From Beijing to the Box Room: The Global Forces Locking Out a Generation

Lingikasinut väli töntä viidette, aitoa jännitystä. Lingikasinulla kaikki on tehty helpoksia. Ei rekisteröytymislomakkeita, supernopea kirjautuminen feissideellä. Saat käspäkkia joka päivä, kun pelat. Te talletus ja saat 250 ilmaaas kierrost. Vain blingikasinut. Ei, ei, ei, ei, ei. Tämä on tämän käspäin, että jotenkin jälkeen makkulmalla on käspäin. Tämä on käspäin, että jotenkin jälkeen käspäin. Ja jotenkin, että on tämän käspäin. Tämä on käspäin. Se on tämän käspäin, että on tämän käspäin. Tämä käspäin, on tämän käspäin, että on tämän käspäin. Tämä on käspäin, että on tämän käspäin, että on tämän käspäin. Ja jotenkin, että on tämän käspäin, että on tämän käspäin. Yksi kesäkin. Kun on mahdollista hankaan syuéksän kesäkseen Followup-Sirotaheeseen. Tys Head also Tosti valmo уже pääse temptingasia. Tommisaonlyasta, sekä heik最 byłivat vielä diagram sealoimme. ally pari kirja Oliver. Kijallisesta kohdalusta. Nämä on sellan jälkeen ulk Daarta Goairring, se on ajatt רotostajan ja tämän onkoa. -Kiitos. FT ja ekonominas on tämän suurin suurin. Tämä on tämän suurin. Tämä on 24. -Kiitos. -Kiitos. -Kiitos. Tämä on tämän jälkeen edettä. Tämä on tämän jälkeen. Obaa, jotenko? Why don't we go to Scotland where Russell is holed up in a place called the Black Isle, which is a long way away. And get this take, because I think this take is unique. I think it explains a lot, and I don't think it's been articulated enough on podcasts on the airways, and certainly not in academic economics. So let's go to Scotland. Russell Napier, one of the greatest monetary historians, and a man from Donica D up in County down a place you might have home of the two door cinema club. If nothing else came out of Donica D, it was the two door cinema club. You are up in the middle of nowhere in Scotland. Where are you? Tell us where you are first before we talk about money. Place called the Black Isle and the shores of the Mary Firth, and as only you can see in nobody else can, I'm wearing a coat because it's rather cold. It's freezing. So anyway, no better place to discuss the future of money. Absolutely. There's actually a little link between the Black Island and the history of money, because the Invergordon Mutiny occurred just behind me. Now tell me what was the Invergordon Mutiny? Well, the Invergordon Mutiny was allegedly, the sealers going on strike, and this was in the depths of the Great Depression. And the word got to Westminster that the sealers were allegedly on strike, and they figured, well, we forced the people through enough in this Great Depression. The deflation of wages is too much. It even the Navy won't go to work. It's time to end the gold standard. Now, whether that's the perit narrative or not, it is one that goes down in the mythology of the end of Britain leaving the gold standard that it happened at Invergordon, just a few miles from where I'm sitting. I love it because it's exactly that what we're going to talk about. So you mentioned the gold standard there, and many of the listeners will be aware that over the years there's been various systems of monetary and economic, but we're doing monetary and financial arrangements. What we want to do here, we want to answer the question posed by my son to me during an Irish election which has been going on the last while, and he said, look at that, listen, I get all this economic stuff, right? But I don't really, but I'm following it. He says, why is it that your generation could afford to buy houses at a rate of a multiple of your income that seemed affordable, and we cannot, our generation are totally utterly blacked out of the housing market. Now, Russell, you wrote something fascinating about a month ago, which may well explain this, but in the context, we're going to have to go all over the world and gen-affected the gold standard to explain it. So explain to me the answer to that question, potentially through your own work. Right, we shall start with a conclusion and work backwards. Yes, which is, economists believe that there's a relationship between interest rates and the growth of the economy, and they believe that fervently, and it's not always true, and it certainly has not been true. And therefore, interest rates have been too low relative to the growth in the economy. This leads to higher asset prices and more leverage. The question is, why we got that gap? Why nothing was done about it? Now, you might think that the European Central Bank is charged besording that out, or the Federal Reserve is sorting that out. But there is something, it's called a global monetary system, such as a thing that used to be called the gold standard. If you ask anybody what the current global monetary standard is, they'll say, I don't know, it doesn't exist. But it absolutely exists. In fact, Paul Volcker used to call it the non-system. So if we're looking for the root cause of why there's been this gap between the growth rate and the economy and the interest rates, we have to go and look outside of each national central bank to the global monetary system. And as you said, that takes us far away from Dublin, far away from the northeast of Scotland to Beijing. And I know people will find it relatively peculiar to think that getting priced are the Dublin housing market has anything to do with Beijing, but actually there is only. So what you're saying is that in the old days, and I'm talking about when I was a kid, having a rate of interest of 10, 12, 13 percent, was kind of normal in this sense that this was the world we were brought up in, was the world our parents were brought up in, the rate of interest could be 10 percent and you deal with it. And the growth rate of the economy could be 5 percent. So there was a real interest rate of about 5, maybe 6 percent. And that seemed logical that people could save and they could get that rate of interest of 6 percent. So they could keep their money deposit stably and happily. And also those of people who invested could inculcate that rate of interest in their calculations about how much income they had to earn in order to pay the money back. And that was how the old system kind of worked for the average pointer on the grant. Yeah, that's absolutely correct. And the levels of leverage in society in those days were much, much lower. I know we got the levels of society in the government and also the private sector, which are depending on which economy you're in, close to record high and it's the rise from low levels of debt to high level debt, which has impacted residential property prices and made prices more expensive. So let's go to Beijing. Let's go from Inverness, Dallaggedee, Dublin to Beijing. Okay, the gold standard is over and everything that's passed is over. And now we're in something different. Let's call it the non-system. It was good enough for Paul Volker. It's good enough for me. So since 1994, the Chinese have linked their currency to the dollar and then to a basket of currencies. Not most people will think, well, what on earth does that go to do with Dublin property prices? Let me explain. It doesn't happen automatically. You have to manage it. The two things that China did that depressed global interest rates, but also elevated global growth was number one to keep the exchange rate down. They actually had to buy a lot of the government bonds of the developed world and the intervene in the stock market and they are a known price sensitive buyer. They explained all this to me. Okay, so let's take one given day on the operation of what would happen. So the people's bank of China, the central bank sees the upward pressure on its own currency and says no, this shall not pass. So it enters the market and it creates and sells new remnant beef for, let's just say dollars. It ends up owning dollars and then the question is what's it going to do with them? And what it does with them is buys government bonds of the United States of America. Well, it actually works broadly. So it's buying bonds of the United States of America, the euro sterling Australia, but it is in this action depressing the interest rates of the developed world. So it's got that direct mispricing of the debt. Now, economists, I don't think agree that this can happen because they would say that this should be a relationship. Interest rates should reset. There should be somebody working the other way against the PBOC. An interest rates should reflect domestic economic growth, but it's certainly my argument for a very long period of time. They didn't because of that action. And I should have just added quickly, it wasn't just the people's bank of China. From 1990, it onwards really the whole of the emerging markets got into this business as well. For reasons I won't go into. And that's supercharged the whole thing. And I'll give you a number. So when we start this period back in 94, the total value of foreign currency bonds held by these central banks is one trillion US dollars. And by the time we finish it, it's closer to 12 trillion US dollars. And that all happens in the space of 20 years. So that buying of those bonds distorts their price relative to the growth rate. So the Chinese, we're going to get onto the reasons why they want their currency week in a second, but they want a currency that is weaker than would be the case if they left their currency be dictated by the market. So what they do is they see the money comes into China. They say, okay, the last thing we want to do is allow our currency rise. So what we're going to do is we are going to buy up all these dollars. We're going to sell our own currency, which oppresses the price. Then we have the dollars. We think, okay, we can't buy anything in China with dollars because we actually don't use dollars in the day to day currency. So we got by stuff outside China. And this then breaks the link between our growth and our interest rates because the Chinese are suppressing the interest rates here. So the real interest rates are moving towards the negative, which is encouraging and coaxing people to invest and are speculated. That's what we're at. Absolutely correct. That's round one. That's going to run two. Okay, round two. Okay. What happens in round two is the Chinese are now creating lots of local currency and they actually invest it in new productive capacity. And over this particular period, there are actually hundreds of millions of Chinese people who can flock to the cities. And so the second way they depress interest rates is they export deflation. They export cheaper and cheaper products to the rest of the world. And that tends also to push tiny interest rates because people who buy bonds want compensation for inflation. Then inflation is very low. They'll accept very low interest rates. So round two is the second act in depressing interest rates relative to the growth rate. Historically, people would have thought, or inflation in our and will only come down if the Irish economy contracts. But actually in a world where China is going through the biggest investment boom in history, Irish inflation can come down because China is exporting so much cheap stuff to Ireland. Exactly. And so the second order is deflation in real goods, real stuff. You know, computers and cars and whatever the hell you like. We're looking at the amount of solar energy systems made in China. All sorts of things. So that's the second order. So again, we're in a low inflation world. The low inflation world comes from a choice made in Beijing. Third thing. Well, the third thing is how we react to that. So if you have this word of low interest rates, but the economy doing reasonably well, it leads people to borrow more money. That's what happens. And if you're going to borrow more money because actually your your economy is growing, wages are growing, but inflation is low, what are you going to use that money for? Lots of things that can be used for, but residential property is going to be high on the list. So as we watch across the developed world for wherever really wherever you are, more and more debt in the household sector. And it comes at exactly the same time as the Chinese change their exchange rate. And that's the link through to residential property prices. Mac, let's just hold Russell there because Russell talked for half an hour or more on other parts of the system. Yes, but we're going to come back tonight. Vine bling, you got in on. That's in an episode for next week because I just want to hone in on this particular bit. So since 2008, the great financial crisis, and central banks introduced QE as the remedy to get a thaw out of this mess. So pump loads of money into the banking system and reduced interest rates. So that was always given us the explanation for the asset prices shooting up and all the rest, which is true. But this Chinese strategy also compounds that. Yeah, I think you're absolutely right. You can maybe so we're talking about a 30 year period from around 1994, 95 to 2025. So it's a 30 year period more or less. And I remember being in China, in Hong Kong in 1997 at the IMF's annual bus in Hong Kong. And it's funny little do you know when you're discussing these things, what's actually going on? It's only with hindsight you figure things out. So yes, I think you're right. So let's say that 30 year period will divide up into two halves, right? Yeah. The first half is the game of two halves. And the two halves are absolutely absolutely. You're Johnny Charles. So you're your first period up until let's say the crash. And then your second period, which is QE, right? So the first thing is what Rosalind has identified there is, and I think it's really interesting, is the impact of China because we always assume that the impact of China can be measured in real things. And by that, I mean in cars and computers, yeah, all the made in China. Yeah. So it's cheap goods being made cheaply by a hugely expanded labor force that got into the globalized world in the early 90s and began to export its way to growth. So that's the story that most people know. And it's the story that leads us to tariffs and trumpism and all that. Yeah. But there is another story that Rosalind has just told, which is I think more interesting, but much less well understood, which is the fact that as China opened up, lots and lots of money flooded into China to avail of the investment opportunities. That money was in dollars. That's just called a dollars. It could have been in euros. It could have been sterling. It could have been in gamble. This is called a dollars. It was in a foreign currency. Yeah. So what the central bank of China did firstly was say we can only grow as a country if our exchange rate is undervalued, not overvalued, because that will make our goods really cheap in America. Yeah. And what we really want to do is we want to gain market share in America, because that is the way we're going to get rich because at the moment we're very poor. And they were very poor in the middle. Right. So the last thing you do is impinge on your competitiveness by allowing your exchange rate to increase, to reflect the amount of money that comes in. So the thing called sterilization. This is central banks. Right. Yeah. So sterilization means you have to sterilize the inflows of foreign currency into your country to make sure your exchange rate doesn't rise. So how do you do this? So if you imagine the way in which you keep your exchange rate low is you buy foreign exchange and you sell your own exchange rate. Right. Okay. So how do you do that? Is you print your own money? So the first thing the Chinese does, the dollars came into China. They said, okay, why don't we let these all expand in our foreign reserves? We will sterilize all these dollars by exchanging them for our own currency. Right. So certainly the Chinese money supply begins to expand. The Chinese money supply expands in remembers, not in dollars in remembers. So you can only use remembers in China. They then do two things with the dollars they have in the reserves. They also buy American government treasuries. Okay. I'll use of the American economy. Now why do they do this? Because they want America to keep buying stuff even if it means America has to go further and further into debt to do so. So they're facilitating the delinquency of the American consumer by actually buying all the debt that the Americans are. Issues. Right. Number one, right. So that keeps the American economy taking over. Right. And America needs this of course. And America needs it because it's running a budget deficit. Yeah. So it needs somebody to find out. Right. And actually, like the second part of our discussion with Russell is just how fragile America is. Trump think America is really, really strong, but it's not we'll we'll talk about that next year. Right. So then second part is they make loans available to Chinese companies cheaply in their own currency. Okay. So what the Chinese do is they buy machines. They buy machinery, real plant machinery, they invest in real things as well as real estate, but also real things that boosts the productivity of China. So that is a sort of a a double positive for me for China and negative family for America. Now the most important aspect of this is by buying American government IOUs. They keep the rate of interest in America lower than it should be. Right. Because they're actually buying American treasuries and American treasuries are bonds. Right. Right. And bonds of two parts. Right. Yeah. One is they have a rate of interest and they have a price. So as they buy up more bonds, the price rises. Okay. The counterintuitive thing about bonds is that as the price rises, the yield has to fall. Right. Because they have fixed income security. So what the Chinese are doing is they are putting a floor on the global rate of interest. This is the key. Okay. And that floor is keeping global interest rates lower than they should otherwise be. So the Chinese are doing two things. They are managing to disguise their competitive position. Number one, they're managing to to ensure their competitive position. Number two, because they're exchange rate is rising. But number three, they are by keeping Western interest rates low, they are minimizing the real impact on us of what's actually happening, which is our manufacturing base is actually sliding progressively to China. Right. And how are they doing that? They're keeping interest rates low. So they said, don't you worry about manufacturing? You can buy real estate. You can feel rich. You can feel wealthy. So this as interest rates remain low, what happens is when interest rates are low, people borrow more than they should. And when interest rates are low, banks lend more than they should, which leads us to the financial crisis. Right. So this is a gallery of buying lending. Progressively over time, you see asset prices rising rapidly. This is what's pushing prices of flats and apartments away from our children, because the rate of interest is artificially low. Can I all around the world? Yeah. So let me just ask you this. This is a cynical view, but was this always the Chinese strategy? And also was part of that Chinese strategy was that to create the environment where the great financial crisis could occur? Well, I don't believe. I mean, there's a touch of the James Bond about this. Go on. Go on. Go on. The first idea is there's this incredibly clever fellow in China who's pulling all the strings. Yeah. A lot of people believe that. Fumantiu, John, do you remember him? Do? Right. Fumantiu of monetary economics. Right. The other thing is that never, ever ascribed to genius, what can actually be explained by incompetence. Right. Okay. I've always felt this. Right. Yeah. That again, we come back. Remember, I talk about biology. You know, the economy evolves and things change. There's unintended consequences. So I don't think it was an explicit strategy to undermine the West, but I think it was an explicit strategy to make sure that China propelled itself to growth via exports. Right. By creating an uneven playing field. By creating an don't even pay for it. feel, basically what Japan did, it's what all the Asians have done, which is they've always undervalued the currency to gain market share, whether you're Korean, whether you're Japanese, whatever, right? And the Westerners were just too busy talking about democracy to see what was going on, right? We're talking about transgender toilets or something. That's the worrisleap of the wheel. Completely, completely, right? So now what you have is a situation that the way in which China has managed its monetary affairs in a world of free capital movements has had a significant impact on asset prices all around the world. Yeah. There wasn't just the Chinese, a lot of emerging market countries have been at this because they all saw throughout the 90s that the only way to grow as a developing country is export. Ireland's done the same thing except we just managed to play with our tax system. Right. So we did with our tax system, what the Chinese are doing with their exchange rate. Got you. But the ultimate long-term objective was to take money from the Americans. Yeah. And the Americans are beginning to wake up to this. But it's a sort of a hysterical sort of awakening up. It's a hysterical reaction that they're kicking out of everybody. But what has happened is America has been since the early 2000s, the locomotive of the world economy. It's one that's been growing quickly. But it's been growing quickly because others have allowed us to do so. So for example, the central banks of many, many emerging economies are developing economies are doing exactly the same. They're holding their exchange rates down against the dollar because they want to export. So two Americans. So long-term. America is the consumer. America is the big fat kid in the sweet show. Yeah. It's going to have loads of all that sort of stuff, right? I wanted it. I wanted it now. I want it now. And if I don't have the income, I'll borrow from tomorrow to pay for shit today. And who's going to lend me the money? The Chinese. Now, beginning the Americans, the Chinese are used to, but they're giving us all this money. But the Fumon Chiu approach is that the Chinese are just allowing the Americans to get into more and more and more debt. Here's more rope. Here's more rope. Exactly. Exactly. And they're hanging them slowly. But the way in which this impacts on our societies is through, well, it impacts on financial market assets, right? Stock markets. But most Irish people don't own stocks. Most British people don't own stocks. Americans do. But most Canadians, they don't. Where we really see it is in residential property. Yeah. Because this process of financialization has turned residential property property from being a home into being an asset to speculate against, right? A wealth creator. And once you go down this route, it's very, very hard to reverse. And of course, the next podcast will, with Russell, will be on how this is unraveling now, how this trade has changed, how the Chinese have now gone from a country, which in the first 20 years this policy was a country trying to prevent its exchange rate rising. Now, or at once, it wants its exchange rate to fall. So they're having their gold standard at the moment where they now need to expand, not contract. They want their local economy to expand. They want their local economy to expand quicker than American. Because they're in trouble. Yeah. So the question is now if that leads to a reversal of Chinese policy, right? Then the last 30 years of financial relations, global financial relations goes into reverse. And what does that mean for us? Because we are passive in this game. Yeah. The Europeans have been passive. We're not actively playing. The Europeans just sitting back waiting for all this to happen. At least the Americans have evolted for Trump and say, actively, okay, this has to stop. Yeah. But we're just sitting here passively hoping to have a seat at the table. A, I don't think we have a seat at the table. B, I don't think there's enough people to understand what the hell's going on. And see all the while. And this is the key. The younger generation feel locked out of the economic party. And that is leading them to have radical solutions, to have radical ideas. And why wouldn't they? Because when they look at us, 20-year-olds are 25-year-olds. And we could move out with our girlfriends and our boyfriends and move into a flat and fireplace. And they're like stuck in the box room in their mom and dad's. And that all comes back to a decision in Beijing in 1994. [Music]