Forget Everything You Know About Money
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Welcome to Merrin Talks Money, the podcast in which people who know the markets explain the markets. I'm Merrin Somerset Webb. This week, I'm speaking with Felix Martin. He's an economist. He's a fund manager. He's an author. He was educated in the UK, in Italy, and in the US, where he was a Fulbright Scholar. He's got degrees in classics, in international relations, and in economics. He has worked at the World Bank, and he has worked in several different fund management companies. Crucially, he's also an

author of a book called Money, the Unauthorized Biography. And that's in part what we're going to talk about today. It was published more than 10 years ago, but I'm afraid it is more relevant than ever today. We talk about that. We talk about modern monetary systems, ancient monetary systems. We don't have time to go into everything I would have liked to, so I really would

urge you to get the book. And when you get it, read the story of the money of Yap and definitely read about the Bank of England and Tally Stones. We are going to talk about a variety of other things. Felix, welcome to Merrin Talks Money.

Thank you very much for having me, Maren. It's a pleasure. Well, you'll find out, won't you? Maybe it will be, maybe it won't be. Now, you are not the first person to write a book called Money, although everyone has a different subheading. But yours, I've got to say, it's particularly good. And I do recommend it to everybody listening. Go out, buy this book. You think it's just about money, but that's because you don't really understand what money is. It's really a very granular history of pretty much everything you've ever thought of. So I think

What I want to do, Felix, is start by asking you what exactly it is that money is and what is the big mistake that people make when they think about the nature of money. Going through your book and through the way that you think, there are two things to think about money. What money actually is.

and who should control money, manage money, manipulate money, and for whose benefit. So there's two parts to the story of money, but you can't talk about the second unless you've really got a good grip of the first. Absolutely right. You did an excellent summary, Miriam. What can I say? And thank you very much indeed for those very generous words. I also, of course, urge everyone to go out and get a copy, and they'll have a more comprehensive version than I'll give here.

The basic story which I try to tell in the book, which I think is very important, is that what I call a conventional view of money and its history. This is the one that you can find in every sort of children's book, and it's the one that's sort of ingrained in people's minds, is wrong.

That conventional story is that in the beginning, there wasn't any money and people just darted with each other. You know, I had fish and you had corn. And in order to exchange with one another, you had to want my fish and I had to want your corn. And in fact, we had one at the same time as well. What economists call a double coincidence of wants and otherwise no trade could take place. And that's all terribly inefficient.

And therefore, at some point in the distant past, probably different times in different places, somebody come up with a bright idea, which is why don't we choose one particular sort of commodity to serve as a so-called medium of exchange? That is to say, something which people don't want for its own sake, but just so that it can be used to settle and liquidate exchange. And that basically was the invention of money.

And typically it was precious metals that were chosen for this use because they've got lots of nice properties and they last for a long time and so on and so forth. That was the invention of coinage. And then people had an even better idea, which is why don't we start lending and borrowing this money commodity? And that was the invention of credit.

And then even later than that, there were institutions that were built up which specialized in organizing credit. And those were banks. That was the invention of banking. That's the kind of conventional history that you find throughout literature on money. And it's the way that a lot of people think about it. But it basically has it all completely the wrong way round. In reality, money is a system of ideas. It is the institution of credits and debts.

It is the various technologies which have been developed and deployed for recording credits and debts and for transferring credits and debts from one person or one company to another.

It's therefore basically a set of ideas and institutions. I don't mean that in a sort of woolly sense. There are very specific ideas which are extremely important in the development of money and which really constitute what it is to live in a monetary society. The most important one of these is the monetary standard, the standard unit.

Economic value, monetary value, is the key concept in money, and it hasn't always existed in human history. It is an idea, a concept of value, which was invented at a certain point in time and has been developed.

Most concepts of value don't have standard units. So aesthetic value or religious value, all kinds of different measures of value that we talk about, but they don't have standard units. You can't enumerate the aesthetic value or the religious value of something.

But the monetary value, the economic value of things, what distinguishes it is it has a standard unit, just like physical concepts like length and weight and so on. They have standard units, kilogram, a meter and so on. And this is what the standard unit in money is, something like a dollar or a pound or a euro. And that's incredibly important. And the key questions around which all of monetary history revolve, and you alluded to this at the beginning, are

are what is that monetary unit? What does it actually mean in real terms? What do you get for it and who gets to decide? Today, the answers to those questions for something like the pound sterling are that we define a pound sterling according to the rate of change of prices for a particular basket of goods and services.

So we don't have, say, a gold standard, which is where you define what a pound is by reference to one particular commodity, gold, and a particular weight of it. We do it with a whole basket of goods and services, the so-called CPI basket. And we do it with the rate of change of prices. So we say we want prices to go up at 2%.

In other words, you want the pound sterling, this abstract monetary unit, to depreciate in real terms by 2% a year. So that's the answer to the first question. What is the monetary standard today for the pound sterling? And then the answer to the second question, who gets to decide that in our current version of the monetary system?

Well, that's actually the chancellor of the Exchequer. He actually, I'm not sure she sets what that standard is, but of course it's implemented and operationalized by the Bank of England, which sits under democratic control.

Okay, let me just take you back a little bit, because one of the things that I found fascinating little side points in the book was when you asked how it could be that this mistake about what money is, i.e. is actually a system, not a token, how this mistake could have been made for so long by so many historians. And the answer to that, you say, is because it is the coins that survive, not the evidence of the system.

Yes, I think there are several answers to that crucial question. And one of them is exactly that. When you're doing monetary history, when you dig into the past and try and work out how things were back then, of course, what survives is physical evidence. In the case of money, that means coins, for example. But we actually know...

that in many past societies, a great deal of monetary credit and debt and financial balances and transactions

were not, of course, represented by coinage and transactions weren't settled in coins. They were very often settled by entries in ledgers, for example, but the ledgers don't exist anymore. And there'll be a whole load of other transactions and balances which were recorded simply by word of mouth or in other formats, and they don't exist. So that can definitely skew and has skewed the perception of things. But let me take it

back a step. I think in a sense it's sort of simpler than that. The curious thing about money as an institution is that from the bottom up,

When you as an individual are interacting with the monetary system, certainly in the pre-digital age when notes and coins were the primary form of representation of money, from the bottom up, of course, money does look like this real thing. That is what you deal with every day. It's only when you look from the top down, as it were, and you try to understand the system as a whole,

it becomes completely obvious that notes and coins are just physical representations, tokens, and there are lots of different kinds of tokens out there, of an underlying system of credits and debts, which is much larger, much less substantial, and essentially abstract. I hope you'll allow me just to say there's another important reason which I go into in my book.

as to sort of historically in Europe and in Britain in particular, which was the financial innovator at the time, why it is that this conventional view held sway in the face of the fact that

That the economy became much more financialized banks became much more important and even today, you know when we live in this digital world where I think for most people it's pretty obvious that money is is an abstract thing and it's because people don't use you know coins and notes anymore Why did it hold such sway and there I tell the story of a very important debate that happened right back immediately after the founding of the Bank of England and

which was a pretty epochal moment in monetary history generally, and certainly in Britain.

There was a genuine huge debate over this very question which we began with of what the monetary standard should be. How should a pound sterling be defined? Because with the creation of this new Bank of England, money was henceforth going to be issued not by the sovereign, the mint as it always had been, but by this bunch of private, in those days private bankers, the Bank of England. So this question was crucially important and it

It all played into an existing political debate about the constitutional changes that have been going on in Britain and the shift towards what we would now call a constitutional monarchy. So political power being taken away from the absolute monarch into a system where it was shared with Parliament.

And as a result of that, there was a big debate between one of the most famous philosophers in British history, John Locke, the great father of political liberalism and his sort of Tory opponents.

And as a result of that, Locke made a fateful intervention in which he came down hard on the side of the conventional view of money, but for political reasons. It's a big question in my mind whether he actually believed what he was saying philosophically. But he made the argument that, listen, a pound sterling just is a certain weight of silver. In those days, they were talking about silver, not gold.

That's what it is. That's what it means. No one can change what that weight is. Anyone who tries to change what that weight is, is effectively lying, defrauding the public. So he was arguing very strongly for a fixed precious metal standard for the idea that money is a real physical thing. But he was doing it basically for political reasons because he wanted to tie the hands of this new institution and

the Bank of England, which he thought would otherwise fall into the hands of revolutionaries and the whole republic would fall to pieces. Okay. And so...

Oh, she's just reading that bit in your book earlier. But that brings us, can take us forward by quite a long way. This idea that money should be stable, that it should always be worth the same, roughly the same sort of thing, that inflation should constantly be contained. And the idea that, as we know, it came out of New Zealand a couple of decades ago, that inflation should be kept by central banks at a level of 2%.

every year forever. And that's something that A, hasn't worked for a while, and B, that you have taken issue with along the way. And there is a bit in your book about the financial crisis, about how it happened, where you point out that everything else was ignored, ignored completely in pursuit of this idea that nothing mattered except stable inflation. So it

booming house prices, a drastic underpricing of liquidity and asset markets, the emergence of the shadow banking system, the declines in lending standards, bank capital and liquidity ratios were not given the priority they merited because unlike low and stable inflation, they were simply not identified as being relevant. So I don't think very many people would accuse central banks of being wedded to sound money, but

This is what it is, isn't it? The idea that money must be stable. And if you put that above everything else in a modern monetary system, you can run into all sorts of trouble. Yeah, but it's very interesting what you just said there. There's no one but accused central banks of being wedded to...

sound money. But that, of course, is exactly... Now, I think if you ask central bankers, they would say that's exactly what they're wedded to. And most modern, important central banks do operate an inflation-targeting standard these days, which intrinsically is targeting a stable value of money. I mean, to be sympathetic...

to Locke. Let's take him as the patron saint of stable money for a moment. I mean, of course, the paradox is that the monetary standard does have to be stable over time and across space.

So within a particular jurisdiction for it to be useful. I mean, that obviously is true to some degree. But one also has to remember that because it is the unit that you're using to denominate credit and debt, and because credit and debt can grow and can go in all kinds of funny directions and can become very inequitable and can become very inefficient. And we've seen that over and over again throughout monetary history. It's the nature of financial capitalism that can happen.

The devaluation of the monetary unit is also an absolutely crucial escape valve for when things become unsustainable. Keynes, John Maynard Keynes, he has a great passage where he talks about this and says, the real parents of revolution are the absolutists of contract.

In other words, it's people who obsess to the exclusion of everything else about this important truth that money must be kept stable to be useful that are the real people that end up creating

Creating revolutions because debt becomes completely unsustainable one half of the population as I think he puts it becomes enslaved to the other and so on so forth now This is all a bit hyperbolic and so on so forth But what is totally obvious and what it only becomes clear when you have a clear view of money as a system of credit and debt Rather than as some sort of physical thing is that one of the primary

economic forces and therefore one of the most important decisions that any government or central bank can make is over the value of the monetary unit because of its distributional consequences. Its distributional consequences. And that's what gets missed and has been, I think, missed in a lot of the last 30 years thinking about these things. It was certainly what was missed in the lead up to the financial crisis. If you're focusing solely upon

keeping the value of money stable in order to make transactions efficient, you lose sight of the fact that this is the most important distributional tool that a government has. Yeah, now this is something that we've actually talked about on this podcast quite a lot, the idea that in many ways what we call monetary policy is effectively a fiscal policy because it has this distributional mechanism. And that brings you back to the question of whether really, really,

a central bank should be independent of government because central bank policies do effectively enact what we would consider to be the results of fiscal policies or the type of results that a fiscal policy might have. So if that is the case, and it is, particularly we saw that during the QE period, etc., is it reasonable that a central bank should be independent of government?

Yeah, I mean, of course, it's a good question. The debate's got sort of slightly mixed up because, and I was probably a bit of a bit on a bit of a rant when I wrote my book, you know, which was published more than 10 years ago now, and arguing against central bank independence. I mean, it all comes down, of course, to the details. The principles of delegating power from a sovereign parliament or from the government that it's chosen to

to an independent agency of any sort, a technocratic agency of any sort. I mean, the central banks are the most important example, but there are lots of other examples in the modern system of governance. The principle is that you're not delegating these crucial, top-level, political, distributional decisions.

Those should be made by the political authorities, legitimate political authorities. And it's the operational aspects that should be delegated to the central bank. And that is the principle of it. And as I was just describing a few minutes ago,

The monetary standard, the inflation target, which is inflation targeting, a 2% inflation target in the case of the UK, for example, it is set by the Chancellor. It's not set by the central bank. They can't choose their own target. So that would be the defense of central bankers. And it is legitimate, but up to a point, because these things do get a bit fuzzy, inevitably, in practice.

Is the answer then to remove the target? The target is wrong. Yes, exactly. All targets lead to disaster. We know that. It's the target that doesn't lead to some kind of disaster. Well, that's a very, very important thing you've just mentioned because my favorite and I think the most important precept in all of monetary policy, and it applies much more broadly, and it's the topic of my next book, listeners. Okay.

Oh, good. ...is Hart's law named for the great British monetary economist Charles Goodhart. And that law, he voiced it in the context of monetary policy. And he said any metric, when it's chosen as a target, eventually ceases to become a good target. And what he's talking about is the tendency of systems, economies, societies, and so on, to adapt, of course, around targets, to game targets, so that they cease being useful. An inflation target is, of course, an absolutely primary example of that. So...

What you were describing and what I write about in my book in that part about the way that the focus on inflation targeting and the apparent success, not apparent, I mean, the success in targeting inflation for whatever reasons, we can debate those, prior to the financial crisis, meant that the system adapted around it and all the kind of imbalances occurred.

which genuine economic and social imbalances, which the inflation target was intended to measure and tame, in fact just emerged in all kinds of other places. It was a phenomenon that had been predicted and written about many years earlier by the American economist Hyman Minsky. He said stability breeds instability. It's the same idea.

So yes, it's the system as a whole, and not just the particular system of inflation targeting, but the idea that you can choose a particular metric and you can then design policy around that particular metric using it as a target. And that is a sensible, effective way of trying to govern a complicated modern economy. That's where the problem lies.

Okay. Let's move to the problems of today then. We talked earlier about how when things go wrong, you end up with unpleasant distributional impacts. We look across the Western world at the moment and we can see exactly that, a distributional problem, particularly intergenerational. Can we blame money for that? System of money? How money has been managed? It's a good question. I mean, there are lots of things which go into it. I mean, I always tell the story

about my mother and her sisters and my grandparents when I'm trying to explain this generational aspect and why monetary policy is important to it. When I was young, I would sit around my mother and her sisters. They were always complaining about the fact that their father

He'd been a distinguished fellow. He'd ended up running a university, a vice-chancellor. Wasn't quite as well paid, by the way, as it is these days, being a vice-chancellor. But nevertheless, he'd been a sort of... That may be temporary, by the way, given the state of the UK's universities. A blip in the history of what chancellors get paid. Well, he certainly would have been absolutely amazed if he'd seen modern universities. But anyway, the point is that having done all this, he had retired.

in about 1970, and he'd retired to a tiny little house back in Oxford, which he'd bought in the 30s. And he lived out his days, and then when he came to expire, there was nothing left. There was no sort of great inheritance to pass on. And they were just baffled by this, and they said, "How could this be that this was the situation?"

Now, the reality was that at the same time, that when they were making all these complaints, they were sitting in their own great big houses in lovely university towns in England, which they had bought, actually, at the very beginning of the 70s. And my father used to tell me this story about how when he'd had this, they'd had their third child, me, and they'd outgrown their house, and they went to look around bigger houses, and he'd gone around looking around with the bursar of one of the colleges in Oxford where

He lived, he was fretting away, I can't afford this big house, he said in the bus. I said, oh, don't worry, you know, just go ahead and buy it, you know, it'll all be fine. And he bought it and was terrified by the size of the mortgage and all this. But of course, by the end of the 70s, this mortgage was worth a pittance in real terms. Now, the point about this story is, I haven't explained it terribly well, but the point is, of course, these things were two sides of exactly the same coin. If you were of my grandfather's generation and you had retired in 1970,

With your handsome pension from your vice-chancellorial job that you'd accumulated. And it was worth... Your DB, by the way, just so everyone's clear. That would be a defined benefit pension. Of course, defined benefit pension. You should get the same amount of money dumped in your bank account every month. And it should crucially be inflation linked. Yes. But I suspect what you're about to tell us was it wasn't linked to the actual rate of inflation, but possibly was capped. Yes.

A lot of ones are capped at sort of 3 or 4%. Yes, exactly. Inflation goes beyond that. The real value of your pension income will fall. That is what happened to your grandfather. Exactly, exactly. And so over the course of the 70s, of course, you know, the value of this thing shriveled up to very little. Hence, his unfortunate penury by the end of the decade.

And whereas young parents like my mother and father, they were on the other end of that. So this inflation over the course of the decade was fantastic because they bought some house for a few thousand quid. And by the end of the decade, it was worth 100,000 quid. And the mortgage, of course, had shriveled away because it hadn't got any value. Now, what was going on? A big transfer happened.

wealth from my grandparents' generation to my parents' generation. So in fact, my mother and her sisters need not have complained because they did get this inheritance. It just didn't come down through, being passed down through the family. It came through this macroeconomic shift. Now, you will have spotted that

But that is very different from what most people understand by inheritance. And of course, it is a matter of chance. Now, I mean, there's a different kind of chance that operates through inheritance through families. It's just whether you're lucky to be born into a family with money or who happen to accumulate some money. And this is a different kind of chance where if my parents hadn't

bought a nice big house and stretched themselves and so on at the beginning of the 70s, well, they wouldn't have received the benefits of this macroeconomic wealth transfer. So it's a different kind of complete chance involved. But of course, the transfer did happen. But in that case, and this is coming to your question,

It happened through the action or inaction of monetary policy. That was what led to this great inflation in the 70s. So it's a really important thing to keep in mind because it is what has, it's what the focus on inflation targeting, for example, has successfully ruled out over the last 30 years, that particular kind of transfer of wealth. But you just alluded to the fact that nonetheless,

It appears that you can point the finger at monetary policy or financial policy more generally for all kinds of other transfers or accumulations of wealth, which many people would see as being rather unfair, being biased across generations. Anyway, I come back to Keynes's point. The issue is monetary policy is very powerful at effecting macroeconomic distributional changes, either by accident, by omission, or by commission.

We have to focus on that and one has to have a deliberate policy about it.

And one of the things that we have talked about on the podcast quite a lot is about whether we do need a generational reset and we need some way to get to reduce not just private debt, but also specifically public debt. And that that would require maybe close to a decade of inflation running at four, five, six percent, which would necessarily mean the removal of the inflation target. There has been mutterings over the last few years, haven't there, about how central banks should need it.

I'll get to maybe 3% or something like that. But it does seem that there isn't any way out for deeply indebted Western nations at the moment. I mean, look what's happening in the bond markets across Japan, across the US and in Europe at the moment. We see these dislocations beginning to happen in the bond market. There isn't any obvious way out other than either exceptionally fast growth, which at this point looks relatively unlikely, or a decade of inflation.

Yes, there are complications that should be mentioned. I mean, it's very notable when you suggest the idea that maybe inflation is not such a bad thing in many respects, which I've done over the last few years in a few columns for the reasons that you say. I mean, yes, of course, there are costs to inflation, but it's really interesting if you look at the economic literature.

The actual costs which are ascribed to inflation are really quite weird and small and not the ones which I think most people would really think of. They are because of the way that money is conceived of in mainstream economic theory.

They are costs to do with frictions, like there's more uncertainty about what the price is when you go to... People have to look around more, so-called shoe leather costs. In other words, they wear out the leather on their shoes, walking around finding alternative prices for things. Menu costs, you know, restaurants have to update their menu. I mean, people will think I'm making this up, but these are actually, genuinely, in the mainstream economic theories, the main costs ascribed to...

And you set those against what we were just describing, which are the big macroeconomic distributional effects of inflation, which might be costly or they might be beneficial. And of course, you're suggesting these imbalances intergenerational, whatever they might be a very unhealthy and inefficient, and they are risk constraining economic growth and innovation. And therefore, presumably inflation, which would be a means of alleviating these would be a positive thing. Now,

Now, there's huge, huge resistance to that. Have you ever talked to anyone from the generation above us, people who remember the 70s, despite what I just said?

which is that actually it was in some ways very beneficial for a lot of people. It made them rich. Well, it didn't, you know, again, I've got to stress that there's a lot of luck involved, like I said, you know. So the story I just told you, my parents, they were lucky because it just affected actually within the family what might have happened anyway. But of course, many people won't have been in that situation. So that's where there's a problem on that front. But anyway,

They're very, very resistant. I have to interrupt you to tell you that I know our listeners and I know what they're thinking right now. They're thinking, lucky old Felix, he gets that great big house. No, no, no, no. I'm afraid not. I'm afraid. I mean, I wish it would say listeners, but unfortunately, I'm one of quite a few children who...

And the inheritance tax regime is horrendous these days. And as you will have discovered from the story, my parents are not in any way experts in financial planning. So they haven't done any of the things that all the sensible boomers will have done to try and avoid all this stuff. So no, I'm on my own. I'm sure some IFAs can get in touch now. And...

Carry on. Sorry I interrupted you. Sorry, we were... Yes, but there are other niggles today. You were describing this as an important and maybe the only way of getting out of very high levels of public debt. Now, very high levels of public debt in places like Britain and the States and Western Europe and so on, they are clearly a historical anomaly at this level in peacetime. So there is a big challenge there. And it is true that inflating away debt...

so devaluing it in real terms, would seem to be a much less painful way of doing things than outright defaulting on debt, which seems highly unlikely and would be very, very disruptive. So that makes a lot of sense. I think that's right. And, you know, we're not talking about hyperinflation. You're talking about a slightly higher inflation target, just like you mentioned. However, one of the important niggles is that we live in a very financially globalized system today, and there are large imbalances between inflation

Famously, of course, the US is an enormous international debtor and runs a big country-count deficit. And the same is true on a smaller scale for the UK. And then within the Eurozone, for example, there's a lot of imbalances of that sort. And that's important because back in the 70s, what we were just talking about, that was much, much less true.

And therefore, the imbalances and their correction and the redistribution was essentially within a particular political jurisdiction, within the UK, let's say, or within the US. Whereas today, there is a big international aspect to it.

and there will be impact on exchange rates, and there will be, well, geopolitical impacts. The whole origin of the massive flare-up in geopolitical tensions and the connections with economics that we've seen this year is precisely to do with this issue of international imbalances and the fact that America wants effectively to extricate itself and to impose some sorts of losses on people who've lent its money.

It's not quite as simple as it might have been in the past. It's less simple than it used to be. Yeah. All right. Let's move on from that to looking actually at markets, because you just mentioned various dislocations in the U.S. And obviously one of the things we talk about endlessly here is the U.S. market. And one of the things I've brought up with a guest last week was about the decumulation of the baby boomer generation in the U.S. and the extent to which that will affect foreclosures.

flows into the market and hence the level of the market itself. And you use this wonderful phrase where people say that bull markets rarely die of old age, but this one actually might.

Yes, that's right. I wrote a column, my column for, am I allowed to mention the competitor? Oh, I don't know. I mean, I think you're probably not. Okay, I won't. You wrote an interesting piece. My column this week. What's the one else? No, exactly. It's about this, because I was reflecting, I went back and had a look in the late 90s. There was a huge panic over this gory named market meltdown hypothesis that

And this was actually driven by the fact that, as some listeners may remember, the U.S. stock market was on a great roll from the sort of early 80s on. And in particular, in the 90s and into the late 90s, valuations were climbing up and up every year. The famous Shiller-Cape cyclically adjusted price earnings ratio, it hit its low in 1982 at 7, and it went up to 44 by the end of 1999-1990.

And a lot of people connected this. And they said, well, hang on a minute. The reason why this is happening is because the baby boom generation is such a historical anomaly. And this is true, much larger than the generation before it and the generation Gen X, that's our generation, which came after it. And they said, well, I mean, obviously what's going on is they've hit their peak earnings.

They're piling money into the U.S. equity market, and this is pissing up valuations. And that's all great, but obviously there's going to be a huge problem when they come into their retirement and decumulation phase because they're going to be trying to offload all these assets onto the much smaller Generation X. And this is important. The whole thesis relies only on the size of the generations. People argue a lot, correctly in my view, about whether it's really true that

flows, drive prices and all this kind of stuff. But this argument is quite simple. It's just that the next generation is so much smaller, so naturally the demand must be lower.

Anyway, it rose to an absolute height of panic. But the funny thing was, of course, in the 2000s, there wasn't any big crash and the whole sort of panic went away. There was a crash, of course, from the heights of 1999. But that just made everyone think, oh, well, it was all to do with the rational observer. It's nothing to do with demographics. It was just a sort of classic bubble. And then it all recovered and started marching on again. And then there were lots of interesting changes like

defined contribution, pensions started to take off. And that seemed to provide a sort of new supplemental source of inflows and the boomer generation themselves, they turned out to live much longer, and they were much healthier. They didn't actually decumulate nearly as quickly as everyone said. So the whole sort of panic went away for a long, long, long time. But the

You're bringing it back.

just in the last couple of years, has gone into decumulation. It is no longer a net buyer of assets. It's gone into net selling territory. And of course, it's just as true as it ever was that Gen X is indeed much, much smaller than Gen Y. So if you look at the so-called old age dependency ratio or the inverse of it, you know, it was the case in 1990 that there were five and a half or six working age people for every generation.

retiree, and it's now about 30 or 40% lower than that. So all the conditions are actually there in place. It is, in fact, happening just as was predicted.

And then there's a couple of other problems which people hadn't spotted in the 90s. One is that, of course, these international inflows, all this globalization and the fact that in the 2000s, when people thought this was going to start, what actually happened was this so-called global savings glut appeared. You know, there was all the Chinese and the Europeans, they were saving up in the Japanese and they all piled into the American market. So they sort of bailed out, you know, the

the boomers then. But unfortunately, they're all in exactly the same or even worse demographic position now than the US. So you can't rely on them anymore. And as we know, capital flows are reversing from the US. They're all starting to seek back out again. So that's a big problem. And then the icing on the cake, the icing on the cake is the following. It is that the

The boomers, this big generation, of course, they didn't just have economic power. What it gave them was political clout. They were, for the longest period of any generation in history, they were the largest voting cohort in the US system. So they were the biggest block of US voters. And that also has just changed. About 10 years ago came the crossover point between

And Maren, I'm sorry to tell you, it's not our generation that have displaced them because we're the small Gen X. It is the millennials and younger. Oh, God. Since 2016, they have taken over as the biggest and most important voting bloc from the boomers. So it's J.D. Vance and his cohort that are now, they are the political center of gravity in the U.S. And of course,

They do not have a vested interest in the types of policies which kept this whole show on the road for the boomers, which staved off the market meltdown hypothesis for the extra 10 or 15 years that it happened. No, they're not interested. That's why they're rolling back all this stuff like globalization. They don't care that the Japanese and the Europeans and the Chinese no longer want to buy the U.S. stock market. They're actively trying to stop it half the time. So I reckon it's here.

Okay, that is really interesting. Good hypothesis. I love it when things come true. 20 years after they were supposed to, it was fascinating. But it's something we must talk about, which is going back to our millennials, it's private currencies. The way we've been discussing money is as though it's always a power of the state, an instrument of policy, etc. But given the way that you've described money as a system rather than a token, it's

fall from the case that money should be something that is state-sponsored. And there's a huge history of private monies back to the endless siege monies and the build of sale. There's so much. There's so much private money. But now we have a private money that is

beyond the scale of any previous private money because of the way it crosses borders, right? So previous private money has been limited to particular societies, particular groups. They've always been physically limited. But Bitcoin and the other cryptocurrencies are a private money that has no border.

And this is a very interesting dynamic, right? And one of the mistakes that I've made for years now is to assume that governments would not allow a private currency to become so widely spread that they would interfere if something hadn't happened.

What do you think is going on here? And would you be a buyer of Bitcoin? Well, when you say it hasn't happened, I mean, I think your instincts are right, which is that governments are very interested in guarding jealously their monetary sovereignty. And I think they are very concerned and worried about the potential for macroeconomic disruption caused by widespread use across all the uses of money, of private currencies and cryptocurrencies.

They are quite right to be so concerned because if you look at the history of many emerging markets, for example, these are countries which have long experience of only limited control grip on the franchise of money by the state. I mean, the most obvious example is in many emerging markets, as any listener who's ever been to France,

One will know over the last 30 years, you will find that US dollars circulate alongside the national currency. And there's a prime example. OK, that's another state currency in that case. But it's a prime example of where, you know, the state in question doesn't have full control over

over the institution of money and you've got another competitor in there. And that makes managing, targeting inflation or managing the distributional content, any of these aspects of monetary policy we've been describing, much more difficult. Because whilst you might control the issuance of your own currency and the regulation of it, you don't control the issuance and regulation of the US dollar.

So that's why they are worried about all of that. And they're right to be worried about it. Clearly, the novel aspect of cryptocurrencies, exactly as you said, is not the fact that they are privatized.

private monies. It's not the fact that these are private monetary units operating on their own monetary standards. They can define them in lots of different ways. It can be a very hard monetary standard like bitcoins, where you've got a set number that can ever be issued and you're going to asymptote towards that over time. But there are all kinds of other, in principle, any old kind of standard that you could use and specify for these private cryptocurrencies. It's not that private

aspect of it which is new, existed all throughout history, like you said. No, no, it's the technology, of course. It's the technology of recording these things on a digital ledger and the fact that you've got the internet which is global, which is 24-7, 365 days a year and therefore can facilitate transactions all that time.

And the fact, of course, that it displaces, operates outside of, doesn't use the conventional banking system. So that's what's new about it. And it's like everything else to do with the Internet. You know, you can have a very small proportionate constituency who are interested and want to use something. And it's massive in absolute terms, in absolute numbers, because that's the nature of the Internet. The key thing to say, however, is...

In terms of the use of money for transactions, to settle, trade, commerce, trade in assets and so on and so forth, it is still the case that most of these cryptocurrencies are of only limited use and are rather constrained. So mostly they are used for speculative purposes. The killer app, I think, which has been identified and seems to me people are correct about is

in this area for transactions is stablecoins. That is to say, that's just essentially a particular type of cryptocurrency for which the standard is an existing fiat currency. So most of them are pegged to the dollar, but there's no reason why in principle you couldn't have one that was pegged to the sterling or the euro or the yen. All that's doing is it's marrying together that incredibly useful digital technology available 24, 7, 365 days a year wherever you are in the world to

the existing national currency units. And I think that's a very powerful marriage. And obviously, I'm not alone in thinking that everyone thinks that it is. But that

That does not interfere with the sovereignty of the currency issuer? In principle, no, because it's pegged to the sovereign currency issuer. However, again, look back over the history of money and the history, for example, of the euro-dollar market, which is in many ways, not in all ways, but in many ways, it's an analogous development. So this was developed

developed in the in the 1960s in europe and it's actually a huge market today this is dollar denominated liabilities which are issued by banks and institutions which are not under the jurisdiction of the u.s federal reserve so they're they are they're a bit like stable they're dollars dollar denominated instruments but they're not real dollars in the sense that your deposit in the u.s banking system is the question you're effectively asking when you say or the

The hypothesis you're putting forward is that the existence of the euro-dollar market does not have any real blowback onto monetary management by the Fed. And that's not quite right. I mean, it does, unfortunately, have a bit of a blowback because when the crisis happens, usually the central banks have to bail out half of these shadow banking systems. And that would be the worry about stable coins, I would have thought, from the central bank side. Okay.

All right, brilliant. It doesn't sound to me like you're a buyer of Bitcoin. So let me ask you this. If gold, under the definitions we've been discussing today, is not money, but is conceivably a store of value... Well, it's not conceivably a store of value. It's definitely a store of value. Okay, it's definitely a store of value. That's quite obvious. But it's not money. But it's not money. Should we be buyers of gold today as we see monetary upheaval around us?

Well, I think that goes back to the earlier discussion about the scale of imbalances, the scale of inequalities, the scale of debt in these economies, and what conceivable policy you can see to get out of it. If you believe, and I think it's perfectly reasonable to believe on a long-term scale, that the only way out of this is the devaluation of the national monetary units like sterling, dollar, pound, and so on,

then quite obviously gold, but I mean any real asset, but you know, gold is awfully nice and convenient. Everyone knows that is going to be a pretty good bet. Brilliant. Felix, thank you so much. Thank you very much.

Thanks for listening to this week's Merrin Talks Money. If you like us, show rate, review and subscribe wherever you listen to podcasts. And keep sending questions and comments to merrinmoney at bloomberg.net. You can also follow me and John on Twitter or X. I'm at Merrin SW and John is John underscore Stepak. This episode was hosted by me, Merrin Somerset Webb. It was produced by Summer Saadi and Moses Andam. Sound design by Blake Maples. And special thanks, of course, to Felix Martian.

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