Bloomberg Audio Studios, Podcasts, radio News. I have news. AI isn't actually magic. It might have the potential to transform our world, but like everything else out there, it is only a function of the amount of energy it uses, and it uses a lot, an awful lot. How much for that? I've got a new column out on Bloomberg dot Com I want you to go and look at.
I talk about the various estimates of how much energy it uses, and the most most quoted estimates suggests it's going to be using as much as a small western country within the next couple of years. There are more excitable for custom that so either way, we are talking an awful lot of energy. Where is it going to come from? I think if you've been listening to this podcast for a while, you know where we think the electricity to power everything from the transition to AI is
going to come from. It's going to come from nuculus. If you're insted in AI, be interested in uranium, which brings me to John. Hi, John, Hey Maan, It's nearly icy season, right? You love ice? The season is the.
Season is clear, It's even better than budget season.
Yeah, y season is the best because ice season we get to talk about how you can save twenty grand a year into a wrapper and you can put pretty much anything you like in that wrapper, even UK stocks, even UK stocks you can put in that wrapper. And then you can just leave it all sitting in there and you never pay another penny of tax on that money.
It's absolutely brilliant. The only thing you have to do is try and find the money to put in the wrapper, and then try and figure out what to invest that money in once it's in the wrapper. And that's why we have you John for ideas. What do we do with that money? Here we are, we're so lucky, We've got twenty grand sitting in a wrapper. What are we going to do?
I'm glad that you asked that question, man. In fact, I was waiting about this very morning. First of all, does cash, if you are interested in cash, cash is suddenly getting your actually getting your real root on on your cash, which is not something that we've had for a very very long time.
Yeah, and you know what, we haven't had it for ages. But and you can. You can buy a money market fund, you know, you can get your four five percent. And this is really interesting. I was talking to someone the other day who was saying to me that the capital preservation investment trust, the ones that you and I love so much or have loved so much over the years, capital gearing, personal assets, ri etc. They've all been suffering
a little. And one of the reasons there, I am told, is because you know, if you want capital preservation now in the old days, you know, oh, I don't really want cash because it's not preserving my capital because it's being eroded gradually by inflation. But now get a proper return on cash or a money market fund for example. So if you want to preserve your capital, if you want to get rid of your risk but keep up with inflation, then you know, you can just go cash.
You don't have to go for one of these big trusts. I love these big trusts still. But nonetheless it's not you don't have to do.
It, yeah exactly, And I mean I think it's that a thing where actually your money is going to go ahead of inflation, and so you then have to think, well, actually, maybe two or three percent rail is a perfectly decent return if that's you know, that's what you're looking for, and if you're looking for something that you needed, I mean I would still say cash is mostly just for either diversification and that everyone should have a bit of cash or for the short term something that you can't
afford to invest for more than five years. But if you do like income but you also like investing, then wow, have we got some ideas for you. The AIC just released its latest Dividend Heroes list of investment trusts. So these are investment trusts that have raised their dividends for various you know, like every single year. And at the top you've got ones that have actually lifted their dividends every year for fifty seven years in a row. And to make this list.
Is quite impressive, come on, quite impressive that a lot of stuff has happened over the last fifty odd years and to be able to continue to raise your dividends for it higher period suggests some fairly good management in place.
If you look at the long term returns, and obviously a big chunk of these returns do come from the dividend and reinvested dividend. But if you are looking for something that is consistently mice to kind of you know, keep paying you an income over a prolonged period of time, and I realize obviously that you know, investment trusts can take dividend income out of their capital rather than just
the dividends that they're getting paid. But even then, if something's mice to do it for fifty odd years without any major hitches, then as you say, you have to think that something's going right. So they kind of the top of the last that fifty seven years is the City of London Investment.
Trust, Great Trust.
Yeah, I think that one that comes very popular was about paying about five percent, and this book treating on a minor, very very small discount go on the list. John more than Less, bank Kill's Investment Trust, Alliance Trust, Caledonia Investments. That's why we quite like.
Yeah, we like both of them. I mean, Alliance has had a difficult time five six years ago, pull yourself together, put a new system for managing the money in place and has done really well ever since. Caledonian of course, had a lot of private stuff and so we you know, if you're not interested in a big trust that has various private investments, don't touch that one. If you are worth a look what comes after that.
Come on another couple on the UK equity income, said JP Morgan Claverhouse and also the muddy income trust Merchants Trust. UK equity Income. Actually Scottish mort gets us on this is it.
Well, they've done a great job too in raising their different end, if not necessarily and not listening, but you know, UK equity income is a great place to look and we've talked about this before. You know, it's one of the few markets where you can get a proper dividend yield on your money. And Mark Dampierre at Huger's Landsdown, we've talked about this before as well. He was used to refer to these great big companies as Nature's annuity
and can buy these big trusts. You can get your your four percent or so every year and you can still have control over your capital and that's really worth something. Well, you might not make the amazing capital returns that you've made in the US market over the last decade or so, but you've certainly had stability and an income. And Scottish mortgage, of course, this is interesting. Scottish mortgage, which of course has had an absolute horrid time since the end of
the growth bubble. They did announce relatively recently this huge buyback, you know, a billion pounds worth of cash put to one side to buy back the shares and try and close that discount in the idea that they're being to suggest. Well, in fact, the portfolio that they have at the moment, they believe it's a great portfolio. They believe it's cheap, so the best thing they can do for shaholder is
to use spare cash to buy shares in themselves. So you know, that's quite a vote of confidence in the trust. Hose surprised that its shapheres didn't move more on the news, but it didn't. You know, it's still an interesting trust, even though I am aware that lots of listener as well have lost a big pile of money on it over the last few years.
That is an interesting move on the buy back, And as you say, I do think it's quite a significant vote of confidence either. And people can be snooty about it, and they can you point out that the nature I buy back is in many ways not different to any
other form of capital return. But the point is that you know they've got the conviction that this is a good idea because they you know, you look kind of stupid if you did this and then the share price continued to fall, So I like to see that kind of conviction, particularly in an area like investment trust, where you know, arguably a lot of the issues with the sector just now are a bit like the issues with the UK at large, which is it's more sentiment driven
than any kind of actual underlying issue with anything. The other couple of interests once black Rock smaller companies and tenders and smaller companies, or a couple of these kind of UK smaller companies on that list. They've both raised a dividend for yeah, twenty years and at all dividend levels around about three percent, and you still.
End up with that, You'll end up with it, Okay, a yield of around three percent. It's not awful. It's not awful at all. And you know, if if we're right, which we may or may not be, about how cheap UK small caps are and how when people come back to this market, it'll move quite fast and those will be interesting places to be anyway. So that's quite interesting list, a couple of ideas for anyone looking at their eyes
of this year. But the key thing, the absolutely key thing, is to remember that if you can afford to put cash into your ICA, you really really should It's a fantastic wrapper and a great way to say, right, John, if you've got anything negative to say about isis John.
No, I don't not at all. Actually not In the other quick thing, you can't lie or in tax allowances to shield you from the tax on your interest income anymore cause of raising and trade streets. So if you're twenty percent and come tax period, you've got one thousand pound personal savings and loans. But if you get anything over twenty thousand pounds in a decent cash aer or in a decent cash account, though, then that will bump you over that limit. So that's why it's also what
thinking about your eyes are particularly this year. We're just perhaps in the past that hasn't been on the cash seed.
Okay, look at that tax advice on top of everything. Thanks John. Welcome to Meron Talks Money, the podcast in which people who know the markets explain the markets. I'm Maren zumset Web. Now this week we're going to do things a little bit differently. I did an absolutely fantastic interview with one of the most interesting men in economics a few weeks ago, the economist and author Bernard Connolly.
You may know him from the Rotten Heart of Europe, The Dirty War for Europe's Money, a book that was not popular with the EU that I rather enjoyed, and You Always Hurd the one you Love, Central Banks and the Murder of Capitalism. Now, what we're going to do here is that John and I are going to talk all the way through the interview, not just at the end. So bad luck for those of you who've just come
to listen to the new Voices. This time you get to listen to me and John interrupting the entire way through. Here we go and thank you so much for joining us today. But we haven't spoken to you and I properly since gosh, mid twenty twenty, I don't think so. Since then you have published the book that we talked about. Then it's a whopper. It's called You Always Hurt, the Ones you Love, Central Banks and the Murder of Capitalism.
It's very well reviewed. Right there on the front is a quote from Mervyn King Connolly does not Take Prisoners a book to be read by.
Anyone interested in political economy today, which it most certainly is. But what it's really about, and I suppose an alternative title for it could have been the big mistake, right, Because what we're talking about here is what has gone wrong with capitalism based on a big mistake made by the World Central Bank.
So why don't we start with that. If we started, say with the mid nineties, big place a good place to start with a big mistake began.
I think it would for two reasons. First of all, certainly if one's thinking about the US, which of course is the most important economy, the mid nineties were a period of what one can troll, what can call into temporal equilibrium. That is to say that it appeared that the plans of businesses investors on the one hand, and savers consumers on the other were in some sort of
reasonable alignment. And in those conditions it's possible to have equilibrium in the short term full employment and inflation at a target at a target rate. And in the long term that's to say that the balance of supply and demand in the economy will remain balanced, not just today but in the future. And ensuring that means getting the interest rate right. The interest rates is the link between the present and the future.
Okay, John, I want to interrupt here. I know I'm interrupting quite early, but there's a really crucial idea that runs through all of Bernard's work that is about intertemporal equilibrium. And I'll just read you a little bit from the introduction of the book. Central to the thesis of this book is an emphasis on intertemporal relations, the economic relations between the present, including the legacy of the past and the capital stock and the future. That emphasis points to
an essential feature of capitalism. It is stored up something. So everything is stored up something. And we talked about this in the context of energy, right everything around you is the result of stored up and then used energy. And when he talks about everything to do with economics, he's talking about the interest rate, seeing the instrument of allocating resources between time, and if you get the interest rate too low, you pull resource use forward, and if
you set it too high, you push it away. So what you're looking for is a correct interest rate that allows the allocation of capital to be correct and so to be correctly allocated between what we invest in and what we consume. Is that how you understand it as well?
Yeah?
Absolutely, I mean I think the most interesting thing about it, and obviously Bernard goes on to talk about this is the fact that this is technically the most important number in markets, and it's also the one that is set artificially by central banks. So you do have to wonder if there would be a better way of setting this number in such a way that to actually distributed resources or allocated resources correctly over time. But yes, I think he ends up getting to that.
Yeah. So the key thing here is that we do have an organization that sets the most important number in the world, the interest rate, and we rely on them to get it right. And the key thing that Bernard talks about is them getting it wrong and how they got it wrong, and the miserable consequences of all that. But that it might I just want to read one more a little bit from the book. I'm basically doing this to prove to you that I have read the book,
which is for six hundred. As long as everyone understands that bit, it is a monster, but it's an excellent monster. Now, there is an interesting bit, and I think a lot of people have forgotten this, which is that pre nineteen ninety six, there was no explicit inflation target in the US. This whole two percent nonsense did not exist, and it wasn't clear that it was going to be two percent.
So there was a point in nineteen ninety six, in July one of the Central Bank meetings meetings of the FOMC, he was pushed into trying to defy price sability what that means. Because the FED was responsible for price stability, they don't really defined it, and so Janet Yellen, who was a FED governor at the time and is now obviously in charge of everything, asked him to describe it
and define it. And at the time he said, we're talking about Alan Greenspan here, the state in which expected changes in the general price level do not effectively alter business or household decisions, right, so you don't change the way you behave based on where you expect inflation to go. But she wasn't having even anything that big. She wanted a real number, so she pushed and pushed from to put a number on it. And do you know what he initially said. He said, I would say the number
is zero if it is properly measured. So there was a little chance in there where the inflation target was going to be not two percent but zero. Anyway, everyone else kind of pushed back and there was a big discussion and At the end of the discussion, Greenspan said, we have now all agreed on two percent, and from that meeting in nineteen ninety six, it all begins.
Before then, the Bank in New Zealand had already gone for two percent, and I actually seem to remember them at one point in having a discussion of it whether it should be as high as five percent. So it's interesting. That's interesting the Greenspan pointed zero.
In the mid nineties, there was the beginning of a very favorable change in the US economy, a change in productivity growth as results of improved business practices, an improved political environment in terms of acceptance of capitalism, and of course technological advances. What on a green span. The Chairman of the FED at the time was to call the new economy. Now, what happens when there's a favorable change in productivity expectations, initially on the part of firms, because consumers'
households don't see that. As soon as the relevant firms do, the rate, the expected rates of return on investment for those firms who have got the favorable opportunities goes up. You can go up a long long way, as we saw in many instances Now, for the economy as a whole, a sharp rise in the rate of return in a subset of firms means a more moderate rise in what
we could call the economy wide average expected rates of return. Now, what should happen in those circumstances is that the ex anty real rates of interest goes up to match that increase in the economy wide expected rates of return. And what does that increase in the rate of interest were it to happen, what does it do well? It doesn't affect the high rates of return companies at all. They just carry on. Their rate of return is far higher
than the economy wide average. It does hold back investment in other sectors with lower rates of return, lower future productivity expectations, and it somewhat holds back consumption. Now, I think it's important to recognize that by and large, it's not truly in every single case, but by and large, productivity improvement requires physical investment first, and physical investment while it's being done adds to aggregate demand. When it's being done,
it's added to aggregate supply. So what one needs is other elements of demand to be held back during the period of strong investment growth in high rates of return companies, and that's done by an increase in the interest rate.
When that investment has been done, other things being equal, aggregate demand falls, aggregate supply has gone up, the interest rate comes back down, and previously postponed if investment projects in other senctions of the economy get done previously postponed consumption comes into play, and the trusts and valleys of
the economy can be smoothed out. Now that didn't happen, And why didn't it happens because central banks and the economists who work in central banks were increasingly bewitched by an academic macroeconomic model with a mathematical elaboration. Now, Greenspan was very quick, quicker than most people, to see the productivity growth in the United States is going to improve. But the conclusion he drew from that was the wrong one, just as Niger Lawson had drawn the wrong conclusion in
Britain in somewhat similar circumstances a decade before. He thought, improved productivity growth lower rates of inflation at every rate of interest, so I don't need to raise interest rates, And he held off raising interest rates until there was such an obvious, massive speculative boom by the end of the nineteen nineties, he had no choice. Now, the speculative boom itself was in part or in large part, the result of keeping interest rates below an appropriate level given
the future, as well as the president. When the boom collapsed in two thousand, the Fed realized it was going to have to cut interest rates to prevent a recession. It didn't realize how far it was going to have to cut rates, so how long you would have to keep rates low, And it didn't realize just how deep the recession could have been in the absence of that rescue operation from the Fed.
Okay, John, I'm just going to stop again here. This is where the whole thing happened when what he called, you know, the original sin was made when Alan Greenspent recognized that productivity was going to rise sharply. This looks great, but then he made the wrong decision. It's so simple, all the way Bernard describes it. It's so simple. One misinterpretation of how capitalism should really work, of how he should have shifted interest rates, and all crises follow from there.
Right, Yeah, And I mean I'm glad to see Greenspan getting name checked in this because I think people forget now that he is ultimately certainly in marview, and it's nice to see in Bernards as well, the architect of essentially everything that has happened in the last twenty odd years, you know. And it's basically does boil, don't you this
mistake with interest rates? So as I understand the way that ber Nuds can only put it, he's saying that productivity is shot up, and rather than worrying about the effect has had one in inflation effectively, because it basically meant inflation was going down along with all the other geopolitical stuff that was happening. Greenspancher dencognites, this was a
good thing. Just put up with the not cut interest rates or reduced interest rates, maybe even put them up, and that would have encouraged all the investment to go into the most productive bit of the economy at that point, rather than being misallocated and a lot can of flop around the edges. Is that basically what he's saying.
Absolutely, And you know, the extraordinary thing is that he did recognize that productivity change. I mean that was you know, there was a genius there because other people didn't. And again I'm going back to the book, page one ninety nine.
For those of you who think I haven't read it all, it will go page one ninety nine, really motoring through now, where Bernard talks about various papers that have been written on this and notes that the productivity trend in the US accelerated quite markedly in the period from nineteen ninety five to two thousand and one as compared to the period from seventeen ninety three to nineteen ninety five, with nineteen ninety five marked out as a very significant year
and inflection point for productivity in the US. And we're talking about a paper here written by Mangled Larry Meyer, who wrote the Greenspan's call on the productivity acceleration was a truly great one. He got it right before the rest of us did. But he got it right, and then, oh boy, oh boy, did he get it wrong. So Greenspan, having spotted a coming acceleration in productivity not yet apparent in the data, took the view that he could keep
interest rates lower than otherwise. And here's interesting as well. He did this in the face of anguished please from several other FMAC members that rapidly falling unemployment was likely to lead to accelerating inflation. So when people look back at this, they see it as a great triumph of his chairmanship, the great brilliance of Greenspan that he didn't rate interest at the time. But of course the premise for Bernard is that it was the worst mistake anyone
has ever made. Now well, in economic terms anyway, won't be not the worst, there's got to be worse, but pretty bad, pretty bad. And I want to go back to where the UK did something very similar. So we're going to go on here and we're going to talk about the US. But if you go back in Bernard's book, page one twenty eight, we get to a point where we talk about how this happened in the UK. So
there were voices in the bank, notably Mervin Kings. We've had We've talked to Mervin King a lot before you and I, and we have a meeting's mind in various things in favor of higher interest rates to restrain domestic demand and prevent a dangerous bubble. The debate within the bank was settled for a short time in the early two thousands when the Governor Eddie George averred that unbalanced
growth is better than no growth. And here we get her a nice little assigne, very Bernard style, a phrase that may have inspired Theresa May and her baffling conviction that a bad deal with the EU was better than now. There in Britain, as in the US, the damage that already been done by the early two thousands into temporal dis equilibrium was firmly established. Miseries on miseries.
Well, the one other thing I wonder about with that is I'd like to know, and I don't know bernadreits about this, but how much of this was just an element of political spinelessness as well, because Greenspan could really badly burnt in nineteen ninety four when he basically crashed the US bond market by raising interest rates faster than
markets would have liked. And I've always had the impression that really after that he was kind of keeping one eye on Wall Street as to how pleased or happy they were with the way he was doing things, because at the end of the day he also lower in interest rates, or so keeping them lower than they should be is the easy way out most of the time, unless like inflation is going absolutely bonkers like it did here. Recently.
Nobody's going to complain that you aventry streets are loyal than they should be, because that's when you get to run out and spend lots of money. Basically, so it's kind of a modal feeling, not until.
They see the consequences a decade later, a Moorral failing too. Yeah. I do think Alan Greenspan's ever going to come on this podcast, is.
He let's try and get hope be.
Good, right onwards back to Bernard. Okay, so just be clear where we've got to hear is that when this great productivity boom or potential productivity boom became clear, the correct thing for Alan Greenspun to have done, and he noticed it, which is a good, good thing, right, we praise him for that he noticed it happening. What he should have done is allowed interest rates to rise or put up interest rights, put up interest rates to encourage
investment only in these very productive sectors. Hold off investment elsewhere, hold off consumption because people could get more money with their money on deposit than elsewhere, So it holds off consumption for a while. Then we get this investment in the productive sectors that's complete. And then of course we need the consumption to come in, and we need other sectors to use these new productive ways of working in their own businesses. That should all come in then and
everything would be absolutely fine. Interest rates would have done their job in translating the present into the future and we would have been in a wonderful place. Instead of which Greenspan, despite noting this, made the wrong choice, kept interest rate too low, and then we got that first bubble that then led us into the next bit. We're
having had a bubble, and that bubble then collapsed. We move in for a recessionary environment, where upon central bankers, and I'm moving us a little further forward here, central bankers panic push interest rates down again, further and further and on we go from there. The so that first mistake led us into the environment where interest rates became almost permanently too low.
Yeah, So what does too low mean? When you push interest rates down in the face of a recession, you get an initial bump, but you're going to trend down again afterwards, unless well unless, what unless you keep reducing interest rates, which the Fed did all the way from twenty and two thousand and four, or you create a bubble another bubble. Now, it's perhaps worth distinguishing two kinds of bubble. What I think in the book I call
the trader's bubble. That's to say, a boom in asset prices, equities, and very important in the United States at that time, in the housing market. And doing that creates a kind of illusory wealth that gives people the impression that even that their future incomes are going to go up sharply, and even if their growth of spending is less than their expected growth, they're expected very sharp growth of income is still faster than the actual growth of income, the
actual growth of productive potential. A second bubble is in credit, where rather than thinking, oh my goodness, I'm spent today, I'm going to have to pay back tomorrow, so I have less to spend tomorrow, people think, oh, it just doesn't matter. I can borrow as much as as I like,
never going to have to pay it back. And those two bubbles in asset prices and in credits were characteristic of the US economy from round about two thousand and three until the end of two thousand and six in the housing market, two thousand and seven in the credit markets, the end of the equity market Okay.
So very brief interruption here. Low interest rates were kept too low for too long. We get this kink in what should have been a time, a different kind of timeline, where these very low interest rates dragged consumption forwards from the future in a way that we really shouldn't have allowed. So you get too much too early, and that's when everything goes wrong, because that begins to turn into bubbles. Right.
Yeah, And as I understood that, the problem is that basically the consumer consumed too much, and then they're coinstantly trying to run in the standstill because they haven't to catch up with themselves because they've overspent, basically, And the only way to get around that is to keep pushing the interest rates law and law still, and then you get even more misallocation, and then that's what leads to the bubbles.
Yeah, and you create a credit bubble at the same time, people get forced into debt because they've pilled their spending forwards and they have to borrow to catch up later. Yeah. Well, very very difficult, but it did. All these bubbles represented effectively the same thing, the pulling ford, pulling back should I say, of what should have been future spending and futuring future investment. So you're messing around with time. It's there what you call an inter temper of dis equilibrium.
All bubbles represent that pulling forward of stuff that should be happening ten to fifteen, twenty years out.
And that's a big problem for capitalism because what capitalism is about the relationship between the present, notably the capital stock, and the future, and the market that regulates those relationships is the most obviously rigged market of all. Now, it may be necessary to rig that market. Central banks may be necessary. That's the debate one can have perhaps another time. But given that central banks are there and they are rigging their market, if they get it wrong, it is
a potential and in fact an actual disaster for capitalism. Now, when one thinks about the crisis in two thousand and eight, I think recognize that yes, was irresponsible, greedy, stupid behavior on the part of quite a number of financial market institutions and players. We can't deny that. But I think it's also important to stress that those institutions and players were responding to the incentives that the market for time, the market for money rigged by the central bank, had
given them. The central bank needed that irresponsible behavior in order to create the pretense that things were going back to normal. Having slashed interest rates between two thousand and one and two thousand and four, the Fed managed to get short rates at any rate back up to something like what they considered a normal level by two thousand
and six. They would not have been able to do that without the bubbles, without the irresponsible behavior for which they had given the incentives, and one could see a repeat of that post crisis. The central banks were concerned to try to return turned to normal, and by normal they meant a situation in which short rates of interest were sort of where they've been in the middle of the two thousands and again, in order to do that, they had to deliberately induce bubbles.
Okay, now, the next interesting bit is when we start talking about COVID, because this really, or the responses to COVID, should we say, the policies around the pandemic rather than the pandemic itself, because this is when things really began
to shift in an extreme direction. As far as far as Bernard's is it, so he's that whether whether you approve of lockdowns or not of lockdowns, et cetera, it became a period when we began to develop even more of a fiscal bubble than we had had before, and that is where he gets very concerned.
Well, the interesting things about this is that the the in the way, the obvious response and what we got after two thousand and eight was basically sovereigns as in countries taken on all of the date that had accrued in the private sector, and that then just kind of like chalk the economy for quite some time, and it was COVID that kind of led to, I guess what we've got now, which is the kind of very prominent fiscal bubble, which I guess I would have expected to
have happened actually potentially much earlier after two thousand and eight, but centers now long that's kind of taken to come with fruission.
A lot of things take longer than you think, and then you have an awful lot of people who think if something doesn't happen, but then the first year or the first year and a half, it's never going to happen. A lot of new things are very slow burn. Now. A lot of the fiscal difficulties here they stem from the beginning of the response to COVID, right. I mean, there was the beginnings of a sense that there might be a fiscal responsibility underway pre COVID, and then we
moved into this environment where governments had no choice. Was certainly felt that they had no choice to go on one of the greatest fiscal splurges ever and one of the greatest monetary splurges ever, and we're now suffering from the after effects of that. But of course the interesting thing being that the deficits aren't coming back to levels that you might have expected, So the COVID defics, it'd be persisting rather than disappearing.
Yes, it is. I agree with you that well, given the fact of lockdowns, at least the initial lockdowns, it would have been socially explosive for the government not to support the incomes of those people who've been told sorry, you're not allowed to go to work anymore. Whether the lockdowns themselves sensible is a big question. I think a lot of the evidence since then suggests that they weren't. But let's leave that aside. The problem has been the
problem has been had since then. The extension and the repeated nature of lockdowns culcated a sort of feeling that well, governments will always bail everyone out whatever goes wrong, not just the financial system as they did in two thousand and eight, but the ordinary man in the street, if you like, the ordinary woman in the street, in a whole range of circumstances, and of course I'm sitting here in London and Britain is perhaps the prime example of
a country where people seem to have given up work, or a great many people seem to have given up work, and absent some man of from heaven. Perhaps I come back to that again in a moment. Absent some man of from heaven, productivity growth is just going to get lower and lower. Regulation, high taxation, the transformation of the education system into indoctrination, camps in political correctness, a seeming unwillingness to work on the part of a large part
of the population. None of those are conducive to productivity growth, or indeed even to the maintenance of the level of productive potential. And in those circumstances, budget deficits and simply not going to come down. And that the bubbles we saw in the second half of the nineties, the bubbles we saw in the two thousands, and again during COVID induced by monetary policy and now being supplemented by a
public finance bubble. It is not possible for people to spend in the future what they think their incomes will be unless that public finance bubble continues and debt ratios grow and grow and grow until there is inevitably a physical crisis. And the risk is that the physical crisis will be met by a renewed resort to bond buying by central banks, and of course the outcome of that, in the circumstances positive, will be in flame and conceivably even hyperinflation. So it's not a pleasant picture.
Do you expect to see inflation fallback down again, do you expect to see rates follow them down? Or do you expect an outbreak of common sense among the central bankers of the world.
Common sense won't be enough. And I tried to explain why part of the inflation that we've seen since twenty twenty one was indeed not just transient and it would just go away, but actually transitory in the sort of technical statistical sense of the term that the price that
goes up would come back down again. And the reason part of the inflation was to do with the disruption of production, the disruption of supply chains, very sharp increases in the prices of a whole range of raw and the dustrial materials, and it was reasonable to expect from let's say, from the starting point of the autumn of twenty twenty, that some of those prices would come back down again. And indeed a little bit of that has happened,
only a little bit, but it's happened with goods. Prices in the US, for instance, have been falling from about the middle of last year. However, that's what the transitory nature of inflation is. What would have happened if the FEDS, if these central banks hand indulged in the massive spurge of bond buying in which they did indulge during the pandemic.
They created super tight labor markets, very low rates of unemployment, massive numbers of vacancies are worse than efficiency of the labor market in terms of matching vacancies, and the unemployed inevitably created inflation, which is not transitory. Now what we've started to see again, let me focus on the US because that tends to lead and to direct everything else is. But the indications are that unless the economy weakens and
weakens quite soon and quite significantly. The non transit chair elements of inflation are not going to go down any further, and they could even start going up again, and that is a big problem the same. I think it's true of Britain for instance. Now it's a big problem for the central banks because they're looking at an inflation rate which may not go down any further. It's still significantly above target, much more so here in Britain than this
is in the United States. Of course, some tentative indications of a little bit of weakening in the economy. Now what do they do. Do they say, Oh, we think inflation rate is going to continue to come down and the economy, like we could a bit, let's cut rates. If they do that quickly, and if they do that substantially, then I think we're going to be off to the races again in terms of inflation. If they don't do it will be continued and aggravated weakening of real economies.
I think the idea that with the notions of immaculate disinflation and self landing are simply wrong. Unfortunately, that's not what's going to happen.
Okay, Now, this bit, John, I find this bit really interesting because there is this whole question of to what extent do central banks have self knowledge or have they developed self knowledge? Are they beginning to understand what they're doing? How long term are they beginning to think in terms of their models and their ideas. And we know that a Bank of England, for example, are beginning to question their models, and we know that their forecasts have been
absolutely awful. Interesting. I was reading something the other day looking at independent forecasts of interest rates and central bank forecasts of interest rates, and interestingly, the independent ones, while also awful, marginally better than the central bank ones, which begs the question is why anyone ever listens to central banks at all? Because models are even worse than the
private sector models. So I have this conversation with Bernard about whether we're beginning to see some change there in and I feel a little change and a little culpability. But but Bernard, really he just doesn't. He's not giving any quarter here, is he.
No, he's definitely not having the optimistic view. I suppose they'd probably be more endured camp from the point of view that I think it's clear that there are questions being asked. I think that there are a lot of central bankers who are aware that their power is actually probably reaching far beyond what it should in a democratic society as well, although to be fair, a lot of those ones used to be in the MPC, and I don't hear that kind of talk from the ones who
are currently in the NPC. But I think part of the problem with central banks in general is that you have to question whether the institution and its current form should exist at all. I mean it goes back to that point we were making earlier about if the industry is the most important number in markets, then why is it being set by a small group of people in a room somewhere. I mean, it is effectively central planning of you know what we're arguing is the most important
number in finance. So why is the kind of like the lynchpin of the capitalist economy basically a classic example of central planning. That's kind of a philosophical issue. Should they even exist?
Yeah? Yeah, And you know what, John, you've gone off topics. Yes, but then it's totally interesting. So I'm gonna leave that. I'm going to let you get away with that one. Like right back to Bernard, do not have a sense Bernard.
But I am getting that the central bankers are beginning to understand what they have done, and that they are looking at very very very long term interest rate trends and thinking for themselves, we need to find a way to keep rates up there with five thousand dear trends and maybe trying to hang in there around four and five percent, as opposed to wanting to go straight back down again. We know, for example, that the Bank of
England is questioning their model. Obviously they're questioning with the wrong people, and they look at their models to already agree with that model. But there's definitely a sense of questioning, how did we let this happen? What have we done wrong? Because you know, while they might present themselves as being victims of global circumstances, I think inside central banks there is definitely an awareness that they hold a degree of culpability.
I think you're being a little bit optimistic. The point about the canonical model is that it says you the sharks are both in a explicable YEP and unpredictable. You can't predict the next anity, you can't explain them expost. Now that's been a tenetive central bank thinking for twenty five years. How long can they continue to do that in the face of what has been a mess. They will hope that they get a self landing. They will
hope that things go back to normal again. There hasn't been the sort of questioning, either of macroeconomic orthodoxy or of central bank practice that there was in the nineteen thirties. After things have very obviously gone wrong, there's a whole new paradigm. Not necessarily a better paradigm, but there's a
whole new paradigm. There's a ferment of intellectual activity in economics, which maybe it's passed me by, but I'm not that radical examination of the foundations of the economic theory that drives central banks is happening.
All right, Maybe not, but there must be an awareness. And one of the things that you say a lot in the book is you make the point over and over again that if we can't deliver for the young, we will lose capitalism and democracy along the way. The young and much of the world are disenchanted by capitalism's
the parent failure to liver for them. They're beguiled by socialism promises and cruelly voish by its fake morality and elsewhere in the book you say that if we can't respect the public's wishes to make capitalism something that brings benefit to everybody rather than something that is equated with bringing markets and making the rich richer, democracy nor capitalism
we can survive. These are very big things. And central banks, as much as governments, are surely aware that the way that we're running economies at the moment is not good for the many. It's in the main good for the few. We've corrupted capitalism to the point where we're on the
edge of bringing it down. So with that awareness, one likes to think that between them, elected governments and central banks may perhaps do something very pessimistic that anything will be done, and if it isn't, we end up in a world that is either either communist or hyperinflationary.
Well, governments like to think that they will do things. It's quite hard to think of anything terribly positive that Western governments have done over the past few years. It's quite hard to think of anything that, for instance, the present British government has done at all. The idea that one needs to capitalism is around, but unfortunately, the predominated idea for rebooting capitalism is essentially corporatist. It's the ideas
of what one might call Davos man. Davos's man appears to have an enormous degree of control would be the wrong word, but influence over elected governments. Populations are increasingly disenchanted with their elected governments, and we're seeing everywhere a swing towards what one used to call populist ideas, but I think are rather more worrying than populist ideas in
the present. I just don't see a willingness even and certainly not an ability on the behalf of governments to even attempt to put things right.
Okay, So, Bernard, what I'm going to do is I'm going to put you in charge of the world right now for ten years. Okay, I mean that's quite a gift, right.
Or a curse?
What ten years is long enough?
Years?
Long enough? You have full control for ten years. This is very democratic. But you know, let's go with it. Let's go with it. What do you do to make this right? What do you do to get it out of this environment where we have this huge amount for you call a Losory wealth, where we've pulled the wealth of the future forward into the present, where we've got in first. Rates simply don't reflect the way economies should
be run. Where we have massive debt and deficit problems in every Western government, and we have stagnating productivity and angry populations. What would you do to make this okay? And I know that you could go back and say, well, I wouldn't have started where they did in the nineteen nineties, and that would be fair.
But here we are, here we are what do we do from here? Well? I think there are two essential elements of what should be done. One is, at first the recognition which I perhaps you to see Marin Premps, but I don't yet of what has gone wrong intellectually, if you like, with the macroecoing model. And second, it requires a radical program of de rigging of markets, taking control away or influencing away from danbos Man and giving
you back to markets. Now, I'm not generally regarded as being into the eastern left wing, and I'm not, but I think that the rather left wing Nobel laureate Joe Stiglitz had a lot of sensible things to say about the how one can rig d rig markets. My way of doing it would perhaps be rather a bit different from his. There needs to be deregulation, or perhaps more precisely, there needs to be a change in regulation to avoid regulatory capture by the nomenclatura as I think one could
one can call it. There needs to be a shift in the taxation system away from disincentivizing thrift, enterprise initiative, sensible commercial risk taking.
If you were doing a budget right now and you could make one big tax change to existing taxes, I know you have a I know you have a thought on a new tax, but on existing taxes. But what would it be one thing you could.
Do onistic taxes. Given the state of the public finances and given the difficulty of cutting public expenditure, although that certainly needs to be done, one can't just cut a tax without an offset somewhere else. And you mentioned a possible upset, but let's leave them aside from the moment. I would cut high rates of income tax, not just a single tax rate that that can solve those problems, right, But I would stress that, you know, I mean, there was a lot of what was right in the Trust
Quarteng experiment. There were things that were disastrously wrong with it. I think what was disastrously wrong apart from the very hand fisted presentation of the ideas was a failure to recognize that budget deficits have gotten somehow got to be brought down.
Okay, I just want to interrupt at this point with Bernett talking about the importance of cutting the operates of income tax. And it's interesting to look at the burden that top rate taxpayers are paying at the moment, the top one percent of the top ten percent, because obviously the top rate is significantly lower than it has been at important points in the past, but it's still the
burden they're carrying is enormous. So the top ten percent of taxpayers back in nineteen seventy eight, seventy nine, these are ifs numbers, by the way, nineteen seventy eight seventy nine, the top ten percent, we're paying thirty five percent of all income tax. Sounds quite high, right in twenty three twenty four, it's sixty percent. Right, the top one percent we're paying eleven percent. Back in nineteen seventy eight seventy nine.
Today twenty three, twenty four they are paying twenty nine percent. So what you've got there is a big shift in the burden of income tax to the people at the very top of the tree. You may think that's okay, that's fine. It's just different. And some of it, of course, is about income inequality, because that may have changed in the interviewing period, But a lot of it, an awful lot of it, is policy choices. So that's that's worth saying,
given that this is one of Bernard's suggestions. Okay, so those things now that all sounds and people are going to listen to this and they're going to say, well, that's just that's just right wing stuff. This is just about making live easier for the rich, which of course
is the opposite of what you intend. But the other thing that you suggest is a new tax that is designed to bring the general population back on side by showing that despite introducing say, deregulation and lower income tax rightly or corporate tax rates, etc. Which might feel like it's working against them, there's another element to what you suggest that should make it clear that that that's not the case. What is that tax on the tax?
The suggestion is that one has to tax what I've called illusory wealth, and by illusory wealth, I mean wealth whose possession reduces sustainable few uture consumption possibilities for everyone else. And that's exactly what bubbles do. They create apparent wealth for those who hold the stocks, or the houses, or the most egregiously of all, perhaps crypto assets, and they
don't increase future productive potentials. So any attempt by the holders of wealth to spend their wealth means there's less to go around for everyone else. And that's what I mean by illusory and politically, I'm not talking about morals here. Politically unacceptable wealth and there needs to be a way of taxing that. And the way I propose is a tax on unrealized bubble gains. And let me stress that is not a wealth tax. It's certainly not a tax
on real wealth. It's a tax on illusory bubble gains. Now, how would that operate? All taxation requires accounting effort, This suggestion would also require a little bit, not a great deal,
of economic effort. That's to say, there would be The tax would be on the difference between what those assets would have been worth had their valuation, as approximated roughly by price ownings ratios for equities or price rent ratios for houses, for instance, what the value would have been in the absence of a bubble, and taxing the difference between that and the present value over a holding period. If you bought something last year, you wouldn't be taxed
on again. Since nineteen ninety five you don't be taxed on again. If there was any a bubble gain over the past year, now, that would not be a tax on real wealth. It could be combined with reductions in taxes. Are this incentives to the creation of real wealth? And it would have to go. It could only really work if there was first of all, a recognition of the faults of the present model, and secondly an improvement in
productivity growth. You need all the other things together, all the other things we talked about, the deregulation, the education, the de ringing of markets, and so on. And I have to say regretfully that it's quite hard to imagine the set of political circumstances that would allow all these things to come together. The taxation of unrealized bubble gains, the de rigging of market, the switch and taxation, the improvement in education systems, and so on. I can't claim
to be optimistic, but one has to try. And the suggestion I put forward, I think, were it possible for it to happen, and that's the question for politicians to decide as much as they're even more than economists would in combination with a most sensible macroeconomic management policy model, would help get the tons of things. Now, I'm pessimistic about that.
Okay, John, you're not a fan of wealth taxes, what about this one? It's not as Bannard describes it. It's not a tax on actual wealth. It's a tax on illusory wealth. Wealth you shouldn't have anyway wealth. It is ill Goshian.
I mean, like, I approve in theory, but I don't see how you even begin to do this in a practical basis. You know you're saying that. I mean, there's a massive argument about whether you can even tell if something in a bubble or not. So how you I mean, and people always talk about the legal battles that would ensure we aligned value tax for example, I mean, this is like that on steroids is how do you say, which chunk of this paper profit is not a real
paper profit? So I'm afraid I just think it's a complete annoying starter.
Yeah, I'm afraid. All right. It's a great idea, but one that that simply won't work. I can't see how it could work anyway, although one must try, As Bernard says, one must try.
I can think it easier things to have a goat.
Is there another way? I mentioned manner from Heaven a little.
Earlier, the optimistic of the podcast.
Could it be, It's a question I put to myself, Could it be that AI will provide that manner from heaven? It boosts rates of productivity, growth and potential, but in such a way that it could, so to speak, validate ex post the levels of asset valuations which are currently illusory. Well, yes, that is that is a logical possible ability, and one
very much hopes that it will happen. But stress again that, however important and useful and potentially by itself game changing, AI is is fighting against the tide.
If we were going to go back to what we were talking about earlier and we're saying, look here there's a fabulous new technology in AI. This is something really interesting with the potential to massively change productivity, then under the terms of the discussion we're having earlier about interest rates and innovation, interest rates should be rising right now.
Yeah, Would it be a rerun of the experience the mid nineteen nineties, And that's a very applesite question. Well, I think if AI were the only things that were happening, and there was an expected improvement in a significant expected improvement in overall productivity growth in the economy, then real interest rate should be going up. They should be going up to match and expected increase in the bridge of return on investment. But it's not the only thing that's happening.
And a big difference from ninety nine five is that we are not starting from a position of intertemporal equilibrium. And yes, one wishes, what could go back to a situation like nineteen ninety five and have AI, and that would be and that we could have the productivity improvement without the mistakes that Greenspan may without the bottles and someone. But we're not starting from nineteen ninety five. We are starting from here, as he reminded me a little while ago,
and that does complicate things quite extensively. It becomes a very difficult question, indeed, to sort out what should be happening to real interest rates in these circumstances. There are questions of fact or future fact. How much difference is AI actually going to make? Will it be more than enough, just enough not to counteract all the forces that are tending towards low rates of productivity growth. First of all,
we don't know. We also have to take account of the fact that, unlike the innovations of the mid nineteen ninety the innovations came a little bit earlier, but the implementation of those innovations in the mid nineteen nineties. Those innovations largely involve the creation of new products. You know, known that how smartphones and everything that goes along with them.
AI today. My understanding of it may not be as correct as it should be, but my understanding of it is that AI involves new processes for doing the same things with fewer people. That's a big difference. The optimism of the second half of the nineties was I certainly would have been widespread, not right at the beginning, but as people realize what was going on, and partly because
they're misled by speculator booms. Admittedly, there was a feeling that things were getting better and potentially getting better for everyone. That is not the case with AI. There are a lot of people who, despite the fact that the overall economy might improve, are going to worry about their jobs.
Can, I ask you, But it under these circumstances and AI is interesting and exciting. There are lots of interesting certain things around. But we also have valuations at bizarre levels. We have all the problems that we've talked about. What is the ordinary investor to do? Is there any way that, under the circumstances that you see over the next couple of decades, we can preserve our wealth. Obviously you don't
want everyone to preserve their wealth. I get that. But ordinary listeners what can they do?
Well? If one thinks that the ultimate outcome is going to be some sort of socialist economy, then the thing to do is to be on the right side of the people who've been running it. We can see that happening already. If one thinks the outcome is going to be hyperinflation, then the traditional hedges I think have some value gold in particular. Does crypto do that? You probably know.
I don't often agree with the ECB, but I do agree with an ECB research paper that came out last week that said fair value for bitcoin, for example, is zero. The bitcoin craze risks bankrupting a lot of people while making other people very rich if they get out in time, So I wouldn't recommend that. I think one does come back to gold as an inflation hedge. There is I think there's still some way to go in AI related stocks. They've gone up an awfully long way and they look
very highly value. But the same was true of the new technology stocks, or not all of them, some of them to go bus of course, but some of the new technology stocks of the nineties. So you know, invest in productivity growth if you think that's going to be there. Invest in gold if you think that there's no way out other than inflation. Get on the right side of the people who are going to be on power if you think we end up with an even more corporate system, socialized system.
Now, the question I normally ask at the end of this podcast is would you choose gold or bitcoin over a ten year period? But I answered that one, so I don't need to ask that one. But thank you so much. That was fascinating. Thanks for joining us today and Mary listeners. Listeners read the book. So Bernard is not a fan of bitcoin, John, I don't ask him about bitcoin and gold here because I think by the end we can kind of get given that he says
the bitcoin craze. We're bankrupting a lot of people while making other people very rich if they get out in time. So I think he comes back to gold as an inflation hedge, and John it kind of looks like a few other people are beginning to think of it like this as well. We've seen gold begin to break out,
We've seen it hit new highs. We know that a lot of the central banks have been buying significant amounts of gold, which of course takes that gold out of the market because they're not traders, they're just long term buyers. We have seen outflows out of gold ETFs, which means that retail buyers haven't been quite so enthusiastic as central bank buyers and physical buyers in the emerging markets, for example.
But nonetheless, even with the outflows from ETF the gold price is on the up, which is kind of interesting in itself, isn't it.
Yeah, And I mean if you think that to me, that implies that the markets either think the monetary policy is going to remain loose or the inflation is going to mean high held dine central banks expect, which is basically the same thing. So in a way that they're sort of backing Balan's argument. And that's I guess as the argument comes, don't either ye s inflation or a productivity medical And that's there isn't really any other option
except that. So holding some gold as a hedge seems like a good idea.
Okay, So I think we can just sum the whole thing up with a wholesome gold pray for a productivity miracle. Roll on, AI, let's get that energy going. Somebody builds some small modular reactors.
Oh, fusion.
That about the size of it, yep, fusion. Yeah, Thanks John, Thanks for listening to this week's Maren Talks Money. We'll be back after the Easter weekend. In the meantime. If you like us show, rate, review, and subscribe wherever you listen to your podcasts, or if you want to get in touch, please do email us at Meren Money at Bloomberg dot net. We've seen your emails and we're working through the guest suggestions. We hope we'll get some of
those fabulous sounding people on. This episode was hosted by me maren' umset web. It was produced by some Sosiety. Additional editing by Rishie Bujakol and special thanks to Bernard Connolly and as ever John Steppeck. Thank you John,