As the long era of neoliberal certainty frays, Mark Blyth argues that we are drifting back toward a 19th century world of rival blocs, imperial habits and dangerous illusions. In this conversation, he traces how repeated “software crashes” of capitalism produced inflation, austerity, populism and now a return to industrial policy and great power confrontation. He connects deficits, demographics, migration, and housing with the lived reality of stagnant wages and rising prices. Along the way, he questions central bank mythology, challenges deficit obsession, and asks whether politics can adapt before events force a far harsher reset.

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Episode TimeStamps:

00:00 - Cold open and warning on a return to 19th century style imperialism

00:23 - Niels and Alan introduce Mark Blyth and set the macro context

02:24 - From Scottish childhood to monetarism and the politics of macro ideas

08:33 - Capitalism as hardware and software and the recurring crashes of each regime

15:32 - The slow death of neoliberalism and the rise of populist reactions

18:57 - Deficits, austerity, bond vigilantes and why the house is on fire anyway

23:49 - Affordability, grocery prices, housing and the disconnect in elite dashboards

29:02 - Generational conflict, asset concentration and the missing left response

35:42 - Aging, health care, migration and the politics of who does the caring

40:43 - Inflation myths, central bank limits and lessons from recent shocks

45:13 - Britain’s broken growth model, deindustrialization and the London problem

48:01 - Industrial policy, defence, housing and what a real project state would do

53:14 - Trump’s hemispheric vision, hydrocarbons, and a world of regional satrapies

59:03 - Dollar power, cheaper currency strategy and fragile growth built on tech valuations

01:02:33 - Long term outlook, risks, and the books that still explain the mess we are in

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We are literally turning the corner into the rebirth of 19th century imperialism. We're closer to great power conflict than we've been in a very long time.

There's a brilliant book that you should read, everyone should read called Appeasing the Bankers Financial Caution on the Road to War by Jonathan Kirchner.

And he basically shows how the bank of France and bank of England basically appeased the crap out of the Germans because they might lose a few basis points on their guilts. I mean, this is where this type of thinking gets you.

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Here's your host, veteran hedge fund manager Niels Kaastrup-Larsen.

Welcome and welcome back to another conversation in our series of episodes that focuses on markets and investing from a global macro perspective.

This is a series that I not only find incredibly interesting as well as intellectually challenging, but also very important given where we are in the global economy and the geopolitical cycle.

We want to dig deep into the minds of some of the most prominent experts to help us better understand what this new global macro driven world may look like. We want to explore their perspectives on a host of game changing issues and hopefully dig out nuances in their work through meaningful conversations.

Please enjoy today's episode hosted by Alan Dunne.

Thanks for that introduction, Niels. Today I'm delighted to be joined by Mark Blythe.

Mark is William Rhodes, 57, professor of international Economics and Professor of International and Public affairs at Brown University.

His research focuses on international political economy and he is the author of a number of influential books including Inflation, A Guide for Winners and Losers, the History of a Dangerous Idea and Angry Nomics. So Mark, it's a pleasure to have you on. How are you doing?

Very good, very good. I mean, it's a new year. It's a whole new way of dealing with international politics. There's so much to discuss. Let's go.

Absolutely.

And those books you've written, I mean, they were written over the course of the last decade or two, but they seem particularly timely at the moment, probably touching on all the major issues we have to get into today.

The one that's killing me just now is when I was writing the book on inflation that you just referenced.

What I was thinking about writing, I kind of got distracted into that book was a book called Burning down the House, which is about America's turn against all greed, investments and the relationship of that to the dollar and international politics and the whole thing. And if people are curious, you can go to the London School of Economics website for the. I think it's the center for Europe, I think it's called.

Everything I said has come true, everything to the point that if I write the book now, by the time it comes out, everything would move on. It's instantly redundant because things have moved so fast. I was talking about things that I thought would take a five year period.

We're already done in a year, so things have shifted.

Okay, well encourage people to check that out. Before we get into the main topics, we always like to get a sense from our guests as to how they got involved in economics and markets, et cetera.

I know you're from Scotland originally. How did you get interested in economics?

It's a really good question. I give a little bit of this in a paper I wrote once. It's buried in an edited volume no one reads, unfortunately.

I remember being 13, I think I was 12 or 13. And you remember Panorama, the British TV show?

Yes.

And there's this new thing, the new kid on the block called monetarism. Monetarism, right. And monetarism is this new shiny thing that says we'll control inflation.

And the old way of doing things, Keynesian macro, is on the way out. And emblematic of this. I remember this distinctly and a friend of mine tried to find it in the Panorama archives and couldn't.

But I didn't hallucinate this. This is literally the origin story is they did a kind of like game show model off.

It's got six equations and no matter what data you throw into it, it says if you tighten the money supply, inflation disappears and everyone becomes a millionaire. I exaggerate slightly and then they bring on this guy who's from, I'm sure he's from Manchester.

And right in front of me was what was going on five or six years later when I got to university, and the pages of the macroeconomics textbook, whereby the transition hadn't yet been made from that Keynesian world into a kind of, let's say what we'd now call new business, real business cycles, rational expectations world. And monetarism was this kind of weird bridge between the two. And I remember watching that thing on TV and thinking to myself, oh, this is bullshit.

I mean this, this, this has to be bullshit. I don't trust this guy in the new suit for a start, right? He's far too slick, he's far too confident, he's got a tiny, stripped down model.

I'm 13, what do I know what a model is, right? But it just didn't smell right.

And it seemed like the other guy was genuinely had spent years building up this model and it was giving results he didn't understand, which seemed to me to be more actually intellectually honest.

And I think that was the kernel, that's where it started and it's where I started to get interested, not just in economics, but economics is a thing in the world. So I try and explain myself this way to other economists, which is I'm not really an economist.

And it's true, my PhD is actually in political science. But I got really interested in economics as a thing in the world.

And what I mean by that is it's not just a. Milton Friedman had a great line about this once. Economics isn't just a camera passively recording events, it's an engine driving them.

And when you get to define how the economy works, what it is to be optimal in some situation, what policy has to be, because anything else would be crazy in terms of economics, when you get to accuse an opponent in a debate of economic illiteracy.

All of these are incredibly powerful weapons and the ability to frame the world in a certain way, saying, this is the way, the truth and the light and the only way things can be. I mean, that just is an astonishing political resource. And that's what I've been interested in. That's how I got into it.

And you could see this clearly with Mrs. Thatcher's premiership, particularly in the first term.

The whole idea of selling council houses to turn people into petty capitalists doing stock market flotations of national assets to get people interested in the stock market, it was about, as some people might call it, changing people's subjectivities, changing their very sense of who they are. And that's well beyond technically mapping how the economy works. That's what it's really all about. That's really what's at stake.

Interesting. Well, I mean, it's hard to know where to start given that backdrop, but I think a lot of the things you're talking about are very relevant.

And actually, one of the things I wanted to kind of kick off is this shift from neoliberalism to, well, whatever it is we're into now. We had Gary Gerstel on a while back and he's written a book, the Rise and Fall of the Neoliberal Order. So it's something that is definitely topical.

So, I mean, from your perspective, how do you trace that rise and fall of neoliberalism? And how do you define what we're moving into now in this new regime?

So this is all in the middle of Angrinomics. The book I did with your fellow Irishman Eric Lonergan, and I gave a kind of potted history of the way that the global macro works.

And it comes from doing talks in tech conferences, because tech people want to know about the economy and I want to know about whether tech people are full of nonsense or not. So there's things in trade for me to be going along and telling them about stuff, and then I learn stuff from them.

But to talk to these folks, I had to figure out a way of making it make sense to them. So I developed this analogy and I figured that it was a bit more than an analogy, which is, think about capitalism as a laptop.

And you get different types of laptop, but if you drop them on the floor and pop them open, they all have the same sort of basic configuration. Right? Now think about an economy as various institutions, as the hardware.

So let's think about labor market, capital markets, regulatory regimes, et cetera.

And then you've got the software, which is the governing ideas, the operating system, if you like, that runs those institutions qua harder in a given historical era.

Hard money, very little intervention from the state, very much lazy, fair free markets, et cetera, as a set of coherent ideas and a set of robust institutions. But just as computers over time have bugs in the software, if you run them long enough, so does capitalism as a computer.

And the bug in the software and the gold standard was deflation, which ultimately crushes wages and then leads to the second international, which leads to the reaction against socialism, which leads to imperialism in World War I. So the big crash and sort of reset that comes out of this is the terrible twenties and revolutionary thirties.

You get the construction of a whole bunch of not warfare states, but welfare states.

Where your basic idea is if we can get the investor class to remain at home and force them to invest at home under good terms, we can basically create high levels of investment that pays for high real wages, productivity increases, then continue that on and we end up with sort of, you know, the type of regime that we had from the 40s through the 70s. Now that was great. It worked for a while. The first one was very capital friendly, this one was very labor friendly.

And that was kind of the bug in the software and the bug in the software. There was a few of them, but one of the big ones, of course was inflation. And inflation is a tax on investment.

If you think you're going to get 5% real, five years hence, inflation goes to 10%, you might as well burn the cash now. It doesn't work, basically. So that was the bug. You got the system crash around inflation and then you got the big reset.

That was a big hardware modification called let's let rip on globalization.

So privatize, integrate, globalize, financialize, deregulate banking globally and locally, open up capital markets, get rid of controls on foreign share ownership, et cetera, et cetera. So all that high level stuff. But then there's domestic privatization, labor market liberalization, huge kick to trade unions, etc.

And that seemed to work well for a long time. Or the rise of independent central banks is the ultimate governor, like really important.

So it's a hugely different setup from what we had previously. And the bug in the software there was because you're relying essentially on, on credit to fill in for a lack of real wage growth.

They can buy and sell assets, raise and lower the price of money. They try both. That causes even greater inequality on the wealth side.

Meanwhile, the economy's generated trillions, literally trillions in wealth, which has gone to an increasingly small number of people. Now the reaction to this has been various forms of populism. There was a left wing one at one point.

That's the one is one to a certain extent, if you look at what's happened in New York, if you think about AOC in Bernie, those folks are still around.

I don't actually think about the ins and outs of Milton Friedman or any of this sort of stuff. The Montparlin society. That's all good and true and other people have written about it.

I think about this as a series of basically large scale capitalist computer crashes of which the latest iteration has been neoliberalism. We basically are. I mean, if you think about the high point of globalization, I've done some empirical work on this recently.

We're going through the uncertain 20s and into the revolutionary 30s.

What do you see comes next? How do you describe the world comes next? Because as you say, it's a bug in the software that makes sense.

And also you touch on a point that we've been through these cycles before. There is a sense of recurring cycles and almost at each regime sows the seeds of destruction.

So as you said, the more interventionist policies of the 60s, 70s, then that fostered the desire for capitalism, which then leads to inequality, then that has to be addressed. So it's kind of, there's a perennial shifting to try and solve the last problem. And we're currently, I guess what are we. We're trying to address.

Well, the great paradox, spending needs and. Sorry, go ahead.

No, but if you think about the great paradox at the moment, I mean, the person who's weaponized this the best is President Trump. And President Trump fully recognizes the sort of the, if you will, how to weaponize this as a politics.

And he points out, you know, that basically what's happened is, you know, this and you know, the MAGA allies, et cetera, the global elite, they don't care about you. They've run off with everything, blah, blah, blah. But then it gets turned.

Then it's like China forgetting to mention that sort of what actually happened was American firms left and went to China. So if you want to blame anyone, blame the American firms, right. That, you know, one of the massive problems here is wage stagnation.

Everyone talks about a cost of living crisis. The president pooh poohs it. Why? Because he's part of the concentration machine that's making things go even more up to the top.

So there's this weird sort of like instability in that coalition.

And you see this with the fragmentation around Marjorie Taylor Greene, how Bannon struggling to control MAGA now that we're basically back to 19th century imperialism. You know, there's a lot of contradictions in this. So. So to get back to your question, you know, where does this all go? It's incredibly uncertain.

I mean, one part of this and a very simple way to think about it. And this is the book that I was intending to write, but I think it's already out of date.

And other people have been telling the story already is the United States has not just decided that doesn't like windmills. One of the reasons behind Venezuela obviously is control of oil supplies.

And they just take an attitude that like either they don't care, they don't believe, or they think they can find some technological Hail Mary to climate change.

Now the figure is something in the region of for every 1.2 gigatons or 12 giga, whatever order of magnitude 1 very large number of gigatons, the earth's surface goes up by 0.1 degrees. So it's cooking. It's just physics, right? Arguing about this stuff is like arguing with physics. Physics doesn't give a shit.

So you can deny it, you can do whatever. And what we've now got is a government that said we're going to double down on carbon.

We have executive orders that are bringing back big beautiful coal. This is the 18th century, right?

If you think about the hemispheric land grab, Venezuela satraps in Argentina, cooperative allies in Chile, the threats to Canada, the faint to Greenland, which I'm quite convinced will happen and will break NATO, all of this is about basically we are going to run a carbon powered continent.

Meanwhile China is basically covering the rest of the planet in panels and EVs and that's basically the fault line that's going to define the next decade. How that plays out, that's anyone's guess because all of it is very fragile.

Well, as you say, like climate change, you know, it's a structural challenge to be addressed. I mean we have other structural challenges here at the moment in terms of defense spending.

And I guess what's interesting about these kind of structural shifts, demographics as well. Third one, aging populations, is they come at a particular time of already high deficits.

I mean obviously you've written a book about austerity before. I mean from your perspective here and now, okay, bond market vigilantes haven't exactly come back yet, but they're maybe lurking in the background.

And certainly deficits are at a level that would normally be associated with a recession. Particularly in the US you only got a 7 or 8% deficit in a recession before. Now it's the norm.

Right.

How does this get resolved?

On the one hand, there needs to be huge spending on structural factors and at the same time there needs to be deficits need to be addressed and austerity is not politically palatable at the moment.

Well, it's not just politically palatable. Let's start with the austerity point and then go to the deficit point. Right.

In that book on austerity, my assumption was the following, that if you don't do something that obviously self harms, which Europe went ahead and did, which is to cut public spending at a time when the private sector is over saving because it's in recession, all you will do is shrink GDP and you'll end up with more debt rather than less. That's what they did. Congratulations. They lost a decade of growth. We know this doesn't work.

So if you were to do this now with bigger deficits and a heightened moment of populism, that would just be a suicide note. So let's just take that off the table right now.

Second thing is, my mistake in that book was I presumed the growth rates were, if you didn't do this, or even if you did it, but stopped doing it, would actually rebound.

And what we did was we built a kind of global system that we described earlier, whereby once we broke it and filled it with liquidity and essentially made the cost of capital free, which brought us crypto sparks and other things that basically create assets for the top and liabilities for below. We gave up on real investment and ultimately we had a decade of austerity in Europe and growth rates didn't rebound. So now we do have a problem.

I mean, Italian growth rates are so low and their debt's so high and they don't have a printing press that if it wasn't for basically the ECB backstopping them, the bond market vigilantes would be all over them. France can't pass a budget. I mean, these are real constraints, particularly for people who aren't sovereign.

Now, I don't want to run down the MMT line of all you need is a printing press. I'm a great believer in the current account.

Right.

So you don't have to go there. But again, when you get to the United States, I mean, I'm. I'm nearly 60 years old. I've been in the United states for nearly 40 years.

I can't tell you the number of times people have said to me the deficit is unsustainable. I mean, we've been saying this for 40 years. It's like, really, are we going to do this again?

Right.

We forget about the demand side for this. It's the same with the uk. Every time a gilt auction happens, it's three times oversubscribed.

But is there a tipping point? I suppose is the Question.

Where would you go?

I don't know. I mean, I suppose. Another perspective on this.

If you're a bond market vigilante, you're basically taking a short position on something, which means you're going to have to cover that short position with a long somewhere else in the system. If you think everybody's in debt, where's your hedge? Is it gold?

Well, gold is. Obviously it has been invested.

So we'll just bid gold to 20,000 an ounce. Okay, what does that solve? My point is I just find it bizarre that at this point in time, yes, there are real issues.

France needs to pass a budget, we have aging populations, but we are literally turning the corner into the rebirth of 19th century imperialism. We're closer to great power conflict than we've been in a very long time.

There's a brilliant book that you should read, everyone should read called Appeasing the Bankers Financial Caution on the Road to War by Jonathan Kirschner.

And he basically shows how the bank of France and bank of England basically appease the crap out of the Germans because they might lose a few basis points on their guilts. I mean, this is where this type of thinking gets you. So I just want to resist it.

In the case of the US obviously there is a capacity for higher taxes.

Absolutely. You could do more taxes, right? Yeah.

I mean, taxing as a percentage of the economy is a lot less there than in Europe. But that aside, I mean, you touched on Trump, maga, global affordability. It has become the buzzword you've written about inflation.

But obviously it's not necessarily inflation. That's even the problem at the moment. It's high prices, Right.

It's the level, it's not the delta. That's exactly it. Right.

How does that get resolved? Or does this, or how does that play out?

There was this thing about the disconnect. And what they talked about with the disconnect was the fact that people like me would get on TV and mansplain.

Well, you know, we've looked into the numbers and it seems that the underlying rate of inflation is now 3 point gajillion percent and we expect it to go to 3.7 gajillion percent. And, and here's what happens. And if we look at core, but what CORE tells us is this.

And everyone's going to the supermarket going, how much do you want for eggs? This is absolutely outrageous. Right. Groceries level has gone up 24% since the pandemic in the United States. So quarter. Right.

Things have gone up and they don't go down. Right. That's the crisis. Now what is it that my tribe does? We look at the delta, we look at the rate of change in the level.

The fact that the level has gone up and stayed up is actually isn't of interest to us. That's your disconnect. And you wonder why people don't believe us. We shouldn't be utterly concerned about the fact that groceries have gone up 25%.

Nothing much has changed. Right. We haven't lost a quarter of the agricultural labor force. Right.

So maybe there's something to this argument that when you have two firms that control the entire cereal market and people kind of lose their price anchor, they might be able to push things up a little bit.

And.

And then when people get used to paying eight bucks for a smaller box of cereal, they just do. Right. I think that's where this is. The other one is, you know, housing.

Starting with Thatcher's privatizations, but going across the world, we basically decided we were only going to build houses for people who could afford them. And if you do that, you're going to have a housing crisis.

If you go to a place like Canada, Canada is Toronto, hugely expensive city, incredibly difficult to live there. You'd be 120,000 Canadian and basically you're struggling to make ends meet.

But despite that, they've built literally somewhere in the region of about 200,000 condo units. Yeah. But they're all $4,000 a month rabbit hutches. So how do normal people access this? And are they near schools? No. Are they near shops?

No, they're not. Right. They're down on the waterfront. Because that looks cool in the brochure when you sell into your investors.

So, yeah, we made an absolute arse of this globally as well. So, yes, there's a lot of anger out there and it's very justified.

Yeah, I mean, it begs the question, I mean, you could say, where do economics go wrong?

I mean, is it that this preoccupation with macro and looking at variables like the general level of inflation, unemployment, like that, they're not really the issues, obviously Inequality, the number of people with a house, the actual price of groceries. I mean, have economists just got the wrong dashboard? Is that fair to say?

And think about this as the high point of globalization. Markets can do everything. Things seem to be going well. Inflation's disappeared. Real wages were actually rising.

It was looking like it was good, Right. And the Blair government commissioned a review on British food security. And you know what they concluded?

This is a country that imports 2/3 of its food. Llt. Let's leave it to Tesco. That's the food security, right?

So if you're in a world whereby, oh, those markets are amazing, they do everything right and it seems to be tracking along and it's all good. It's like central banks and inflation control. We have anchored people's expectations. No.

500 billion Chinese people joined the global labor force and prices collapsed. That's what happened. You're just claiming credit by standing on the sidelines with your signaling models.

When you, you know, when you, when you look at it that way, they're looking at the wrong things. And also, I mean, there's a very simple thing here is like the administrative class of which I am part, right? We no longer live near normal people.

We don't send our kids to the same schools as normal people. We think we have a crisis of our income falls below 300,000 and there are people trying to get by on 30, and that's the vast majority of people.

And our crises are completely different from theirs. So we are just blind to the fact that basically a grocery basket going up 25% with stagnant wages is a huge societal problem. We don't see it.

But what is the solution?

I mean, around the world, the solution to the affordability crisis seems to have been more fiscal supports, which, yeah, justified politically and morally, I guess. But obviously there's nothing to address deficits or put finances in the stable. Do you think that's fair enough?

Is that the right response, you think?

Well, again, sort of like pivoting back to deficits on this.

I mean, ultimately, if you continue to run this for another five years and you start to have food riots and you're talking about deficits, they will come and burn your house. Down with justification. Right? Now, what's the answer to this? Look, we've been running a global experiment on winner takes all for the past 40 years.

And we're doing zero about the fact that ultimately this is what's going on. And this goes beyond sort of simple policy regimes or what we do in a given moment, right? The gold standard. Go back to that.

That was a concentration machine. That's what gave us socialism 1.0, right?

Then there's the collapse of the 30s, which gives us fascism as a reaction to the collapse of everything that has its own genocidal solutions that, thank God, didn't work and we defeated it. Then you have a kind of social democratic era that works for a while, but ultimately is bad for capital, so capital rebels against it.

Then you've got this incredibly pro capital regime that just is another concentration regime. But it all goes to the top.

And these are the giant macro things which are driving this and you know, to me to sort of like stop and go, you know, I gotta check about those deficits. It's like, you know, the house is burning down and you're like, jesus, I better save that rug.

I mean, one of the curious, I suppose, transitions we've seen in the last while, I mean, you talk about, okay, they shift to socialism, then they shift to a fascism. This time we haven't seen really a strong shift back to the left. It's been more to the extreme right more than anything.

What does that mean for us from an economic, from a policy perspective? Is that more worrying and a triple it's way?

Well, it's less worrying in the sense that basically with one third of every country obese and old and unfit and ill, our chances of marching into somebody else's country are massively reduced. So there is that. But the serious point is who's benefited from the concentration regime? Not just the very top, the top 10%.

How do assets compound over a lifetime? Who are the people that vote twice as much? The old. So what do you get? You get regime maintenance policies that will never touch wealth holders.

It's like, you want to do a good one? Let's think about this one. Dementia care. This is something that's going to bust every health system across the developed West. We all know it, right?

So when Theresa May comes in and says, maybe we could have a little tax to prepare for this, you're out, you're done, right? That's it. The Aussies have been smart about this.

The Aussies set up a sovereign wealth fund and the sovereign wealth fund, the Future Fund is basically hypothecated for future healthcare expenditures. They're actually thinking ahead. The rest of us are absolutely in denial about this because we can't vote against the boomers.

That's how this really begins to stick to. Why is it that basically millennials and younger are freaking out about the future and about housing and everything else?

Because it is ludicrously expensive, because their wages are low, because we ran a regime that allowed firms to take everything. In the US, corporate profits are 12 and a half percent of GDP. Historically it's 4 to 6. We've trebled it. That's going to 5% of the population at most.

When you just break it down, it's really simple.

But I suppose my point is that what you say is correct. And we had Occupy Wall street, we've had. And I suppose we had bidenomics, which was somewhat progressive.

But why has that kind of progressive agenda that hasn't resonated more with the us?

Because the other correlate of this that gets weaponized is migration.

And the left is completely unable to talk about maybe just doing an open border policy for 20 years and assuming it would all work out was probably a bad idea.

Maybe taking a global upsurge in refugees and dumping them in the poorest communities in our countries, miles away from the wealth holders who make the decisions was probably a bad idea. Right. And they just completely screwed the pooch on this one and still don't have any good answer to it.

The right always have an advantage because they can talk about us, Us, the citizens against them, the elites.

And in a world where it's absolutely transparent where the money is and the people who have the money are not like the majority of us, that's such an easy card to play. I mean, think about the inability of the British Labour Party to even talk about these things.

And when they do, they stumble into this kind of Tory esque policy of Rwanda shorn of shoving everyone away. That doesn't really do anything about the fact that, and this is your demographic point, at the end of the day, you need them.

And here's why you need them. It's very simple. An economy stripped down to zero.

I'll be very neoclassical for a minute, is the number of people, the number of hours worked and the quality and quantity of capital they work with. So unless you want AI to replace a third of all jobs because you're running out of workers, your productivity is going to crash.

And if your productivity does crash, then you're going to have to work more Hours.

But given the fact that you want to work less hours and in the UK, 800,000 people have decided to have a bit of a lie down since the pandemic that you can't actually get enough people in the labor market.

Then you think about the damage that's been done to your domestic labor supply through the collapse of skills training, really shitty jobs, zero hour contracts, massive stress on single earners, particularly single women and single women with kids. Right? You've got a highly stressed, underpaid workforce.

The only way you can balance this out is if you bring new people in and you have an answer, no, we'll stop that and that'll solve all our problems.

Well, as you say, we've got this problem, looming problem of healthcare dementia. Charles Goodheart, I don't know if you read that book, that was critical observation he had in that of it that been inflationary.

But obviously there's the basic need for the workers. And you see it here in Ireland, all the healthcare workers are from overseas and the problem's only getting bigger and worse.

So you've got these inherent tensions, immigration being one, the old versus the young, the young have been another one. And then the asset holders versus those who have not. You know, how does it get resolved? What is the flare point, do you think?

So is there a peaceful political way to resolve this? I mean there's a book from a few years ago by a historian, Stanford, whose name escapes me, called someone like the Four Horsemen.

And he basically points out the only time you ever solve this stuff is when you get plague, famine, pestilence or war. It levels the playing field. I hope that he's wrong.

You have to break it, you have to stop it being a concentration machine. You have to do big institutions of redistribution locally and globally. And nobody is in favor of this. Nobody even wants to try this.

You have a left that's intellectually and fiscally paralyzed. Like they wake up in the morning thinking of a deficit while the house is on fire.

And then you've got a right that doesn't give a shit about the deficit, never has, only talks about it when the left is in power, openly says as they did in the Bush administration, deficits don't matter. We've proved this time and time again. And then to even call Biden, the left is hilarious.

But when the other side gets in, it's like, oh, that deficit and the debt, it's the most terrible thing. And then people fall for this garbage every time. Meanwhile, the house is burning down. I really don't know where this goes.

This is why I can't write the next book. I genuinely don't know where this goes. I fear for the paths it could take.

The path of least resistance is always to spend more money, allow inflation to be higher politically, and that's effectively the route that's gone down the last few years.

He said, don't you dare time the Twitter battle. And it's not because they gave in on this one, but the Fed's own research said, maybe we could run the economy a little bit hotter.

We don't always, oh, look, wages are going up quick, raise interest rates. Maybe we can back off a little bit. And they actually did.

Everyone in Europe would murder for 3%. If you've got 3% and you're running 4% inflation, basically your debt eats itself.

If you're running 1%, you got 100% debt to GDP and all these tensions, you're Europe and you've got a lot of trouble problem. If you think that basically slashing public spending now is the solution, good luck putting the fires out.

No, it's true. And this is the Trump, I guess, optimistic scenario.

You've got AI, you've got productivity growth, and that you'll have stronger economic growth and debt is sustainable because of that. I mean, if we do get better productivity growth from AI, that has social consequences as well. Obviously, we're seeing that at the margin.

It's hard to know how big an issue it is, but certainly anecdotally it seems to be.

But it seems to be further up the income scale, which is why people are paying attention to it. Right. So here's the pop quiz. I always ask people on this one. What's the fastest growing job in the United States? Has been for a decade.

What do you think it is?

I heard you on another podcast. Is some kind of healthcare Worker, Right, exactly.

Because if you do it basically by percentage increase, it's data scientists, but it's like 200,000 to 400,000. If you do it by volume of jobs, like millions of jobs, it's not a surprise. It's elder care nurse, there's no AI for that shit. There just isn't. Right.

There may be some apps that help you remind yourself to not walk across the road because you don't know where you are or something, but that's pretty much it.

So again, the long term effects on this, on sort of productivity, if it is, it's going to basically take a slice through college graduates and that's going to really piss off the middle classes. So that's going to be interesting to see how this one plays out. But ultimately it really is just, it's the same old story. You're right.

You print more money, right. And you get inflation. Well, I mean I just did a book on this actually. Monetary inflations are actually. And monetarists hate me for it.

America outsourced its ability to produce most things and they stopped getting them. QED prices went up. Europe lost its gas station. QED prices went up. Money was involved, but oh, they were running the printing presses.

Actually Germany had higher inflation in the United States. There was no Biden stimulus checks in Germany. Right. So inflation comes from multiple sources, not just deficits.

Why would we expect things to work out the same way?

Well, I guess, yeah, the economy is structurally different.

But that's the concern that we're heading back to the 70s and the 70s being a period of time higher spending, central banks without credibility, without a mandate to really address inflation. Now we've got.

But can they do it anyway? I mean, let's think about what happened in this inflation. Not one central bank raised their policy rate above the actual rate of inflation.

There was no Volcker shock. Nobody said let's make loads of people unemployed because they knew it'd be politically disastrous.

Absolutely.

And the idea that basically the signals from the central bank credibly reduced inflation. No, the Supply chains came back and you found Qatar. Let's be honest about what actually happened. Right.

So, yeah, I mean, the whole sort of technology of central bank and then the justification for it worked well in the nice years, worked well in the great moderation, because there was nothing to do and the minute the volatility returned. I talked about this at the bank of England to people, the bank of England, I think these guys have been handed a poison chalice.

We expect them to do everything and they've got two tools which are quite blunt when it comes to doing those things.

Only because we made it the only. It was a policy.

Well, that's right, yeah.

Right. We do have a fiscal side of the ledger, but what we've said is you're not allowed to do that.

You can't do that and if you do do that, bad things will happen. Leave it to the central banks. Now, if you want to know where all the debt came from, let's be honest about this.

Who were we bailing out at that point? And they went up again in Covid. The notion that we've been spending like drunken sailors on migrants is just bullshit.

It's these two structural facts you touched.

On the UK and Labour and their inability to articulate. I suppose, I don't know, you said a coherent policy, but certainly there's a sense of an economic malaise in the UK at the moment.

I mean, is it just Brexit or are there more? I mean, you mentioned.

Yeah, Brexit didn't help, put it that way. Right, so let's get the guy who did Brexit to run the shop because that'll clearly work.

What they had is they basically went long an open financial economy with London as the growth engine. London generates 34% of British GDP. Pretty much all the other regions, Scotland, marginally, now and again is GVA positive.

They see underlying core of gdp. Everybody else essentially lives off transfers. So you've hollowed out your entire economy and how do you do that?

Well, let's think about the world 50 years ago, Bolton may not have been the most attractive place to live, but it was a functional place and Bolton made stuff and it then sent stuff on a train to a place called Birmingham. Birmingham Assembled this stuff and then a bloke in London financed it and you shipped it somewhere.

Fast forward 50 years, London doesn't give a crap about Bolton. Couldn't find it on a map. Bolton doesn't make stuff anymore.

Birmingham occasionally makes things, but it's really about football, tourism, universities and a few other things these days. And what London cares about are the other globally connected cities where you bake finance.

Now, if you go to London, everything's fine because that financial model, that growth model that works on that now, local scale is there, but it's not earning enough money to basically do the transfers to the rest of the United Kingdom and you don't do anything anymore. I had a conversation recently with a guy, very successful software developer, really wants to do something for our mutual hometown of Dundee.

And I sent him this piece of research that basically pointed out the like, Dundee is Bolan, right? Dundee is like, you know, name a dozen towns in the north of England. This is northern France. This is where you're getting the populist reaction.

Because what we did, we said was why don't we take our capital and move abroad, why don't we just import stuff that we make cheaper because it's more efficient and then somehow the labor market will adjust. And it did adjust. Adjusted to unemployment, not long term unemployment. And working at asda, that's what we did. We did it to ourselves.

So is there a short term policy fix for this? Hell no. This is 40 years in the making.

Is there a long term policy fix?

Yeah, there is, and you're seeing it, which is essentially the reassertion, if you will, of different types of national sovereignties and the desire to rebuild industrial capacity. It may not be efficient from the economic point of view, but Britain has one strategic sector and one strategic sector only is defense. And basically.

And they won't do it because they're idiots, but basically you should double down on this as much as you can. You should take advantage of the fact you're outside the EU's regulations on data. You should basically have AI drones, everything like that.

You've got contracts from the Norwegians and others to build frigates. You actually have a sustainable defence sector. Go along on that. What else should you do?

Do what the British government's done several times before, build housing. And I don't mean hand wave reforms to the home counties so they don't get annoyed.

Build 3 million houses, go out and do it, then keep it on the state's balance sheet, build them as high quality housing. And when you do that you actually reduce your debt. Why?

Because if you're building this at 4 and financing at 5 and your income 6, that's net income, reducing your debt. So you keep it on the state's balance sheet. What else do you do? Well, just those two things. Think what it would do as skills we don't need.

Trust me, I'm an academic. I graduate lots of people from universities with social science degrees. We could do with a few more H Vac guys.

If you try and get an electrician at your house, how long does it take and how much does it cost? Right. If you actually had housing that was quality, that people could build and learn skills doing that would also free up labor mobility.

If you invest in your defense, which you're going to have to because the Americans are about to take Greenland and NATO is over. Right. Then you can see where this becomes a productive thing. A really great book for people to have a read of.

It's a big book, came out a couple of years ago and it's very pressing for the moment. It's by a historian at Harvard, old guy now, well, in his 80s called Charlie Meyer, and it's called the Project State.

And what he does is he tells a kind of history of the world through Europe from 45 on. When he says, look, it's. We misunderstand what happened here. It wasn't just that sort of like technology and entrepreneurs and social forces.

States had projects, they did things. The Cold War was a project to stop another state project. Right. The Italian state was a project to suppress domestic communism.

Let's just go with this whole market thing. And you get exactly what happens. You get concentration de industrialization, de skilling and inequality.

Well, around the world, we are seeing a bit of a snapback towards industrial policy. We're seeing it obviously in the US We've seen it definitely in Germany, a little bit in France as well.

I mean, it sounds like you see that as a good thing. I mean, in the US context, I mean, it's hard to know exactly what the objective of Trump's tariffs are.

I mean, various explanations are put forward, but certainly the re industrializing, reinvigorating, manufacturing is part of it.

But, you know, some people will say, well, yeah, that's fine, but I mean, a lot of those jobs won't come back because robots did manufacturing these days.

I think there is a real. Again, we're not in the 70s, right. You can't really. The big.

To me, the big weakness of Liz Truss wasn't basically the insanity of that budget, it's the fact that you don't get to deregulate the banks twice. You don't get to do Thatcher again because we've done it. And once you've done it, you have to deal with the consequences of this, not do it again.

And part of the thinking on industrial policy does have the nostalgia that we can go back to the French did planning and all the rest of it and. Yeah, you can. And there's lots of sectors where this works. I mean, hell, look at China. Five years ago, there was no such thing as green tech exports.

Now, somebody showed me a video the other week of Aleppo in Syria. They're rebuilding it after the civil war. It's a drone shot. Every single roof is panels. Like every single roof, they won't have a grid.

It'll be distributed right. When Europe took Qatar's gas, or there's rather the share of Qatar's gas that was going to go to Pakistan because we outbid them.

Pakistanis didn't have enough to run their grid. So autonomously and quite apart from the state, large chunks of Pakistani society said, let's just get our hands on some panels.

20% of Pakistan now runs off the grid. It's the fastest solar transition in human history. So all this stuff is there.

All this stuff is possible and it's all kind of like, you know, wired into it now. You know, can you. And should you do industrial policy? Yes, because the United Kingdom can't defend itself.

I mean, this is literally a question of life and death at this point. Let's leave it to. Tesco has reached its end and completely failed. So we're going to do this. Will some of the jobs be taken by robots?

Yes, but elder care nurse won't. H Vac engineer won't. Plumber won't. Sparky won't. So why then say. Let's not try.

But take the case of the uk, is there even the policy flexibility to do that? Does it require spending? Is there fiscal space to actually do that?

The fiscal space again, it's this thing. Every treasury auction is three times oversubscribed. Why do you keep coming back to this? It's just not true.

What the markets want is a credible growth story. Why is it that gilt yields are higher than other yields? Simply because of one thing? Embedded inflation is higher.

So they Want to basically have a margin of protective.

Yeah, no, no, I mean that's fair enough but obviously you did touch on the lustrous debacle which was obviously about.

And that was a lot of a credible story. All you need. Look, if you told markets, here's what we're going to do, obviously the United States is about to short us.

You won't get any of your money back on a 30 year bond. If the United States is occupied by Russia, clearly we need to. Actually the United Kingdom is occupied by Russia. We need to do something about this.

So here's what we're going to do, here's the bets, here's how it fits together and we're going to do it over multiple parliaments. We've got cross party agreement, this is the way we're going to go forward. If you did this, the bond market would be like, sure, have another 20%.

And also why do we have to just finance it through debt?

I mean there's huge amounts of financing you can do in the United Kingdom through for example, reforming the so called self employed sector, which is one giant scam as far as I can figure out. You've got massive tax avoidance, you've got all these shelters, the Edinburgh partnerships, the Scots Law partnerships.

I mean there's so much avoidance. I mean, Jesus, go down a high street and you see tax avoidance. Turkish barber, Kurdish barber, American sweet shop. What is all that crap?

They're just tax avoidance and money laundering scams. What's missing is political will to do it.

I mean why has a coherent economic package of policies not emerge? It's a lack of.

Because they've got no imagination and they've been told by in the morning, this is, I think the British government works basically. The Chancellor gets a call from the treasury saying this is how much you can spend today. As if they're running a corner shop.

Then the bank of England gets on the other phone and says, and if you try and spend more than that, this is what we'll do of interest rates. And they go right, well our job done then is to sit and adhere to the fiscal rules.

And these are rules that were written for a higher growth, low volatility environment. And now you've got low growth and high volatility and you're trying to hit a moving target. Good luck with that. I'm a pretty good shot.

I couldn't get near it.

Yeah, I mean moving to Europe, I mean we have seen Germany taking a radical change in policy.

They obviously released the debt break, they've committed to higher infrastructure, defense spending for I mean basically along the lines you're talking about. I mean it sounds like you think that is the correct route to go.

I. It's the only route to do. What else are they going to do? I mean half the bridges in the country, I mean people forget the Merkel era, right?

You know, Merkel did this thing, stability, right. You know I'm going to stay. Nothing changes, right? When you know what, you know what a situation where nothing changes is called being dead, right?

And for 15 years in terms of public investment on private investment to a large part Germany was dead. But my God, did they balance the budget. To this day you go into a hotel in Berlin and try and run a zoom call, it's a disaster.

The digital infrastructure is non existent. They just simply forgot to invest. They confused debt should guilt and investment and they saw them as radically different things.

That somehow investment happens when there's no investment. But to investors to take on some debt in the hope of a return. When the private sector does this, everyone goes oh you're a genius mate.

Well that's brilliant. Right. Public sector does this. Oh my God, it's terrible. We have to stop this immediately.

You mentioned Trump, NATO, Greenland. Sounds like you think it's inevitable. I mean, okay, how does that impact the international order? What happens after that?

Well, could be badly.

So I mean to be quite explicit about this and the new national security doctrine that came out just about a few weeks ago, basically explained says this is what we're going to do. But it was quite clear from day one.

I mean I didn't have Canada on my bingo card but when you think about it from basically the point of view of the MAGA folks, their definition of the world is the following. We sold our souls to China. You didn't basically allowed American firms to do what they did. But nonetheless China is now a pure competitor.

Europe's useless. They've been basically leech in office for years. They don't do anything. They have huge non tariff barriers.

They don't allow our whiskey and motorcycles in the country while we have to take theirs. A lot of this is self interested and jaundiced and downright wrong. But nonetheless that's the way to think about it. So how do we rebalance this?

Well basically we're not really big believers in sort of the post war democratic rules based order. We think that's part of the problem. We allowed the WTO to go under.

We are quite clear that we are concerned with tariffs both for revenue and also perhaps as A way, as Scott Bessem keeps saying, of addressing. Addressing global imbalances. These are people who think the trade balance runs the financial account and not the other way around.

And if that's the case, what do you want? Well, you realize now that you're at a technological point where China's not just a peer competitor.

If you were to sail the navy to Taiwan, they would sink it. And then what do you do? You go straight to nuclear dominance as your last option.

All right, if we were to back off from that but still have influence, what would we need to do? Well, they're going to pave the world with panels. We can't compete on that basis. What are we going to do? We'll double down on hydrocarbons.

We are going to basically be the hydrocarbon continent. We are going to basically control global oil supplies.

Yes, many people may be shifting off of it, but we can use our tariff policy to make sure people buy our oil. For example, Japan, 150 billion. South Korea, 100 billion. I think Europe. What was the figure? That was insane figure. 450 billion over like two years.

It was like, if you add those three together, it's more than America produces in hydrocarbons. But the direction travel is clear. Right? If you want to be our friend, you need to buy our oil and that's going to screw up your green transition.

And that's our point of competition with China.

When you have a regime we applaud, like El Salvador or Argentina, you got our help in cooperation. If not, we're going to actively undermine you.

Greenland is there basically because of the defrosting of the north of the polar ice cap and the shipping routes around that control those shipping routes, plus also rare earths. We stopped doing that and we outsourced the whole thing to China. Turned out that was a bit of a mistake.

It's hard to do that stuff because of environmental laws, even in Trump's America. But it's bloody easy to do it in a big sat trap called Greenland. Canada is basically an oil and parts and wood supplier.

And then everything else runs hemispherically. China gets to run basically Southeast Asia.

If the Indians want to buffer them a little bit, we'll sell them Some weapons and Europe frankly, we're bored with and we think they're all parasites and they can just either sort themselves out with the Russians or go under. And that's basically it.

So that is the worldview as outlined in this document, of regional blocs take it seriously.

This is what they think. This is better long term for America. And there's a certain point of view where you go, all right, so what would be the rationale for that?

Well, if it is the case that global warming is real, you're not going to solve this problem. Even if everybody paneled the Earth, there's already enough stuff out there that's like, it's a bit of a problem.

Sea level rise is baked in, et cetera. We're going to need transformative technologies. You're going to have to basically do carbon capture.

You're going to have to suck it out the air and store it somehow and we can pretend that that's not true. We're going to have to do geoengineering, whatever. Again, this is what these guys think, right?

So we are going to concentrate on the frontier technologies. We are going to basically use our comparative advantage in oil and gas.

China can use what seem to be the technologies of the future, but they're actually just the technologies of the moment. And ultimately we will survive this and we will prosper.

That's their long term hedge, because the alternative is essentially like fractionalization and decline. And regardless of whether it's MAGA or the liberals, the American ruling class cannot cope cognitively with the idea that they're not in charge.

They just can't.

From a kind of capital markets perspective, this is a radically different world, obviously in terms of free markets, et cetera, that we lived through for the last 20 years. What are your thoughts on how that impacts the dollar, if at all?

These guys want a cheaper dollar and they're already getting it. It's already, what is it down 20%?

Yeah, I mean that's 10%. Maybe last year.

10% last year, maybe a bit more.

Yeah.

So.

But I mean in terms of the reserve status, is that something?

Well, I mean, it's kind of a rock and a hard place for everybody else, right? I mean, we'll make it worth less and you'll still buy it. Why? Because what are you going to do? Just buy more gold and. Great.

And as gold goes up, what do you do? Liquidate some of your gold to buy some dollars so you can buy oil? I mean, and Europe can't do it?

Europe would literally need to Become rather than export Weltmeister, which they've been living off for the past decade, they need to basically become much more consumption orientated, spend a hell of a lot more domestically, reorientate their entire industrial structure so that they import more because that way people would hold Euros. There just aren't enough out there to make it worthwhile. So basically Americans are like, suck it and see. We will lower the value.

That'll help us rebalance. That's our currency. Your problems, John Connolly all over again.

I'm conscious of time. We're nearly up on an hour.

I mean, we've talked a lot about the challenges, which are fairly obvious, and we've brushed on some of the possible solutions. I mean, putting it all together, taking a political economic view for the next five years, are you more optimistic?

Obviously, there's lots of reasons to be cautious, but from an economic growth perspective, do you think it'll be higher or lower? Do you think inflation will be higher or lower? Do you think any of these social problems will get addressed?

I think that the United States, if things don't go bad geopolitically, which is an increasing possibility, we'll continue to grow at a higher rate than the rest of the world. The rest of the rich world, I should say. And Europe's going to be basically still in trouble, still in paralysis.

My favorite example at the moment is France, when your government can't agree to pass a budget. Spain's in the same position. You've got a problem right there.

Before you go anywhere else, but it's increasingly uncertain and fraught how much we can rely on this. Markets are just big, dumb, stupid adding machines at the end of the day and things go up. So buy more because things go up, right?

And what is it, 70%, 60% of your growth is driven by mag stocks, et cetera, by the Magnificent Seven.

If AI bust proves to be true, then that's a huge problem for the US because top 20% of people who own 80%, 70% of the stocks, whatever it is, essentially will go, oh my 401k. And then at that point they'll stop spending. And then you could risk a real recession and a real collapse in growth.

So the AI bubble popping is a real issue. I mean, fundamentally, we're just at the point now where can markets continue in this way?

Yeah, if nothing happened, I mean, yeah, sure, but as macmillan said, events, dear boy, events. I mean, that's what we need to look out for. And the problem, events is you don't know they're coming because they're events.

But what we're doing is we're loading up the. We're loading up the chamber of the revolver of events with random events. And that's the thing that I worry about.

One thing we do like to get people's perspective on, particularly first time guests, is advice to people who are interested in reading more about economics than learning more. You touched on some interesting books there. The Project State was one. Any other things that were very influential on you?

Obviously our guests, our listeners will go and check out your books, but anything else that you would point people to that are. Have been influential for you?

Right, yeah.

And you know what, it's the same thing. It's almost as if nothing's changed. Right. And just reflect on that. Because we went through boom and we went through bust and we've been through.

Right. And the world's obviously a very different place. But you can read that book as if it's published now.

Interesting.

Right, so that's one in terms of long term stuff that I think are just absolutely classic books. There's two brilliant books by the economist Albert Hirschman.

The first one is called the Passions and the Interests and it's a bit of a detour in sort of philosophy, political theory. It's only about 110 pages long and it's in big print. It's basically an essay in the classic old sense. It's beautifully written.

And what he does in that book is basically say, in order to have capitalism, you need to have people who think like capitalists. And getting people to think like capitalists was not normal. Carl Polyani makes the same point, but he does it in a much shorter, beautiful way.

It's kind of like Foucault without any of the jargon. And basically it's about how liberal subjects are created and the arguments for them.

The subtitle of the book is Arguments for Capitalism Before Its Triumph.

And if you read that, you will read things that you hear coming out of the mouths of politicians today and they have no idea that they're channeling arguments from three, 400 years ago. And the other one from Hirschman is called the Rhetoric of Reaction.

And it's a fabulous book because you get to play Hirschman bingo once you've read it, which is anytime that you hear an argument, oh, you can't do that or this will lead to terrible things. You can actually put it in four buckets, which is perversity, jeopardy, futility jeopardy, and futility, jeopardy. Perversity. Right.

So here's how it goes. Well, you know, you say that you want more immigrants because if we don't have immigrants, the economy will shrink. Right.

But if you do, British society will be torn apart. Jeopardy. Right. Well, you know, the problem is the deficit is huge and we're going to have to face it at some point.

And if we don't face it, ultimately there'll be inflation and that's even worse than what we've got now. Jeopardy. Probably with a bit of futility if you don't do it. You get my point. You can basically dump any and all arguments into these things.

Now, it doesn't mean they're wrong, but it means you should always give them a good sniff because these are what he calls the rhetorics of reaction. And it's always good to have your rhetoric radar on.

Interesting stuff. Well, definitely good suggestions for people to check out. And obviously people can follow your work. Obviously. I've mentioned your books.

I think you're somewhat active on social media.

Yeah, I was for a while and then I discovered that if I stop being active on social media, I can write a book. So. Yeah. And it's also, I mean, I used to love Twitter 10 years ago, but now it's just like, it's just bots and. Right. So that's annoying.

And then when you go on Blue Sky, I hate to say, it's just sort of like liberals bickering with each other. So I don't know, I think it's a bit of a dead space. I still post stuff out if I'm going to give a talk or if I do.

Like, for example, when you send me the link to this, I will say to everyone, and if you want my one hour New Year's rant, here it is. And that will get a lot of traffic. But I don't actually engage in social media. Because you're actually arguing with a bottle.

Yeah. Okay. Well, certainly we'll appreciate you posting this out. Oh, absolutely. But thanks very much for coming on.

Fascinating to get your perspective and definitely all of the topics that you research and write on. Hugely relevant today. So thanks again. And from all of us here on Top Traders Unplugged, stay tuned for new more content. We'll be back soon.

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