Lawyer by training
Advises institutions on investment allocation
Chairman of listed company, wrote 2 books on financial history
Since 1978, key question is what will happen to interest rates
Now largely an irrelevant question
Belief we live in market system, there’s relation between inflation and interest rates – but we’ve moved into a new system
Too much focus on central bankers – they’re largely impotent now
Old regime = China and others linked currencies to USD
Results = depressed inflation in US
Central banks (CBs) believed they were fighting deflation —> low interest rates
After GFC —> low rates was not enough, added QE – which kept rates low and added more to debt
Debt kept rising – then covid, which led to even more debt
US debt:GDP ratio to highest level ever
Fed Reserve did not create great growth in money supply – failed from 2009 to 2019 – but kept rates low
So low nominal GDP growth, high growth in debt
Then covid-19, caused another recession – debt:GDP spiked even more
Most people believe CB creates money but it’s incorrect
CB controls commercial banking system – like coachman and team of horses – the horses (the banks) pull the carriage
CB provided lots of liquidity, low rates – but banks didn’t expand balance sheets, so didn’t create money
But did create a lot of debt – in the bond markets, money markets, shadow banks, because rates were so low
There’s no beautiful deleveraging for US economy as a whole
Household sector is much better
But US govt, corporate sector, both debt:GDP are all time highs
Why can’t we just issue more debt?
2 recessions in last 12 years – both genuinely close to Great Depression
In recessions, cashflow declines, risk of mass defaults, turn into depressions because debt is so high
Bankers remember that after Great Depression —> World War, so very fearful of consequences
Very high debt:GDP after WW2 – governments decided to inflate those away
Socially it’s dangerous situation to be in
Demetri: Financial repression + inflation to reduce relative debt burden
It’s a political choice – no invisible hand to solve this problem
Some options:
1. Austerity = government borrowing less, repaying debt = scaling back social policies, welfare, not popular w/ voters
2. Default has tried before = crushing contraction in economy = domino effect of defaults, instability
3. Hyperinflation = technically 60% inflation a month = but roll of dice for consequences
4. Real growth = productivity and innovation growth, but very hard to do, can’t rely on this
5. Repression = most politically acceptable, more subtle tool
Volcker called this system the Hybrid system = some countries linked currencies, others float = our current system
Leads to unbalanced consequences – Volcker railed against it
Dollar at center of it, but driven primarily by other countries – primarily China – linking their currency to the dollar
What does financial repression look like?
Post WW2 1945 to 1979 – focused more on Europe
Similar system China has run
Aim to force savers to have money in fixed interest securities at level of interest below inflation
Slowly de-lever your economy
Before it was easier to do because inflation was low – now we need to regulate / force people and corporations to do it
Ex: Nixon’s price and wage controls
What drives inflation?
Supply side factors
40% increase in global money supply in last 2 years – root cause
Why did money creation work now when it failed in last 10-20 years?
Because of gov interference in commercial banking system – government guaranteed the loans, will underwrite the losses – so commercial banks start making loans, money starts getting created
Governments learning how politically powerful – push credit where they want it
Ex: UK gov’t – 600M sterling loan to Land Rover to make green vehicles – money creation to achieve a green policy
Govs justify it in the name of “emergencies”
-Cold War w/ China
-Climate emergency
-National security emergency
-Health emergency
-Inequality emergency
-Labor price emergency
Govs will use bankers to fund all of these – create lot of money – lots of inflation being created
Meet political goals, create higher inflation, financial repression
Finance = someone’s savings = governments will increasingly steer it to where they want it to go
US economy story for last 30 years: anyone who wants credit can get it – now that’s changing, state will play a role in prioritizing where it goes, historically they haven’t been good at it but need to do it anyway
Who won’t get this credit?
-PE, investment banking, commercial property, leveraged corporate finance, Krugman’s “realm of the rentier”
-credit will go to more productive industries
–
Lead to more capital controls in Western countries
Greece, Cypress, Iceland – struggled with high levels of debt
Solved thru capital controls, tons of external help
“Corralling savings into killing pens of fixed income securities”
More nationalization in Europe than America
EU tried to create single currency, failing so far
Governments will regulate biggest pools of $ first – securities, life insurance funds, corporate pension funds, mutual funds – will come for individual’s holdings last (eg, private gold holdings)
End of WW2 – 70% of UK stock market owned by individuals, now it’s ~10% – now it’s all run through institutions, easier for govs to direct / regulate
Recommends people hold assets in own name instead of through intermediaries eg mutual funds
Govs will justify in name of emergency – climate, inequality – word “emergency” will keep appearing
Can characterize the saver, the rentier as evil – can see a shift to see saver as being demonized, or “capitalist”, greater political ability to force them to pay
Huge amount of path dependency – not difficult to forecast what will happen next
Capitalism created enormous imbalances, not enough political capital to stop it
Many thought it would reverse after 2009 (GFC), but there was one financial gasp — and now it’s over
Income inequality mean reverts ultimately – because of taxation, warfare – suggests a long cyclical thing for human societies