115. Trump Could Kill The Dollar

0:10Hello and welcome to The Rest is Money with me Robert Peston. I'm thrilled to be joined today by Jim O 'Neill. He has been one of the most influential economists for two, three decades. For a long time at Goldman Sachs, he spotted the rise and rise of these powerful developing nations, these emerging economists, particularly China, long before economists spotted the extent to which, in particular, China was utterly transforming not only the economic landscape, but the political landscape. He coined this name for these emerging economies, Brazil, Russia, India, China, South Africa, as the BRICS.

0:55And it is actually a brand that they themselves have now embraced in their own grouping. So I want to talk to him about how he feels, for example, about seeing all these BRICS nations gathering around Putin, as they did recently, as a challenge to the democratic West. West. I want to talk to him about these other areas where he's been enormously influential. He was influential in the creation of the Northern Powerhouse, which is this grouping of both people from government and what you might call opinion leaders, phrase I hate, to essentially create the conditions in which way more money would go into infrastructure investment in the north of England.

1:35And just in the last few weeks, his plea to government to change the so-called fiscal rules so that it would be easier for government to invest in productivity enhancing projects. Well, you know, Rachel Reeves did change the fiscal rules. And when standing before MPs announcing this change, she said one of the reasons she did that was because she'd listened to Jim O 'Neill. So a whole range of subjects to discuss with Jim. At its core, how do we get living standards up for millions of people whose living standards are flatlined for 15, 20 years? Here's my chat with Jim O 'Neill. Jim, economists don't often become famous.

2:27But I would argue that when you created this concept of the BRICS, you became one of the best known economists in the world. And at the time, I felt your analysis of the rise of these nations was very much a force for good. And one of the things I just wondered, I suppose almost emotionally, how you felt when you saw these nations, including Russia, China, Brazil and the rest, gathering in Russia, hugging Putin and sort of setting themselves up as very much a sort of political counterweight to the democratic West. Did you feel uncomfortable about that? The answer is yes. And let me put it in some slightly longer term perspective.

3:19When they started off the whole political club in 2009, I was obviously kind of flattered, but also found it a bit awkward because within the first couple of years, it became apparent that they were sort of using it as some symbolic thing against the status quo. and if you recall the specifics it was you know not long after the recreational bringing to life of the G20 which I thought was one of the very few really positive things of the era we've gone through in this millennium so far and in ways that have developed through time and that example you just cited the recent meeting helped to undermine the cohesion of something like the G20 in this ridiculously complex modern world we've got.

4:11So I'm quite uncomfortable about it. And I've written a few things about it saying, I don't really see what purpose it serves other than this never-ending symbolism about how global governance isn't fair. And there is some sort of amazing paradox that you were at Goldman Sachs at the time when you created, what I would argue is a brand. You know, who created the brand for the powerful emerging economies. I mean, I don't know if there's something to say about how the chief economist at Goldman Sachs, presumably an institution they don't love, brands them. Back to the first decade, really. In fact, through the 2008 crisis, because if you recall, not all, but most of the BRICS countries dealt with it pretty well.

4:59And in fact, the last couple of years before it became evident that especially Brazil and Russia are going to have problems. The sort of belief in the BRICS concept actually accelerated after the crisis because there was this view that the West, including the US, was finished, which obviously turned out to be wrong. And actually, despite Goldman Sachs and my role there, many of the BRICS country's senior policymakers and other aspirational ones would reach out to us and quiz us quite a bit about how they could make it better and stronger, although it never got much towards the top in certain countries, notably Russia.

5:38In fact, it's now 11 years since I left Goldman, but I've not actually visited Russia since then because I'd already become quite disillusioned in the way Putin was starting to drag the place, a sort of forerunner of, you know, many of the events that have happened over the decades since. Do they look to you in any way other than just, we want more representation around the table when it comes to global governance, and we're not going to be bossed around by America and Europe anymore. Do you think politically they stand for more than that? I think it's pretty hard to see evidence that as of yet they do.

6:18I've written a number of pieces, probably over the past five years, trying to specifically suggest some more concrete, objective things the BRICS should do as a political group, such as being a lot more transparent about how they might genuinely cooperate to help each other's economies, and all the obvious things of a more global nature that their size and their possible growth would have huge consequences and influence on, such as climate change, such as global infectious diseases and of course the never-ending topic of whether the dollar could ever have some alternatives and i've i've suggested this to a lot of high-level technocrats across the brick countries and there's always a lot of academic interest in what i say but it it never seemingly penetrates serious thoughts of the highest levels i i don't think the bricks actually have some kind permanent secretariat.

7:21So it's a very loose thing. And sometimes I feel I downplay it. But the thing that they do do is to really highlight the woeful state of global governance. And they do that once a year and occasionally in between. But as of yet, they don't do anything beyond that. And in fact, by adding more countries that seem to be a real licorice all sort of collective nations rather than some specific reason why them and not others, it's effectively undermining their ability to be effective as a group even further. So you say that they don't appear to have a collective purpose. I mean, I was struck that they are doing work on trying to create a new reserve currency that, you know, there's this project to somehow create a basket of their currencies that could become a money transmission mechanism to rival the dollar.

8:14Do you not take any of this terribly seriously? No, I don't. Why not? Because obviously, it looks quite threatening to the world economic order. Yeah, yeah, on a number of very different levels. And I often say to cut to the central point, it's pretty hard to get China and India to sit in a room together and talk about anything, never mind something as major as developing a shared currency. And to turn that into a constructive thing, and I've actually just suggested this to a couple of technocrats recently, especially given our interesting friend back in power in Washington in a couple of months, if you really do want to think of a more fruitful, constructive world, a number of other parts of the world can think of doing things differently they have been.

9:03And one of them, which really would make the BRICS as the economic concept, never mind the political group that I talked about, so much more powerful if China and India truly, truly wanted to embrace trade with each other, and then seriously pursued the idea of both their own currencies being developed and their financial markets being developed more, which would be at the root of a more genuine attempt to create an alternative currency. Whereas what we really have, in reality, is since the sanctions against Russia, including the very clear, let's call it brutal, role of using the dollar as some kind of thing to apply sanctions, the Russians are eagerly trying to persuade the others to pursue some alternative payments mechanism.

9:54The Chinese, obviously, for all the issues about Taiwan and many others for the future have their own eye on those kind of concerns. And so I think there is a technocratic level, some interest in that. But if you delve below the surface, I don't think the Indians could care less. I don't think the Brazilians could really care less, even though Lula talks about an alternative to the dollar every time they get together. Of course, ultimately, it boils down to really hardcore basic things like a central bank and shared monetary policy. And, you know, as you and I know, and many others know over the past few decades, it was quite a tall order to get the euro to come into existence with the European Central Bank.

10:34And who would be the central entity for this shared BRICS currency? I mean, it's just sort of bonkers, really. Can I just ask, because we talked about the political drivers, you know, maybe over the very long term to, you know, create a rival reserve currency. But I would argue that Donald Trump in terms of certainly the policies that he's announced, we don't know whether or not in practice, he'll run the size of deficits that his current tax cutting protectionist policies would imply. But if you run the numbers, you know, it looks as though on the basis of what he said, America is heading for deficits of about 12 % of its national income.

11:14Isn't he doing his best to undermine the dollars reserve currency status? I mean, to try and put it in some slightly more never let a crisis potential go to waste. He's creating some weak version of modern Reaganomics in that weird policy choice that is certainly going to challenge the never-ending strong, seemingly strong belief in Washington that the dollar is always going to be impervious. Because of course, if that results in some reasonably possible chaos in fallout in bond markets over time and with it equity markets and US financial conditions collapse in some version of what we've seen so many times in the past.

11:59One of these times or one of these decades, the dollar won't end up being a safe haven because people will really fear about the ability of the US Treasury to sort of deal with it, as they did rather spectacularly in hindsight in 08, that there'll be a time where they can't. And yes, and that will be the days of the dollar starting to have serious future issues as the reserve currency. And, you know, I've spent more than 40 years thinking about that. That goes back to where my original supposed expertise was about this whole idea of alternatives to the dollar. And if you reflect on our own history here in the UK and the pound's dominance, it is hard to conclude anything other than if your economy doesn't continue to be the most dominant economy in the world, at some point, your currency will cease to be the dominant currency in the world.

12:54But, you know, the pound remained the dominant currency, I think, quite a bit longer than we were the dominant economy. And that's kind of in a way how I think about how it's going on in the US. But when you have the kind of, from an economics perspective, kind of crazy things that we have an incoming US president proposing, it definitely pushes that risk nearer, even though, ironically, as I'm sure you're very aware, the current mood of virtually every sell side analyst you could come across is that this is all wonderful for the dollar, which that's on the basis that the Fed's going to be raising rates and all the rest of it.

13:31But It's clearly fundamentally not a good thing for the long-term health of the US dollar. I would agree with that. There's always a gap which is extremely difficult to sort of calibrate between seeing that there is massive structural weakness, let's call it, in a market. So for years before the financial crisis of 2007-8, we could see some of the risks that were being taken, particularly in debt markets. I actually remember saying, this was in 2006, to an editor of the news at 10. I said that, you know, there's a massive bubble in these markets. There's going to be one almighty crash and we should get it on the 10 o 'clock news.

14:13All right. This would be about the middle of 2006. And the editor said to me, well, when is this going to happen? And I said, well, the problem with bubbles and market crashes is you can never be certain exactly when it's going to happen. and so he said to me oh well which case look let's put it in the top drawer it'll hold for a few weeks but even when you see these structural problems you just don't know when market sentiment is suddenly going to turn do you that's uh right at the core of the fascinating irritating reality of markets it's easy to think markets are stupid i i think and i still do despite 40 years in them but you know there is this quite remarkable ability of them to sort of very implicitly weigh up all these different things going on and absorb all these things that are problematic but it will just be some moment where there's no buyer left let's call it and then that's it in the same sort of context I will never forget when I was the chief economist when I presided over our US guys is putting out our very first, and I think one of the earliest pieces ever, saying that nationwide house prices in the US were unsustainable, and it was very likely in coming years they would decline.

15:35What year was that you put that out? We put it out in 07. Okay. It was early 07, but even that close to when the real mess started, I remember, and I won't say them specifically, I remember talking to highly respected academic economists, including some that had been in close to the Fed, with pretty close contacts to broader policymaking, telling us we're being sensational. And these were people that had and still have huge academic credentials. And then sure enough, the beginnings of it came about six, seven months later. You know, I remember precisely the same time. I mean, after Northern Rock and after we saw the seizing up of those asset-backed bond markets, you know, I would go on the BBC and say, a recession is coming because the financial tap is being turned off.

16:27And I remember that just a sheer number of really distinguished economists and indeed people in government just saying, shut him up. He's wrong. He's talking the economy down and just refusing to look at the mechanics of how financial markets work such that if you can't get money into the system, credit will not be created in the same way. and were obviously heading for a recession. And it was amazing how people would not allow their models at the time, which were not factoring in a recession, they would not challenge these models that they had at the time that simply didn't capture the financial system and how when that seizes up, the economy also seizes up.

17:09Listen, I mean, without trying to flatter you excessively, you played a huge role in trying to create, given your role in public broadcasting at the time, in creating greater awareness of some of the issues that one should consider, and you ended up being bang on. The only thing, not that I'd want to necessarily defend the economics profession, nor for that matter, policy makers, but of course, and this goes also to another aspect of interaction of individuals with financial markets, people don't like trying to forecast recessions by and large unless it becomes your speciality topic and it does link to some technical complexities samuelson's famous thing about stock markets have predicted 10 of the past four recessions i mean because you can get you can get overly carried away but there are certain moments where you can see the gathering of a number of connected forces which greatly increased the probability of it and you were bang on of course you were bang on yes sadly so looking back on it many ways we're uh you know what is it 16 years on the western the western world and this indirectly goes to i think where you're going to go now one of our very very specific challenges in the uk we have had desperately weak productivity in the uk ever since that's certainly right we've had low growth and low productivity stagnating living standards now for 15, 16 years, as you say.

18:41And I was going to sort of point out how influential you have been on policymakers over a number of years, including very recently, Rachel Reeves, the chancellor, citing you, or rather your influence for the way that she has changed her fiscal rules to facilitate more public sector investment. Her budget has come in for quite a lot of criticism, particularly because the official forecasts from the OBR, what they show is a bit of a sort of sugar rush increase in growth in the short term, but then a reduction. And at the end of this parliament, the OBR is forecasting no overall increase in the size of the economy.

19:28And actually, again, over the course of this economy, flatlining more or less living standards. I just wondered whether you felt on this occasion the OBR was being over conservative, over cautious. How do you evaluate this budget? I watched it more closely than a few of the more recent ones for the reasons that you raise. I think as time passes, it could turn out to be the most positively consequential policy shift for at least a couple of decades, going back to the early Brown-Blair years, maybe before. But it depends on whether the Chancellor and her advisors and the broader government learn from the things that perhaps they shouldn't have done that day.

20:17So talk me through what you mean by that. So if you look at, let me link it also to the markets, because we talked to them out a bit, and again, markets are markets. But if you look sort of minute by minute through the budget speech, The gilt market really liked what the Chancellor said at first, including the new framework. And it was only towards the end when she announced the big, I suppose, let's call it Labour Party eye-catching 22 billion for day-to-day spending on the NHS. and then when analysts could get to then look at the OBRs and the other booklets about how they independently interpreted it, that the market started to get worried.

20:58And I think there are three things that are going on here. First of all, and because I've been so focused on it, it sounds a bit odd to say given how many people with the aid of technology analyze everything. I don't think that many people have thought through what the government has set out that it's going to do, possibly to some degree, including the OBR. So I think the real test is going to come in the spring with the spending review and the unveiling of this 10-year infrastructure strategy. what that actually includes will it include for example instead of 20 odd billion on day-to-day spending for the nhs will it will it be as broad to include investments in preventive infectious health diseases because interestingly in its long-term debt sustainability report in september the obr has already taken that kind of work on board and showed that whatever the debt level would be in 2050, take 40 % off it if the government of the day did just that.

22:07This is about catching diseases before they become acute, essentially. It's investing in scanners, maybe obesity, this issue with obesity drugs, things that will help bring all these people, the staggering number of people that have left the labour force over the past decade in the UK. I think it's getting on for something like 700 ,000. bigger than any other G7 country. So we can boost the size of the labor force and its longevity as being actively useful in the workforce, because ultimately, long term growth is about the number of people that are working and their productivity. And I'm pretty sure that if the OBR had, and this is the second issue, I don't think they really had the time to look at some of the things that the government threw at them.

22:57And I think the head of the OBR actually said, they just used a standard across the board, simple investment multiplier. And that won't be, I hope, the process that is used in the spring and beyond, because there will be specific investment projects that the Expanded Infrastructure Commission that's now, let's call it NISTA, and the National Audit Office will have effectively approved. And then I guess, and I hope, the OBR will then look at its trend or long-term growth forecasts and see whether that then makes them think that the long-term trend growth rate, instead of being 1.66, which is what they said it is now, and that was unchanged by this budget, whether it's getting closer to 2.

23:42I think what you're saying is, which I would certainly agree with, but I just want to check, is that actually at the moment, we just haven't got enough detail on what the investment projects will be to be able to make an assessment about whether the long-term growth rate will, over the next few years, trend up to 2 % or just bump along at this unsatisfactory level. I think that's exactly right, along with the third thing, is I think if it was my design, I would have just announced the framework and not announced some of the big things they did that day, which is very easy for me to say because I'm not sitting in the hot seat of real life politics.

24:24But just to be clear, you thought announcing the 22 billion for the NHS at that point was unnecessary and actually spooked providers of capital. And this government desperately needs those people who manage vast pools of capital to be confident in where the government is going. I see it, if I look at how the markets have behaved since, I see it as a healthy message of the ability by market participants to say, be careful, because as we showed, we kind of quite like the idea that the UK is trying to finally do something to boost its investment performance. But you have to do it in a way that yes, you spend more and it's more fruitful.

25:04But you also do it in a way that actually really does excite the private community and investment goes up from the private sector, rather than just using it as a reason to announce a lot more money on things that, as of yet, don't appear to be that good for boosting our productivity. And I think the specific is, of course, the health secretary, Wes Streeting, had said a number of times that there won't be any more money without reform. And so I have to say, I was quite surprised. And it's very, you know, it's very easy for me to say, because as we all know, there's plenty of reasons why the NHS might need more money for day-to-day things.

25:43But I think to do it at the same moment of announcing such a big shift in the framework was a little bit dangerous. But I, you know, that withstanding, I really welcome it because I think the country's been crying out for something like this for quite a long time, because we have this very clear problem of very weak investment spending by both the public and private sector, and extremely weak productivity. It's pretty, you know, economics is a social science, but it would seem pretty clear that those two things relate to each other. Gripping stuff, Jim. But let's just take a quick time out.

26:24Although we haven't got the detail, one of the things I was, I suppose, a little bit disappointed by, given that there is a very clear link between transport investment and productivity, that actually the quantum of what they announced for transport was a bit less than existing plans. I just worried that actually they weren't focused enough on the kind of long-term investment that we desperately need when it comes to boosting living standards. I mean, of course, when it comes to health, there's got to be a focus on preventative and primary. But equally, have they got the balance right between, for example, transport on the one hand, which appears to have been slightly downplayed, versus energy and net zero?

27:16I mean, look, I think you've got to invest in low carbon energy. But it does seem to me that that appears to have, frankly, got the momentum at the moment. And again, some of that investment in energy is simply a substitution. It won't necessarily be productivity enhancing. I have a lot of my own personal favorites of what I would do. But what's really important about this shift, if it's going to be truly fruitful for the country, is that a whole range of projects, let's say 100 things, including transport and all sorts of energy alternatives or more effective energy producing ones as well. And if I put my northern hat on, some of those would be really potentially great for transformative productivity boosting things in the north, such as small modular reactors and nuclear.

28:13But it's not for me to say this is what should happen, although I will. What's really the case is that with the core people at Treasury and probably from Johnny Reynolds' department and maybe others, the NISTA is presented with, I don't know, a hundred things to be working on, of which the 20 that seem as though they're going to have the most positive multiplier effect, consistent with some kind of goals of the current government, then go through the process, and we see what comes out at the end. Because I think the thing that, when I see what people write about what the shift has been and certainly the role that some of us have played.

29:00As we know, with a dreadful example of HS2, you don't want to just throw more money at it. You want to make sure that the probability of it going to something that's likely to be positive multiplier, long-term growth enhancing, and done in a credible way, is also likely to be of increased probability. Because otherwise, you know, for all the reasons why many skeptics, especially on the right, who essentially say, you know, governments can't do any of this stuff well, then you would end up in the mess where you've just created a colossal amount of debt that is not going to be able to be repaid through higher growth.

29:38Is there any way of resurrecting the northern leg of HS2 so that it does become productivity and halting and, you know, creates an enormous amount of added value? I don't know if there is. You know, I spend a lot of my time involved in all these things. I'm fresh from last week and this remarkable memorial for Howard Bernstein, who was at the centre of Manchester's incredible resurrection. I've never been at an event quite like it, Robert, to be honest with you. There's a couple of people who reminded me because the whole Northern Pairhouse idea came out of this City's Growth Commission that I chaired.

30:11And a couple of the colleagues on that were a side event that I was participating in. and reminded me that we had effectively suggested back in the day that HS2 should have started in the north and then you might have ended up with a lot more logical process than where we are today. So I think given the understandable and justifiable concerns about the sheer colossal overspend of getting us to where we are and the fact they've got to get this thing into Houston because why on earth would you have it just stopping at Old Oak Common? You know, it is very, very difficult for a government faced with all these other things to really think, okay, we're going to resurrect it very close to what it was.

30:58However, I know there are some pretty savvy people that are working, beavering away on some cheaper alternative that would really remove the congestion problem. I've always been of the opinion myself that the speed issue is a bit of a red herring. I mean, I've traveled back and forth between Manchester and London for over 40 years. And you can now do that journey in half the speed that it used to be. And I don't really think making it half an hour quicker is really that crucial. But the congestion issue and making more space for freight, which often gets under discussed in the issues. And the thing that one would really like to see is proper urgency in getting from concept to delivery.

31:44One of the things we're terrible in this country is executing on these projects in a timely and cost effective way. And I feel almost panicked about it at the moment, partly because we now see in the outcome of the American election is how many millions of Americans are saying the flatlining of my living standards matters more to me than whether I've got doubts about whether or not Donald Trump really believes in democracy and really believes in the American Constitution. And I think this is a problem all over the West, that the system has basically failed millions of people on average and below average incomes.