But knowledge to work and grow your business with c i T from transportation to healthcare to manufacturing. C i T offers commercial lending, leasing, and treasury management services for small and middle market businesses. Learn more at c i T dot com put Knowledge to Work. Welcome to add thoughts.
I'm Tracy Alloway, executive editor of Bloomberg Markets. My co host Joe Wisenthal is away this week, but never fear because his absence means we are about to geek out on some of the most financing things of all things in finance. So today joining me, we have a former banker and corporate treasurer. He's also an all round derivatives expert. He is the author of one of my all time favorite finance books, Traders, Guns and Money. I am talking,
of course, about Showtujit das Uh. He actually has a new book out, but you are going to be talking about something much broader than that. The topic of today's podcast was inspired by a recent column by my Bloomberg colleague Noah Smith. His column was called How Finance took Over the Economy. Dass has previously spoken about the financialization of the world economy. Many of his books are full of specific examples of this. But we are not just
going to talk about financialization of the economy. We are also going to talk about the financialization in markets and monetary policy, and that is of course one of the big big questions for investors at the moment. So Das, thank you so much for joining us today. It's my pleasure. All right. Maybe just to begin, we should start by defining our terms and talk about what we mean when we say financialization. Well, that's a very very difficult question.
I think it's a bit like trying to define a smile, because I think it was us who once said a smile is the drawing back and slight lifting of the corners of the mouth, which partially uncovered the teeth. So I think financialization is a little bit like that, and I have seen many people struggle with that. So I actually tend to think about its manifestations, and I think there's a few of them which are very important. One which is obviously very topical, which is the use of
debt to drive financial and economic activity. The second is which actually has become topical again is the size of the financial sector and how large that is relative to the real economy. And this is the whole idea, which is a third point that instead of using traditional ways to drive the economy, which is things like innovation, productivity, new markets, we now start to use financial techniques or financial engineering rather than real engineering to try to create growth,
wealth and prosperity. And the last one is an excessive reliance I suppose on financial techniques and instruments, And maybe underlying all of that is the increased emphasis on not the real economy but just creating and trading financial claims of different types on them. And the best way to describe it as you and I are creatures of that because at an earlier age we might have been useful and worked in real industry instead of which we keep
talking about financialization. Oh wow, um, you went there. Okay, Well, I'm going to turn this back on you. You have a long career as a banker and a trader. Was there a particular moment in time that you can remember thinking that financialization was a thing, or that the finance industry had grown too big, or that financial engineering was
starting to get a little bit weird? Well, I think I think there was never one magic moment in all of this, but I realized there was something very odd when I used to be a corporate treasurer, and in those days it was fashionable to run corporate treasuries as
profit centers. That's something that's fallen into disrepute recently. But in a particular year, we made more money than the real business, which was to me a sign of considerable alarm in the sense that we were a transport company, but the financial jiggery, pokery and pettifoggery that we were doing was actually creating more wealth then the business of shifting parcels around the world, which I didn't think was healthy.
And the other thing I supposed was earlier in my life when I used to work in banking, and I remember, with some degree of shame, actually thinking that my bonus in one year was more than the earnings that my father, who was a mechanical engineer, had earned over probably really a decade, or probably more than that. And I thought there was something I suppose wrong with the world, which
actually looks at that type of evaluation relatives. Wow, this podcast is turning into a big guilt trip for finance workers. But tell me, how do you think we got to this point in time where a trader, someone like yourself can earn more than a mechanical engineer in a single year. I think there's several aspects to it. I don't think
it's actually any one thing. I think you have to go back to the seventies, and in the seventies, you remember we had a period of stagflation, which is a period of high inflation and high unemployment and low growth.
And at that point in time, I think the economic policymakers and political leaders were experimenting with the different ways of breaking out of the traditional Keensian dominated mixed economy, and people like Milton Friedman and basically Frederick Hike became very popular, mainly because politicians kept quoting them, despite the fact that none of them had the slightest idea of what their principles or policies or theories were. And what
that did was deregulate a number of key industries. And one of those key industries that had actually deregulated was finance, and that set off the whole series of things, including the rise of the financial sector, the growth of debt, and obviously the entire process of financial engineering that went on. And I think that was very successful, and that grew the economy. So that created that self reinforcing sort of dialectic,
which is that this must be good. And I think that effectively started a process which has different sort of strands, one of which is what Emmanuel Derman called the POWs, the physicists on Wall Street. I actually called them actually prisoners of Wall Street, because once you get there and
get paid that you can never lead. But essentially what happened was industry was dying, the bell labs were shutting down, some major science based projects were shutting down, to talent basically moved away from real industry into the financial industry,
which was getting started. And the other thing which I think people underestimate in terms of the importance of one element of finance, which is actually drives financialization, is I don't know if any industry in which you can actually attribute earnings or at least choose to attribute earnings as accurately to individual activities and therefore link directly rewards to
those achievements. And that's a huge element. If you work for a large company building a motor car, there are so many little bits to it, who actually takes credit for it. But if you make a trade which makes a lot of money, it's much more easily to attribute
the success to an individual. So it felt like we did get close to a moment in two thousand and eight where the world could have woken up and said, wait a second, all this financialization, whether it be in terms of products like derivatives or in terms of growth generated through the accumulation of debt, this is not a good thing, and it's bound to end in tears. But it feels like we actually kind of moved away from that. It feels like, if anything, we've sort of continued with
our financial engineering. Well, I think fundamentally our problem is a different one, which is we are addicted to growth and we can't conceive of a world without growth. And particularly after two thousand and eight, we had an additional problem. We recognized that we had too much debt in the world, and the only way you actually reduced debt in a
meaningful sense is through growth and inflation. So we needed things which created that growth and inflation and the elements of the real economy, because what lives growth really is things like population, new markets, productivity, and innovation. Those things are very difficult to engineer on demand, certainly within the life of a political leader. And remember political processes have quite short lifespans because you have to run for office regularly,
So everybody was looking around for something to do. And essentially the financial leavers, which is budget deficits, let's get interest rate, let's do que or move on to something more adventurous like helicopter money, was far more I suppose attractive to people with those shorter term horizons. And I think that's what actually happened, and nobody really sat down and looked very, very clearly at what the causes of the problems of two thousand and eight are. I'll give
you one example. You know we talked about de leveraging in terms of debt. Debt is increased by over fifty seven trillion dollars between two thousand and seven and two
thousand fourteen. Now we know the world has actually grown in terms of GDP as well, but if you take it as a percentage of GDP, world debt has grown by seventeen percentage points, and most alarmingly, places like China have gone from seven trillion dollars in debt in two thousand and seven to well over twenty eight trillion dollars of debt today, and even despite the fact that their economy has grown quite a lot during that period. It's
almost doubled as a percentage of GDP. So we went for the easy solution, and and to some extent, I can understand why people chose that, because they didn't want a sudden curtailment of activity. But there's a problem with debt driven growth, which is what they're trying to do, which is that the moment you turn off the debt tabs, growth stops as well. So this is the classic heroin addiction, where you need to take larger and larger doses to get the same effect, and that obviously traps you in
a number of things. For instance, now were now trapped in a position where we can't actually increase interest rates or normalize interest rates because that would bring the house of cards down. So what we've seen is, I suppose the financialization of economic policy with some I suppose problematic outcomes. All right, we're going to take a quick break for a word from our sponsor. But knowledge to work and grow your business with c i T from transportation to
healthcare to manufacturing. C i T offers commercial lending, leasing, and treasury management services for small and middle market businesses learn more at c I T dot com put knowledge to work. We are back with shot Das. We are talking about the financialization of the economy, of markets, of monetary policy. So Das, I'm wondering, you know, policymakers were
in a tough spot after two an eight. I know they used quie and we can argue that that increase the debt burden and it hasn't been successful at least yet in terms of generating inflation. Have there been any benefits to those sorts of medicines. Sure it bought time, and I think the crucial thing was that politically nobody could accept the actual sort of collapse of demand and activity that may take place as a result of just called turking the cure, I suppose. But the problem with
buying time is you have to use it properly. And there's a very famous line in Shakespeare and Richard the third I think it is I wasted time, and now time wastes me. And so we wasted that time because we did not look at the real issues of re engineering our economies away from financialization, away from debt, focusing
on the things we actually needed to do. And so that opportunity has now been wasted, and during problem we've multiplied the debt and all sorts of other issues, which leads us now down a path which is very difficult to reverse. And that's the real issue. So yeah, there were benefits, but ultimately I don't think that was the right decision. I'll give you an idea of how ridiculous the argument gets. We're not talking about negative interest rates,
which is kind of a strange, surreal world. And let's have a look at if you want to have negative interest rates, the kind of arguments you put up in support of it. Now, first thing, low interest rates haven't works. I'm not quite sure why negative interest rates will necessarily work much better. But then what happens is if you have negative interest rates, look at the sort of side effects of that. What is you undermine the profitability of
the banking system. And what happens is people just take their money out, because why would you leave money in and lose some of it? You take it out and keep it at home. Incidentally, home safes, particularly places like Japan, and so it's all and have gone through the roof in terms of sales. So you take the money out. But that destroys the funding base off the bank. And one of the reasons for basically having negative interest rates is to encourage lending. But if you don't have a
funding base, how the hell is that can occur? And then you get into an absurd situation. And I've noticed that several luminaries have now been enlightening us on the pages of different publications saying how bad cash is for crime. Now, you know, money has been around for a long period of time, and crime has been around for a long period of time. But I'm now discovered that these large notes are the cause of crime, which has something I've
never really understood before. But the problem here is the truth lies somewhere else. And Andrew Haldane from the Bank of England actually outlined there is very very clearly. He said, when the next crisis comes, and it will come, we're going to have to cut interest rates and they're very low, so we're going to have to go into massive negative territory. So to make that policy work, we have to ban cash.
Now it's not only banned cash, he didn't go to this extent, but you have to also ban capital flows between countries because otherwise people would take money out of a country with negative interest rates and get to somewhere with positive interest rates, which is a completely dysfunctional reversal of the precise objectives that we actually are trying to achieve and some of the things we believe in, which
is free capital flows. And one of the things that really troubles me about this spirit of history is that, you know, Winston Churchill once book is very elegantly when he said, you know, no no matter how beautiful the strategy, one should occasionally look at the results. And I don't think anybody's looking at the results. Well, what is the solution? Then it seems like we're sort of at our wits end.
In terms of monetary stimulus. It doesn't seem like fiscal stimulus is on the way anytime soon, and it's unclear whether or not that would even really solve the problem that we're talking about. You're right, and I think there's basically three scenarios which now stretch out in front of us. One of which is is what I call the Lazarus economy, which is that things miraculously suddenly get better for all
sorts of reasons. I'm personally personally looking for the Martians or some extraterrestrial intelligent life to visitors and solve our problems. And that's some major technological advance, right, Yeah, and it could be a technological advance. You never can say never. I mean, if somebody was to basically find infinite energy solve the problems of cold fusion, you would get certain things that would happen. But that's not something you can bank on. But the more likely case is a period
of prolonged stagnation. And this is very much the Japanese and what's becoming the European model, which as we can solve the problems, so we will use monetary morphine to keep the process going for as long as we can do, and hope over that period we can gradually deliver the economy. And that basically means transferring wealth from the savers to
the borrowers. And that's what's going to happen to be done, and you're trying to stretch out that adjustment over a long period of time, and Japan shows that you can do it under certain conditions, at least for a long period of time. But the problem with all of that is that once people realize that the outcome, the last option comes into play. Which is everybody panics and starts to try to get out of this game, as it were.
And the crucial thing he remember is this game is underpinned by essentially an act of heroic faith in central bankers. And remember, in the old times, priests intermediated between rulers and their gods. These days we have economic gods, and the alchemists or the priests are the central bankers and the economic policy mandarins, and they intermediate between the body politic and these economic forces. And there's a lot of faith in them. And everybody has suspended disbelief and wants
to believe that this will work. But at some point in time, and I'm starting to see signs of that or ready that there will be a moment when they say, well, actually, you know, they don't know what they're doing, or what they're doing can't work, or they don't have the tools
to do this, and that sets off a horrible process. Now, you know, I've worked in financial markets for a very very long time, and the one thing I do know is when people panic in financial markets, it's never a very pretty side, and everybody wants to be first to get out. And the reason is very simple. If you're the first. It's you don't call it panic, it's very sensible trading. And everybody is looking at each other saying, how long can we continue this game where we suspend disbelief.
And that's a very dangerous situation to find yourself in because the consequences are not only economic. This is not an economic problem ultimately, this is actually a social problem and a political problem. All economic problems ultimately more as we saw in the nineties and nineteen thirties, into political problems.
And we're seeing signs of that in terms of extreme um movements of the right and left in different parts of the world, the rise of some interesting populist politicians, and those pressures are going to start to actually play out. I mean, the most interesting thing about the Republican potential candidate is he's repudiating things like free trade and all
sorts of things that we believed in. And he's openly flagged the idea that perhaps not repaying your debt is not such a bad idea, which are things that are very, very dangerous in the way we've structured our financial system. Uh, let's leave our listeners with some actionable advice in terms of the rush for the exits that everyone seems to be worrying about and has been worrying about for so long. What do you think is going to be the key
thing to look out for. I think in terms of asset classes, the key asset classes which will take the pressure of currencies. I know there's no currency war going because I listened to central bankers, but I can assure you that there is a currency war going on because everybody is trying to devalue their way to prosperity. That's the first thing. That's one of the asset classes which
will take enormous train. The other thing is I think political and policy developments are going to be crucial in that, so you have to monitor what these people do. But the other thing is in terms of investment, I think you need to understand some very very simple rules, and I always look at investments in terms of three criteria. One is basically the capital the return of the capital.
The American comedian Will Rodgers once said very elegantly, it's the return of my capital rather than the return on my capital that I worry about. The second thing is the income, and the last thing is the capital gains. Now, historically in the last thirty years, we've reversed the order of importance. I think maintaining capital and getting a bit of income will actually be crucial. And I think this is a world in which you can't actually look at
the past in any meaningful way. And I'll tell you an example all of that, which is one of my great mistakes. A friend of mine who used to trade JGBS or who's actually a fund manager Japanese government and g GBS were around three. He asked me a question. He said, to me, is it actually good value? And I said, you know, you're looking at twenty years. Three percent does not seem to me the right record for that period. He ignored my advice entirely, and he loaded up on every long day to j g B that
he could actually find. And history shows that g GBS had never flirated with those sorts of levels. Again, so what we thought was in the past reasonable and what we may need to live with are going to be fundamentally different. So being agile and actually going back to some very very simple principles will serve people much much better than trying to be clever in this sort of environment. All right, I think that is some excellent advice for all the investors out there. Show us. One of my
all time favorite finance authors. He has a new book out called The Age of Stagnation, Why perpetual growth is unattainable and the global economy is in peril. If you're looking for some uplifting reading over the weekend. Thank you so much for joining us. It's my pleasure. Tracy. All right, that was shortage at das UM talking about the financialization of everything, pretty much the economy, markets, monetary policy, and
leaving us with some quite depressing thoughts. To be honest, thank you so much for joining this episode of Odd Blots. Joe Wisenthal will be back next week. Put Knowledge to work and grow your business with c i T from transportation to healthcare to manufacturing. C i T offers commercial lending, leasing, and treasury management services for small and middle market businesses. Learn more at c I T dot com. Put Knowledge to Work t