. If they can't really beat this new power called Egypt, you know. So the question you get, Christ, like, Straits of War moves in Iran. It's like, hmm, now let's look at what's actually going on.

32:51David McWilliams: So when the Americans decided in the 1980s and 1990s that they could export their currency, something bizarre happened. As the rest of the world wanted American assets for safe haven, okay, to get out of complicated investments, to get it. When communism fell, when there's lots of capital on the move, people on the move, people said, look, the world is too weird. Let's just put our money in America because at least we know America's safe, stable. America's always produced a return. They have an incredible macro system. They've also an incredible micro system. They have great innovations. They have great companies.

33:30They have great entrepreneurs, all that sort of stuff, right? So the demand for the dollar goes up.

33:35David McWilliams: When the demand for the dollar goes up, because America allows the dollar to float, the real exchange rate in America rose. Now, what that means is it became much more expensive to manufacture real things in America. So corporate America said, well, why don't we embrace globalization and we will make the cars in Mexico or we will make the cars in China or we will make the cars in Europe or we will make the Viagra and the Botox and the Monjaro in Ireland, right? Yeah, yeah, yeah. So you get this significant movement of American industrial prowess to the rest of the world. Yeah. All the while, American finance is absorbing in all this foreign money, okay?

34:21David McWilliams: Because the foreigners want American dollars. This is enormously inflating the financial industry in the United States. Yeah. I'll give you an example. The average wage in finance now in America is$140 ,000 a year. The average wage in manufacturing is$84 ,000 a year. So American people are moving into finance. So the best people are moving into finance. The money's moving into finance. But all the while it's hollowing out the manufacturing base. Precisely. So it looks like everyone's winning. The finance industry is paying lots of taxes. Shareholders are winning because companies are increasing.

34:59The shares of companies are increasing. The bankers are making money. The tech bros are making money. The finance bros are making money. You know, all this sort of stuff. In effect, America has become captured by finance. The cost, of course, and of course the cities where finance is prevalent, the real estate there goes through the roof. Of course, yeah. You're San Francisco's, you're New York's, all that sort of stuff. Who pays?

35:22David McWilliams: Cities like Detroit, places that used to produce cars, blue collar workers, etc. The Rust Belt. The Rust Belt, all that sort of stuff. And over time... Springsteen. You're made. Exactly. This is the background music to many Springsteen albums, right? Bon Jovi as well I know you don't like Bon Jovi I actually do Living on a prayer Brilliant Where did the man Living on a prayer Where did Johnny work Living on a prayer New Jersey wasn't he But where did he work On the docks On the docks yeah Why because he was Making stuff Bringing it in and out Didn't say Didn't say Johnny worked in a Real estate company Johnny was a bond trader He was a hedge fund Johnny was a hedge fund manager No good Oh man I've got to write a song No good White rock and roll Things starts with Johnny, a hedge fund manager.

36:10Johnny was a private equity dude, right? Okay. So all the great canon of Americana is based on manufacturing blue collar guys, right? They're wiped out. Yeah, yeah, yeah, yeah. Takes them a while to figure out what the hell is happening. And they emerge as MAGA. Precisely. Yeah. They emerge as the Tea Party movement first and then that morphs into MAGA. And what they hate is the state because they blame the state for not protecting them. Yeah. But what they don't realize is the guy whose garden they are now doing, because they used to work on the docks, right? Yeah. But that skill set can only be turned into a guy working and gardening.

36:51Yeah. The guy whose garden they're working on is the finance bro whose life has been changed dramatically for the better as a result of financialization. Yeah, yeah, yeah. They're not geniuses. They're just in the same industry. Yeah. You might have even seen that Zoran Mandami's attack on Ken Griffith, who is Ken Griffith, is the head of a hedge fund called Citadel, who bought like a$200 million apartment on, I think it was somewhere Upper West Side. Yeah. And it's kept empty. And Mandami actually said he's the guy we're going after. So politics is changing. It's kept empty. Why? Because your man doesn't live there.

37:29He lives down in Mar-a-Lago or wherever he lives. It's just, Mandami's saying, we can't have all these rich guys just coming in and out of New York when they want them. We're going to tax them. Anyway, the point is, MAGA is. Go Mandami. Go Mandami. And that's, Mandami is like a communist MAGA. Yeah, yeah, yeah. But the point is, it's the same movement. Yeah. It's the movement of the little fella. And this is the political result of the explosion in the demand for dollars, which has sent the dollar rising over the last 40 years. It is now falling because that period is coming to an end, number one.

38:04Number two, what it has meant, though, is the weapon of using the dollar has become much more powerful for the Americans. And this is back to the swaps, the geoeconomics, because they're saying, you guys all need dollars. We're the only one who can print it. And their supposition is, you need dollars because you want to buy more American assets. And what I'm saying is what might be happening now is the world might wake up and say, do you know what? We don't want to buy more American assets. We wouldn't mind buying Chinese assets, European assets, African assets, Latin American assets. The one thing that prevented foreigners, John, from having that moment, that light bulb moment of clarity was always the supposition or the assumption or the presumption that the people who ran America were sensible.

38:59The people who ran America were centrist. The people who ran America as their great president, Coolridge in the 20s, said the business of America is business. So that ultimately their idea was the people who ran the United States believed in free markets, in competitive markets, in international trade, in free trade, all that stuff. that's now all out the window. Well, it's our friend who games the system entirely for himself. Like I'm talking about Trump, but all the guys he surrounded himself with, Besant, I mean, didn't he make all his money by betting against Sterling?

39:44David McWilliams: He made it certain. He was a lawyer working for Soros who had to come up with the contracts. See, when you bet against Sterling, it's a whole series of contracts. Because basically you're writing short contracts, with lots of people. So yeah, he was a finance guy. It is Hegseth buying military arm and shares a few days before. It's the crypto infestation of the White House with Trump and Trump's sons and Wyckoff's sons having sort of crypto companies. I mean, it's so blatant. It's insider trading. So basically that's the extreme part of it. or that's the stuff that we know about that's the stuff we know about but the other idea is the budget deficit the budget deficit is now 39 trillion overall American debt which is phenomenal it's about 120 % of GDP your debt GDP ratio is rising rapidly, your long term rates of interest are rising rapidly so what I'm saying is and of course your big beautiful bill John is adding enormously to the American underlying debt and it's given all the resources and all the tax breaks to rich guys yeah so what you have the only people with the money the only people with the money so what you have in the united states is a moment i think where people are thinking huge amount of money in the states yeah huge amount of foreign capital in the states foreigners have up to now bet on the american tripled down on the American bet since 2008.

41:26What if they decide we don't want that? Yeah. And I think what we have now is one of those moments where every single, there's nobody who manages money around the world is not talking about Trump. Yeah. And nobody who manages money around the world is not talking about the negative aspects of Trump. These are not conversations that are just wild and in the pub and whatever. These are people thinking, am I happy with the risk profile in the United States? And the interesting thing is these are conversations that must have been going on about Britain in the 1950s and 1960s. And gradually, progressively, money leaves that country.

42:10And I think gradually and progressively money will leave the United States. And all the while, the Americans are now threatening to cut off the swaps, etc. But if the Americans cut off the flow of dollars to the rest of the world, the rest of the world is highly likely to react to that by liquidating their positions in the United States because they realize that the United States has in effect held their equity positions hostage to good behavior. Then does the dollar just nosedive? The dollar then begins, so the dollar lost 8 % of its value last year. It has gained 2 % because of the safe haven effect of the war.

42:55That is now dissipating. And I think the long-term decline of the dollar is the only logical path for that currency. Does it nosedive? I don't think so. And the reason it doesn't nosedive is because there still is a lot of assets held in the United States. But as they are gradually sold down, because what happens is in economics and finance, this is known as a crowded trade. So the trade of being long the United States is now crowded. Everybody is. And when everybody, it's like a horse, right? Yeah, yeah, yeah. Like when everybody's betting on one horse, what happens? The odds become incredibly unfavorable.

43:31Yes. And what happens then is if anything possibly wrong happens to that horse, you lose all your money. Yeah. Because the odds are not in your favor. and obviously gamblers will always lay the odds off of an over-fancied horse. Yeah. And at the moment, it's fair to say the Americans are an over-fancied horse and I think that is the big lesson and this is what you're seeing now. They realise that they are almost in a cul-de-sac themselves because when we own all of their stuff, all they can do is threaten us. But the only way that you can actually liberate yourself from America, if you want to do that, is eventually sell your American positions.

44:17Well, let me ask you one last question then. Is there an opportunity and or why doesn't the likes of UAE peg their currency to the euro or not the ruble, but, you know, anywhere else?

44:35David McWilliams: because up until now, now this is the very interesting and final point, is that the Americans have undertaken to supply dollars to the global financial system if there is a liquidity crisis. So that is the first thing. So on the one hand, they're getting a bit of a free lunch. On the other hand, they have an obligation to supply dollars, right? Yeah. The Americans have the self-confidence to do that. for the Europeans to allow the UAE to peg their currency to the euro, the quid pro quo of that would be that the Europeans, the European Central Bank, would have to open up swap lines with the UAE producing or undertaking to supply them with an infinite quantity of euros.

45:26David McWilliams: And nobody in Europe is prepared to do that. Why not? I mean, it's not like a one-way street. it's a two-way street. You said it's a swap. So we get something back. Because deep down, the Americans are an imperial power. Yeah. They realize that economics and finance and politics and military go together. The Europeans are afraid of themselves, right? Europeans, we don't even have a banking union. I can't go to France and borrow money to buy a house in Ireland. Yeah, true. You can't even do that. So there's no way we'd be providing free money to the UAE. It's a sign of maturity where the Americans have got themselves to, in fairness.

46:09But that system, like all systems, is just kind of coming to an end.

46:13David McWilliams: Now, whether it ends quickly or gradually, I think it'll end gradually, but I think the defeat, which I think it is in Iran, it has been a defeat, a strategic defeat, will be part of the process, and we leave it here, of chipping away at that American credibility that they started building in 1945. That's the point. And they built it slowly and progressively and successfully over the years. And this administration is unravelling that decades-long endeavour in a matter of months. So there you go.

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