Hello, and welcome to another episode of the All Thoughts podcast. I'm Tracy Allaway and I'm Joe Wisental. So, Joe, I feel like there's a bit of a consensus emerging that maybe, in the midst of the biggest economic crisis in decades, and in the midst of rising death toll from coronavirus, that there might be a greater role for the government.
Does it feel like that, Yeah, absolutely, I mean, of course, you know, there's a public health crisis, uh, and so it can't really be addressed in a compelling way without some sort of broader government plan. But from an economic perspective, and this is something that we've been talking about a lot, and I think it is huge ramification the degree to which government, both in terms of spending and also in terms of thinking about their sort of domestic industrial strategy.
This crisis has really, uh really brought forth a lot of talk about how important that role is, right, what the potential role is. And it can fall under a bunch of labels. One of them, of course, is modern monetary theory, so I went ahead and said it. The other one is fiscal stimulus. Exactly how does the government insert itself to try to break our current economic cycle
downward spiral. But I feel like whenever we have these conversations, we talk about there is a role for government, but we don't often talk about what that government itself could and should book Like, Yeah, that's absolutely true. I mean I do think, you know, this is sort of the big question, but what that really looks like? How much should spending be used to permanently provide a safety net, to permanently provide more spending to lower income households? These
are huge questions. I mean, hey, we don't really know if the momentum that we see on government spending will really last, but even if it does, the future feels very wide open on what the sort of the new economic consensus could look like. And part of it is stuff like free market capitalism versus central planning from the government.
That's kind of obvious, but some of it goes, I think even deeper than that, and we start talking about freedom of the individual and what sort of rights should people have under a government that's trying to guarantee or secure a particular economic future. Yeah. It's kind of a weird point, isn't it. Because there is this growing consensus
about the need for more government activity. And yet, you know, at least in the US context, whether it's on the right or the left, you know, just straordinary amount of skepticism about government in different ways. It's different on either side, but there is this weird tension between how much the government is thought to need to do versus the confidence that people have in government to do anything effectively. Yeah, exactly.
So today we're going to be diving deep, deep, deep into that question, and we're going to talk with Victor Schutz. He's the head of Asia strategy over at mcquarie. He actually has a new book out which is all about this topic. It's called The Great Rupture, Three Empires, Four
Turning Points, and the Future of Humanity. So I just want to say one quick thing, which is that I wasn't here for that last episode, that interview that you did with Victor last year, so I listened to it this morning is part of the prep and I was like, wow, this is a topic that the interview that you guys did was extremely timely in the head of the curve because it felt like you guys were talking about this
at the end of last year. Now everyone's talking about it, so that got me super impressed, and I was very I'm very excited for this conversation. Ah, thank you, Joe. I do do better on this podcast when you're not here. It's true. Okay, let's bring on. I'm just kidding. Let's bring on Victor. Victor. It's so good to have you again. Thanks very much, Tracy, and I'm very happy to be here. So one thing I've always wondered. You know, I said,
you're one of my favorite analysts. But one of the things I really like about your research is there's always a touch of history to it and always a touch of philosophy. You're sort of like this philosophy philosophical analyst of philosopher, king of the cell side. I guess how did you develop this unique approach. Well, it's a it's a good question. Um. I was born in the Old Soviet Union. I sort of grew up in the communist system.
I migrated when I was around twenty. I moved to Australia and I had a very classical I get economics and finance education. I worked in the banking industry for a long time in Russia, in Britain, in the US, in Australia, in Hong Kong and China, covering variety of areas from stocks and sectors to strategy to politics. UM. And I guess it's sort of amalgamation of what I've learned When I was younger, I used to specialize in Marxist Leninism and all the way to a more classical
economics and monetarist economics. UM. I guess it's a blend of all of those things have come together, and for me personally, two thousand, two thousand one dot com crisis and even more importantly two thousand eight global financial crisis really brought at home that economics cannot be separated from politics, finance cannot be separated from economics, market signals cannot be
separated from people or philosophy. And I guess over the last ten ten to twelve years, my views UM kind of evolved and hardened UH and become not just economics and finance, but a bridge between that and UH and politics, philosophy, and most importantly history. History really educates us and really
shapes us. So, as I was saying to Tracy, I really enjoyed the conversation that you did last year because it struck me as just incredibly timely because Okay, here we have this crisis and a lot of people think there's gonna be this new rethink about the economic consensus, probably more government spending. You were talking about the rethink
the new consensus last year, even before this crisis. So setting aside the coronavirus, what were you already seeing in terms of the sort of shifting uh, shifting tectonic plate towards a rethink about what what the government's role is in the economy. Why was that already something happened in ee, Well, you can actually go all the way to my first crisis. I was a young analyst in Sydney, Australian seven during the Black Monday, and that's where green spent put option
for the first time really appeared. And as we've gone through nineties, whether it was seven, two thousand one, two thousand eight, two thousand, fifteen, two thousand twenty, every time we are in at the intersection or a t junction and the question is raised, should we rebase our economies,
should we make them much more liberal capitalism economies? The answer universally from people and politics is no. And the reason it's no is because for the last thirty or forty years, we really were growing much faster than our productivity would allow. And how we finance that is primarily by bringing future consumption to the present, and eventually we to ourselves to asset prices. And then when you do that, eventually neither central banks nor treasury departments can tolerate any
volatility at all. Zero volatility is your right answer. But the problem with that is that monetary policies become incredibly, incredibly toxic and the side effects are extreme. So what I felt for the last five years at least possibly longer, that we need to change policy tools. Either we allow liberal capitalism to succeed, but that's going to be incredibly
painful because we will need to recognize decades of excesses. Alternatively, we switched the tools are public sector is still critical, but instead of using purely monetary levels, they're going to use fiscal levels. They're going to be much more aggressive in directing and managing cycles than what they were even in the last sort of thirty or forty years. And the way I tend to look at it, it's like a bridge. We've got on that bridge in let's let's
call it. That's that's your deadline that that's your beginning. For about thirty forty years, we essentially used monetary levers. The next twenty or thirty years will be essentially fiscal and m MT style policies. What lies on the other side of the bridge twenty or thirty years from now, nobody really knows, but my guess it will be nothing like conventional capitalism. We can debate whether it's communism, whether
it's feudalism, whether it's a despotism. There is a variety of labels and sort of use you can have, but ultimately it's not going to be a liberal capitalism. And the reason for that is very simple. As I said, every time we have a choice, we prefer not to have the adjustment. And so when people say I was Green spent to blame for it? Was Bernaki blamed for it, was Janet Ellen? My answer is no, it's you, it's us,
it's people. We buy in large, did not want to have an ajustment, and politics delivered what we wanted, which is wealth and income beyond our productivity. So every time we're faced with the crisis or this sort of turning point, it feels like we avoid that adjustment and policymakers sort of turn inwards on themselves. I guess, can you give us some historical examples that go beyond the nineties, because
I think this is the basis of your book. You actually look at three empires, three major turning points, and how those different authorities responded to the turning points. Can you describe that? Yeah? Absolutely, Well, if you think of the greatest quality that humans have, and that's quality to resist change. Nobody wants change, and some societies are being very,
very resistant to change. And what the book describes are the reason why China, Russian Empire, and the ultimates really preferred stagnation and no change to embracing new things exploration, scientific revolution, industrial revolutions. And it also discusses why Western Europe, which is really a small rain swept peninsula of Eurasia, decided to take a different course in the same sort of five hundred years and as a result conquered the world.
So we have seen similar degree of resistance in the past, and as I said, some societies really cannot overcome depth resistance. And I described in the book the role the Mongols, for example, played, the role the Black Desk played, the role rejuvenation of human spirit in the fifteenth century played But whatever the reasons were, Chinese never got off the
doomsday highway. Neither did the Russians. But Western Europe, prepared to be flexible, prepared to exchange ideas, views, products, services, explore, change things, enhanced Europe One and any European settlement, including the United States, was part of that winning team. The key question, however, now is whether, in fact, the same recipe for success that ensured that the West is going
to be dominant is rapidly changing. And if it is changing, is it possible that for the first time in five years, East is much better structured to the world I had and and part of that is the role of the government. Part of that is a role of technology, and and and and what role the place in our daily life. Part of it is financialization that we have done over the last thirty forty years. And that's really, I guess the crux of the book. We know what succeeded in
the last five hundred years. We know why the West
was successful and why you know, Chang dynasty collapse. The interesting saying is that are we changing now to a stage that a different front rules and a different success flammul level up life m M. One thing I keep coming back to, and I you know, this is obviously very sort of like big picture and thought provoking stuff, but I always sort of end up like coming back to this question in terms of like the markets ramifications of a turn like we've had forty years or whatever
of this current economic consensus of almost entirely relying on monetary authorities to uh stabilize the economy and now we've gotten ourselves. And even I think Jay Polos acknowledged this as a jackson the whole speech where it's all about financial conditions and anytime there's any sort of deflation risk because of all the leverage that's been built up, the FED has can't tolerate that and to do a rate. If we have this big shift, what is the new
sort of what does that mean for investors? Like does that fundamentally change from your perspective, how investors should be thinking about portfolio To answer your question, absolutely, investment strategies are going to change. One of the big paradigms or paradigm shifts UH that is likely to occur, and one of the big questions that investors will have to consider is whether we're shifting from a dec inflationary climate over the last twenty or thirty years too much more inflationary.
And the reason why investors have such a difficulty deciding what to do is it most market signals have died, or if they have not died, they degraded to a stage that they no longer have any meaning. So, for example, when people worry about saints like yield curve, Now, what message does a yield curve conveyed of the marketplace? If central bank determines force, quantity, and price. The answer is none. Why do we need prime dealers for when in fact
central banks determined posts, price, and quantity. Well, the answer, we don't need them. Why do we need commercial banks? Well, the answer we don't. So the problem for investors is the playbook that they've used for decades no longer exists. Market signals don't convey what they're supposed to convey. Reactions in the marketplace are completely different. Again, that's a merger of financialization and technology um And at the same time
they know that the environment is changing. State will be driving and already is driving most of the business cycles. State will determine capital market cycles. State will determine the winners and losers. Now at that point, what do you do as a fund manager? How do you position yourself? Um And the answer that is, if you continue on the current paths of using primarily monetary policy, interest rates eventually will be negative everywhere because we must generate more
and more capital than what we need. What that implies as interest rates go down, cost of equity goes down. At that point, every company can beat for any project because any project is viable. As I continue to compete, return on projects decline, which means it brings cost of equity even lower. At that point, you reach singularity. There is no returns and there is no cost of capital. Now what does it do to stocks? What does it
do to the bob market? Well, the ounce any case of stocks, some become infinitely expensive, others just become average and continue to degrade, and its stocks have become infinitely expensive, just as quickly can fall down if suddenly they're no longer capable of delivering growth rates. So how your structure portfolio is different. It's no longer value versus growths, it's no longer value versus quality. It's no longer defensive versus north defense. It is no longer bay markets a bull markets.
We can now have a bay market in the afternoon and a bull market in the morning, whereas in a past bay markets would last five ten years. So it's a completely different environment. Just on the notion of the cost of capital declining, I mean, presumably that sort of hastens the technological shift or the technological advances that have led to or contributed to declining productivity in the first place.
So I imagine you kind of get a cycle where the cost of capital goes lower, technology improves, and I guess um, dissatisfaction with employment and the general state of affairs kind of increases. Yes. Absolutely, the way I look at it, financialization is like pouring oil on the bonfire of information age. Technology is a human spirit, it's a human ingenuity. But the speed with which technology progresses depends on the cost of capital. The lower your cost of capital,
the faster it grows. And as it grows faster and faster, it's started disintermediating people from fruits of their labor. It start disintermediating corporates from their products, their brands, their distribution systems. It started increasing disinflationary pressure. So the dissatisfaction in the society increases. And what I do I call it in the book Fujiwarre effect, which is a merger of two hurricanes. One hurricane is a human spirit, which is technology, but
the other hurricane is financialization. Is what we have done over the last thirty or forty years. And those two hurricanes continue to merge and reinforce each other and strengthen as we go forward. As I said, one of those hurricanes is the good saying, it's our ingenuity, but the other one is a self inflicted wound. We did not have to have financialization. Those two working together do several saints. Number one, they reduce the cost of capital of the time.
Number two, they accelerate disintermediation of society. Number three, they cause income and wealth inequalities to skyrocket. It creates social geopolitical pressures. It's quite deadly. And if you think of m MT policies or government policies, the objective of those policies is not to restore liberal capitalism. The objective of those policies to reduce the speed with which we're falling to zero. So here's here's the question that I thought of earlier, and you answer there sort of reminded me
of it. But what is the value of these labels of saying, Okay, this is capitalism, this is communism, this is socialism, this is something else. Do we need to have words? Or if we have an economy in which the government plays a much more robust role in spending money, uh to without the business cycles, whatever it is, is it important that we label it? Does that necessarily help us understand this or could there just be like a blend of different models and it's you know, kind of
free markets but also with more regulation and so forth. Well, you you know, you're absolutely right. If you think of the United States in nineties fifties, and for a chunk of nineteen sixties as well, it was incredibly constrained society post economically, financially, and politically. If you think of Europe in nineties fifties, it was incredibly constraint. Nobody would recognize those societies as liberal capitalism. In other what the premus
of the private sector. The premise of the private sector signals the government essentially stands aside and create environment in which businesses are prosper or fail. That was not nineteen fifties, and so the way look at it, we're going closer to nine fifties and sixties than we are to. But there is a twist, and the twist is that technology now allows us to create totalitarian dictatorships that no longer will suffer from shortage of ideas, from shortage of wealth, productivity,
or anything else. In the past, a totalitarian system such as imperial China or the Soviet Union, where a sort of places of stagnation, where places of lack of growth, lack of opportunity. The technology now can create societies that are illiberal, some potentially quite at all, but nevertheless society is that will not suffer from stignation as set of ideas, inventiveness, growth,
or anything else. And that's one of the lessons from the book is to say that as we go over the next couple of decades, it is quite possible that not only we will not have what we recognize as liberal capitalists, that it's going to be much closer to nies and sixties, where the government will be directing capital, where regulatory structures will be much stricter than what they are today. But in addition to that, at least part of the world that maybe big chunks of the world
will decide that personal freedom is also optional. It is not actually necessary for your success. Um, can you elaborate on that last point? So not actually necessary for your success, But I guess the question is it necessary for your happiness? And if the thing we're trying to solve is resolve is um people's relationship with labor and how happy they feel in their jobs, then then doesn't that become important? Yes,
it does. But one of the things to remember, of course, is that labor is becoming less and less critical most marginal utility and marginal returns, and labor has been declining for two decades and that decline is accelerating. Many professions are no longer exist anything like what they used to
twenty or thirty years ago. Over the next two decades, whether you are truck driver, whether your plumber, whether your PhD in computer science, you will feel the same pressure of irrelevancy, or the same pressure that you're no longer contributing what you used to contribute. So one of the saints that societies are trying to understand it what is
the role of labor in industrial age? In the ninety century, it was very straightforl labor was a critical productivity driver and needed to be trained and skilled to hire and high level to grow productivity. In the twenty one century, that is no longer, so labor is no longer the key productivity driver. The same happens was capital. If you think of nineteen twenty century, capital generally was scarce. It needed to be allocated carefully to whatever utilization people want
to do. That's why we have a DCF model and capital as a pricing model. Most of our activities were highly capital intensive. Today most of our activities are not capital intensive at all. We have a surplus of capital. We are drowning in capital. We have at least five ten times more than we need, and that's as a result of our financialization. And at the same time, as I said, the need for capital is declining and so cost of capital continues to fall. But in addition to that,
the nature of capital is also changed. In the past, it was a hard capital, it was roads, factories, machinery, plant Today it's mostly intangible capital. It's a software, digital capital, social capital. Now the heart and soft capital have different different properties and they behave differently, and so you find compared to industrial capitalism what you can argue industrial societies, not only labor or nature of labor changes dramatically, but
in addition, nature in demand for capital also changes. Now, if you don't have free labor selling services in the free market in order to maintain their upkeep and life expenses, and if you don't have capital as a critical part of your system, it is no longer capitalism as we know it. Now you can call it variety of ways. As I said, you can put various labels, and eventually
different countries will find different relationships, but they will be different. So, if you are a human being, how do you find happiness? If it's not through work, if it is not through money, if it is not through power, What gives you happeness? And can society delivered that happeness. That's where you're go into the ideas of universal or basic income guarantees. That's where you get two ideas of how educational and skilling
systems are going to change. That's where you've got too many other ideas of building a different society funded by the state, because private sector will never fund any of that and will never be prepared to do so. And that's why the way describe it. Whether you look at m MT, whether you look at perpetuals, whether you look at other Neo Kinsian models, whatever your model is, the objective of the government is to reduce the pace at which we go to zero. It's not to create inflation.
It's not to reflate the debt away, it's not to inflate the dead away. It is purely to reduce the speed with which post value of capital and labor decline. So you said companies will never step in to provide those sorts of services, things like teaching people new skills that might be essential in this new technology driven age. But why do you think that is? Because I know
there are some visions of our future. I mean, I mean Margaret Atwood's books kind of spring to mind, or one of them does, where she envisions companies as taking over the role of the government and providing security services, health services, educational services for their respective employee. Is because governments won't step in to do it. So why are you convinced that it's going to be governments and not corporate entities that take this on. I basically said, not
so much. Take it on funded pay for it. If you think called bell laps. Bell laps in nineteen fifties forties fifties six is invented almost everything we use today. Bell laps were private, but they were fully funded by the federal government. Federal government in the US in sixties used to spend two of GDP on basic scientific research. Today that number is down to point six point seven, and even that is grossly exaggerated because a lot of
senal funding is really applied. So the way I look at a private sector, private sector never invents private sector innovates, and there's a big difference, and so inventions always have to come from the public sector. Innovation always have to come from the private sector, and so you have a
combination of the two. I mean, one of the classic questions is if a private company discovered, for far, private pharmaceutical company discovered that a certain product or a certain drug works incredibly well, but it will benefit their competitor, not themselves, would they develop that drug? And the answer
largely is known. So there is a whole range of activities from community support to basic income guarantee consumption support to some of the infrastructure, to basic scientific R and D thinks like rescuing NASA and NIH and CDC and the rest of it. That is a rule for the government, and the government does it generally better than the private sector. So this idea that whatever problem you have, that private sector solution is always the best is really a relatively
new idea. It only came in in late seventies. If you go back the fifties and sixties, neither John Maynard Ken's John Gilbride felt that there was a huge difference between a private and public sector. So when I talk about public sector, what I mean they're going to initiate it, they're gonna fund it, they're going to find They're going to create regulatory structures around it to encourage and sometimes compel the private sector to participate in those projects in
and in those endeavors. I think the time of creating British Layland, of British steel, on nationalizing Amtrak, that that sort of time is gone. I don't think anybody will try to do that. But the private sector will be courseted, it will be regulated, capital will be directed in a certain fashion, and the government increasingly will be doing it.
But as I said, the alternative is if you continue to use monetary tools the way we have done over the last thirty or forty years, disinflation will get stronger, grows will get narrower, and we income in well cite equalities will continue to rise. Eventually societies will simply blow up, and so there is really no choice but to adopt a different strategy. You probably remember in one of my reports I outlined two or three alternatives. One is a war.
War is capable of destroying excess capital access resources. The other one is to send some of the resources to another planet, uh, and basically exit the existing system. But the only other third alternative to me is a more aggressive stance by the public sector. I don't think private sector is capable anymore of actually reversing what occurred over the last four decades. Uh. This is such great stuff, and I have like a million thoughts, but you know,
sort of big picture. And I mentioned at the beginning that you anticipated a lot of the debate the mainstream is having today in the coronavirus praises. Last year during your last interview, this area of the government funding basic research obviously another area that's coming back into vogue with the hunt for a vaccine and all the money that's being spent there. In general, would you say, this crisis has mostly just accelerated the trends and accelerated your thesis
about where things were going. Absolutely, and that's what I find. Every time we have a crisis, we have acceleration. If it goes through history and you say, why didn't people do things that they were supposed to do? If you go to you know, Alexander the first start of Russia in eighteen o one, didn't you served them was a bad say he knew it was holding back Russia? Why didn't he do something about And generally speaking, people don't do things and leslie have to unless there is absolutely
no alternative. And what happens every time we come to this t junk and every time we have come to intersection, we need to make a decision. And so the importance of fiscal policy has already been on the horizon for at least the last five or six years. In fact, look at it, for the last five years we've been tolerating much higher deficits than we would have tolerated ten or fifteen years ago. In fact, the markets were encouraging
higher deficits. So this this shift from monetary to fiscal policy has already been on the goal at least the last five or six years. What coronavirus has done to fiscal policy is what global financial crisis have done to monetary policy. It accelerated it um and doesn't mean that that we already at the stage that people are prepared to accept a very close coordination of fiscal and monetary policy, a fusion or emerger of fiscal and monetary policy into
m MTY or something else. Well, the answer is no. As you earlier on said Joe, people are reluctant to accept that the core premise of their livelihood. In other words, private sector is dominant. It's always better to have Walts creators. Private sector solution always better that to change that takes time and so and so the way the way I look at it, we probably need another crisis. It doesn't matter whether it's men made or nature made. It doesn't
really matter where it comes wrong. But and the next crisis will happen sometime over the next two or three or four or five years. And when it does happen, then all the ideas were discussing now, whether it's a regulatory changes, educational changes, health care changes, m MT and how the government gets funded, all of that will fuse. It's like a broken volt. Whether you're twenty five or forty five, your your bold takes time to fuse. That's exactly what's going to happen. And I think at that
point in time everybody will accept it. And when people say it's going to be terrible it's going to be hyper inflation, No, it doesn't need to be. Or it's going to be a runaway wasteful spending. Again, it can be, but it doesn't have to be. Uh. And in fact, I would argue for bulk of the population, it's probably going to be a much better world. And that's the idea to reduce social tension. The whole purpose of shifting policy tools is to quiet in societies down and reduce
the degree of geopolitical or social tension. Do we really need another crisis? And for I would I would love like a longer break from crisis. Can we maybe wait like ten years for the oven? Yes, I usually say. I usually say to my clients that, And I think I mentioned in the book as well that if I could just go back toies and liberal capitalism that I used to enjoy so much, I will do it. But the problem is you can't you can't go backwards. You
can only go forwards. And remember Mike Bears at the bridge. In the bridge, we passed the first part of the bridge, which was monetory. We are now on the second part of that bridge. That bridge will go on for several decades. As I said, at the end of the bridge, at different world looms. And one of the things I discussed
in the book what that world would look like. What will be the right policies to make sure that it's not disruptive enough for all of us that we don't have war, we don't have conflict, we don't have extreme inequalities. And so we are on that bridge. Now on that bridge, the life will change gradually more and more. As I said,
a number of policies will change. Clearly, taxation policies will change massively, whether it's a corporate taxation, whether it's closure of the loopholes, whether it's rules regarding CEO compensation, whether it's ability to do share by backs. There will be other rules that will change. Capital gains tax wealth taxes, mentioned taxes, and a lot of those taxes will believed not to finance government. I think the government will get
financed mostly through central banks. As what's happening today. I think all of those policies will be introduced to make a fairer society. So, in other words, the way I look at it, baby boomers, like myself wanted to be independent. Baby Boomers wanted to tell the government, we don't want to leave me alone, let me do what I want to do. And baby boomers created Ronald Reagan and Magnufacturer and Milton Friedman and the rest of it. The new
millennium and Z generations are are different. They're asking for different things, they're looking for different things. And so what you find the new generation values fairness, their value equality. Well, the older generation valued choice, freedom, efficiency. Now those two concepts iron conflict. And remember in the US, within the next five seven years, millenniums and Z generation will be the electoral majority. And when they are, fairness and equality
will really trump efficiency. And I don't mean to use the world trump, but really will will exceed efficiency, um, freedom, choice, all these things that Baby boomers and ex generation really believed in. In love and it's not it's not gonna be easy for a number of people who are somewhat older to accept that the world has changed. But by
the way. The same happened in nineteen fifties. As they said, if you go back to nineteen fifties, if you have a different view, you could be sacked from your job. If you go back to nineteen fifties, if you do not believe in ideology of the United States, you can be deported, or you can lose your job. If you have any devions either political or sexual or whatever, or religious, again,
you did not have a good life. And so there were many periods in the past that those sorts of generational changes created societies that strove to be fairer, more equal, but gave you less freedom, less opportunity. And that's a question in the book, is to say, between changing generations, between technology and financialization, how much freedom can we keep?
Just going back to uh, the markets right now, so I'm looking at a chart of the spire and we're not that far away from the pre March peak in the market. When when you see what's happening in global markets in asset prices, how does that fit into your framework of thinking about things? Well, you have to remember that we are still financialized. We're highly financialized globally. The debt to GDPs in excessive three to one. In a number of countries it's as high as five to one.
But if you think of value of financial instruments, not debt, real financialization is at least five ten times GDP. Now that's why interest rates cannot go up. But it also means that we're all committed to asset prices. Uh consumer decision whether to splash or to say, corporate decision whether to do share buy backs or to do investments are
now increasingly driven by asset classes. Now, what that implies the policymakers central banks, treasury departments, ministries of finance is that you can't allow holistically defined asset prices to contract because as soon as you have those contractions, real life impact for people living under the cloud of finance are going to be terrible, are going to be devastating. And so what you do You make sure that Humpty Dumpty
stays on the wall. And the only way to do it is to continue to generate more liquidity than what you require, more capital than you require, and at the same time very rapidly act to suppress us any sign of molatility or spreads. And given that finance has different rules to economies, people saying that finance and economics are the same thing. They're not. They're completely two different beasts. Eventually finance cannot survive with out the economy, but for
years decades they do not obey the same rules. And so the objectives of central banks is not specific level of s ANDP. The objective is to reduce molatilities and shrink the spreads. And because cloud of finance is based on digits, it's not based on factories or roads. You can change narrative in a matter of seconds. That's why we have the fastest bear markets and the fastest bull markets right now. Because you can change the narrative, you
can change communication in a matter of seconds. And that's why I said earlier we can have a bear market in the afternoon and a bull market in the morning because none of it is real. It bits in the sky, its numbers. But those numbers are very important if you don't look after them. Which you find is that people under that that live on the ground, that going to work, feeding their children, living in their houses, they're going to suffer.
And and so to me, central banks are caught an impossible dilever that people are demanding wealth, their demanding income, financial markets demanding growth, and they mass delivered because the alternatives are will be far, far worse. And so the only way out of this dilemma either you allow productivity to mushroom massively, and we believe it's going to take several decades before productivity will sustainably rise, so that's not
really an option. Alternatively, you change the policy tools. Instead of using laboratory tools, you start using fiscally oriented tools, which much more focused and less wasteful, although as I say earlier, you can scraw up anything, and fiscal tools, particularly in combination was monetary, are very dangerous and not many countries can actually pursue those policies. Victor, absolutely fantastic
having you on the show. As always, I love that there's an analyst out there who's sort of thinking these big picture questions about what our political systems and monetary and economic systems might and could and should look like and how they sort of fit into I guess, the meaning of human life making people happy. Um, thank you again, Thank you very much, Thanks Victor, and that was fantastic. Joe,
did you enjoy that conversation. I'm glad you got to play into one of the Victor Schwetz Interviews that was so good and kind of like, I'm glad I missed the last one so I could just like listen to the old one and be a fan and then get really excited about this one. It was great, and I feel like nobody has sort of as well as he can tie all of these big themes together, because there's
a lot going on. Obviously, politics is one, the financialization of the economy is another, this sort of accelerant effect of the inequality derived from our focus on monetary policy, the sort of m MT ideas of leaving more on fiscal and I think he really pulls them all together extremely well, especially his point about sort of generational attitude changes and how that it affects the policy mix that
people voters are going to prefer just just great stuff. Yeah, And I think what I really like about the way he's thinking about things is it's sort of it brings the focus back to politics, which I think has always been my one criticism of m m T is that if we agree that, you know, the only thing binding government debt is inflation, the government still has to make a decision about issuing new debt and where it's going
to spend it. So it always comes down to politics history in some respects, and I feel like Victor's starting point is always politics and history and how that feeds into economics. So I really like that framework. Now I completely agree. I think, you know, to some extent, markets have always been their downstreaming from politics, and that if an attempt to separate them has always been very arbitrary. But I think Victor is right that going forward that
link is going to be extremely clear to people. What what will the next stimulus bill look like? What will the next president if we get a different president, if it's Biden or even if it's Trump, whatever, Like, what will they decide in terms of permanently changing how we trade, permanently changing the tax code, thinking about fiscal transference. Like, these things are gonna be really real, and if you want to understand them, you have to be sort of
a big consumer of economic political analysis. Yeah. Absolutely, Well, we'll have to get Victor back on in in a year's time to discuss what's happened in the interim, But shall we leave it there for now? Okay, this has been another episode of the All Thoughts podcast. I'm Tracy Alloway. You can follow me on Twitter at Tracy Alloway and I'm Joe Wisenthal. You could follow me on Twitter at The Stalwart. Follow our producer Laura Carlson at Laura M. Carlson.
Follow the Bloomberg head of podcast, Francesca Levi at Francesca Today, and check out all of our podcasts at Bloomberg onto the handle at podcasts. Thanks for listening to