Shownotes Transcript
We have before us the opportunity to forge for ourselves and for future generations a new world order. This is Multipolarity, charting the rise of the new multipolar world order.
Okay, folks, this is Multipolarity Live. We are just waiting for Philip Pilkington. He's going to join in a moment. I'm Andy Collingwood. We are going to do Multipolarity Live this week. We very much like this idea as a little experiment, see how it goes, see if it feels more free flow.
People will be aware, of course, everybody who's tuning into this will be aware of the convulsions that have been caused in the last two or three weeks by Donald Trump's decision to impose tariffs, not just on China, not just on Russia or one or two other selected enemies of the state, but on literally every single nation in the world, starting from a baseline of 10%.
Right up to 40-50% depending on the bilateral trade imbalance these countries had with the United States. As I say, that's caused something between a kind of market freakout and outright hysteria.
But we're now getting to a stage where perhaps after he kind of put a pause, a 90-day pause on those tariffs, and as he, in his own way, invited countries to come and negotiate with him, we might be getting closer to seeing at least the contours, at least the outline, at least the silhouette of what will replace the system of
that the world has had since the U.S. exited the gold standard and currencies became free-floating. What will Bretton Woods be? And will the U.S. dollar survive that? So, Philip, I think this is a good time perhaps for you to give us all an overview of what you see it since you're a resident economist.
Yeah, well, I mean, it's been a bit of an ongoing theme on Multi-Polarity, the podcast about de-dollarization and so on. I think actually when we started the podcast, we were already talking about de-dollarization. I wrote, I think one of the first essays, if not the first, on the prospect of de-dollarization or the end of US dollar hegemony in American affairs.
In March, I think, 2022, like the month after the invasion of Ukraine and the subsequent seizure of Russian reserve assets. I wasn't the only one saying it. It was going around financial markets. I think there was a note circulated from Goldman Sachs at the time.
It was interesting because the person who seized the reserves, Dalip Singh, was ex-Gulben Sachs working on the National Security Council previous to Treasury. So the whole thing is a mystery of why all that was done, really. I think historians still need to dig into it. But anyway, we've been talking about it for a very long time.
It's now totally mainstream. I mean, I was looking today before the show or the spaces or whatever we're calling it, about what the mainstream media or at least mainstream financial media is saying about the prospect of de-dollarization. And it does appear that they're talking about it pretty openly. It's kind of irritating. I know that...
that we may have taken some contrarian stances on the Trump phenomenon so far. But I think it really is worth highlighting that people have just jumped on this bandwagon because they don't like Trump.
I think that says a lot about our politics and how pathetic they are, really, in a way. I mean, this is a really world historic event. I mean, a really once-in-a-century event, maybe once-in-a-century-and-a-half event. And it's being treated like a political football, as if it's like, you know, Melania Trump's haircut or something. So, I mean, that's kind of pathetic by my estimation. But it's got increasingly popular. But the big brains, the smart people have been talking about it for decades.
for a number of years and mainly on the right wing, on the new right, in Trumpy circles, that sort of thing. That's where they've been talking about it.
I suppose what's happened recently, well, I put up a chart on Twitter today showing the interest rate differential between, I guess it's the federal funds rate and some sort of weighted basket of other central bank rates. And what you see is it tracks the US dollar index pretty well.
And that basically is how that's really the standard quote unquote that we're on. We're not on a gold standard. Obviously, we're not on a Bretton Woods quasi gold standard. We're on a Federal Reserve standard in a sense. And the relative valuation of currencies is.
is largely set by the Federal Reserve's interest rate. And then other central banks, if you want to think about it, they respond to that interest rate, and that determines the overall value of the dollar. There's some nuances to that, but that's broadly true. And what we've seen is in the past couple of days, since the liberation day, as it's being called, the correlation there has completely broken down.
I think that's probably one of the early signals of true de-dollarization. I think we were in slow burn mode until Liberation Day, and now we're on fast forward. Liberation Day is probably going to end up being written into history as the day that the US dollar was liberated from its hegemonic status. And I don't even mean that particularly sardonically. I think it's really bad for the US to have the reserve
dollar but even apart from that the dollar has been falling falling very fast relative to other currencies now the dollar falls sometimes that's fine no big deal Phil but yeah it's in a really high risk scenario it's in what the market people call a risk off scenario which means people are actively pulling out of risk assets like equities you'll see the stock market's falling Nasdaq is now in a technical bear market
Usually when you're in that kind of an environment, the dollar rallies and, uh, and, and people start buying, um, people start buying up, uh, equities, uh, in the U S American equities and American bonds. And I actually saw a kind of, um,
I guess like a 4chan anti-normy interpretation of Liberation Day. And one of the theories, I don't think it was White House official or anything, but one of the theories floating around, no doubt from somebody who's relatively well informed in the markets, was that part of the Liberation Day play
was to create a market event on Wall Street, or at least tolerate a market event on Wall Street, drive liquidity into the U.S. bond market, and thereby bring down borrowing costs for the United States, which are obviously extortionately high right now. Now, in a normal time, that is actually what would have happened. That's not a completely crazy interpretation. Do I think that's why the U.S. Treasury, Scott Besant, is doing what he's doing? No, I think that's overblown. But the interpretation of what would happen
happen in normal times makes total sense. That's exactly what would or should have happened when there was a big stock market sell-off. And this is kind of the paradox, you might call it like the paradox of dollar hegemony, that
Even though what you'll see is a crash out in the U.S. equity market, which is like a crash in America Inc., in a sense, you get a stronger dollar because people get so spooked. So that's always been the case. And you get lower borrowing costs for the U.S. government. That's not happening now. You're getting higher or at least the same borrowing costs and the dollar is selling off.
So we're in a completely different world. These are definitely the early indications of actual, you know, rapid de-dollarization. And I think we're probably, I mean, we don't really want to try and forecast these things, but I think, I think it, I wouldn't think it would be crazy to say that the world might be fully de-dollarized by the end of the current Trump administration. Well, that's an amazing, an amazing prediction, Philip.
I'm quite surprised that look, I mean, multipolarity has been speaking about the potential for de-dollarization for some time. You mentioned the dent in confidence or the dent to confidence that the 2008-2009 financial crisis put in the dollar. It seemed that dollar assets at least were no longer as safe perhaps as they had been, especially in a very highly financialized market like the U.S.,
Then we also had the confiscation of Russian foreign policy, foreign currency reserves, most of which were in dollars. Now, granted, a lot of that was in the EU through a clearinghouse called Euroclear. But still, it seemed to suggest that even sovereign reserves weren't sacrosanct anymore. And whether or not you agree that Russia should somehow be punished,
And confiscation of reserves is a suitable punishment for Russia.
At the same time, that gives pause to any country that doesn't feel confident that it would take the U.S. line on every single major foreign policy issue. So major current account surplus countries who are accumulating large quantities of U.S. dollars, like Saudi Arabia and like China, must have been given pause for thought, at least, when the U.S. confiscated Russia's sovereign currency reserves.
Then finally, into this, we had the beginning of the end for the current global trading system. Now, as we said last week on the podcast, we spoke at length about this, and I wrote about it for the Multipolarity Substack. Biden introduced a series of pretty stringent tariffs on China.
on a range of Chinese industries, including electric vehicles, including solar panels, including personal protective equipment and the pharmaceutical sector. And that was in addition to his trade restrictions on the high-tech sector, microchips, semiconductor, wafer, all the rest of it.
And I wrote and said at the time that, look, this is the elite in Washington signaling to the world that the old trading system is gone. The old trading system is finished. They don't feel that it works for the US anymore. And they're going to move away from it. They're going to start making trade policy in their own interest rather than to maintain trade.
the trading system as it was. They're starting to act as a nation rather than an empire. But nobody talks about this in the mainstream press, Philip. You're quite right that it's only when Trump does it. Now, I'll admit that what Trump's done is much more dramatic and much more drastic, in fact, than what Biden did. But it's a kind of extension of the same policy. And Biden's policy itself was an extension of the Trump policy.
In fact, even Obama was talking, if you read, you know, there's Obama speeches out there complaining about the bilateral trade deficit between the U.S. and China in specific and more generally about how globalization hasn't worked well for the U.S. blue collar. So this is a longstanding thing. And it's just been something that the world's jumped on. Now, the issue that I have with your prediction, Philip, and maybe you can kind of come back at me on this a little bit, but
The issue that I have with your prediction about full de-dollarization by the end of the Trump administration is what's the alternative? I don't see, certainly there's no national currency out there right now. I know that the Russians have been working on and got the green light from other BRICS members to continue their work.
on an alternative trading unit, essentially. It wouldn't be a currency. It would almost be like a clearing unit for trade, essentially. But, I mean, they're a long way away from that. Then, you know, if there are any trade imbalances in the world, you know, you would need somewhere to recycle those trade, you know, surpluses.
In addition to that, you would need some kind of financial plumbing, things like trade financing, things like repos and reverse repos, and all the sorts of things that countries engage in or corporates engage in to minimize the risk of trading, and which are all very much available at the moment through Wall Street and in great depth and with great transparency.
And with until fairly recently, until the kind of the Russia thing, pretty cast iron rule of law protection as well. So what is the alternative? Where's that going to come from? How is the world going to deal with, you know, what's the world going to replace the dollar with essentially?
Yeah, I mean, this has been the question from the start, and it's always kind of made me tear my hair out, because if you don't have a world of massive trade deficits, you don't need a highly liquid reserve currency. That's kind of the point that I've been trying to hammer around to people for a very long time, that the dollar hegemony and the trade deficits are the inverse of each other.
as are sterling imbalances, which is a kind of mini dollar, you might think of it. Most countries in the world don't run massive trade deficits. It's only a couple of these highly financialized economies. And what you'll always see in the case, unless it's a small developing country, maybe an obscure country that takes a lot of foreign aid from the United States, think a kind of military-based masking as a country,
Any real country that's running massive trade deficits, by which I mean 3%, 4% of GDP in a large country, is almost definitely going to have a very large financial sector that's backing it off. And that's just how the current account works. The current account has to be plugged by the capital account surplus. So if you have a world where...
Trade is forced to be roughly balanced. I don't mean totally balanced, but roughly balanced. You don't actually need a quote-unquote reserve currency, or you don't need a very substantial reserve currency. You may need a clearance system, but clearance systems are two-a-penny. You can clear in almost anything. I mean, in theory, David Goldman says that he reckons that if gold goes to 10,000,
And we're about a third of the way there. If you'd said that we'd been at 3,300 or wherever we are now a couple of years ago, people would have laughed at you. Well, we're a third of the way to 10,000. David thinks that if you get to $10,000 an ounce gold, you have plenty of bullion to clear, to clear trade. I haven't looked at the numbers, but David's a pretty good econometrician. He's a good stats guy. And I think that sounds about right.
So there's all sorts of ways that you can clear, even if you continue to use a certain amount of dollars to clear trade.
That's not the equivalent of having the dollar as a reserve currency. When you clear, you're engaged in a financial transaction. You give someone dollars for goods, and then they turn around and use those dollars to buy more goods from another country. That's circulating currency. It's when the currency is put aside. It's when surplus dollars are in the system, and they need to be recycled into bonds, into stocks, and so on. That's when you get
the need for a reserve currency. But again, I'm just kind of talking in circles here because it's all about are you allowed to run massive trade imbalances, which is the flip side of do you have a paper reserve currency with no gold backing? If the answer to those questions is yes, then we're in the system that we're in.
When we're out of that system, you won't run large trading balances, and so you won't need a reserve currency. Not in the same sense that you do now, anyway. In that world, it can be a multilateral system, it could be a gold-backed clearing system. You could even have the majority of clearing continue to be done in dollars, although I actually doubt that'll happen. But you could in theory have that, but people are just unwilling to hold surplus dollars. So anytime a currency accumulates a surplus of dollars,
rather than recycling them into American equities and bonds. They just offload them into the foreign exchange market, drive down the value of the dollar and rebalance trade. The second thing I'd say about this is, again, I keep pointing it out, the system that we've had for the past half century
the post Bretton Woods hegemonic dollar paper currency system is the weird, it's a weird system. I mean, it's never, maybe it's existed somewhere like in Babylonia or something and we don't know it, but according to, you know, anything we have,
statistics on, anything we know about economic history, a system like this has never existed before for the simple reason that people won't usually accept paper for things. Because that's a stupid trade, actually. I mean, you might be able to, like,
go and get on your galleon and sail over to America in the early settlement period and trick some Indians to take some beads in exchange for expensive furs or whatever, but they're not going to really fall for that trick for very long. So running these enormous trade deficits for so long, which means getting people to give you resources and products that cost human labor in exchange for what is ultimately worthless paper,
It's a really weird system. And so everyone, everyone's kind of, when they're asking what's the next reserve currency, et cetera, et cetera, they're implicitly saying that really weird system that existed for half a century and probably never existed for any extended period at any time in human history, that weird system is going to continue on. And I think the simple claim is no, it's not. And when historians look back in 500 years time,
They'll spot this weird anomalous system that existed for 50 years and they'll study it because they'll think it's so weird. Yeah, but Philip, I mean, you're not just getting worthless paper. You're getting US dollars which can be exchanged for, for instance, interest-bearing US promissory notes. Well, that's worthless paper with an interest payment in worthless paper. Yeah.
Okay, okay. Well, all right. Another thing, you can exchange it for a share in a business, otherwise known as equities, right? Like I could take my, I could convert my £8.73 that I have in my bank account. I could convert that into dollars and I could buy, you know, £8.73 worth of Apple computers or Apple Inc or whatever it's called now. And that gives me like a share.
in a business or I can go to the US and buy stuff that isn't linked to the stock market, buy other assets through private equity systems, right? Like I could...
I don't know, buy an NFL franchise. I mean, not for £8.73, but maybe for £8.73 billion, I could buy myself an NFL franchise. And that's like a real good. The point of the dollar is that it is backed by the full faith and credit of the US Treasury. And with that, I can go to the US and buy lots of stuff. And that stuff is valuable. It's a jurisdiction that has...
I have a pretty good rule of law by global standards. I can rely on it. And I can't get like, you know, I can't get stuff. I can't get assets back. I can't get like, you know, manufactured goods or commodities or stuff like that. But I can buy assets, right? That's the point. I could buy real estate in the U.S. I could buy an NFL franchise. I could buy like a share in a publicly listed U.S. company. That's
That makes US dollars not worthless, right, surely? Well, this is where you get into the really complex question of what equity markets actually are. They are what you say they are. You're not getting stuff. You're getting a claim on wealth. And the wealth is always kind of...
I don't want to say fictitious, but there's an element of fictitiousness about it. Here's a thought experiment. Imagine I get up from where I am right now and I get on a plane and I fly down to some really troubled African country, the Congo or something like that. And I say, right guys, okay, this isn't going well. You guys are really poor, but I've got this one weird trick to make sure that you can like run a huge trade deficit for 50 years.
and we're going to run a trade deficit and we're going to massively boost the consumption of the Congo, either because the Congo just want to consume more and we'll let them buy iPhones, or they utilize that trade deficit to stock up on capital goods and develop their economy. Either or, right? And they go, wow, one weird trick. We haven't been able to figure it out yet. What's the trick? And I say, well, we'll create a load of Congolese companies and we'll sell shares in those companies to foreigners.
And they go, "Oh, geez, I don't know if the foreigners would really want to buy the shares in the Congolese companies, because they might not be good companies."
And you say, well, any company's worth something, you know, I mean, as long as there's something, I mean, it's not even clear if there's something underneath the company immediately. It could just be a future growth company or whatever. Okay. That kind of highlights the issue. First of all, are the companies real? Second of all, do they have future prospects? I mean, even if they're not real now, maybe they have future prospects, which makes them kind of real in a virtual sense. And then what's their value?
Well, what happens in the financialized system in America is that there's too much capital sloshing around and there's not enough actual viable companies to sell. And so what happens is two things in that scenario. First of all, you get bubbles, you get stock market bubbles.
That's what I said in the Congo. I go over and I come up with this borderline scam where I'm like, yeah, we're going to boost your consumption by financing it, by getting all these people to invest in Congolese companies. And those companies like basically aren't real or they're like semi fake business models. OK, so that's what you get in a bubble like pets dot com back in the 2000s bubble. I'm sure we're about to see a lot of pets dot com.
in the near future, actually. I have a sneaking suspicion that we have a very similar bubble to the tech bubble back in 1999-2000, but we'll see.
So that's the first thing that happens when you get too much capital flowing back into an economy. The second thing that happens is that even real companies become overvalued. And this is where you have to talk about company valuations, which are incredibly tricky. No one's really been able to give a final answer on what the average company should be valued at. But I mean, think of it this way, right?
Let's say Boeing or something like that. Boeing has a certain amount of capital goods. It has employees, it has revenue, et cetera, et cetera. And you have to put a value on that. Usually the way that you measure them is it's a price to earnings ratio. So it's the price relative to earnings. So if the earnings are $5 and the price is $10, the price to earnings is two. If the price is $20, it's four, right?
Stuff like that. So there's no real answer for what is a fair price to earnings ratio for any given company. It's a notoriously tricky question that financial analysts deal with all day, and they never really solve it.
They can't solve it because there's no way to solve it. But what happens in a system like the one that we have is the price to earnings ratios rise and rise and rise. And stock market people go, well, I guess that's just a new norm. And then we can't detect bubbles anymore. So those are the two things that happen. Fake companies and bidding up valuations of actual companies. You can bid up the value of property as well. That's a serious problem in the United States, causes all sorts of social problems that the equity markets don't.
But, you know, you boil it right down and American companies are overvalued relative to other companies in the world. The price to earnings ratios are higher. You're not getting any more revenue for that money. It just has America Inc. stamped on it. That's all. And then there's periodic bulk.
bubbles where a bunch of fake companies spring up. And I think we're about to see a bunch more of them. So that tends to be what happens in the equity market. As I mentioned in the bond market, it's just like moving your money from a checking account to a savings account.
It's still the same money. It just accumulates an interest rate. That's all the bonds are. That's just worthless paper chasing worthless paper. So those are the two problems. Worthless paper chasing worthless paper. And then if you want to reinvest it in equities or even property, you're just bidding up the multiples on that equity or you're convincing guys to go around and create companies that aren't viable and then sell you stock in it. Okay. So where are we going at the moment, Philip? Like what...
What is I mean, it seems quite clear that what Trump wants to do is he wants to bring the U.S. trade balance compared to the rest of the world into balance, into something close to balance. At least, you know, the the trade deficit now within the U.S. is pretty grotesque and.
He wants to bring it back to normal. The reverse of that, of course, is that countries like Germany and Saudi Arabia and China are going to be forced to also run balanced budgets, which means that their exogenous, I suppose you might say, economic policy where they rely on global consumption rather than national consumption to fuel their economic growth
is going to come to an end. I mean, is that where we're at?
Yeah, that's the other side of the ledger. And that kind of answers the question of like why the Indians have been accepting the beads for so long. You know, they've been accepting the beads because they've realized they can massively grow their economy. Like if they accept the beads from the white man, then like the Indians will hunt more. And so their GDP will grow. And that's basically what the Chinese and all these other countries have done. And it's really funny watching the kind of Chinese people
versus America argument on Twitter because the Americans are like, you stole our jobs. And the Chinese are like, you've been giving us free stuff for beads for years. And you're looking at both of them and you're like, you guys were both on other sides of each of the trade. You bear completely co-responsibility for the crazy system that you've created.
And it should be in both of your interests to resolve it in a peaceable manner. And this is why I've been, you know, everyone's like, oh, Phil, you were like so supportive of China before Trump got in. And now you're like saying that they need to take a hit as well. Yeah, they both need to take a hit because he created a stupid system. Like he's created a stupid system that was unsustainable. The U.S. was running over consumption. They had their living standards too high relative to what they were producing. They hollowed out their economy.
Uh, they hollowed out their manufacturing. They ruined a bunch of people and society and fentanyl addicts and all that. And then on the other side, the Chinese have become addicted to a growth, a growth model that involves accepting beads for furs. And so like both of them have to actually sort it out. And the, and the battle that you're seeing, it's a classic trade war battle of the sort that you do hear about in history. And it's quite common. Both sides are kind of like the Spider-Man meme, like
pointing at each other and like, it's your fault. No, it's your fault. The reality is like they both were involved in this transaction, consenting adults, whatever. And they both kind of in their own weird ways benefited from it. But I'd argue that they're not really benefiting from it. At least they're not anymore because the Chinese probably deserve a higher standard of living than they currently have, which is what rebalancing would mean.
And America needs to accept, probably at the end of the day, lower wages in international terms to rejuvenate their industry. But the process of adjustment is going to be painful even if it's properly managed. And if it's improperly managed, it's going to be like twice as painful. And that's for both countries. Yes, of course, America will be hit worse in a trade war than China because China's the creditor.
But China will be hit. This is what I keep trying to get to the, you know, fairly limited, I suppose, number of Chinese people on Twitter. You will be hit too. And the more turmoil you create, like, no one wins in that. Like, it's not a net win. And, like, what's the end point? To get the guy to cry uncle? Like, trade wars are stupid because it's about trade. If you have a war with somebody, like a kinetic war, there's usually, like...
Like Russia's goal in Ukraine is to presumably control the Donbass region and to eliminate the Ukrainian military force. Those are goals that can be achieved by the war. But in a trade war, you're not pursuing any goals.
It's like two idiots in a bar who got drunk and they're punching each other in the face for absolutely no reason. Like that's the kind of scenario that you're in. It makes both of you poor. It creates complete chaos for both of you. One side may end up winning, but like if one of the guys is knocked out behind the bar and the other guy comes in like in a Bukowski novel or something and he's like dripping blood and he orders a beer and he's like, yeah, I really beat that guy. It's like,
Okay, maybe you have to go to hospital now because you have a concussion. So the whole thing's really, really idiotic in a sense. Like, this happens periodically throughout history. This one is probably worse than other ones because of the kind of bead-for-furris economy that we live in.
we, um, we created, but ultimately this is going to have to be wound down. And even if there wasn't a conscious decision at some point to wind this down, it would have started to happen naturally by itself. That's what the more natural version of the dollarization, uh, would it look like? So whatever else you say about liberation day and the tariffs, which I think are pretty dumb, it's kind of, it's drawn a line in the sand now. And it said,
This problem's real. We can't just pussyfoot around it anymore. It's gone intolerable, and we're going to have to resolve it. A quick question on that. You mentioned that, in your view, China has more leverage than the United States. In other words, China would take a hit, but it wouldn't be as bad in relative terms than the US. Could you explain that? Because the standard argument or the standard reasoning here
is that it's actually the deficit countries that tend to have the most leverage and will suffer the least pain in a trade war simply because they, in any kind of forced rebalancing through a trade war, painful as that would be, they can actually expand their capital stock through things like reindustrialization to cover that portion of the trade deficit.
Whereas the surplus nation would have to get rid of that kind of stock. And furthermore, you look back at the Great Depression, for example, and that was, you know, there was trade issues related to that with Smoot-Hawley, etc.,
And it was the United States and Japan, which were surplus nations, which suffered much worse. I mean, Germany did as well, but that's a different matter because of the kind of deliberate devaluation of their currency in relation to the Versailles Treaty. But anyway, I mean, as I say, the standard...
The standard argumentation on this is that it's the surplus country that has the least leverage and would get hit worse, whereas you argue that it would be the opposite. I mean, can you explain your reasoning on that?
Yeah, and I don't know what is currently going on out there in discourse land, but what I'm about to say is the standard economics presentation. Anything else is like, I don't know, something that somebody made up for political reasons. The problem facing the deficit nation is a lack of real things.
The problem facing the surplus nation is a lack of paper money. What's easier to produce, real things or paper money? Pretty obvious, right? Paper money. So there's a million ways to skin that cap, but ultimately, if the Chinese see a substantial amount of their trade cut off, I think exports to the US are about 2% of Chinese GDP. Let's say that's cut in half. It shaves off 1% of GDP for their growth, and it has dynamic effects too, whatever.
It's actually, when you think of it that way, it's not that bad for the Chinese. But, you know, there are dynamic effects and, you know, you could lose all of it and whatever. But let's just say that.
All you have to do is find somebody to buy that 1% of GDP worth of goods. There's a million ways to do that. You can increase the value of the renminbi, which would increase the purchasing power, and it would offset the loss of purchasing power from the US imports, exports on the Chinese side, the US imports on their side. You could also just engage in fiscal stimulus. You could monetize some government debt. You could start building up your welfare system in China.
in China. You could increase pension consumption, something like that. The point is, all you have to do is increase spending power. And that just means you have to increase money. And increasing money isn't that hard. It's what the Western countries have been doing for a very long time, led by the United States.
On the surplus side, you have to build out capacity to replace those lost goods. That is a 10 to 20 year project at best. Some of those goods are being produced in ways that you no longer know how to do because your factory closed in the early 1990s and the last guy who was like operating, designing that factory is like 80 or he's dead.
So you've actually lost those skills and you'll have to rebuild them from the ground up. That's a very long-term project. You're going to have to retool your education system. You're going to have to look at supply chains. I saw China are now saying that they're going to cut off all these kind of rare earth metals and so on. These exist elsewhere, but there's environmental regulations to getting at the things. There's processing issues that create another load of pollution and everything like that. And then there's just the know-how that's been developed in China to...
to extract and process these minerals over the past 10 or 20 years. So there's all these things that you need to build up. Meanwhile, all the Chinese have to do basically is make money printer go burr, right? And the Chinese can say, oh, well, then we're going to smoke the Americans in a trade war. We're going to win immediately by printing money. Yeah, I mean, in some sense you could, but in another sense, you're going to have much poorer capital allocation. China went through a money printing episode recently.
after 2008 to support the economy when the global recession hit. And it led to mass amounts of corruption in local government. It led to some overbuilding in housing, not the pedestal housing bubble that some people talk about. That's probably not real. But it led to a lot of capital misallocation and it led to a lot of corruption in local government. Xi Jinping comes in, anti-corruption campaign, clears all that out. If he has to go back to the money printer,
kind of loses a lot of credibility. I mean, he's supposed to be the stern headmaster who comes in and calls time on the excesses of the previous period. He wants to keep China competitive and lean and so on. So if he goes in and he turns on the money printer, yeah, it could rebalance demand, I guess, but it will create these problems. He'd be better off revaluing
But of course, that's what we'll talk about about Bretton Woods. That's the ideal solution to this, currency-based solutions, rather than all this trade war, trying to plug fiscal gaps, trying to force reindustrialization that won't work. That's the real solution to these problems. So what should happen, Philip? I mean, what should the US try to do? What should China try to do? What should Britain and the EU try to do? And more importantly, I think, what should these guys try to do together? Because
One thing I've noticed is that on both sides of the argument, I mean, certainly the American side of the argument, I spoke in spaces on Saturday. I spoke on multipolarity last Thursday. And I said that I've got a lot of sympathy for people like J.D. Vance or the outlook of people like J.D. Vance and Trump. I grew up in a working class area of the northeast of England.
It was traditionally built on shipbuilding and coal mining and steel and a few miles farther south, one of the greatest centers of the chemical industry in the world. And I saw that all decimated during the era of globalization. And I saw the effect that that had on communities, on local morale, on the creation of a literal underclass in the northeast of England.
So I've got a huge amount of sympathy with these guys when it comes to rebalancing trade. I would like Britain's trade to be rebalanced. The problem I've got is that nobody's actually willing to accept or nobody's willing to say the other half of the ledger out loud, which is if you start trying to rebalance trade, what you need to do is you need to start consuming less. And that means your average person
would actually be worse off, especially at first, because they would just be buying less stuff. Okay, I might desire a balanced trade, but do I really want to have one less pair of trainers? If I'm a family, do I want to buy my child one less football or one less Newcastle top or whatever? These are all things that...
The consumer society that we've built prizes in terms of standards of living. And that's going to have to go down. And nobody on the Trump side of the argument
or nobody anywhere in the United States admits that consumption will have to be squeezed. It'll have to go down. And that requires a worse standard of living. Now, eventually, it should lead to a better economy where there are more better-paying jobs, where economic growth is better, where that economic growth is sustainable. More importantly, where overall debt, both government and social debt,
But that transition period is going to be painful. So I would imagine, Philip, that really what needs to happen is...
And when I say the big nations, I'm probably talking G20. So, and include Russia in that. So like, you know, you're talking, uh, the U S Canada, three or four countries from the EU. Uh, you're talking Mexico, you're talking, uh, Indonesia, China, Japan, uh,
You know, all these countries get together, have a conference and see how they can manage this rebalancing process where countries like China and Saudi Arabia and Germany and probably Indonesia would consume more over time. And the standard of living of their citizens would go up and the U.S. would have the reverse of that. But it would take place over time.
Yeah, I mean, if they can get a truly multilateral conference, I'm kind of game, but they don't actually really need that. They just need the Chinese and the Americans to sit down and sort this out. And once the Chinese and the Americans come to some sort of an equitable currency regime relationship, I think we're calling it Bretton Woods 3.0 for now.
I don't know what reason, because there hasn't been a two, but I like it because it's kind of esoteric and people are like, where's the two? So we'll keep three. But if we come to that kind of arrangement, just between China and America, every other country will just kind of automatically buy in, in a sense. I mean, they'll just have to get with the program because these are the two largest economies in the world. Europe, in theory, should have a seat at the table, but like...
to Europe anymore. There's no one to deal with in Europe. They're all a bunch of crazies who are trying to send their non-existent armies into Donbass. So sorry, they're not going to get a seat at the table because they're not adults or whatever. But the Americans and the Chinese can sit down and they can hammer out
an agreement here and it'll be a it should be okay so at a minimum it should be a kind of plaza accords which is is what happened between the united states and japan in the mid-1980s where they just re rebalanced the the currencies to try and rebalance the trade against now that had some negative impacts for japan we can't get into it now yeah well that's i'm trying to interrupt for it but that's one of the points i was going to make it like the plaza records
as far as I can see, had some really negative effects in Japan. It was like, I don't know enough about the economics or the data to be able to say, but it's difficult to ignore the kind of correlation, if you like,
between the signing of the Plaza Accords and the end of the Japanese miracle and the entrance into this kind of three decades long period of stagnation. Like, did China really want to repeat that? The stagnation isn't caused by the Plaza Accords. The Plaza Accords did cause a financial bubble in Japan.
that can be managed if we want to go down the other route that I'm talking about. There won't be any crazy capital flows. But the Plaza Accords did cause a financial bubble in Japan, a twin housing and stock market bubble, which blew up, I think, in 89. Might have been 90. But that...
It was a weird correlation is not causation thing. China's main problem with stagnation has to do with their incredibly old population and stagnant wage growth. It's a completely different situation. If China had a normal economy, apart from the Plaza Accord shock,
It would have had a bubble and probably recovered in a couple of years, like Ireland did after its property bubble. Probably would have looked something like that. So I would not... The Chinese accounts were like, it's an imperialist trick to do a plaza accord. Look what happened to Japan. It's not...
That's not real, okay? That's not actually real. But if you are concerned about the capital flows and you want things to stick a little more, because the Plaza Accords solved the trade imbalance issue for a couple of years, and then once everybody forgot about the Plaza Accords, they went back to the crazy beads for fur economy. So if we want something more sustainable, we need a global system like the Bretton Woods system. And so it's a rule-based system.
We can have a gold backing if we want, but I don't think we really need to. It just needs to be a rule-based system. And I've laid out a paper on this and say that it's circulating in D.C. and there's increasing interest in it because tariffs haven't gone so well. So I'm pretty positive that we might actually get to a point where we start talking about this. But that would basically look very similar to the first Bretton Woods system, except it would not be dollar-based.
It will be truly multilateral. It will be based on a fictitious currency called a Bancor. It would just be a kind of international clearing system, pretty much like IMF special drawing rights, except given more power, as it were. And the goal is basically to force readjustment on anyone that runs a trade imbalance, be that a surplus or a deficit.
And there's multiple. The main mechanism is to devalue your currency, but it's a very aggressive system. So if currency devaluation doesn't work, as it sometimes doesn't, the surplus country will basically be forced, not forced, but it'll be strongly incentivized to reinvest that money in the deficit country, but not in stocks and bonds, in FDI, in actual industry.
I think there might be some provision to allow agreement on kind of aid for public works programs too. That was in the original Bancor platform that came before it in 44. I think it sounds pretty sensible, but these are details. These aren't the overall plan. So what that'll do is basically once you do this, you're operating in a managed exchange rate system.
So you'll have fixed exchange rates that can be changed over time in line with very specific international rules. In a managed exchange rate system, you have managed capital flows.
So you own a free floating capital. This will kill the finance parasite, right? Because there won't be international capital flows. This will be back to a system where if you want to go from London and visit France, you'll have to go to a foreign exchange counter and there'll be limits on the amount of foreign exchange you can take out.
And people would say, oh, that's annoying. Yeah, well, it's better than like trade war going to World War III, guys. So, you know, just deal with the currency holiday annoyance, please. And don't be children. So basically, you'll have control capital flows on that. Now, capital flows for foreign direct investment are free. You can do as much FDI as you want.
And they'll have to redefine FDI very specifically because currently private equity is counted as FDI. It's a bit of a State Department scam. Sorry, guys, I've revealed the trick of telling the world that America engages in all this FDI, but it's actually doing private equity roll-ups of foreign companies. So some of the definitions will need to be fixed. But basically what we're dealing with here is that you'll close the capital account.
Now, people from a finance background can go, oh, no, Phil, you're going to destroy our business, whatever. Your business is in the process of melting down anyway. Trump's pretty much destroyed it because even if they force trade balance through tariffs, for example, I don't think it's possible. But let's say in theory they did or they generated a worldwide depression.
which is possible, and they rebalance trade that way. Either way, once those trade imbalances are gone, Wall Street business model's gone anyway. So Wall Street business model's going by hook or by crook, unless the Trump administration and the Americans have some Damascene moment where they're like, no, we like the beads for our economy. Let's run even larger trade deficits. And that's not going to happen. The Americans have now voted for three presidents, Trump, Biden, and Trump again, who've basically promised...
to deal with this issue, right? So there's a massive democratic mandate for it. Ignoring that democratic mandate, as some people are doing, is delusional and will only cause trouble. So they voted for this. They're going to get it by hook or by crook. The finance sector is pretty much done at that point, at least in its current scale, probably, you know, one-tenth, one-fifth the size.
They can go back to kind of recycling granny's saving pension pot into local government debt, some corporate debt domestically, all that. Fine. They'll be doing that, but much more limited model, kind of more like, um, like, uh, like that, that film that people always talk about with the bank run the Christmas film. Can't remember the name of it. Um,
It's a wonderful life. It's a wonderful life. So we'll be back to the wonderful life banking model. All good. You don't get there by regulations like they told you. They lied to you after 2008. You get it by rebalancing trade and sorting all that out. That's the real solution here.
So we go back to that fixed capital, fixed capital controls in place, fairly harmonious global domestic financial system, good harmonious global trade. Everybody grows together. Everyone's friends. There's fixed rules in place.
So we don't get in any more like drunken boxing matches at 12 o'clock in the back alley or whatever. It's all good. And what we have to sacrifice for that. Well, two things, annoyance at the foreign exchange counter. Sorry, deal with it. There'll probably be less global travel in the system anyway, just due to the nature of it, because the wealth won't be as the wealth would be more evenly spread around the world. So you won't be able to go to like cheap holidays in Thailand or whatever. But then the other thing is basically, yes, in theory, there'll be a
decline in living standards in the deficit countries. But the more you think about it, the more you think maybe there won't actually be that much of a decline. Because what's going to happen is all that financialization parasitical garbage is going to go away. House prices are going to go
down in that scenario and they're going to stay down because there won't be these capital flows sloshing in and out of property markets. So your main expenditures are going on property, for example, whether you buy or rent, it's probably going to be lower. The lack of global conflict, which we hope will be achieved, and I'm pretty sure it will be achieved, will mean that energy prices will probably be structurally lower because there won't be fighting and sanctions and all sorts of craziness. So like
What will you really lose access to? Like cheap Chinese junk that you like use once and throw into a shed that you build specifically to house your Chinese junk. Yeah, that like wastrel economy will have to go away. Fast fashion will have to go away.
like it's a pair of shoes will be better built and it'll cost you more, but it'll last 20 years. And maybe you'll learn to like polish them and like respect your clothes rather than running around in pajamas and throwing them out after a month. And then going to like your, your climate change summit and being like, Oh, I hate pollution or whatever. And like your, your seventh piece of plastic has been thrown in the bin or what? It's rubbish. So, so,
So I think basically, yes, living standards in one sense will have to come down, but you won't see a reduction in nominal wages at home. You'll see a rebalancing on the foreign exchange account. Imports will become a bit more expensive and more fast fashion. But, you know, you'll probably have access within five years. Your employment opportunities will probably be substantially better than they were.
So what do you think we can expect? I mean, this sounds all really wonderful. I mean, it sounds a little bit like a return to It's a Wonderful Life, actually. A return to less of a consumerist society, better quality goods that are made at home, a recognition that consumers are also producers.
A respect, again, for the artisans and the craftsmen and the tool makers and the manufacturers, the people who make the country. I mean, this all sounds really wonderful, Philip, but let's go back to reality. Like, what can we expect? I mean, can we expect, I don't know, like a Mar-a-Lago accord? I mean, what can we expect realistically? Or are we just going to have a sudden breakdown in trade?
Well, we're moving to one or the other, and a sudden break in trade will be catastrophic for living standards. At the worst end of the scale, it could produce some sort of an inflationary depression.
Some of the Western countries might not recover from that very quickly. It could cause all sorts of global chaos. I don't even want to think about what that does in an already unstable world. I don't think we'll go to World War III. I've said on the show before, I think Ukraine was like the worst we'll ever see, hopefully ever, in history. Between now and Judgment Day, hopefully. I'll remember that as I'm picking through the ashes, Philip. Yeah.
Playing Fallout 2. Yeah, I mean, I hope I'm right, but I just don't see... Trade wars don't actually inevitably spiral into war, much less nuclear war. That's probably false advertising. But look, just general global conflict, it's not good. And all this kind of hybrid war, cyber attacks and stuff, yeah, that could get quite bad in a sense. So we don't want that. And that is kind of at the low end of the bad thing.
And then the good thing is basically, yeah, the Americans kind of get it together, stop acting out, which is what they're doing now. It's hysterical. It's like, what is it, a trillion percent tariff or whatever? And like massively overhyping America's importance in the global trade system. And the Chinese, you know, I understand their reaction, which is kind of like, oh, you don't want the free stuff.
okay, let's see how long you can go without the free stuff for. It's a rational reaction, but it's still two drunks in a bar fighting each other, and it's just causing chaos, and it's hurting everybody. So, you know, if they can sit down at the table and hammer out these terms, it would be really good, and that system would probably last forever.
I mean, forever really, because it would be a pretty equitable system. It would start operating in the background, like antivirus software or something, and no one would even notice it anymore. Much in the same way as some of the global monetary architecture works today, people don't even notice it. So we'd kind of just close off these discussions forever. That was always Keynes' goal. To get it over the line in the short term, I guess the steps are, part one, convince the Americans.
That is happening right now behind the scenes. I'm not going to go into specifics about it, but the documents are circulating. It is being discussed. We are seeing in real time that the tariff-based Navarro-style trade war is not going to work, and it's going to cause absolute chaos. How much pain do the Americans want to take before they wake up to that? We'll see. But I think they're going to wake up to that. Step two is post-war.
hoping that the Chinese aren't so annoyed that they will actually talk. Now, I think they will. I think the Chinese are pretty reasonable people. I think a lot of the stuff we're seeing online is kind of almost like cyber warfare, like we saw in the early Ukraine war. I don't think it reflects the thinking of the Communist Party. So get them to the table and then hammer out a deal. Step three, that is going to be the tricky part because...
Look, you're going to phase this in probably over 10 years, and no one's going to feel it. No one's going to feel it like a sharp burst of inflation or anything. There'll be gradual adjustments in the currencies. But in the short term, the Chinese do, in a sense, lose here. They are the surplus country, just as America was in 1945.
And while you're the surplus country, it can feel good. It produces imbalances in your own economy. So it's not good long term. It's not good for your long term growth. Actually, it's not good for the living standards of the people in your country. But you can juice growth with it. And you can be very easy in that scenario to be the world leader in technology and EVs.
In the short term, it's very seductive. It's not actually a good idea to go with this in the long term, but in the short term, it's very seductive. My guess is that if you have to get a deal over the line, the Chinese will probably have to get something out of it. I think we all know what that probably is. Probably Taiwan.
I think that's the direction this is probably going to go in. The Americans are kind of sick of that whole thing anyway. Trump is. He's made it pretty clear. And that would be, you know, that would solve all the global problems at once. At that point, the only real global flashpoint that's yet left, once you put Ukraine to bed, is the Middle East. And look, if anyone has the one weird trick to solve the Middle East, like...
I don't know, DM me and I'll send you a t-shirt or something like that. There is no one word trick. So that would be a very, that would be a very, you'd get to a pretty balanced world at that stage. So I think some combination of allowing the Chinese to communicate to their people that you have a very clear win from this, the Americans can be convinced very quick because you're saying we're solving this trade issue and we're doing something, we're doing so in this managed, responsible, adult way.
I think you can pretty much get it over the line. I mean, I'd hope. And add to that to just say to the Chinese, really, you want chaos? You want global chaos? Because that's what you're going to get with this. And you hate chaos. So, like, let's just not have global chaos. How confident am I that it gets to there? Well, I mean, it can't logically go anywhere else, but we've made...
We've made terrible mistakes in the past, especially in the 20th century. So, and I mean, economic mistakes. I don't just mean the war ones. I mean, the depression, the extractive loans on Germany in the 1920s, which did lead to war. I'm talking about all these things. We could go there again, but, you know, I think understanding of these things is much higher than it was in the past. In the 1920s, a handful of people understood what the German reparations would do in the long term. Keynes wrote a book on it.
I don't think people fully understood his book. I think there's a whole politics behind the economics consequences of these. Very few people actually understood it. Today, I think you can explain this to probably a fair number of policymakers in every country, right down to like a country of 4 million people. I think the economics education and history education is sufficient.
to convince people of that. So, so cautiously optimistic, but the liberation day has put the line in the sand. Like the chips are down now. What happens over the next two years is probably going to determine the future economic future and probably the future more generally of probably this generation's life and probably your children's life. So there's a lot at stake here. So one more question before we go, like one more issue that I think I might have with this.
You spoke about capital flows. You know, you've spoken about currency adjustments. Countries like the U.S., the U.K., France, Italy, well, maybe not Italy, but certainly those three run, you know, in addition to trade deficits, they also run fiscal deficits or budget deficits by another term.
In America's case, like really huge, like I find quite shocking deficits given it's not war. I mean, we're talking five and a half, six percent of GDP, like not of tax income of GDP. You know, that's like a huge amount. Britain runs pretty scary budget deficits as well because we don't have the global reserve currency.
What effect would a kind of a trade rebalancing and what effect would some kind of 21st century bank or system have on fiscal discipline? Because my assumption would be in that situation, it, you know, it would be a real discipline for governments, you know, because if there's capital controls or like if there's no longer free movement of capital,
then any money that the government wanted to spend more than it took in tax would have to come from its own citizens, right? You would get like a genuine crowding out system and you would potentially have the possibility for fiscal dominance. I mean,
What would be the effect on the fiscal situation? I mean, would countries like the US and the UK not only have to close their trade deficit, but also close their fiscal deficit as well? Because right now, they kind of rely on the kindness of foreigners and free capital flows to fund that fiscal deficit.
No, not really, actually. If they want to impose a hard gold standard domestically, that would force the fiscal situation simply because of the fact that any excess money in the system could be cashed in for gold and the reserves would soon run out. But in the bank or system, you're not actually impacting the domestic banking system. The domestic banking system can remain in effect fiat.
And it probably will remain fiat because you can't really put a government with like 100 percent debt to GDP on a gold standard unless you want to cause a massive economic depression like Churchill did to Britain in 25 or whenever it was that he slapped on the gold standard. So actually kind of nothing happens. Well, I'll say this. Once you rebalance trade, a lot of the fiscal pressures, not all of them are taken off.
Because what it'll do, first of all, is some of the fiscal deficit finances the trade deficit. It's like an accounting identity. So if you run a trade deficit, either the government can go into deficit or the private sector can go into deficit. But one of them has to. And in general, it's usually the government because they can borrow ad infinitum or in theory they can borrow ad infinitum and the private sector can't.
So some of your deficit will close, but not all of it. Second thing that you'll get is more robust economic growth because you'll actually get productivity growth. The reason that we see such stagnant productivity growth in the developed countries is because manufacturing is shrinking.
And manufacturing is the heart of all productivity growth. Hairdressers have the same productivity today as they did in 1650. Isaac Newton's hair, when he was master of the mint, was cut pretty much as efficiently as somebody's hair today. And that scales somewhat for services in general. Accountants can be a little bit more productive with a computer rather than an abacus, fine. But productivity gains in the services sector are pretty limited
The same is true for shopping and so on, even with Amazon and everything like that. It's limited and it tends to cap out. Whereas manufacturing, you just keep getting productivity gains. So with increased productivity gains, you'll have increased GDP gains. And of course, that brings down your debt to GDP ratio. So I think a Bancor system, a New Britain was, would help over time.
to rebalance the government deficit and it would start to bring down the public debt ratios. Whether it'll be quick enough, I can't say. You'll be fighting against the other big trend that's driving fiscal deficits, which is an aging population. That's an entirely separate issue to any of this stuff.
I'm always talking about family policy on Twitter, there's a reason for that. Demographics is just a whole separate issue and there's no point in talking about the two things in the same breath. In terms of sustainability, the sustainability of the debt actually becomes much better in a balanced trade scenario. I don't want to advertise governments.
MMT, as it were, and governments running infinite fiscal deficits, I think is bad for an economy. I think it's bad for capital allocation, blah, blah, blah. But the MMT guys are basically right. If you run balanced trade, you can monetize the debt forever. Just look at Japan. Japan runs a current account surplus, which we may as well say they run balanced trade.
Makes no difference. They have 260 debt to GDP at low interest rates because it's only domestic buyers that have to be forced to buy the debt. You just stuff the central bank, you stuff the pensions and so on. So without a trade deficit, debt becomes...
I mean, pretty sustainable. Now, I'm not, again, advocating they should move to get those debt ratios down. They should stop relying on government funding money to prop up the economy. But once you move away from the fast fashion economy, I think you'll see that pretty quick through the mechanisms that I'm saying. Well, I should say pretty quick. I think over 10 years, you'll start to see your fiscal situation get better. But the short answer is no, a bank or system won't lash constraints on government. Now, what...
If we move to a system, a forced rebalancing system, so let's say that people start using gold, like David Goldman says, to balance to...
to transact trade, and then a gold standard system naturally emerges out of that. That's what's happened throughout human history. The gold standard system naturally emerges. If that happens, and the gold standard system gets embedded at home in the banking system, the domestic banking system, then you'll have a fiscal crisis.
So it's actually very in the interest of governments that are highly in debt not to have us naturally fall back to a gold standard. But the Bancor system will allow, well, it'll allow a lot, actually, but it'll definitely allow time for adjustment and the conditions to adjust. Well, folks, let us hope that Mr. Xi goes to Mar-a-Lago and we can all be led to the land of milk and honey.
On that note, I think we should end this first experiment with multipolarity live.
Uh, perhaps it's something that we should do again because I very much enjoyed it. Philip was on rare form. Um, and it leaves me to say, thank you all very much for joining us. We had a great crowd and we'll see you next week, probably with a regular multipolarity. We shall take stock and see how this experiment went in the meantime, folks have a good, but I think we should get going. Philip, how about that? Um,
People will be aware, of course, everybody who's tuning in.