The Mechanics of Financial Repression | Russell Napier

The regulator told the pension funds and the life funds, you need to match your assets and your liabilities and they bought it and the guys don't even know they've lost the money. >> So they regulated them to buy the bonds cuz the government needed the money. >> When I talk about financial repression, it is kind of esoteric. So I had to think up a better phrase for it. So I call it stealing money from old people. You you denude property of its ability to to protect you from inflation. Ultimately it was about making one asset class less attractive so you would buy more government bonds. If you bought a French government bond, the 50-year bond with a half percent coupon, as of yesterday, you'd lost 78% of the capital value of buying the risk-free asset from the French government. So you've effectively had your capital wiped out buying the risk-free asset. >> be quite scary for people listening to this who think, "I look, I've worked my whole life. I'm looking at my retirement. I've saved. I planned for it and because our government have run up such high debts and they can't afford to pay their bills, they're going to come after what I've worked hard for." Right, Russell. Sometimes I need notes. Today's one of those days. I just don't need any notes. I'm trying to understand what is a bigger problem. Is it is that there's part of the voting public that would rather vote themselves poor than have a a party from the country that they are ideologically against or is it that most people just don't understand enough about basic economics? >> I So we're going to begin by disagreeing. I mean there's there are polls of the voters of the United Kingdom. I think we're we're starting with this country, the United Kingdom where we're sitting today. And one of the questions is, do you do you prefer higher more tax or spend or cutting taxes and lower spending? And there's now a significant majority in former of the latter amongst the population of the United Kingdom. Now that may not show up at the polling booth and there's lots of reasons for that cuz people usually vote against something rather than for something. >> >> But for the first time in a really long time, most people in this country would now prefer lower taxes and less spending. >> Is that cuz we've hit the middle class so hard? >> I so I I think this is we're way beyond my pay grade here. We're getting into sociology. We're way away from financial history, but I've got a very simple reason for that. The so-called working class who, when I was a boy, worked in factories for a big company for a boss, don't. They are what I think pejoratively is called white van man. >> Yeah. >> And they take the risk in society. They are take They're the risk takers in society. The middle class are not necessarily the risk takers. I I might change that. But if you're a risk taker, if you're a guy who's a plumber or a or a joiner and go out every day, you're the guy who's paying the taxes. You're the guy who's paying for everything else. And fundamentally, we'll just call them blue collar. I don't you know, I don't really care what term we have. Those it's those people who actually are voting for who are Sorry, not voting for, but not expressing an opinion that they want lower taxes, less regulation. So, we've got this volte-face. Then you have the public sector workers who are in favor of more taxation and more spending. Surprise, surprise. So, I think the the traditional narrative here is that it's the less well-off in society who vote for more stuff. It's not really that true. Of course, we can't call plumbers the less well-off in society anymore, can we? Because they're doing very well for themselves. So, there's there's a there's a bigger shift underway here that we're not really focused on. >> Okay, so how how bad would you say the financial situation is of the country? >> Of the United Kingdom, not that bad. So, I'm a completely non-consensus on this. So, of our public sector, very bad, you know, extremely bad. Of our private sector, extremely good. And that's the bit that we don't talk about. You know, I wrote a book on the looking at the four great bottoms for for the American stock market. I read all the Wall Street journals at the bottom of bear markets. And of course, all the bad news is on the front of the paper. And there is good news, but it's in the middle of the paper. And where we are in the UK today is all the bad news is on the front of the newspaper. But our banking system is rock solid. And these could be famous last words, of course, but is rock solid. Our household sector is is is completely de-geared since 2007. and our corporate sector is completely degeared from 2007. So when we look at the macro data, our balance sheet is really quite similar to Germany now on the private sector. So for all the bad news you read on the government, which I can completely concur with, we have this coiled spring in the form of a private sector that should the government decide to get out of the way, and I'm sure we're going to discuss that, is really going to go through a profound large-scale investment boom. And let me say that that is not a UK phenomenon, that's a global phenomenon. Every developed world country has a program now for massive investment and I'm on the campus says it will get done. How it gets done and whether it produces any profits is a different question, but it will produce jobs and I think in a world like this, you know, debtors get relief. So I am much more optimistic. There are lots of countries that do not have a vast vastly undergeared private sector who are in deep deep trouble and I put France right at the top of the list. So yeah. >> I've learned from history that you've got to look deeper into the newspaper. So we had some pretty good growth numbers out today. Gordon Brown, not everybody will trust what Gordon Brown writes, but he wrote a wrote a nice little letter in the FT recently a couple of days ago pointing out that I think it's Wolverhampton is one of the fastest growing regions of the United Kingdom. So it's happening, but as a financial historian I can tell you that nobody will recognize it until it comes and then we can talk about the catastrophe that is the British government finances. >> Well, let's talk about that because certainly when I talk to people people don't feel richer, people feel poor. People are having less holidays, people are buying less, people are worried about their mortgages. And you know, part of this might be that we get a lot of our news from online and the online algorithms, like we've learned this with the podcast, bad news sells better than good news. But even with that, people are feeling poorer. >> Sure. So the government has to do something about it. There was a brief period, I'm going to say it was two and a half years where where wages real wages went up and then it stopped again. but there was a brief glimmer there where real wages went up. So, uh I think we're going to talk about financial repression, and it's worth remembering that in this system, it's all about getting nominal growing faster than debt. So, nominal has to be nominal household cash flow and nominal uh corporate profits nominal. So, everybody who's listening to this knows the difference between nominal and real. >> Not everybody. >> Not everybody? So, nominal is a If you got a 10% pay rise, that's 10% nominal pay rise. But if inflation's 10%, you've got a zero real pay rise. >> Mhm. >> So, we're definitely going to get higher nominal. I think we for for many people in So, they don't feel it as you just pointed out. Nobody feels it. You get paid 10% more and inflation's 10%. You really don't feel it. And if you're not particularly wealthy, you see more because if all of inflation's in food and energy, it's worse cuz inflation's not 10%. It's significantly higher than that. So, we have to engineer a system where real wages are growing. We have done that historically. We can do it again. It is very bad news for savers, but it's not necessarily bad news for the people in receipt of the higher nominal income. So, let's take a little microcosm. We're sitting in London. Uh the real value of property in London in some bits of it has collapsed. No, I don't >> 30% >> I don't think you and I are going to be buying in St. James, but anyway, you know, if you are one of those people, you've just got considerably better off. Your salary is going much, much further than it ever did. So, that's all just a little microcosm of how in this world actually people can get better off in real terms. Not just nominal terms, but in but in real terms. But to be clear, we haven't done that yet. I mean, that hasn't been achieved yet. That's not where the country currently is, but a grand investment boom can take the country and the people who get paid less can take them into into that world. >> Every person I've sat opposite me who is a an economist, a professor, somebody who understands how the system works, uh I mentioned to you I read Richard Werner in here the other day said, "It is really easy for the government to deliver high growth." >> I think so. I think it's never been easier for a government because we've got a private sector balance sheet coiled like a spring. We have massive investment we need to do because we are distrustful of China. And it's worth just pausing on that a little bit because that is where this investment comes from. Let me tell you the things that we not currently not doing with China. The National Health This is about 2 months ago. National Health Service will not buy fridges from China anymore. They don't trust them. The government just banned the Chinese from building wind turbines in this country because they don't trust them. I think it's public knowledge or relatively public knowledge that members of the armed forces in this country are not allowed to drive Chinese cars because the government doesn't trust them. The Danes canceled a huge order for Chinese buses because they don't trust them. You remember the Internet of Things? Remember that? Well, we've got it. So, what is the most important attribute of the Internet of Things? It's trust. Because you can turn anything off at any time. We don't trust the Chinese. Now, that might change, but we don't trust the Chinese. So, we've got to build this stuff. Now, I'm not suggesting we're going to build all of that stuff in the United Kingdom. We the developed world are going to build all of that stuff. We now have to replicate most of the productive capacity of China if we don't trust China. And that is one of the biggest problems in history. So, I agree with Richard. You have a balance sheet, private sector balance sheet capable of funding it. We have a strategic need to build it. And it's not just that, we've got the Let's call that friend-shoring. It's a nice little phrase that Janet Yellen used for it. We need to We do need to green the economy. People will disagree on that, but we need to do that. We need money for defense. So, the answer to all of the problems that you and I are probably just about to discuss all come down to one word, investment. And we've got a balance sheet that can do it. So, let's get on with it. >> But what what What's getting in the way of it then? Why is it not happening? If it Because I you know, you look at you look at this Labour government. You look at Andy Burnham. He's come in. I I assume most people who come to power they they want to be remembered as a great leader, as being successful, as doing good things for the country. If every economist that I meet and and I know there are different economists who've got different ideas, but if everyone says it's easy, why will they not unleash the power of the private sector? >> There is an ideology lingering in the party. I mean the Labour Party is not one party, neither is the Conservative Party. There are bits within it. Uh and this Prime Minister has said he loves the 1970s. I mean, 1976, not far from here, Brown's Hotel, the delegation from the IMF arrived because the country was bankrupt. >> Yeah. >> Two former leaders of the Labour Party, well, one leader and the Chancellor, uh Callaghan and Healey, uh had to go cap in hand to the IMF and then kind of did a dramatic return. I mean, it's kind of nuts to hearken The only way you can have a liking for the 70s is if you were only a child in the 70s. You know, if you're bouncing up and down on a space hopper, driving your chopper around in circles, it was wonderful. >> Is this because ideologically they cannot admit that Thatcher turned the country around? >> Well, I think ideologically they can't admit They have a There's a short huge section of the party. I'm not saying he's actually one of them. I don't think he necessarily is one of them that has to be pandered to. That is the enemy. Has to be. That's how you get that part of the party on board. You have to say that's the enemy. Now, saying it's the enemy, but actually, you know, like the the PR and Andy Burnham, has he worked with the private sector in Manchester? I don't know. I wasn't I've no idea whether he did or not. But you have to pander to that part of the party. Remember, this is the Greens taking all of the votes from the ideal from the ideological bit of the party that these are the bad guys. Uh most people listening to this will not have heard the debate prior to the Scottish elections. Uh there's a Reform candidate there. He's a very wealthy man called Malcolm Offord. >> He was here. >> Was he here? >> Right after I think he he was with the Green guys. I said, "Do you want more people like me or less?" >> That's That's exactly right. >> here straight after that. >> That's what I was going to say. He asked the Green Party, "Do you want more people like me?" And they said, "Less." Now, who do the Green Party think is going to pay for everything? So, I uh Okay, I'll I'll declare my ideological bias here. I think the people of Britain are ultimately pragmatists. >> Mhm. >> And they vote ultimately. Sometimes it takes a while for a pragmatist. >> Who delivers pragmatic outcomes. >> And I think we're not as prone to ideology as I mean You can see the bias in all of all of this cuz I am cuz I am British but uh I think ultimately we vote for pragmatists, not ideologues, and we'll get there in the end. And it could be Andy Burnham. >> And if he is disciplined by the bond market >> Big if. >> Big question this week. >> Big if, big question this week. If he's disciplined by the bond market, we'll get there quicker. So, we're less prone to ideology. Uh I can see how you're going to get a lots of annoyed emails about all of this. >> Well, no, it depends. Look, you know, one of the things I've always said to people is like I actually I I'm I'm not I haven't voted in the last three elections cuz I there's no one to vote for, but I don't care. If the Green Party came out which they would never do, and said we want to have a productive economy, we want to unleash the private sector, we want to get kids to work, you know, we want to deregulate I would vote for the I don't I will vote for anyone. I think the most important thing to fix in this country is the economic situation. Even the people who are, you know, very upset about the immigration situation in the country. I'll always say, "Look, you can have zero immigration. If you do not fix the economy, you're going to get materially poorer, and your living standards are going to drop. The most important thing is to fix the economy." I just cannot see, and I haven't seen in government for a while anyone who seems to be able to get control of power, who seems to be able to do this. And Liz Truss made an attempt. I don't know, she made some mistakes. But she seemed to upset the Bank of England. >> Sure. >> Yeah, well, we're getting into I mean, you know, I'm a financial historian. We're not talking about the blobs, so we're well away from my um >> Well, we don't have to be. >> my expertise. But but the this is this is the fundamental bullishness that if ultimately the people prevail. >> Yes. >> Um um the people don't want the Green Party. They don't want neo-communism or whatever. That's not what they're voting for. Now, they're obviously North London's very different. You know, the the communists Sorry, the Green Party. Uh >> I think it's fair to call them communists. >> They're supported by the middle class. They're supported because they want to shore up the status quo effectively. I mean, you they might say we're we're radical, we're going to change everything. You don't find many blue-collar people voting for that. What they want is more jobs and more money. They don't They can't afford ideology. >> This show is brought to you by my lead sponsor, Iren, the AI cloud for the next big thing. Iren builds and operates next-generation data centers and delivers cutting-edge GPU infrastructure, all powered by renewable energy. Now, if you need access to scalable GPU clusters or are simply curious about who is powering the future of AI, check out iren.com to learn more, which is i r e n dot com. So, is the is the thing really getting in our way, the wings of the parties, where they have to pander for certain, yeah, ideological bends that stops them actually just going out and doing what is right? Like, does Andy Burnham really We should be talking about economics, but does it seem to you like he knows what needs to be done, but that he has to pander to the other parts of the party? >> that's I think that is where he was. Now, if you think back to the Labour Party of the 1970s, that's exactly where it was. It had its ideological firebrands, let's call them the the Bennites, and then it had its pragmatists. And what forced the pragmatists to win was the bond market. We couldn't borrow any more money. There's a famous speech by Callaghan Callaghan on the I have to tell you con- con- uh conference that this is no longer an option. So, is the bond market going to force Burnham to do something like that and have to and pander to that other part of the party, but actually get on with growing the economy? So, my answer would probably be yes, but of course I don't know. I'm to forecast. >> It's a shame though, cuz it seems to me therefore there are a very low number of people, we're probably talking tens, maybe a hundred or so people, who are ideologically holding the country back. >> I I I do think that it's not the people holding the company >> Well, I'm saying within the within the within government within Whitehall. >> So, I keep using the word ideology cuz I'm a pragmatist. And I think there are idealogues that are holding the country back. But it I mean but it's ideology. I think they probably know themselves it doesn't work. But they don't want to go to a dinner party in North London and admit that. You know, if you're going to do I don't go to dinner parties in North London as you probably guessed. But you these are the things you have to say there. This is where your own your whole self-esteem is based upon the fact that you say those things. And I'll blame the whole problems of the country on the North London Labour Party, which is not the whole Labour Party, which is why when Burnham comes from the north, one hopes that he doesn't start having dinner in North London. >> Stay away from Islington, please, Andy. >> Okay. So, you talk a lot about financial repression. Even if we unleash the private sector, is financial repression coming for >> Very probably. So, let's begin with why I'm making the forecast with probably a high degree of certainty. I don't always make forecasts with a high degree of certainty, by the way. So, it was because of the debt to GDP in aggregate. So, I've told you why the private's good and public's bad, but in aggregate it's bad. In aggregate that's a bad number. Where are we? So, the United Kingdom's total debt to GDP is about 234%. So, public plus household plus corporations. Now, 234% if I could draw a little graph would be not quite where we were at the end of World War II, but pretty close. So, pretty horrific. So, it's not a good number. >> Unpayable. >> Uh unpayable in hard money. >> >> Maybe we'll come back to that. >> Payable in in inflation. >> Yeah. So, that's that's where we're going to to next. But I want I just want to point out that 234% of GDP, although it's really bad, is actually very good relative to everybody else. Not everybody else. Let's pick some numbers. So, America is now 254% of GDP. China is 300% of GDP. France is 324% of GDP. Japan is 350% of GDP. Uh now, let's talk about the good ones. Well, the Germans are 200, but we're 234, not too bad. India's about 190% of GDP, so you've got a really big big big range here. But fundamentally, any number way up into the 200s, and we are at 234, ultimately, you've got to do something about it. We have to do something. So, here are the five things, and this is where we come to paying back in real money. So, the number one the most the beautiful way of doing this is really high real growth. Do I think we can elevate real growth to that level? Probably not. >> What kind of growth are we talking? 10%? >> No, no, real growth per annum. I think four would do it. But four four But four is very high. We, you know, I'm looking back into the 19th century now to see if we get numbers like that in huge investment. But so, obviously, the great white hope is AI. That that can elevate the growth rate. I don't I can we can talk about that as a separate issue. So, there are five ways to do this. Really high real growth, austerity. Well, there is absolutely no political uh mandate for austerity at the minute, anyway. Default. Uh well, Lehman Brothers defaulted, it didn't really take us to a land flowing with milk and honey. Uh the government of Greece defaulted, and it's taken at least 10 years for the nation to recover from that. And then there's finally financial repression. So, I pick financial repression cuz it is the least If you're a politician and you're choosing, it's the least bad option, unless we get some sort of miraculous real GDP growth. But clearly, you have to try for the higher real GDP growth. You have to do everything you can to achieve it, but I think it's going to be a a challenge to get it to the right level. If like Britain, you start with a with a more moderate debt to GDP ratio, then maybe you need to do a little bit less financial repression. >> But 4% is that achievable with the right leadership and the right will and the support of the public? >> Probably not. I mean, that's probably too high. I mean, you you have to put that in a historical context. We we just very very rarely ever got to that level. That's a very very high number. >> Can you work towards it year on year? >> Yeah, look, I'm saying we can get much much higher than we are today. So, if we were to get elevated real GDP growth, say, you know, 2 and 1/2 isn't that long ago where we could achieve stuff like that. Helps a lot and reduces the nature of the level of uh of of uh repression that you might need. >> But when they get to an odd percent growth, do they spend spend more? >> spend more, yeah. >> Spend more. >> Well, there will be more spending on defense for sure. That's just inevitable given what's happening in China and not Russia. Uh so, yeah, there is a temptation that they spend more. >> So, financial repression is the easiest one to slip into the public? >> It is because you're attacking only one section of society, at least for the first decade, and that is savers. And you can see the rhetoric on that changing. So, if I want to attack you, I have to give you a bad nasty name. So, I'll call you a rentier. Uh for those listening who don't know what a rentier is, you can Google it, but it's basically somebody lives their life on unearned income. And what could be more horrible than somebody learning their right leading their life on unearned income? So, we have to demonize you as one of these people who lives on unearned income. Everybody else is like toiling hard, but you're 65 and living off your pension, that's unearned income. And we be say that this is a legitimate person who has to lose. There's a grand reordering that has to come. The country's a mess. Who do we think has to pay for that? Well, the saver, because they've never had it so good. So, that's how you do it. But it is worth pointing out in that environment that debtors do well and young people probably do well in a great investment boom. So, this is where we were after World War II. So, I'm not making this up. We've done it all before. >> This is a redistribution of income. >> Correct. Financial repression is that. It's not necessarily done for that reason, but it is done to reduce debt to GDP ratios, but it has that effect. There will be some There will be a lot of people listening to this who've read who've sorry bought a copy of Piketty, Thomas Piketty Capital, the great Marxist economist. An oxymoron if there ever was one. Uh not many people will make it past page 20. But anyway, I think in the first 20 pages you see a chart of wealth wealth distribution. And you see, despite what Piketty says, what you see is effectively uh the mean reversion of wealth distribution. But if you look at the period after World War II, which is the period we're talking about here, financial repression, you get a collapse in financial inequality. But that's not because necessarily uh you know, working people are doing better, although they are. It's known as the Trente Glorieuses in France, the 30 glorious years. It's because savers are doing so incredibly badly. So, when I was a boy in the '70s, the worst section of society the society that was really on its knees were the pensioners. Well, that's not where they are today, is it? >> No. >> So, we just going to have to go through reversing that. And my free I spoke I've spoken to pensioners about this, and I when I talk about financial repression, it is kind of esoteric. So, I had to think up a better phrase for it. So, I call it stealing money from old people slowly. And the slowly bit's important because you mustn't frighten the horses. You know, they mustn't stampede for the exits. So, that is a world where the politicians will say, "You know what? Somebody has to pay for it. Why why not those guys?" Now, the triple lock lock obviously is evidence that they haven't got there yet. But the triple lock will have to go as well. So, that's the world where >> Nobody wants to go for the triple lock, do they? >> Yeah, it's incredible. I mean, all those problem with all those old people, and I'm obviously not one of them, is they all vote. So, if young people really want to change something, they have got to got to get out and vote. So, I we haven't been really that precise about what financial repression is, isn't it? So, to the extent that you and I as savers are within regulated financial entities, we force those entities to own government bonds at yields that do not compensate us for inflation. Now, there's a hundred dollar things to it, but at the core of it, that is what a financial uh repression is. So, bond yields are held below the rate of inflation by forcing us to buy them. I don't want to buy bonds. Uh no, I don't want to buy them either. I mean, I wrote a huge piece for my clients uh >> You said, "Don't buy bonds." >> Yeah, 2021, I said, "Look, uh it was called the train to the Finland station." And Lenin and in on on the train to the Finland station and I said look this is regime change. What's happening here in 2021 which was the bankers commercial bankers expanding their balance sheets into recession with government guarantees to create masses amounts of money is a going to create lots of inflation tech but B it's a sign of a regime change that the government has realized how to make money and you don't want to be anywhere near a government bond. Now obviously it's been right but I want to show you how right it's been. If you bought a French government bond issued in the first quarter of 2021. So that was a 50-year bond with a half percent coupon. As of yesterday you'd lost 78% of the capital value of buying the risk-free asset from the French government. Now that's a nominal number. French CPI basket not annual but since then is up 18%. So you've effectively had your capital wiped out buying the risk-free asset from the from the fourth biggest issuer in the world. >> Risk-free. >> So uh I I I'll see if I can get this right in a way that George Bush didn't. Fool me once shame on me. Fool me twice shame on you. Now are investors going to be fooled on the second time on owning the risk-free asset given that's an extreme example. A 50-year piece of debt is an extreme example but and no one knows they've lost this money. This is what I mean about stealing money from old people slowly. They don't know. Who who owned that? I'll tell you who owned it pension funds. >> Yeah. >> The regulator told the pension funds and the life funds you need to match your assets and your liabilities. You need to buy every piece of long-term paper there is to match those two things up and they bought it and the guys don't even know they've lost the money. >> So they regulated them to buy the bonds cuz the government needed the money and they lost that's the trans that is the subtle No one's ever explained it to me. >> Well that is so that's not the rationale then. The rationale then was if you have long-term liabilities you need long-term assets. But but you can easily just change that to we need the money and here's and then give it another name. You know, stealing money from old people slowly it is not declaring the government needs the money you're going to lend it to. So, it's finding reasons of safety and security and prudence as to why you need to buy government bonds. In a risky, dangerous world, of course you need more government bonds. So, it's not dressed up in the language of we need the money, governor. >> >> Uh you know, it's not a revolver in the in the back in a dark alley in Soho. It's uh for your own good and safety you need to have more government debt. >> So, so is the triple lock really a subtle way of hiding this? The belief you're you're outperforming. >> Yeah, well that's in the that's the public sector, isn't it? So, the public sector pension is what it is. It's the private sector pension. So, it depends on where you as a pensioner sit. If you have a private sector pension >> I'm more likely and my family's more likely to be in the private sector. >> Yeah, so that's where you're going to lose out. I mean, fortunately, you know, maybe not losing out as much as people think at the minute because for for for all that you've lost on that but that asset, you know, equities have done pretty well. So, it's it's pretty well hidden down in the weeds at the minute, but I that's my kind of point. We're getting to the stage where you can't really hide it anymore. We fooled the people once. Difficult to do it again. It might have to be more overt the second time. So, the public sector pension triple lock will have to go eventually, but but that the attack is on the private sector. And I would be clear that it's not just private sector pension funds because you've got the sort of life life insurance as well. There're all sorts of pots of capital savings institutions in a society and all of them can be put in that. So, if we go back not that long ago, one of the legacies of the last financial is that at the age of 75 your pension will have to go into an annuity. And guess what the assets of an annuity are? Government bonds. That's the legacy of the old system. We could bring that back. You know, so many ways of of doing this. We had at one stage I think that the peak rate of uh transaction tax on equities in this country was 4%. There was never a transaction tax on government bonds. You know, to make government bonds more attractive. If you put on rent controls, then you you you denude property of its ability to to protect you from inflation via higher rent, making government bonds more attractive. You give me any sort of piece of legislation we ran from 39 to 79. I'll show you how it ultimately was about making one asset class less attractive so you would buy more government bonds. And that British investors from 45 to 79 in real terms lost nearly 90% of all their money in British government debt. >> So So really are you saying these people aren't idiots? They know exactly >> No. No, I'm not yet. But >> >> I'm not yet. I think so I mean I've been writing about financial repression for a long time. And the question always was is there an evil hand behind the scenes moving the chess pieces? And I think the answer was No. I paused there because there was a man who was in high policy circles in this country who did write a book about it and did suggest it. And his name was Lord Turner. Now he published that about 2012-13. So there was a blueprint there. But no, I think the government as governments do so far have stumbled into all of this. It's been accidental, but I think in the last year and a half there is evidence that someone is is working it out. So I For the United Kingdom, the best example I can give you is the power of mandation. So the British government, last one, conservatives, this one, have a thing called the Mansion House Accord where they're trying to steer the capital of the pensions industry into the certain assets that they think they should invest in in this country. So we'll just leave that there. But there was a problem with that. The guys who run that money said, "I'm a fiduciary. I have a legal obligation to my people. And if you make me do that, they'll sue me." So last October, it's nearly a year ago now, the British government passed a piece of legislation called mandation which sits up there and I and says a government minister can force a pension fund to buy whatever they wanted to buy. Because that gave you a legal backstop. So if you get sued by your client, you say, "Well, wait a minute. We hadn't done it. They had forced us to do it." So the moving to that piece of legislation tells me that there's somebody and this came after the Liz Truss budget where we had a spike in bonds. >> remember anyone talking about this. This sounds like one of those things that just goes under the carpet. >> Well, it yeah, I would say it wasn't a high profile, but it wasn't done in secret either. I mean, a lot of a lot of people in the pensions industry obviously were not happy about it. So, there's now a backstop. Now, is the backstop random? No, I think the backstop's deliberate. Liz Truss thing helped that. So, I think in the last 18 months there's a little bit of sign of losing hand. I I mean, if Madam Smith believes in the invisible hand, this is the clunking fist. So, the the clunking the clunking fist is becoming more visible than it, you know, there is more order in this than there used to be. >> Right. So, can you explain to me cuz look, I'm just a I'm just a guy who goes to work, who tries to save some money and help my kids and have a holiday each year. And I think a lot of people are probably in a similar position to me. I watched what happened with Liz Truss. I quite liked Liz. Um I I believe she wanted the country to go. I believe she wanted to unleash the private sector. Uh unfortunately, she didn't last unfortunately, she didn't last too long. I would like to seen her as a Prime Minister for longer. Uh and I've read all the arguments either side, but I've got a feeling you fully understand exactly what happened there with every player. Can you explain to me how you saw it? >> Well, I think the problem with the plan is that it it it it initially would have entailed a much bigger fiscal deficit. I if there'd been something to perhaps contain the size of the fiscal deficit while this was going on, I don't think the bond market would have reacted as badly. There are and there were then backstops on the bond market that were not deployed. I do not have an opinion on whether that was a political choice by the institutions that can deploy the backstop or not. She obviously has an opinion on that and she's very vociferous about it that the Bank of England could have deployed the backstop and things would have been okay. I you know, I'm not taking a an opinion on that. The point is we now have a backstop and it's not with the Bank of England. It's with a British government minister. That's the change. That's what's brought it. That's what tells you the clunking fist is moving. It's realizing we can't be dependent upon a decision of the Bank of England anymore. We need executive power to force people to buy these bonds. Had Liz Truss been in power at a time when mandation was already in place, she would have been able to say you need to buy these bonds. She would have argued there's a temporary extension in the fiscal deficit coming until we get the elevated growth. And in in that hiatus, you're going to own more government bonds. So the world this world changed. Now, I'm not sure to what extent other parts of the world changed the the mandate of the clunking fist, but it's been changed. So that tells you that somebody somewhere is working this side. I don't know where Lord Turner is these days. I don't know if he's a consultant to the government or not, but uh he he understood it and wrote it all up. And there are people like him and not just him, others who say, "Look, the British post-World War II period was the golden era era for Britain." Now, in many ways it was if you're the average Joe. Uh it just wasn't if you were a saver. And they think we can replicate this. I don't know what I'm saying. Yeah, we probably can replicate this, but the saver pays the price. And then who sacrifices the saver? Well, I think So we had a little uh discussion before we began recording. And I don't think it matters whether they're left-wing or right-wing. They all sacrifice the saver. Because what else you going to do? >> So So what What should a saver do in this time? >> Start spending. >> Well, uh so yeah, so that is one thing you can do, absolutely. Uh but So the good thing is we have a history of this. I mean, we know Well, we know what what worked the last time, which even as a finan- financial historian I'm going to tell you is not, you know, foolproof guide to what happens the next time. But here are the things that would do well in a financial repression. Obviously, you don't want to own bonds. You know, if I tell you we're going to inflate away our debts, why the hell would you want to lend anybody any money? Okay? Uh but there are equities that do benefit from all of this. We've talked about what I think and which may or may not be true, this great capital expenditure boom that's coming across the developed world. Well, there are equities that are well plugged into that. I believe we're suspending or will suspend very aggressively uh trade with China cuz we simply can't live with the China that is that competitive. For whatever reason, it doesn't really matter. People argue why it's competitive, it's kind of irrelevant. Sociopolitically, we can't cope with it and therefore we won't. So, there are lots of companies that make a huge amount of money because they're not uh subject to Chinese competition anymore. Uh gold is actually a good investment in a financial repression and uh there are uh surprisingly, maybe we can go into it in more detail later, banks are a good investment in this. So, you So, the problem here is is as follows. When you reach a great big structural change in the world, the professionals and the amateurs are all looking back to guide their asset allocation. And doing that, they're on 60/40. Well, 60/40's been a nightmare, which is 60% equities, 40% bonds. And they still haven't really changed. And what you need to do at a time of great structural change is have a radically different portfolio. And that is a radically different portfolio. The The stocks I've mentioned are usually classified as value stocks, not very good definition of them. Value stocks, gold, banks, and invest in countries that aren't going to run a financial repression. And actually most of the emerging markets who've got very low debt-to-GDP ratios, ex-China, don't have to do it. Now, the problem with that is it's an incredibly idiosyncratic portfolio and everybody will tell you it's incredibly risky. Why is it incredibly risky? Because it doesn't look like anybody else's portfolio. >> But sometimes that's a good thing. >> Absolutely, that's my point. A great I mean, in in a business cycle, when you're playing business cycles, then maybe being like everybody else's kind of useful. But when you come to a great structural change, you need to be radically different. The professional community can't be radically different. They have internal risk control officers who'll tell them that this is far too risky. You as an individual can do that and then you have to live with the volatility. Uh so, that's the problem we have. We've built an industry that is benchmarking, benchmark hugging and is not capable of making a grand leap. Why would you as a professional? You get it wrong, you lose your job. You get it wrong in the herd, maybe you keep your job. >> So, in my world, we mentioned it before before we started recording. And you mentioned gold. And I didn't think I I don't always bring it up for the sake of it cuz the show used to be about Bitcoin, but a lot of my friends and people I know are investing in Bitcoin for the same reason that people are investing in gold. But you are not a so believer >> No, I'm not. So, a little bit of So, there are obviously three different types of crypto and we're just going to talk about Bitcoin. >> That's the only one I care about. >> Yeah, because I think stablecoin will be very successful. I think the central bank digital currency will be very limited. It's too dangerous. I don't think they'll go there. So, we're just just to be clear, I'm not negative on all crypto. It's just the and I'm not it's not I'm not picking on Bitcoin either. We're just picking on private sector crypto. Private sector crypto, whether it's called Biden or whether it's called Trump or whether it's called Bitcoin. So, a currency as it used to be. So, it doesn't have any of the It used to be 5, 6 years ago we thought it was going to be, you know, coin. It's going to be a currency, but it's not a store of value. It's can't credit Well, let's just say it's very volatile to be classified as a store of value. >> I'm used to the volatility. >> Okay, it's it's not a means of transaction yet. Though stablecoin I think really could be a means of transaction. And it's not a method of account. So, it doesn't have any of the functions of a of a of a currency. So, it doesn't have all three functions. And it's clinging on to the store of value one, but it's exceptionally volatile. So, when I speak to I don't speak to a lot of Bitcoin people, but I do. And and they say to me, "Well, what it is not is a way to avoid the government." >> >> That's what it is. It's not really a coin. It doesn't have those three values. But as a way of avoiding the government, that's really why Bitcoin is going to do very well. You want to avoid a financial repression, you buy Bitcoin. Well, let's go to China. You can go to jail for buying Bitcoin in China. So, you know, if it's really going to be this gaping hole to escape a financial repression, they're going to be after it. So, that's why I don't want You might say the same for gold, but it's actually much easier to to move to hide maybe not move gold. Well, actually even moving gold fits in the glove compartment. >> Actually, it's very it's very easy to hide and move Bitcoin. Um and you know, we we know in the US they came after the gold. >> China, they put people in jail for doing that. >> Yeah, that's China, but the the rest of the world they're not going to be in jail for it. >> No, not yet. I mean I mean, we used to have capital controls. We had them and people did go to jail. There's a famous corporation back in the '60s early '70s called Bernie Cornfeld Inter-International Overseas Investors. And it looked like a mutual fund company, but it was an illegal capital flow company and lots of them went to jail. And we The point of having capital controls or exchange controls is you go to you break them, you go to jail. >> But they could do that for gold as much as they could do for Bitcoin. >> They they they absolutely could if you're going to move across border. >> Mhm. >> Yeah. >> So, that but that's the same risk on the on both assets. >> it's not. I think it's much less on gold because gold is is so much easier to have somewhere and and it's not a big asset class. It's getting bigger by the day, but it's not a big asset class. Gold is not a I mean the way I look at the financial repression, if you're a government, what you do is you look at a tree full of fruit and the fruit is savings. And you start with the low-hanging fruit, of course you do. Pension funds, life funds, you regulate them anyway, you bring in the Mansion House Accord, you bring in mandation, easy easy picking. But as it goes further, you've got to go higher up the tree. So, the first thing I'd say is clearly Bitcoin is higher up the tree. It's going to be much more difficult to get your hands on and then you work your way up. I put gold maybe at the top of the tree. >> Is that cuz the government has the gold themselves and they like it? >> No, no, it's not that. It's just that it's just not a big asset class. It's just not worth getting to when there's stuff further down the tree. I mean, just I mean, obviously everybody talks about Roosevelt '33 and his his hand in all your gold, but in those days gold was quite a big chunk of a personal portfolio. Gold gold was money and money was gold and a and a gold standard. And now it's just a tiny bit. Now, if we're here in 10 years, maybe it'll be a big bit and the governments will come after it, but at the minute, if you and I were going to run a financial repression, we couldn't care less about the holdings of gold because they're so small. >> I saw recently Chris Chris Christine Lagarde Christine Lagarde talking about savings. >> Mhm. >> The power of savings is a trillion euros or whatever locked up in savings. >> it was Ursula von der Leyen. Sorry, Ursula von der Leyen she's done a big speech about all of the savings lying around Europe and the same speech that Macron does, which is I don't know if the number is still right, but roughly 300 billion a year of European savings goes to fund America. Free choice. Free choice by the people, by the savers, that's what they choose to do. And it will not surprise you to know that Ursula von der Leyen and Macron are not very keen on that idea. So, they would like more control over those savings so they can be invested where they want them to be invested. That's financial repression. >> But so >> So, in the context of von der Leyen Lagarde Macron, they all want control over people's savings. So, it is buying their bonds. >> Want or need? >> Need. >> They need it. >> Need. But there's also a secondary point, which is the the Draghi plan. So, Draghi has a plan for massive investment across Europe to save it. And so, they want it for that as well. But that but they're no different from the government of Britain, from the government of Canada. I mean, it's possible that the biggest investment in the world is now in Canada. Because if Canada is really going to ostracize itself from America, given how intertwined those two are, that might be where the biggest investment by Mr. B To finance that, Canada will be bringing tens if not hundreds of billions of dollars of capital back from America every year to fund it. That's the world we're looking at. You know, we we have we are as we sit here today, bond markets are breaking. There are many reasons for that. We can talk about all of them, but the one that the press doesn't talk about is repatriation of capital. Everybody needs their savings home. And where are their savings? They're in America. 70% of the world stock market, you know, the land of the free, American exceptionalism, that's where the savings have been going. And if Von der Leyen wants them back, the British government wants them back, Mark Carney wants them back, and financial repression is is forcing them back. And in first instance, if you want to bring liquid capital back, the first thing you sell is your most liquid asset, which is government bonds. So, >> Which we're seeing a lot of people selling their US bonds. >> Yeah, but not just US, you know. >> Any bonds. >> My Fran- Any bonds, but France is the worst, much worse than the US. So, uh yeah, so that's the world that we're living in. And that speech by Von der Leyen is could have been could have been really made by uh Andy Burnham. The thing is Andy Burnham doesn't need to make that speech cuz he already controls the savings of the British people through the powers of regulation. Von der Leyen needs to make that speech cuz she's no control over the over the uh savings of Europe. I mean, the the Chancellor of Germany controls German savings. The President of France controls French savings. Her desperate gambit is for the European Commission to get control of these savings so that she has a role to play in the future, and she'll fail. She'll absolutely fail. But that's why she's getting so vociferous about this cuz she knows that if the Germans run financial repression independently and the French run it independently, there'll be nothing for her to do all day. And there's nothing a politician likes less than realizing that she's completely powerless. So, hence the great big public announcement that we absolutely need to have this capital union cuz I need to control the allocation of savings. So, I think the allocation of savings will be done in Europe, but it'll be done by the the member states individually and not by uh the commission and and and Von der Leyen. >> Now, I know that running a business means you're always reachable until you're not. And the second you miss that call, that text, that follow-up, someone else picks it up. That's the bit people don't think about. You don't just lose that customer because you were worse than the other guy. You lost them because you didn't answer. That's why today's episode is brought to you by Qual spelled Q U O, >> >> the business phone system built so you never miss a call. Everything lives in one place. Calls, texts, voicemails, and your whole team can see it. 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You you and I part of the animal. You've got the money. You know, I know the speeches are always against the billionaires. >> >> Yeah. >> Billionaires have got the money. Let's get the money from the billionaires. Well, that proves to be quite tricky. >> Yeah. >> >> And guess what? The billionaires don't have life funds and pension funds. So, in terms of this tree of taking money away from people, the easy thing is just a regulated savings industry. It's quite difficult to go after the guys at the top. I mean, eventually probably we make an effort, but we're already making the effort. >> Well, they're trying in California, aren't they? >> Yeah. Yeah, it doesn't you know, we we can as we said here today, there's lots of stories about Greece and what Greece is doing to lure people away. But this is a is a problem for the European European Union. Greece is hitting the headlines, but actually Milan's much bigger threat to Europe than many many very wealthy French people are moving to Milan. There's a flat tax rate on your overseas, sorry, non-Italian income. And this is driving a lot of people. Why is this a problem for Europe? To make a single currency work, you need to move towards a single fiscal system. And this competition for tax, and of course the Irish have been doing it for a generation very successfully. Well done them, but uh The Irish have been doing it for a generation. The Greeks are in the business. The Italians, I mean, who are they taking all this tax money from? France and Germany. And their public finances, particularly the French, are already in a mess. So, in terms of attacking the wealthy people, to the extent that they go to Greece, you got a problem. So, maybe you should stop that. So, you just go back to your pension and life funds. You know, most people don't even know it's happening. How many people who have a French pension know they've lost 76% of their money lending it to the French government. None of them. >> They'll protest when they realize >> Yeah. So, yeah. Well, >> They love a protest. >> They protest every Sunday anyway. It's just a just a new reason for a good protest on a Sunday. >> now. >> Is it Saturday? Well, Sundays I remember, you know, being Parisian on a Sunday, you can you can dip into three or four different demonstrations depending on one's political opinions. >> I just It is It is really sad. Uh and maybe I just romanticize too much, but I just wish I just wish we would have some political will to do this in a more honest way. You look I am 10 maybe years away from retirement. I'd like mid to late 50s to be able to retire. And you know what, Russell? I look I don't mind taking a small haircut for the future for the kids. Like I feel like in some ways it's kind of like a a war footing, you know, post World War. You got to rebuild this country. I want to I want my kids to be able to have kids and buy a home. And in doing that, I want their peers to be able to have the same because >> I'm suggesting you can do that. I'm suggesting you can do that. One, try not have your money in regulated financial institutions. Number two, own value stocks. >> But what I mean by this >> Buy gold and you can profit from this. >> But that's for me personally to help my kids. But what I mean I want it for their generation. >> Sure. >> And it appears to be that their generation will benefit from this financial repression. They will be the beneficiaries. But I don't think it's happening because the the powers that be that control these want to control our money are thinking about the future of the because they think about saving themselves. >> Well, there's Well, there's two things they're thinking about. So, one is just what you said. But the second one is China. >> Yeah. >> And we must not underestimate what this country has to do now in a cold war. Or or France or Germany or Canada or America. And that's where the jobs come from. >> to build. >> We have to build like never like really like never before. This country lost a a significant stock of its capital assets due to enemy bombing after World War II. We've lost even more due to the hyper competitiveness of China. And that all has to be rebuilt. All right, I don't think all of it is rebuilt here, but some of it is rebuilt here. And that's what the politicians are I thinking about. You know, this great thing, are we really really rebuilding the defenses of this nation, the defenses from Russia? >> No. >> It's not possible. >> But you know, we we can see what Russia is in the in Ukraine. We're building it for something bigger than that, and that's China. And nobody will talk about that. Nobody will say anything about it. But this is not about going to war. It's about about realigning the supply chains of the entire developed world to be less reliant on China, whether it's solar panels, automobiles, fridges, buses, the whole thing. Now, if trust is instantly regained in the Chinese leadership, or there's a new leader and we instantly regain trust, then I'll have to come back here and have a different opinion. So, that's what they're trying to do, and that's what that creates the jobs for your children and your grandchildren. Uh and creates uh for them a better a better future than it currently would appear to to be. You probably don't need a university degree for quite a lot of that, by the way, so. >> Well, it's a big conversation I have sold at the moment, yeah, with a 16-year-old. I mean, what what I mean, how do you even choose what to to learn cuz, you know, in 5 years' time, I think the world's going to look very >> I think they should learn from their father. I think they learn communication. I mean, they This is one thing I think that will always be there, the ability to communicate, which is the ability to lead. Like maybe one day it's only AI and there's no human beings to lead. But the ability to communicate would appear to me, and this is what the older generation always say, would appear to be a dying art amongst the younger generation. >> That is a fun Well, interesting we had this conversation yesterday cuz my daughter is a she's an artist, she loves art. But you know, part of her A-levels, she has to do other subjects. She she took economics cuz you know, she wanted to make her dad proud. >> I was going to say, she wanted to make you happy. >> Yeah, but she she's not enjoying it. She wants to be an artist. And the interesting the conversation, I said to her yesterday, I said, "Look, I don't mind you being an artist, but I also want you to get a job because the creativity is beautiful, but you got to be able to learn to communicate with people, to be able to deal with people." So, we've we've had that conversation. And I It's a really funny time because when my son went uh got to say he was selecting A levels, yeah, they this was what I mean he's 22 now, so you're talking 6 7 years ago we think about it. There was no chat GPT we were talking about. We considered his career. With my daughter now, I've got no idea what the world would look like in 5 years. So it is the conversation now is pursue your curiosity. Pursue your curiosity. Just pursue that and in 5 years time we will figure out the world that's the world that that that is here. We'll figure out what's right for you and it's a very different >> I so I I understand that completely, but there will be lots of blue collar jobs and in terms of your daughter, I think if she in the in the way along the way learns to communicate with people, lead people, personally based on my own experience, I think a lot of that comes from the sports field. Team team sports may not come from university at all, but I can't foresee a world that with AI 10 15 20 years from now where there isn't the role for somebody who can communicate and lead a team. >> I completely agree. >> Yeah, and and that's a skill set which you know, tons of people have who are never going to even near university. They're brilliant at it. >> Just back to the point I was making previously that I look again, I don't mind elements of financial repression where we're talking about rebuilding the country, not saving the government. I think there's a distinct difference between rebuilding the country and saving the government. >> They they don't see the distinction. >> They don't, but we do. And and saving the government means saving face, which means screwing up power, which means you know, all the things that come with that. And and to me, the problem we have with that is is like even if we get to that high grade, they'll just spend more again stupid they need to to maintain power. But if there was a genuine plan to rebuild the country, if somebody came out and said, "Okay, look, Pete, you're going to have to pay a bit more tax. You're going to have You're going to You're going to have a lower pension, but we're doing this to rebuild the country for the children. Here's the plan." I think I can be on board. >> Don't rule it out. That's all I would say. Don't rule it out. I know we're both skeptical about that. I think it is because there's this block in the Labour Party which is ideological and and probably doesn't represent the base of the party. The base of the party is working class. That's theoretically what labor is about. But there is now obviously a large public sector middle class part of the labor party. So that battle has to go on. I'm maybe slightly more optimistic than you that one bit of that wins and the other. But that battle as it has gone on throughout the history of the labor party has to be won by somebody. The question is, I hope we don't have to wait another four, five, six, seven, eight years before one of them wins it. >> So in the '70s they they still had this middle class labor wing. >> Well, they did. >> But I mean, remember what happened? The >> I don't remember. '78 I was born. >> Who voted Margaret Thatcher into power? The working class. >> Yeah. >> That's what happened. So they just So they just stuck with that and said, "These are the people we represent." And the whole working class who was supposed to represent the working one the guys in Liverpool didn't. Uh but a large percentage of them just said, "Well, what the hell? If you're not If you're not going to represent us, then we'll go and vote for somebody else." That is the fear he currently faces from reform. And he better do something about it. I mean, the Reform Party is will not run through all the policies of the Reform Party. But one of the part one of the things is, we'll get the government off your back. I mean, that's it. And it's very popular with blue collar voters. >> Yeah. >> Burnham can't see that and I know he sees it and he'll have lots of advisers telling telling him it as well. But he has this other bit the ideologues who are saying, "Oh, no, that's not what labor really stands for." So if if he doesn't do something, he loses the vote the way Callaghan lost it to to Thatcher. >> You you are still very optimistic then. >> I I'm so I Look, I'm I'm getting old now. I I've been in the country a long time. You know that great thing about a quick quote from Churchill about Americans, they always do the right thing after they've exhausted every other I think the British people get to the right thing much more quickly than Americans do or other countries do. I think there's a pragmatism here that'll get us there. It could be in this government. That's probably where I'm you would call me wildly, unduly, and stupidly optimistic. But I think we can get to the right answer quicker than other nations. But I don't know that if it's this year or next year or the year after. >> Yeah, I mean I look at the I mean this only this week Donald Trump offering to pay 5,000 dollars to every citizen if they win the midterms. I mean it just seems so lunatic. >> Well, see that >> I mean I get it, but it's >> I know it's it is lunatic, but there's a there's a pervasive view in the across the developed world by some people that that most people in the country are stupid and fall for that stuff, and they're not. And they're not. >> Well, I mean you know, what's his name? I've lost his name. Um The the labor guy a few years ago. >> Well, Jeremy Corbyn? >> Corbyn. But he pre-election started offering everything for free. >> Sure. >> Everything for and nobody bought it. Nobody bought it. >> Absolutely. And and as I said, once upon a time these people voted for Thatcher. That's the pragmatism. It's to say that inherent within the country there is no ideology, there's just pragmatism. And we'll get there, but it's just it's just taking a long time. >> Okay, well we should finish talking about AI cuz it's come up a few times. Uh So are you optimist optimistic that AI can bring a productivity boom and therefore growth? Or on how much you looking at the other side of this where there may be a lot of jobs lost and we have to consider that maybe this is a world that can't really support that much debt. >> That's brilliant question. I think a lot of people don't think about that second bit, and that's the bit we need to think about. >> We're a debt-based world. >> Yeah. So let's talk about the upside first, and there's no doubt it will produce higher levels of productivity growth. Which is not necessarily the same as high levels of real growth. We have to remember that because of the dislocative effects that you say. So there a little bit on that. We have lots and lots of history of technology booms and and lots of sort of parallels and analogs that we can look at. So what will they tell us about this? Well, they will tell us that at certain points in time financial capital will fall over itself to fund a technology, and then it will stop. And it will stop because it doesn't see the returns. And we maybe not there yet, but and then after a couple of years, it'll see the returns and it'll come back. In other words, any technology boom should be feast and famine. And we kind of saw this with the dot-com bubble. So, we're absolutely in feast, but at some stage the people who provide the financial capital will reconsider the returns that the physical capital will get and it'll stop for a bit. Doesn't change the long-term projection for AI. So, the best example of of an equity for that would be Amazon. >> It falls 90%. I remember. >> Uh but had you bought it in 2000 and held it to 2026, you didn't care about the 90% decline cuz you made so much money. The point is that for a while we couldn't work out where the cash flows would align. You know, Amazon was building lots of eyeballs, but would it get the cash flows? We didn't know. So, it'll happen. I think that'll happen with AI. It seems more clear where the where those cash flows will align, but it's not that clear. So, in terms of AI, you can't say it's going to give you a permanent lift in productivity growth. It's likely to be up, it's likely to be down, but in aggregate over 10 years it'll be a positive number. The bigger problem, the one you've just mentioned, is the reassignment of cash flow in a world of high debt. And uh there are three three people we have to worry about there. The The household sector, the corporate sector, and the government. Well, look, if you reassign cash flows to the household sector and the corporate sector, that is the government because, you know, tax, that's that's us. So, that's the challenge and I think there are significant challenges in that uh that that would would one of the reasons we might have to slow this down is if AI starts taking all the cash flow from heavily indebted companies, those companies default on banks, those banks are in trouble, etc. etc. So, the problem with AI is we're looking at so many moving pieces here. So, what is the net from all of that? I think the net from all of that is we do get a higher real growth. Clearly, I think it's supplemented and actually bigger driver will be in will be investment. But there has to be something to slow down this reallocation of cash flows. If it really accelerates the way it could accelerate, we're going to have a credit problem. Now, the good news for the United Kingdom is we've got low debt to GDP, low private sector debt to GDP. France has got high private So, you can then sort of go around the countries and say, "Who's going to have the biggest problems from a reallocation of cash flows?" And you don't You know, the UK is going to have a problem, but you don't point to the United Kingdom as the biggest loser in that. There There are other places. I think people will say that's a very unclear answer cuz I try not to be the two-handed economist, you know, on the one hand, on the other hand. But in great periods of great uh technological break through, there are pluses and there are minuses. Uh Andrew Carnegie, by the way, the famous steel man left Scotland as a young boy with his father. He left because his father was a weaver. And he was, you know, completely run out of time by a technological break through. Went to America and became possibly the richest man in the world, if not one of the three richest men in the world. So, the technological mess that comes along, historically, it reassigned people all over the planet. It reassigned cash flow. It wiped people out. That's not the word we live in. That's not going to happen. It's not going to be allowed to happen. It can't happen. The social political system can't handle the scale of technological revolution that AI brings. Most people will say, if they're Peter Thiel, they'll move to Argentina and say it's coming anyway. I think if you're a political economist, which I would style myself as cuz I'm certainly not an economist, you would say that just means the state has to manage this in some way. To slow it, not stop it, but to slow it. And financial capital can slow it for two or three years on the plug and financing, but ultimately something bigger. We can't We can't have another Andrew Carnegie. We can't have Well, Ireland Ireland for other reasons to do with the potato lost a third of its population to America. Or America and Britain. We can't That's not, you know, we can't deal with the dislocation that's necessary of a technological revolution of this scale. So, we'll have to slow it down. >> So, really the the the primary difference with AI is the pace of change. We've it's unprecedented. >> Yes, I think that's true. I mean the real ways or I mean I I I one I like is the the world's first refrigerated ship. I think it's the 1870s. Leaves Argentina. And if you're in the beef cattle farming business in the United Kingdom, problem. But not when the Strathcona arrived. But you know, 2 years after that, 3 years after that, 4 years. It takes a while to accumulate the effect. I think the difference with this one is just how quickly it could happen if unregulated. I think that I think that look I think that is genuinely different from all the technology booms we've had before. This one can happen much more quickly. >> Yeah. >> But but that's not the key question. The key question is can society deal with it? And if it can't, what does it do about it? >> Well, it's a We had an interesting conversation here the other day with um a guy who's a CEO in the AI industry and he made me think about something with I hadn't even thought about. I I use AI. I pay for my tokens. It's expensive, but you know, it's it's manageable. But I assumed the long-term business model of these of frontier AI labs was people buying tokens. And he said, "No, the the future of these businesses is they've spent the last 4 years sucking up the entire history of human knowledge." And >> Including your podcast? >> Including my podcast, yeah, it's out there. Um but although I feel this is a defendable job for now. But they've um where the real power is is where they've got models ahead of us. They've got the Yeah, we're on what GPT-6 now, Astra? They all have models more far more advanced. They can be able to build new businesses or they're going to be able to attack businesses that currently exist and they're going to create business models which aren't the tokens, which is, you know, I don't I mean we've seen these big breakthroughs in mathematics and physics and they'll probably be drug development. That's where they're going to make the real money and that could have the catastrophic effect for traditional businesses. >> That's right. So, I mean I I always come back to debt. So, if it reassigns cash flows, it gives you a debt crisis. Therefore, it'll have to be slowed down in some way. >> You mean by that is companies that currently have debt who suddenly lose their ability cash flow. That's a problem. >> That is. It's a problem for the global credit system. >> Yeah. >> And we don't like problems for global credit systems as Lehman Brothers proved. And so, that means a society has to slow things down. >> >> Can't tell you how they slow it down, but they have to slow it down. >> It's going to be a wild, wild world, man. >> Uh >> >> yeah, it certain it certainly is. Uh you think of railways? That was a wild world, but, you know, transformed the whole world. But not on it not in this pace. This is This is only wild because of its speed. But in terms of the scale of transformation, you know, we have seen all this before, but never never probably at this pace. >> We've had time to kind of absorb it. >> Yeah, you know, you read in the the novels of George Eliot, for instance, it's about the coming of the railway and the changing of rural Britain, but it takes place over 20 20 years. >> Not two. >> Wow, Russell, a lot to think about. I really do appreciate you coming in and talking with you. Is there anything I didn't ask you about you wish I had? >> Mhm. Let me think. Financial What do we What else do we need to know about financial repression? I think it's important that you try and So, I once said a presentation of financial repression with Theresa May, and we were both on the same stage at the same time. It was a very long time ago. And I did my presentation on financial repression, and I concluded with uh just to be provocative, I said, "So, in conclusion, get your money out of the country." Now, when I said it, that wasn't a bad idea. Anyway, the first question for the Prime Minister, the future Prime Minister, was, "What do you think of Mr. Napier's presentation?" And she said, "Or would you like to comment on Mr. Napier's presentation?" She said, "No." So, uh think when you're reading the newspapers every day, look at that little bit of news and say, "Is this building the wall? Is it the wall of finan- Is that another brick in the wall if we can quote from Pink Floyd? And try to see the world through the prism of financial repression. Because something that looks completely in in in the regulatory world it actually is important. So, economists tend to see the world as monetary authority, which we know are on the whole separate from the government, fiscal authority, and then they stop. The regulatory authority is what will determine the next 20 years. It's what determines the situation post World War II. Mhm. So, uh you There'll be lots of people listening who don't don't agree with me. Don't think there's a financial repression. I would say whenever you're looking at news, see it through the prism of the regulatory state because that is where it's coming from. And all of the noise and you know, obviously monetary and fiscal are important, but that's where all the focus is. And you got to start looking at where this regulatory state is beginning at the edge of the radar screen is beginning to move in and then think of what the consequences are >> >> are for you and where you should allocate your money. And the number one way to do it is put it in a country that isn't going to have financial financial repression. >> But hold on. So, if if you're looking through the regulatory prism, is is it wider than just looking at regulation of the financial markets? When you see, for example, digital IDs, attacks on free speech, is that all part of the same thing? >> Uh I'm not so sure about free speech, but I think the ability to know where your wealth is is Anything that's sort of is about where your wealth might be is to do with building the a building block of financial repression. >> Mhm. Mhm. When Richard was here the other day, one of the things he talked about was if we want to unleash the private sector, we want to have a a growing successful middle class, he said we we really need a decentralization of the banking sector cuz at the moment we are consolidated into five large banks. He said we need lots of regional bank lending. >> Absolutely brilliant comment. And you know someone who's doing something about that Scott Bessent. Bessent is spending a lot of time with So, America's blessed with a lot of regional banks. They're tiny compared to the big guys, but it's been shrinking from a very high number, but they're still there. And I can point you to speeches by Besant where he talks about the importance of these banks for getting money to small medium enterprises and households. And geopolitically they're important for reindustrialization. Absolutely Britain needs that. And if the big, you know, they've got to find a way to getting a big guy It's very difficult to set up a bank. You know, I run a thing called the Library of Mistakes. And we we on Monday night this week, we had Alexander Hoare of C. Hoare & Company, the bank, which was founded by his family in 1672. And you won't find any bigger proponent for small banking than Alexander Hoare. That that is obviously obviously what we need. But the last bank I still think the last bank to get a license in this country was Hambden Bank of of Edinburgh. And I I mean it was I think 6-7 years it took them to get a license. Decentralization of the provision of finance by banks is really really really important. >> It is It is working. But it is this controlled by the big banks? They don't want this. Is that they they the lobbyists that stopped them? >> I mean, look, we're on a different subject now, but the world to an extent that I thought was impossible in the world that we live in is controlled by oligopolies. I mean, how can you have a global beer oligopoly? I would have thought that was impossible, but we actually have got a global beer oligopoly. We've got beer oligopoly. They're like three big beer companies that control not all of the world's market, but a large chunk of the world's market. Make horrible beer. >> Yeah. >> Uh but still have these oligopolies. Well, banks are oligopolies as well. So, when we talk about the future, I think we your questions to me and my answers usually sort of look at this future where there's more state involvement. But if Adam Smith was here, the great Adam Smith, he was saying he would say, "What we need is to break up these these oligopolies. These oligopolies are not good are not capitalist, not good for society. I mean to break them up. And if we could get lots of small banks in this country uh lending to people that they knew, then that would be a huge leap forward for the country. So, maybe going forward, one of the other things that will happen is an attack on the oligopolies. I think what is really interesting is you don't you don't have to be on the left. I went to an academic symposium recently. Quite a lot of them are overt Marxists and say they're Marxists, and they were talking about breaking up big companies. I said, you know, you don't have to be a Marxist to want to break up big companies. You could be Adam Smith and want to be a >> libertarian. >> be a libertarian. You you you should be talking to the libertarians. Oh, we couldn't talk to libertarians. We're Marxists. But uh you know, this is a this is something that they have in common. So, maybe we're getting to a world, and that's where I wanted to sort of to to finish actually. The The Americans have a body for this called the I think it's called the Federal Trade Commission, where they take actions to break up oligopolies, monopolies. The president who took the most actions in history was a Republican, and his name was Eisenhower. >> Mhm. >> And Eisenhower's final speech before leaving office was to warn us about the military-industrial complex, which is the concentration of power outside democracy. And we're This is a very opportune moment to discuss that, because last week, the National Bureau of Economic Research released data that shows corporate profits as percentage of GDP in the United States of America are at an all-time high. Now, this used to be the most mean reverting series in economic history, and it seems to have stopped mean reverting. So, I I just want to finish on that, because it was sounding like the center of our conversation is all the evils of the world are are the evils of the government. The oligopolies are a problem. They're a problem for so- society. They're a problem for liberty. They're a problem for the distribution of wealth. They're not a good thing. And if Adam Smith was here, he'd say all of that. So, I'm not a Marxist. >> Well, so interestingly, a lot of the conversations we've had on this podcast recently with people who sound like conspiracy theorists, but seem to be getting their facts straight, is that yes, look, I'm not a fan of the I think the government's mainly incompetent, but there is a layer now above the the government which really controls uh what's happening, which is the asset managers, the money people, the people who move the money. They They own large percentages of these companies. They want to They want to have it in this way. And that uh even Chamath, I don't know if you know Chamath, he's on the All-In podcast, talked about it. He said, "There's basically Sounds conspiracy." He said, "There's basically 150 people who control where the money goes in the world, where the vast sums of capital are. And they want the centralization." >> So, we Liberty Mistakes we run lectures, and you'll find a lecture if you go to our website, recording of Fiona Scott Morton, who's a professor of economics at Yale. And she's written this up. And what she points out is that if you are a large wealth manager, I think we can mention one cuz it's just a statement of fact, BlackRock, for instance. >> we all go to. >> Okay. And it runs lots of index funds as well. And there are three large beer companies in the world. They will own shares at all three of them. >> Mhm. >> When they go to a meeting with the those companies, do they suggest to them that they should compete more more viciously? >> >> You know, that's This is the point she makes. It's a very obvious point. So, the success of big asset gatherers, and particularly the success of index funds, concentrates ownership that may align ownership with oligopoly. Whereas, if you and I own a small brewery, I do own a small brewery, by the way, we want to we want to beat the socks Yeah, we want to beat the socks off the big brewers. We want to compete, and we want to win. Uh but if if the index funds all hold the same three brewers, they don't want them to compete. So, there are And this this oligopolistic behavior comes in many different places, but you're right to point out that one of the places it comes from is the success of some particularly big asset gatherers, uh you know, Vanguard, BlackRock, and State Street are the three index funds. Uh and index funds uh are clearly a good thing for the consumer, but are they There's lots of things that can be good for the consumer that can be bad for society. Mhm. And I think that's where where are with these funds. Now, we're not anywhere near to breaking these things up, but the time will come when, you know, we'll we'll have another Eisner who'll say, "Look, the power is not within the elected representatives of the people, and we need to get it back." >> Yeah, well, it's cuz there's an alignment between the asset managers and the politicians, and whilst they're aligned, it's going to be very hard to break it up. >> Sure. So, maybe we need a general to break it up. General General Eisner. But, he wasn't the only one. Teddy Roosevelt tried to do it. Uh Woodrow Wilson tried to do it. Even John F. Kennedy tried to break up the steel monopoly. Uh Yeah, we're not when when Kennedy tried to break up the steel monopoly, the steel companies came in and sort of started beating him up. And I I think you know who John Kennedy's father was, Joseph P. Kennedy, great speculator, first head of the SEC. And apparently as they were leaving the room, Kennedy shouted after them, "My father always told me that businessmen were sons of bitches." >> >> Thank you so much. Uh tell people about your newsletter. >> Well, my newsletter is mainly aimed at institutions, but there is not a version which is aimed at high-net-worth individuals. So, you have to tick a little box to say that you fall into that box. It has a unique name, it's called The Solid Ground. So, it's not difficult to find if you put my name and The Solid Ground. Given my accent, I should spell that, shouldn't I, cuz people >> The Solid Ground. Yeah, I think we got it. We'll put it in the show notes as well. >> Yeah, yeah, people get it. So, it's uh yeah, and then it's all pretty self-explanatory how it is and what it works. >> Now, more importantly, tell me about your beer. >> So, my beer I so I often get described as a Scottish economist. The only problem being I'm not Scottish and I'm not an economist, but anyway, I'm actually from Northern Ireland. So, my brewery uh the brewery that I co-fund with others is in Northern Ireland, is in Bellaghy. Bellaghy? >> Yeah, that's right. >> Yeah. >> Practice it at home. Uh and that is an if you think of Northern Ireland has a great big hole in the middle, which is called Lough Neagh, in the top left-hand corner, and it's called Heaney Farmhouse Brewing, and it's a uh a venture with the uh nieces and family of Seamus Heaney. Seamus Heaney won the Nobel Prize for poetry, and this is the other side of the family, his brother Hugh's side of the family we build that on the family farm. And it's tough. You try competing with the global oligopoly. You know, it's it's tough. >> And it is beer, right? Not whiskey? >> No, no, it's beer. >> How many beers do you make? >> Five standards and then and then the specials. That's kind of I think what most microbreweries do, but it's a very, very tough market. I mean, we Look, there's there's some really good beers in this country that you can buy in the supermarkets for like two pound a bottle. You always That's a that's a pretty competitive price. >> Mhm. >> I'll be going on the Pennine Railway trail, so you know, I believe that in Ballymoney you can still buy a one pound pint. So, uh you know, this is a tough market to to be in. >> if I if I cuz sometimes when I get when I get to Donegal, sometimes I fly to Knock. >> Mhm. >> But I don't like the drive. Sometimes I go to Derry. Quite like the drive. Sometimes if I don't mind a long drive, I do go to Belfast cuz it's a lovely drive over to Donegal. Does that mean I will go past the brewery? Is that the journey? >> Yeah, it is. You're going really very close to it. >> You got a pub on the brewery? >> There is a tasting room there. Now, this is a fairly new thing and of course the pubs of Ballymoney sell it in Castledawson. And yeah, you'll be going right past it. >> I'll probably need a night. >> Just as you cross the River Bann, just as you look to your left and you see the eel fishery to the left, you're within drinking range of the brewery. >> I'm not in but then I won't be in driving range of Donegal, so I'll probably need to find a hotel for the night. >> You might have to to shack up in Ballymoney for the for the evening. You can go to the Seamus Heaney visitor center in Ballymoney, have a couple of beers, eat some eat some fresh eel uh >> I've never had a eel. >> No. I had it once. >> It sounds gross. >> Tells you everything you need to know. >> Yeah. >> Uh but yeah, so that's your option next time you're driving. >> I'll tell my dad. I'll tell my dad to meet me there and we'll do it. Listen, brilliant. Thank you so much. I really appreciate this. You genuinely helped me understand some things I didn't understand hopefully the listeners too. Um I hope at some point we will do it again, but >> Okay. >> we will see. >> We will have to see. >> Good luck, Russell. Thank you for everything. Thank you to everyone for listening. Stay safe out there.